UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
---------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
-----------------------------
Commission File Number 1-8037
----------------------
AEROFLEX INCORPORATED
(Exact name of Registrant as specified in its Charter)
DELAWARE 11-1974412
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
35 South Service Road
Plainview, N.Y. 11803
(Address of principal executive offices) (Zip Code)
(516) 694-6700
(Registrant's telephone number, including area code)
---------------------
*Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
May 10, 1999 18,312,403 shares (excluding 15,993 shares held in treasury)
- --------------------------------------------------------------------------------
(Date) (Number of Shares)
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I: FINANCIAL INFORMATION
- ------ ---------------------
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and June 30, 1998 3-4
CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended March 31, 1999 and 1998 5
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 1999 and 1998 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1999 and 1998 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Nine and Three Months Ended March 31, 1999 and 1998 13-19
PART II: OTHER INFORMATION
- ------- -----------------
ITEM 6 Exhibits and Reports on Form 8-K 20
SIGNATURES
21
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- --------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,515 $ 24,408
Accounts receivable, less allowance for
doubtful accounts of $301,000 and $317,000 32,656 19,853
Inventories 34,719 29,851
Deferred income taxes 5,139 1,861
Prepaid expenses and other current assets 2,271 1,197
-------- --------
Total current assets 78,300 77,170
Property, plant and equipment, at cost, net 49,788 26,994
Intangible assets acquired in connection with
the purchase of businesses, net 14,154 7,578
Cost in excess of fair value of net assets
of businesses acquired, net 13,733 9,827
Other assets 4,013 2,532
-------- --------
Total assets $159,988 $124,101
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- --------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 5,741 $ 1,755
Accounts payable 8,793 6,668
Accrued expenses and other current liabilities 15,353 12,932
Income taxes payable 2,588 1,850
-------- -------
Total current liabilities 32,475 23,205
Long-term debt 26,209 9,726
Deferred income taxes 3,363 1,156
Other long-term liabilities 2,447 2,978
-------- -------
Total liabilities 64,494 37,065
-------- -------
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 40,000 shares,
none issued - -
Common Stock, par value $.10 per share;
authorized 40,000,000 shares; issued
17,927,000 and 17,378,000 shares 1,793 1,738
Additional paid-in capital 103,900 100,481
Accumulated deficit (9,922) (15,178)
-------- -------
95,771 87,041
Less: Treasury stock, at cost (32,000 and
1,000 shares) 277 5
-------- -------
Total stockholders' equity 95,494 87,036
-------- -------
Total liabilities and stockholders' equity $159,988 $124,101
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------
1999 1998
-------- --------
(In thousands, except per share data)
<S> <C> <C>
Net sales $108,430 $ 84,431
Cost of sales 69,504 55,417
-------- --------
Gross profit 38,926 29,014
-------- --------
Selling, general and administrative costs 18,306 16,020
Research and development costs 6,874 3,510
Acquired in-process research and development
(Note 2) 3,500 -
-------- --------
28,680 19,530
-------- --------
Operating income 10,246 9,484
-------- --------
Other expense (income)
Interest expense 1,024 1,798
Other expense (income) (734) 41
-------- --------
Total other expense (income) 290 1,839
-------- --------
Income before income taxes 9,956 7,645
Provision for income taxes 4,700 2,750
-------- --------
Net income $ 5,256 $ 4,895
======== ========
Net income per common share and common
share equivalent:
- Basic $ .30 $ .35
===== =====
- Diluted $ .28 $ .32
===== =====
Weighted average number of common
shares and common share equivalents
outstanding:
- Basic 17,628 13,948
======== ========
- Diluted 18,973 15,749
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- -------
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 40,604 $ 31,221
Cost of sales 25,205 20,338
-------- --------
Gross profit 15,399 10,883
-------- --------
Selling, general and administrative costs 6,914 5,655
Research and development costs 2,580 1,481
Acquired in-process research and development
(Note 2) 3,500 -
-------- --------
12,994 7,136
-------- --------
Operating income 2,405 3,747
-------- --------
Other expense (income)
Interest expense 457 548
Other expense (income) (190) (33)
-------- --------
Total other expense (income) 267 515
-------- --------
Income before income taxes 2,138 3,232
Provision for income taxes 1,950 1,175
-------- --------
Net income $ 188 $ 2,057
======== ========
Net income per common share and
common share equivalent:
- Basic $ .01 $ .14
===== =====
- Diluted $ .01 $ .13
===== =====
Weighted average number of common
shares and common share equivalents
outstanding:
- Basic 17,839 14,749
======== ========
- Diluted 19,416 16,132
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------
1999 1998
-------- -------
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 5,256 $ 4,895
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Acquired in-process research and development 3,500 -
Depreciation and amortization 4,853 3,791
Amortization of deferred gain (441) (441)
Deferred income taxes (531) (307)
Other, net 55 184
Change in operating assets and liabilities,
net of effects from purchase of businesses:
Decrease (increase) in accounts receivable (8,946) 2,027
Decrease (increase) in inventories 2,386 (8,455)
Decrease (increase) in prepaid expenses
and other assets (2,663) (514)
Increase (decrease) in accounts payable, accrued
expenses and other long-term liabilities 617 4,644
Increase (decrease) in income taxes payable 3,129 1,584
-------- -------
Net Cash Provided By (Used In)
Operating Activities 7,215 7,408
-------- -------
Cash Flows From Investing Activities:
Payment for purchase of businesses, net of cash
acquired (43,475) -
Purchase of equipment, inventory and
technology rights from Lucent Technologies - (4,435)
Capital expenditures (6,902) (5,710)
Proceeds from sale of equipment 967 184
Other, net (10) (149)
-------- -------
Net Cash Provided By (Used In)
Investing Activities (49,420) (10,110)
-------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of common shares in
public offering - 31,781
Costs in connection with public offering - (496)
Borrowings under debt agreements 24,188 6,232
Debt repayments (3,910) (13,380)
Proceeds from the exercise of stock options
and warrants 1,377 1,106
Purchase of treasury stock (343) -
-------- -------
Net Cash Provided By (Used In)
Financing Activities 21,312 25,243
-------- -------
Net Increase (Decrease) In Cash
And Cash Equivalents (20,893) 22,541
Cash And Cash Equivalents At Beginning Of Period 24,408 600
-------- -------
Cash And Cash Equivalents At End Of Period $ 3,515 $23,141
======== =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The consolidated balance sheet of Aeroflex Incorporated and Subsidiaries
("the Company") as of March 31, 1999 and the related consolidated
statements of earnings for the nine and three months ended March 31, 1999
and 1998 and the consolidated statements of cash flows for the nine months
ended March 31, 1999 and 1998 have been prepared by the Company and are
unaudited. In the opinion of management, all adjustments (which include
normal recurring adjustments and the adjustments referred to in Note 2)
necessary to present fairly the financial position, results of operations
and cash flows at March 31, 1999 and for all periods presented have been
made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1998 annual
report to shareholders. There have been no changes of significant
accounting policies since June 30, 1998. Certain reclassifications have
been made to previously reported financial statements to conform to current
classifications.
Results of operations for the nine and three month periods are not
necessarily indicative of results of operations for the corresponding
years.
2. Acquisition of Businesses
-------------------------
UTMC
----
Effective February 25, 1999, the Company acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of
cash. The purchase price was paid with available cash of $22.5 million and
borrowings under the Company's bank loan agreement of $20.0 million. UTMC
is a supplier of radiation-tolerant integrated circuits for satellite
communications. The acquired company's net sales were approximately $33.4
million for the year ended December 31, 1998.
The Company had 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 and acquisition costs, of approximately
$500,000, as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Net tangible assets $29,220
Identifiable intangible assets 6,300
Excess costs over fair value of net assets 3,980
In-process research and development 3,500
-------
$43,000
=======
</TABLE>
The identifiable intangible assets include existing technology, customer
relationships and assembled work force. The intangibles are being amortized
on a straight-line basis over 6 to 15 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 1999.
<PAGE>
Summarized below are the unaudited pro forma results of operations of the
Company as if UTMC had been acquired at the beginning of the fiscal periods
presented. The $3.5 million write-off has been included in the March 31,
1999 pro forma income but not the March 31, 1998 pro forma income in order
to provide comparability to the respective historical periods.
<TABLE>
<CAPTION>
Pro Forma Nine Months
Ended March 31,
-----------------------------------
1999 1998
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net Sales $ 128,475 $ 112,137
Net Income 4,968 7,347
Earnings Per Share
Basic $ .28 $ .53
Diluted .26 .47
</TABLE>
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred had
the acquisition taken place at the beginning of the periods presented or of
future operating results of the combined companies.
Europtest
---------
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1.1 million. The purchase
agreement also requires that the Company purchase the remaining 10% of
Europtest pro rata over a three-year period at prices determined based upon
net sales of Europtest products. Europtest develops and sells specialized
software-driven test equipment used primarily in cellular, satellite and
other communications applications. The acquired company's net sales were
approximately $1.9 million for the year ended March 31, 1998. On a pro
forma basis, had the Europtest acquisition taken place as of the beginning
of the periods presented, results of operations for those periods would not
have been materially affected. The purchase price has been allocated to the
assets acquired and liabilities assumed based on their fair values.
3. Common Stock Offering
---------------------
In March 1998, the Company sold 2.6 million shares of its Common Stock in a
public offering for $31.3 million, net of an underwriting discount of $2.0
million and issuance costs of $496,000. Of these net proceeds, $9.6 million
was used to repay bank indebtedness. The balance of the net proceeds was
used primarily for the acquisition of UTMC.
4. Earnings Per Share
------------------
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share", earnings per common share ("Basic EPS") is computed
by dividing net income by the 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 the
weighted average common shares outstanding plus potential dilution from the
conversion of debentures and the exercise of stock options and warrants.
<PAGE>
A reconciliation of the numerators and denominators of the Basic EPS and Diluted
EPS calculations is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
---------------
1999 1998
---- ----
(In thousands, except per share data)
<S> <C> <C>
Computation of Adjusted Net Income:
Net income for basic earnings per common share $ 5,256 $ 4,895
Add: Debenture interest and amortization
expense, net of income taxes - 103
-------- --------
Adjusted net income for diluted
earnings per common share $ 5,256 $ 4,998
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 17,628 13,948
Add: Shares assumed to be issued upon
conversion of debentures - 522
Add: Effect of dilutive options and warrants
outstanding 1,345 1,279
-------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 18,973 15,749
======== ========
Net Income Per Common Share:
Basic $ .30 $ .35
===== =====
Diluted $ .28 $ .32
===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net income for basic and diluted earnings per
common share $ 188 $ 2,057
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 17,839 14,749
Add: Effect of dilutive options and warrants
outstanding 1,577 1,383
-------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 19,416 16,132
======== ========
Net Income Per Common Share:
Basic $ .01 $ .14
===== =====
Diluted $ .01 $ .13
===== =====
</TABLE>
<PAGE>
5. Bank Loan Agreements
--------------------
As of February 25, 1999, the Company replaced a previous agreement with a
revised revolving credit, term loan and mortgage agreement with two banks
which is secured by substantially all of the Company's assets not otherwise
encumbered. The agreement provides for a revolving credit line of $23.0
million, a term loan of $20.0 million and a mortgage on its Plainview
property for $4.5 million. The revolving credit and term loans expire in
December 2002. The term loan is payable in quarterly installments of $1.25
million beginning September 30, 1999 with final payment on December 31,
2002. As of March 31, 1999, the outstanding term loan was $17.5 million.
The interest rate on borrowings under this agreement is at various rates
depending upon certain financial ratios, with the current rate
substantially equivalent to LIBOR (approximately 5.0% at March 31, 1999)
plus 1.50% on the revolving credit borrowings and LIBOR plus 1.75% on the
term loan borrowings. The Company paid a facility fee of $100,000 and is
required to pay a commitment fee of .25% per annum of the average unused
portion of the credit line. The Company mortgaged its Plainview, NY
property in the amount of $4.5 million. This mortgage is payable in monthly
installments of approximately $26,000 through March, 2008 and a balloon
payment of $1.6 million in April 2008. The interest rate under this
agreement is at various rates depending upon certain financial ratios, with
the current rate substantially equivalent to LIBOR plus 1.50%.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash
dividends. In connection with the purchase of certain materials for use in
manufacturing, the Company has a letter of credit facility of $2.0 million.
At March 31, 1999, the Company's available unused line of credit was
approximately $21.0 million after consideration of the letter of credit.
On December 29, 1998, the Company financed the acquisition and renovation
of the land and building of its Pearl River, NY facility and received
proceeds amounting to $4.2 million. These borrowings are payable in annual
installments of approximately $200,000 through 2019.
6. Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- --------
(In thousands)
<S> <C> <C>
Raw Materials $ 19,705 $ 12,012
Work in Process 11,864 12,737
Finished Goods 3,150 5,102
-------- --------
$ 34,719 $ 29,851
======== ========
</TABLE>
7. Income Taxes
------------
The Company is undergoing routine audits by various taxing authorities of
several of its state and local income tax returns covering periods from
1994 to 1996. Management believes that the probable outcome of these
various audits should not materially affect the consolidated financial
statements of the Company.
<PAGE>
8. Contingencies
-------------
A subsidiary of the Company whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in
August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively exceed $500 million. The complaint alleges, among other
things, that the plaintiffs suffered injuries from exposure to substances
contained in products sold by the subsidiary to one of its customers. This
action is in the discovery stage. Based upon available information and
considering its various defenses, together with its product liability
insurance, in the opinion of management of the Company, the outcome of the
action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.
9. Conversion of 7-1/2% Debentures
-------------------------------
On September 8, 1997, the Company called for the redemption of all of its
outstanding 7-1/2% Senior Subordinated Convertible Debentures ($10.0
million) at 104-1/2% of the principal amount. As of October 1997, all of
the principal amount outstanding was converted into Common Stock at $5-5/8
per share. In connection with the conversions, $599,000 of deferred bond
issuance costs were charged to additional paid-in capital.
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Aeroflex, founded in 1937, utilizes its advanced design, engineering and
manufacturing capabilities to provide state-of-the-art microelectronic module,
integrated circuit, interconnect and testing solutions used in communication
applications for commercial and defense markets. Its products are used in
satellite, personal wireless, cable television ("CATV") and defense
communications markets. It also designs and manufactures motion control systems
and shock and vibration isolation systems used for commercial, industrial and
defense applications. 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, except for
Europtest, as discussed below.
Effective February 25, 1999, the Company acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of cash.
Prior to the acquisition, UTMC distributed by dividend to its then-parent,
United Technologies Corporation, the assets and United Technologies assumed the
liabilities of the circuit card assembly portion of UTMC's business. The
purchase price was paid with available cash of $22.5 million and borrowings
under the Company's bank loan agreement of $20.0 million. UTMC is a leader in
supplying radiation-tolerant integrated circuits for satellite communications.
The acquired company's net sales, excluding the circuit card assembly business,
were approximately $33.4 million for the year ended December 31, 1998.
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1.1 million. The purchase agreement
also requires that the Company purchase the remaining 10% of Europtest pro rata
over a three-year period at prices determined based upon net sales of Europtest
products. Europtest develops and sells specialized software-driven test
equipment used primarily in cellular, satellite and other communications
applications. The acquired company's net sales were approximately $1.9 million
for the year ended March 31, 1998.
Approximately 42% and 50% of the Company's sales for fiscal years 1998 and
1997, 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 following
its 1996 acquisition of MIC Technology and the resulting expansion of its
Microelectronics business which is more commercially oriented, and a focusing of
resources towards developing standard products for the commercial market.
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.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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 adopted this standard effective July 1, 1998, as required, and does
not believe the adoption will result in a material change to its segment
disclosures in its fiscal 1999 annual financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities at their fair value.
In certain circumstances changes in the value of such derivatives may be
required to be recorded as gains or losses. Management believes that the impact
of this statement will not have a material effect on the Company's consolidated
financial statements.
<PAGE>
Market Risk
The Company is exposed to market risk related to changes in interest rates
and, to an immaterial extent, foreign currency exchange rates. Some of the
Company's debt is at fixed rates of interest or at a variable rate with an
interest rate swap agreement to effectively make it a fixed rate of interest.
That debt which is subject to a floating rate of interest (30-day LIBOR) and is
not hedged by an interest rate swap amounts to approximately $26.7 million at
March 31, 1999. If market interest rates increase by 10 percent from levels at
March 31, 1999, the effect on the Company's results of operations would not be
material.
Year 2000 Compliance
Management has initiated a company-wide program and has developed a formal
plan of implementation to prepare the Company for the Year 2000. This includes
taking actions designed to ensure that the Company's information technology
("IT") systems, products and infrastructure are Year 2000 compliant and that its
customers, suppliers and service providers have taken similar action. The
Company is in the process of evaluating its internal issues - all of its IT
systems, products, equipment and other facilities systems - and modifying items
that are not compliant. With respect to its external issues customers, suppliers
and service providers - the Company is surveying them primarily through written
correspondence. The Company expects to incur internal staff costs, as well as
consulting and other expenses, and believes the total costs to be incurred for
all internal Year 2000 compliance related projects will not have a material
impact on the Company's business, results of operations or financial condition.
The Company has completed substantially all of its investigation,
remediation and contingency planning activities for all mission critical systems
and areas. The Company has received written correspondence from substantially
all mission critical third parties indicating their compliance but has also
created contingency plans such as increasing inventory levels and identifying
alternative sources. Despite its efforts to survey its customers, suppliers and
service providers, management cannot be certain as to the actual Year 2000
readiness of these third parties or the impact that any non-compliance on their
part may have on the Company's business, results of operations or financial
condition, which impact may be material.
Results of Operations
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998
Net Sales. Net sales increased 28.4% to $108.4 million for the nine months
ended March 31, 1999 from $84.4 million for the nine months ended March 31,
1998. Net sales in the Microelectronics segment increased 29.3% to $68.1 million
for the nine months ended March 31, 1999 from $52.7 million for the nine months
ended March 31, 1998 due to increased sales volume in both microelectronic
modules and thin film interconnects and due to the acquisition of UTMC at the
end of February 1999. Net sales in the Test, Measurement and Other Electronics
segment increased 49.4% to $26.9 million for the nine months ended March 31,
1999 from $18.0 million for the nine months ended March 31, 1998 primarily due
to increased sales volume in both frequency synthesizers (including shipments on
the new Navy CASS program) and high speed automatic test systems (primarily
satellite payload test equipment for Hughes Space and Communications) and due to
the acquisition of Europtest in September 1998 offset in part by decreased sales
volume in stabilization and tracking devices. Net sales in the Isolator Products
segment decreased 2.5% to $13.4 million for the nine months ended March 31, 1999
from $13.7 million for the nine months ended March 31, 1998.
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 34.2% to $38.9
million for the nine months ended March 31, 1999 from $29.0 million for the nine
months ended March 31, 1998. Gross margin increased to 35.9% for the nine months
ended March 31, 1999 from 34.4% for the nine months ended March 31, 1998. The
increase was primarily a result of increased margins in the Microelectronics
segment reflecting the greater efficiencies of higher volume and a favorable
sales mix in that segment.
<PAGE>
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 14.3% to $18.3 million (16.9% of net sales) for the nine months ended
March 31, 1999 from $16.0 million (19.0% of net sales) for the nine months ended
March 31, 1998. The increase was primarily due to labor related expenses,
including salaries for additional hires.
Research and Development Costs. Research and development costs consist of
material, engineering labor and allocated overhead. Company sponsored research
and development costs (exclusive of the charge for acquired in-process research
and development) increased 95.8% to $6.9 million (6.3% of net sales) for the
nine months ended March 31, 1999 from $3.5 million (4.2% of net sales) for the
nine months ended March 31, 1998. The increase was primarily attributable to the
costs for development of a new low-cost, high speed, high performance frequency
synthesizer intended for commercial communication test systems.
Acquired In-Process Research and Development. In connection with the
acquisition of UTMC, the Company allocated $3.5 million of the purchase price to
incomplete research and development projects. This allocation represents the
estimated fair value based on future cash flows that have been adjusted by the
projects' completion percentage. At the acquisition date, the development of
these projects had not yet reached technological feasibility and the R&D in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the acquisition date.
The Company used an independent third-party appraiser to assess and value the
in- process research and development. The value assigned to this asset was
determined by identifying significant research projects for which technological
feasibility had not been established. In the case of UTMC, this included the
design, development, and testing activities associated with its Commercial
Products, Data Bus Products, Radiation Hardened ("RadHard") Products and ASIC
Products. The research and development projects are associated with the
introduction of several new products as well as specific significant
enhancements to existing products. Valuation of development efforts in the
future has been excluded from the R&D appraisal.
The nature of the efforts to develop the acquired in-process technology into
a commercially viable product relate to the completion of all planning,
designing, and prototyping and testing activities that are necessary to
establish that the proposed technologies meet their design specifications
including functional, technical and economic performance requirements.
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology in developing
a commercially viable product, estimating the resulting net cash flows from the
expected sales of such a product, and discounting the net cash flows to their
present value using an appropriate discount rate.
Revenue growth rates for UTMC were estimated by the third party appraiser
based on a detailed forecast prepared by management, as well as the appraiser's
discussions with finance, marketing and engineering representatives of Aeroflex
and UTMC. Allocation of total UTMC projected revenues to in-process R&D was
based on the appraiser's discussions with Aeroflex and UTMC management. A
significant portion of UTMC's future revenues is expected to originate from the
sale of products that are not yet completed. However, UTMC's existing products
and technologies are expected to generate sales through 2008. Management
believes that sales of the new products, if successfully completed, would begin
in the later half of 1999.
Selling, general and administrative expenses and profitability estimates were
determined based on management forecasts as well as an analysis of comparable
companies' margin expectations.
<PAGE>
The projections utilized in the transaction pricing and purchase price
allocation exclude the potential synergistic benefits related specifically to
Aeroflex's ownership. Due to the relatively early stage of the development and
reliance on future, unproven products and technologies, the cost of capital
(discount rate) for UTMC was estimated using venture capital rates of return.
Due to the nature of the forecast and the risks associated with the projected
growth and profitability of the development projects, a discount rate of 45
percent was used to discount cash flows from the in-process products. This
discount rate is commensurate with UTMC's market position, the uncertainties in
the economic estimates described above, the inherent uncertainty surrounding the
successful development of the purchased in-process technology, the useful life
of such technology, the profitability levels of such technology, and the
uncertainty related to technological advances that could render even UTMC's
development stage technologies obsolete.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate sales, development
costs or profitability, or the events associated with such projects will
transpire as estimated. For these reasons, actual results may vary from
projected results.
Remaining development efforts for UTMC's R&D include various phases of
design, development, and testing. Anticipated completion dates for the projects
in progress will occur in 1999 at which time the Company expects to begin
generating the economic benefits from the technologies. Funding for such
projects is expected to come from internally generated sources.
As evidenced by the continued support of the development of its projects,
management believes the Company has a reasonable chance of successfully
completing the R&D programs. However, as with all of Aeroflex's technology
development, there is risk associated with the completion of the UTMC R&D
projects, and there is no assurance that technological or commercial success
will be achieved.
If the development of UTMC's in-process research and development project is
unsuccessful, the sales and profitability of the Company may be adversely
affected in future periods. Commercial results are also subject to certain
market events, and risks, which are beyond the Company's control, such as trends
in technology, changes in government regulation, market size and growth, and
product introduction or other actions by competitors.
Other Expense (Income). Interest expense decreased to $1.0 million for the
nine months ended March 31, 1999 from $1.8 million for the nine months ended
March 31, 1998, primarily due to reduced levels of borrowings throughout most of
the current period. Other income of $734,000 for the nine months ended March 31,
1999 consisted primarily of interest income. Other expense was $41,000 for the
nine months ended March 31, 1998 comprised primarily of $102,000 of debenture
redemption costs net of $62,000 of interest income. Interest income increased
due to increased levels of cash equivalents throughout most of the current
period. The reduced levels of borrowings and the increased levels of cash
equivalents resulted from the net proceeds of $31.3 million from stock issued in
a public offering completed in March 1998. In connection with the acquisition of
UTMC at the end of February 1999, the Company used most of its cash equivalents
and increased its borrowings by $20.0 million.
Provision for Income Taxes. Income taxes recorded by the Company increased
70.9% to $4.7 million (an effective income tax rate of 34.9%, exclusive of the
special charge) for the nine months ended March 31, 1999 from $2.8 million (an
effective income tax rate of 36.0%) for the nine months ended March 31, 1998.
The income tax provisions for the two periods differed from the amount computed
by applying the U.S. Federal income tax rate to income before income taxes
primarily due to state and local income taxes and research and development
credits.
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net Sales. Net sales increased 30.1% to $40.6 million for the three months
ended March 31, 1999 from $31.2 million for the three months ended March 31,
1998. Net sales in the Microelectronics segment increased 31.4% to $25.8 million
for the three months ended March 31, 1999 from $19.6 million for the three
months ended March 31, 1998 primarily due to increased sales volume of
microelectronic modules and as a result of the acquisition of UTMC at the end of
February 1999. Net sales in the Test, Measurement and Other Electronics segment
increased 50.6% to $10.1 million for the three months ended March 31, 1999 from
$6.7 million for the three months ended March 31, 1998 primarily as a result of
increased sales volume of frequency synthesizers (including shipments on the new
Navy CASS program). Net sales in the Isolator Products segment decreased 3.6% to
$4.7 million for the three months ended March 31, 1999 from $4.9 million for the
three months ended March 31, 1998.
Gross Profit. Gross profit increased 41.5% to $15.4 million for the three
months ended March 31, 1999 from $10.9 million for the three months ended March
31, 1998. Gross margin increased to 37.9% for the three months ended March 31,
1999 from 34.9% for the three months ended March 31, 1998. The increase was
primarily a result of increased margins in the Microelectronics segment
reflecting the greater efficiencies of higher volume and because UTMC generally
has higher margins than the balance of the Company.
Selling, General and Administrative Costs. Selling, general and
administrative costs increased 22.3% to $6.9 million (17.0% of net sales) for
the three months ended March 31, 1999 from $5.7 million (18.1% of net sales) for
the three months ended March 31, 1998. The increase was primarily due to the
addition of UTMC expenses.
Research and Development Costs. Company sponsored research and development
costs (exclusive of the charge for acquired in-process research and development)
increased 74.2% to $2.6 million (6.4% of net sales) for the three months ended
March 31, 1999 from $1.5 million (4.7% of net sales) for the three months ended
March 31, 1998. The increase was primarily attributable to the acquisition of
UTMC, since UTMC generally has a larger amount of research and development
costs.
Acquired In-Process Research and Development. In connection with the
Company's purchase of UTMC, the Company allocated $3.5 million of the purchase
price to in-process research and development. Since the research and development
projects had not reached technological feasability, this $3.5 million was
charged to expense in the third quarter of fiscal 1999 in accordance with
generally accepted accounting principles.
Other Expense (Income). Interest expense decreased to $457,000 for the three
months ended March 31, 1999 from $548,000 for the three months ended March 31,
1998, primarily due to reduced levels of borrowings throughout most of the
current quarter. Other income, net was $190,000 for the three months ended March
31, 1999 including interest income of $184,000. Other income was $33,000 for the
three months ended March 31, 1998. Interest income increased due to increased
levels of cash equivalents throughout most of the current quarter. The reduced
levels of borrowings and the increased levels of cash equivalents resulted from
the net proceeds of $31.3 million from stock issued in a public offering
completed in March 1998. In connection with the acquisition of UTMC at the end
of February 1999, the Company used most of its cash equivalents and increased
its borrowings by $20.0 million.
Provision for Income Taxes. Income taxes recorded by the Company increased
66.0% to $2.0 million (an effective income tax rate of 34.6% exclusive of the
special charge) for the three months ended March 31, 1999 from $1.2 million (an
effective income tax rate of 36.4%) for the three months ended March 31, 1998.
The income tax provisions for the two quarters differed from the amount computed
by applying the U.S. Federal income tax rate to income before income taxes
primarily due to state and local income taxes and research and development
credits.
<PAGE>
Liquidity and Capital Resources
As of February 25, 1999, the Company replaced a previous agreement with a
revised revolving credit, term loan and mortgage agreement with two banks which
is secured by substantially all of the Company's assets not otherwise
encumbered. The agreement provides for a revolving credit line of $23.0 million,
a term loan of $20.0 million and a mortgage on its Plainview property for $4.5
million. The revolving credit and term loans expire in December 2002. The term
loan is payable in quarterly installments of $1.25 million beginning September
30, 1999 with final payment on December 31, 2002. As of March 31, 1999, the
outstanding term loan was $17.5 million. The interest rate on borrowings under
this agreement is at various rates depending upon certain financial ratios, with
the current rate substantially equivalent to LIBOR (approximately 5.0% at March
31, 1999) plus 1.50% on the revolving credit borrowings and LIBOR plus 1.75% on
the term loan borrowings. The Company paid a facility fee of $100,000 and is
required to pay a commitment fee of .25% per annum of the average unused portion
of the credit line. The Company mortgaged its Plainview, NY property in the
amount of $4.5 million. This mortgage is payable in monthly installments of
approximately $26,000 through March, 2008 and a balloon payment of $1.6 million
in April 2008. The interest rate under this agreement is at various rates
depending upon certain financial ratios, with the current rate substantially
equivalent to LIBOR plus 1.50%.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. In connection
with the purchase of certain materials for use in manufacturing, the Company has
a letter of credit facility of $2.0 million. At March 31, 1999, the Company's
available unused line of credit was approximately $21.0 million after
consideration of the letter of credit.
On December 29, 1998, the Company financed the acquisition and renovation of
the land and building of its Pearl River, NY facility and received proceeds
amounting to $4.2 million. These borrowings are payable in annual installments
of approximately $200,000 payable through 2019.
In March 1998, the Company sold 2.6 million shares of its Common Stock in a
public offering for $31.3 million, net of an underwriting discount of $2.0
million and issuance costs of $496,000. Of these net proceeds, $9.6 million was
used to repay bank indebtedness. The balance of the net proceeds was used
primarily for the acquisition of UTMC.
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 104-1/2% of the principal amount. The Debentures were convertible
into the Company's Common Stock at a price of $5-5/8 per share through October
6, 1997. As of October 1997, all of the principal amount outstanding was
converted into Common Stock.
The Company's order backlog at March 31, 1999 and 1998 was $92.1 million and
$69.4 million, respectively.
As of March 31, 1999, the Company had $45.8 million in working capital. The
Company's net cash provided by operating activities was $7.2 million for the
nine months ended March 31, 1999. Net cash used in investing activities was
$49.4 million for the nine months ended March 31, 1999, consisting primarily of
$43.5 million for the acquisition of both UTMC and Europtest and $6.9 million
for capital expenditures (including $2.5 million for the acquisition of a
previously leased operating facility in Pearl River, NY) offset by the proceeds
from the sale of equipment of $1.0 million under a sale-leaseback arrangement.
Net cash provided by financing activities was $21.3 million for the nine months
ended March 31, 1999, consisting primarily of the proceeds of $20.0 million from
the revised revolving credit and term loan facility and $4.2 million from the
financing of the Pearl River, NY facility, offset, in part, by debt payments of
$3.9 million.
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.
<PAGE>
Forward-Looking Statements
All statements other than statements of historical fact included in this
Report on Form 10-Q, including without limitation statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
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 Report on Form 10-Q, 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, 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, the
ability of the Company to integrate the production facilities of UTMC, 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.
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On February 10, 1999, the Company amended its Certificate of
Incorporation to increase its authorized capital stock to 41,000,000
shares, of which 40,000,000 shares are common stock, $0.10 par value
and 1,000,000 are preferred stock, $0.10 par value from 26,000,000
shares, of which 25,000,000 were common stock, $0.10 par value and
1,000,000 were preferred stock, $0.10 par value.
In connection with the amendment to the Company's Certificate of
Incorporation, on February 10, 1999, the Company amended its
Certificate of Designation for its Series A Junior Participating
Preferred Stock to increase the number of shares designated to 40,000
from 25,000
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement dated as of March 1, 1999 between the
Company and Harvey R. Blau.
10.2 Employment Agreement dated as of March 1, 1999 between the
Company and Michael Gorin.
10.3 Employment Agreement dated as of March 1, 1999 between the
Company and Leonard Borow.
27 Financial Data Schedule
(b) Reports on Form 8-K
(1) Current Report on Form 8-K dated February 25, 1999 covering
Item 2- Acquisition or Disposition of Assets, Item 5 - Other
Events and Item 7 - Financial Statements, Pro Forma
Financial Information and Exhibits.
(2) Report on Form 8-K/A dated May 5, 1999 covering Item 7 -
Financial Statements, Pro Forma Financial Information and
Exhibits.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AEROFLEX INCORPORATED
(REGISTRANT)
May 12, 1999 By: s/Michael Gorin
--------------------------------
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements for the nine months ended March 31, 1999 and
is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,515
<SECURITIES> 0
<RECEIVABLES> 32,957
<ALLOWANCES> 301
<INVENTORY> 34,719
<CURRENT-ASSETS> 78,300
<PP&E> 82,551
<DEPRECIATION> 32,763
<TOTAL-ASSETS> 159,988
<CURRENT-LIABILITIES> 32,475
<BONDS> 0
0
0
<COMMON> 1,793
<OTHER-SE> 93,701
<TOTAL-LIABILITY-AND-EQUITY> 159,988
<SALES> 108,430
<TOTAL-REVENUES> 108,430
<CGS> 69,504
<TOTAL-COSTS> 98,184
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024
<INCOME-PRETAX> 9,956
<INCOME-TAX> 4,700
<INCOME-CONTINUING> 5,256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,256
<EPS-PRIMARY> .30
<EPS-DILUTED> .28
</TABLE>
April 15, 1999
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of March
1, 1999 (the "Effective Date"), by and between Aeroflex Incorporated, a Delaware
corporation, with its principal office located at 35 South Service Road,
Plainview, New York 11803 (together with its successors and assigns permitted
under this Agreement, "Aeroflex") and Harvey R. Blau, who resides at 125
Wheatley Road, Old Westbury, New York 11568 ("Blau"), amends and restates in its
entirety the original agreement made and entered into as of July 1, 1994 between
Aeroflex and Blau, as subsequently amended through July 1, 1998 (the "Prior
Agreement").
WITNESSETH:
WHEREAS, Aeroflex has determined that it is in the best interests of
Aeroflex and its stockholders to continue to employ Blau and to set forth in
this Agreement the obligations and duties of both Aeroflex and Blau; and
WHEREAS, Aeroflex wishes to assure itself of the services of Blau for the
period hereinafter provided, and Blau is willing to be employed by Aeroflex for
said period, upon the terms and conditions provided in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, Aeroflex and Blau (individually a "Party" and
together the "Parties") agree as follows:
1. DEFINITIONS.
(a) "Beneficiary" shall mean the person or persons named by Blau pursuant
to Section 17 below or, in the event that no such person is named who survives
Blau, his estate.
(b) "Board" shall mean the Board of Directors of Aeroflex.
(c) "Cause" shall mean:
(i) Blau's conviction of a felony involving an act or acts of dishonesty on
his part and resulting or intended to result directly or indirectly in gain or
personal enrichment at the expense of Aeroflex;
(ii) willful and continued failure of Blau to perform his obligations under
this Agreement, resulting in demonstrable material economic harm to Aeroflex, or
(iii) a material breach by Blau of the provisions of Sections 14 or 15
below to the demonstrable and material detriment of Aeroflex.
Notwithstanding the foregoing, in no event shall Blau's failure to perform
the duties associated with his position caused by his mental or physical
disability constitute Cause for his termination.
For purposes of this Section 1(c), no act or failure to act on the part of
Blau shall be considered "willful" unless it is done, or omitted to be done, by
him in bad faith or without reasonable belief that his action or omission was in
the best interests of Aeroflex. Any act or failure to act based upon authority
given pursuant to a resolution adopted by the Board or based upon the advice of
counsel for Aeroflex shall be conclusively presumed to be done, or omitted to be
done, by Blau in good faith and in the best interests of Aeroflex.
<PAGE>
(d) "Change in Control" shall mean the occurrence of any of the following
events:
(i) the acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as
amended (the "Exchange Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities
of Aeroflex when such acquisition causes such Person to own 20 percent or more
of the combined voting power of the then outstanding voting securities of
Aeroflex entitled to vote generally in the election of directors (the
"Outstanding Aeroflex Voting Securities"); provided, however, that for purposes
of this subsection (i), the following acquisitions shall not be deemed to result
in a Change in Control: (A) any acquisition directly from Aeroflex, (B) any
acquisition by Aeroflex, (C) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by Aeroflex or any corporation controlled
by Aeroflex or (D) any acquisition pursuant to a transaction that complies with
clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that
if any Person's beneficial ownership of the Outstanding Aeroflex Voting
Securities reaches or exceeds 20 percent as a result of a transaction described
in clause (A) or (B) above, and such Person subsequently acquires beneficial
ownership of additional voting securities of Aeroflex, such subsequent
acquisition shall be treated as an acquisition that causes such Person to own 20
percent or more of the Outstanding Aeroflex Voting Securities; or
(ii) individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the Effective Date whose election, or nomination for election by Aeroflex's
stockholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding for this purpose
any such individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(iii) consummation of a reorganization, merger or consolidation or sale or
other disposition of all or subsequently all of the assets of Aeroflex or the
acquisition of assets of another entity ("Business Combination"); excluding,
however, such a Business Combination pursuant to which (A) all or substantially
all of the individuals and entities who were the beneficial owners of the
Outstanding Aeroflex Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 60 percent of,
respectively, the then outstanding shares of common stock or the combined voting
power of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation resulting from
such Business Combination (including, without limitation, a corporation that as
a result of such transaction owns Aeroflex or all or substantially all of
Aeroflex's assets either directly or through one or more subsidiaries) in
<PAGE>
substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Aeroflex Voting Securities, (B) no
Person (excluding any employee benefit plan (or related trust) of Aeroflex or
such corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20 percent or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(iv) approval by the stockholders of Aeroflex of a complete liquidation or
dissolution of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Committee" shall mean the Compensation Committee of the Board.
(g) "Consulting Period" shall mean the period specified in Section 13 below
during which Blau serves as a consultant to Aeroflex.
(h) "Disability" shall mean the illness or other mental or physical
disability of Blau, as determined by a physician acceptable to Aeroflex and
Blau, resulting in his failure during the Employment Term or the Consulting
Period, as the case may be, (i) to perform substantially his applicable material
duties under this Agreement for a period of nine consecutive months and (ii) to
return to the performance of his duties within 30 days after receiving written
notice of termination.
(i) "Employment Term" shall mean the period specified in Section 2(b)
below.
(j) "Fiscal Year" shall mean the 12-month period beginning on July 1 and
ending on the next subsequent June 30, or such other 12-month period as may
constitute Aeroflex's fiscal year at any time hereafter.
(k) "Good Reason" shall mean, at any time during the Employment Term,
without Blau's prior written consent or his acquiescence:
(i) reduction in his then current Salary;
(ii) diminution, reduction or other adverse change in the bonus or
incentive compensation opportunities available to Blau (with respect to the
level of bonus or incentive compensation opportunities, the applicable
performance criteria and otherwise the manner in which bonuses and incentive
compensation are determined) in the aggregate from those available as of the
Effective Date in accordance with Section 4(a) below;
(iii) Aeroflex's failure to pay Blau any amounts otherwise vested and due
him hereunder or under any plan or policy of Aeroflex;
(iv) diminution of Blau's titles, position, authorities or
responsibilities, including not serving on the Board;
(v) assignment to Blau of duties incompatible with his position of Chief
Executive Officer;
<PAGE>
(vi) termination by Blau of his employment within one year following a
Change in Control other than (a) by mutual agreement, (b) for Cause or (c) by
reason of Retirement, death or Disability;
(vii) imposition of a requirement that Blau report other than directly to
the full Board;
(viii) a material breach of the Agreement by Aeroflex that is not cured
within 10 business days after written notification by Blau of such breach; or
(ix) relocation of Aeroflex's corporate headquarters to a location more
than 35 miles from the location first above described.
(l) "Retirement" shall mean termination of Blau's employment, other than
due to death, with eligibility to receive a benefit under the terms of
Aeroflex's Supplemental Executive Retirement Plan as then in effect.
(m) "Salary" shall mean the annual salary provided for in Section 3 below,
as adjusted from time to time.
(n) "Spouse" shall mean, during the Employment Term and the Consulting
Period, the woman who as of any relevant date is legally married to Blau.
(o) "Subsidiary" shall mean any corporation of which Aeroflex owns,
directly or indirectly, more than 50 percent of its voting stock.
2. EMPLOYMENT TERM, POSITIONS AND DUTIES.
(a) Employment of Blau. Aeroflex hereby continues to employ Blau, and Blau
hereby accepts continued employment with Aeroflex, in the positions and with the
duties and responsibilities set forth below and upon such other terms and
conditions as are hereinafter stated. Blau shall render services to Aeroflex
principally at Aeroflex's corporate headquarters, but he shall do such traveling
on behalf of Aeroflex as shall be reasonably required in the course of the
performance of his duties hereunder.
(b) Employment Term. The Employment Term shall commence on the Effective
Date and shall terminate on June 30, 2004.
(c) Titles and Duties.
(i) Until the date of termination of his employment hereunder, Blau shall
be employed as Chief Executive Officer, reporting to the full Board. In his
capacity as Chief Executive Officer, Blau shall have the customary powers,
responsibilities and authorities of chief executive officers of corporations of
the size, type and nature of Aeroflex including, without limitation, authority,
in conjunction with the Board as appropriate, to hire and terminate other
employees of Aeroflex.
(ii) During the Employment Term, Aeroflex shall uses its best efforts to
secure the election of Blau to the Board and to the chairmanship thereof. During
the Employment Term, if the Board forms an executive or similar committee, Blau
shall serve thereon.
(d) Time and Effort.
(i) Blau agrees to devote his best efforts and abilities, and such of his
business time and attention as is reasonably necessary, to the affairs of
Aeroflex in order to carry out his duties and responsibilities under this
Agreement. The Parties hereby acknowledge that Blau is chairman of the board of
Griffon Corporation and senior partner of the law firm, Blau, Kramer, Wactlar &
Lieberman, P.C. and that during the Employment Term he will be devoting time and
attention to those activities.
<PAGE>
(ii) Notwithstanding the foregoing, nothing shall preclude Blau from (A)
serving on the boards of a reasonable number of trade associations, charitable
organizations and/or businesses not in competition with Aeroflex, (B) engaging
in charitable activities and community affairs and (C) managing his personal
investments and affairs; provided, however, that, such activities do not
materially interfere with the proper performance of his duties and
responsibilities specified in Section 2 (c) above.
3. SALARY.
(a)Initial Salary. Blau shall receive from Aeroflex a Salary, payable in
accordance with the regular payroll practices of Aeroflex, in a minimum amount
of $275,000.
(b) Cost-of-Living Increase. During the Employment Term, Blau's Salary
shall be increased semiannually by an amount equal to the increase in the cost
of living for the immediately preceding calendar half-year, as reported in the
"Consumer Price Index, New York and Northeastern New Jersey, All Items,"
published by the United States Department of Labor, Bureau of Labor Statistics
(or, if such index is no longer published, a successor or comparable index that
is published). Such amount shall be calculated and paid to Blau in a single sum
on or before the first day of the second month following the applicable calendar
half year, and thereafter his Salary shall be deemed to include the amount of
any such increase. The first calculation and payment shall be made on or before
August 1, 1999 with respect to the period July 1, 1998 through June 30, 1999. If
Blau's employment shall terminate during any such six-month period, the
cost-of-living increase provided in this Section 3(b) shall be prorated
accordingly.
(c) Salary Increase. Any amount to which Blau's Salary is increased, as
provided in Section 3(b) above or otherwise, shall not thereafter be reduced
without his consent, and the term "Salary" as used in this Agreement shall refer
to his Salary as thus increased.
4. BONUSES.
(a) Annual Bonus. For each Fiscal Year during the Employment Term Blau
shall be eligible to receive an annual bonus equal to 3 percent of Aeroflex's
consolidated pre-tax earnings for such Fiscal Year, computed without regard to
any amount due under this Section 4(a). Any such bonus payable with respect to a
portion of a Fiscal Year shall be prorated accordingly. Blau shall be entitled
to elect to defer, under the terms of any deferred compensation agreement or
annual incentive compensation plan applicable to him and then in effect, any
portion of his annual bonus that is not already subject to deferral thereunder.
(b) Special Bonus. Blau shall be eligible to receive additional bonuses
during the Employment Term. The Committee shall determine, in its discretion,
the occasion for payment, and the amount, of any such bonus.
5. LONG-TERM INCENTIVE.
During the Employment Term, Blau shall be eligible for an award under any
long-term incentive compensation plan established by Aeroflex for the benefit of
Blau or, in the absence thereof, under any such plan established for the benefit
of members of the senior management of Aeroflex.
<PAGE>
6. EQUITY OPPORTUNITY.
During the Employment Term, Blau shall be eligible to receive grants of
options to purchase shares of Aeroflex's stock and awards of shares of
Aeroflex's stock, either or both as determined by the Committee, under and in
accordance with the terms of applicable plans of Aeroflex and related option and
award agreements. It is the intention of Aeroflex to grant stock options to Blau
during the Employment Term. Also, to the extent permitted by any such plan, Blau
shall be eligible during any Consulting Period to receive grants of options and
awards of shares of Aeroflex's stock in the same manner.
7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS.
During the Employment Term and any Consulting Period, Blau shall be
entitled to prompt reimbursement by Aeroflex for all reasonable out-of-pocket
expenses incurred by him in performing services under this Agreement, upon his
submission of such accounts and records as may be reasonably required by
Aeroflex. In addition, Blau shall be entitled to payment by Aeroflex of all
reasonable costs and expenses, including attorneys' and consultants' fees and
disbursements, incurred by him in connection with adoption of this Agreement and
any related compensatory arrangements that Aeroflex adopts solely for his
benefit.
8. PERQUISITES.
During the Employment Term and, and any Consulting Period, Aeroflex shall
provide Blau with the following perquisites:
(a) an office of a size and with furnishings and other appointments, and
exclusive personal secretarial and other assistance, at least equal to that
provided to other executive officers of Aeroflex as of the Effective Date; and
(b) payment of club dues and the use of an automobile and payment of
related expenses on the same terms as are in effect on the Effective Date or, if
more favorable to Blau, as are made available generally to other executive
officers of Aeroflex at any time thereafter.
9. EMPLOYEE BENEFIT PLANS.
(a) General. During the Employment Term, Blau shall be entitled to
participate in all employee benefit plans and programs that are made available
to Aeroflex's senior executives or to its employees generally, as such plans or
programs may be in effect from time to time, including, without limitation,
pension and other retirement plans, profit-sharing plans, savings and similar
plans, group life insurance, accidental death and dismemberment insurance,
travel accident insurance, hospitalization insurance, surgical insurance, major
and excess major medical insurance, dental insurance, short-term and long-term
disability insurance, sick leave (including salary continuation arrangements),
holidays, vacation (not less than four weeks in any calendar year) and any other
employee benefit plans or programs that may be sponsored by Aeroflex from time
to time, including plans that supplement the above-listed types of plans,
whether funded or unfunded.
<PAGE>
(b) Medical Care Reimbursement and Insurance. During the Employment Term
and Consulting Period, Aeroflex shall reimburse Blau for 100 percent of any
medical expenses incurred by him for himself and his Spouse that are not
reimbursed by insurance or otherwise, offset by any amounts that are
reimbursable by Medicare if Blau and his Spouse, when eligible, elect to be
covered by Medicare. Aeroflex shall provide Blau and his Spouse during his
lifetime with hospitalization insurance, surgical insurance, major and excess
major medical insurance and dental insurance in accordance with the most
favorable plans, policies, programs and practices of Aeroflex and its
Subsidiaries made available generally to other senior executive officers of
Aeroflex and its Subsidiaries as in effect from time to time.
(c) Life Insurance Benefit. In addition to the group life insurance
available to employees generally, Aeroflex shall provide Blau with an individual
permanent life insurance benefit in an initial amount of not less than
approximately $250,000, the terms and conditions of such benefit to be more
fully described in an insurance ownership agreement between Blau and Aeroflex.
(d) Disability Benefit. In consideration of the benefit payable to Blau in
the event of termination of his employment due to Disability, as provided in
Section 10(e) below, or, if applicable, in the event of termination of Blau's
consulting services due to Disability during the Consulting Period, as provided
in Section 13(d) below, Aeroflex shall not be obligated to provide Blau with
long-term disability insurance. Notwithstanding the foregoing, if Aeroflex does
provide Blau with such insurance, he shall be the owner of any individual
policies obtained and shall pay the premiums thereon.
(e) Retirement Benefit. Blau shall be entitled to the benefits provided
under the Aeroflex Incorporated Supplemental Executive Retirement Plan (the
"SERP"); provided, however, that if Aeroflex fails to maintain the SERP, Blau's
retirement benefit shall be determined as if the SERP had remained in effect
until termination of his employment with Aeroflex by retirement. These benefits
are in addition to the benefits provided under this Agreement, and no
modification, amendment or termination of this Agreement shall affect Blau's
rights under the SERP as in effect on the Effective Date or, if more favorable
to Blau, as in effect at any time thereafter.
10. TERMINATION OF EMPLOYMENT.
(a) Termination by Mutual Agreement. The Parties may terminate this
Agreement by mutual agreement at any time. If they do so, Blau's entitlements
shall be as the Parties mutually agree.
(b) General. Notwithstanding anything to the contrary herein, in the event
of termination of Blau's employment under this Agreement, he or his Beneficiary,
as the case may be, shall be entitled to receive (in addition to payments and
benefits under, and except as specifically provided in, subsections (c) through
(h) below, as applicable):
(i) his Salary through the date of termination;
(ii) any unused vacation from prior years;
<PAGE>
(iii) any annual bonus for the current Fiscal Year, prorated to the date of
termination;
(iv) any annual or special bonus previously awarded but not yet paid to
him;
(v) any deferred compensation under any incentive compensation plan of
Aeroflex or any deferred compensation agreement then in effect;
(vi) any other compensation or benefits, including without limitation
long-term incentive compensation described in Section 5 above, benefits under
equity grants and awards described in Section 6 above and employee benefits
under plans described in Section 9 above, that have vested through the date of
termination or to which he may then be entitled in accordance with the
applicable terms and conditions of each grant, award or plan; and
(vii) reimbursement in accordance with Sections 9(a) and (b) above of any
business and medical expenses incurred by Blau or his Spouse, as applicable,
through the date of termination but not yet paid to him.
(c) Termination due to Retirement. In the event that Blau's employment
terminates due to Retirement, he shall be entitled, in addition to the
compensation and benefits specified in Section 10(b), to the benefits provided
under the SERP, as provided in Section 9(e) above. The Consulting Period shall
begin on the day following termination of Blau's employment by Retirement.
(d) Termination due to Death. In the event that Blau's employment
terminates due to his death, his Beneficiary shall be entitled, in addition to
the compensation and benefits specified in Section 10(b), to his Salary payable
for the remainder of the Employment Term at the rate in effect immediately
before such termination.
(e) Termination due to Disability. In the event of Disability, Aeroflex or
Blau may terminate Blau's employment. If Blau's employment terminates due to
Disability, he shall be entitled, in addition to the compensation and benefits
specified in Section 10(b), to his Salary payable for the remainder of the
Employment Term at the rate in effect immediately before such termination,
offset by any long-term disability insurance benefit that Aeroflex has provided
for him and for which it has paid the applicable group or individual insurance
premiums.
(f) Termination by Aeroflex for Cause. Aeroflex may terminate Blau's
employment hereunder for Cause only upon written notice to Blau not less than 30
days prior to any intended termination, which notice shall specify the grounds
for such termination in reasonable detail. Cause shall in no event be deemed to
exist except upon a finding reflected in a resolution approved by a majority
(excluding Blau) of the members of the Board (whose findings shall not be
binding upon or entitled to any deference by any court, arbitrator or other
decision-maker ruling on this Agreement) at a meeting of which Blau shall have
been given proper notice and at which Blau (and his counsel) shall have a
reasonable opportunity to present his case.
In the event that Blau's employment is terminated for Cause, he shall be
entitled only to the compensation and benefits specified in Section 10(b).
(g) Termination Without Cause or by Blau for Good Reason.
(i) Termination without Cause shall mean termination of Blau's employment
by Aeroflex and shall exclude termination (A) due to Retirement, death,
Disability or Cause or (B) by mutual agreement of Blau and Aeroflex. Aeroflex
shall provide Blau 15 days' prior written notice of termination by it without
Cause, and Blau shall provide Aeroflex 15 days' prior written notice of his
termination for Good Reason.
<PAGE>
(ii) In the event of termination by Aeroflex of Blau's employment without
Cause or of termination by Blau of his employment for Good Reason, he shall be
entitled, in addition to the compensation and benefits specified in Section
10(b), to:
(A) his Salary, payable for the remainder of the Employment Term at the
rate in effect immediately before such termination;
(B) annual bonuses for the remainder of the Employment Term (including a
prorated bonus for any partial Fiscal Year) equal to the average of the three
highest annual bonuses awarded to him during the ten Fiscal Years preceding the
Fiscal Year of termination, such bonuses to be paid at the same time annual
bonuses are regularly paid by Aeroflex to Blau;
(C) continued medical reimbursement for the remainder of the Employment
Term and thereafter the lifetime medical benefits described in Section 9(b)
above;
(D) a lump-sum payment equal to the then present value of the excess, if
any, of (x) the retirement benefit to which Blau would have been entitled if he
had remained employed under this Agreement until age 70 over (y) the early
retirement benefit actually payable to him, both as calculated and payable under
the SERP; and
(E) continued participation in all employee benefit plans or programs
available to Aeroflex employees generally in which Blau was participating on the
date of termination of his employment until the end of the Employment Term;
provided; however, that (x) if Blau is precluded from continuing his
participation in any employee benefit plan or program as provided in this clause
(E), he shall be entitled to the after-tax economic equivalent of the benefits
under the plan or program in which he is unable to participate until the end of
the Employment Term, and (y) the economic equivalent of any benefit foregone
shall be deemed to be the lowest cost that Blau would incur in obtaining such
benefit on an individual basis; and
(F) other benefits in accordance with applicable plans and programs of the
Company.
(iii) Prior written consent by Blau to any of the events described in
Section 1(k) above shall be deemed a waiver by him of his right to terminate for
Good Reason under this Section 10(g) solely by reason of the events set forth in
such waiver.
(h) Change in Control. Notwithstanding anything to the contrary in this
Section 10, termination of Blau's employment within the one-year period
following a Change in Control for any reason other than Cause, Retirement, death
or Disability, shall be governed by Section 10(g). In the event of any such
termination, Blau shall be entitled to compensation and benefits in accordance
with the provisions of Section 10(g)(ii).
11. NO DUTY TO MITIGATE; NO OFFSET.
Blau shall not be required to mitigate damages or the amount of any payment
provided for under this Agreement by seeking other employment or otherwise, nor
will any payment hereunder be subject to offset in the event Blau does receive
compensation for services from any other source.
<PAGE>
12. PARACHUTES.
(a) Application. If all, or any portion, of the payments provided under
this Agreement, and/or any other payments and benefits that Blau receives or is
entitled to receive from Aeroflex or a Subsidiary, whether or not under an
existing plan, arrangement or other agreement, constitutes an "excess parachute
payment" within the meaning of Section 280G(b) of the Code (each such parachute
payment, a "Parachute Payment") and will result in the imposition on Blau of an
excise tax under Section 4999 of the Code, then, in addition to any other
benefits to which Blau is entitled under this Agreement, Aeroflex shall pay him
an amount in cash equal to the sum of the excise taxes payable by him by reason
of receiving Parachute Payments, plus the amount necessary to put him in the
same after-tax position (taking into account any and all applicable federal,
state and local excise, income or other taxes at the highest possible applicable
rates on such Parachute Payments (including without limitation any payments
under this Section 12) as if no excise taxes had been imposed with respect to
Parachute Payments (the "Parachute Gross-up").
(b) Computation. The amount of any payment under this Section 12 shall be
computed by a certified public accounting firm of national reputation selected
by Aeroflex and acceptable to Blau. If Aeroflex or Blau disputes the computation
rendered by such accounting firm, Aeroflex shall select an alternative certified
public accounting firm of national reputation to perform the applicable
computation. If the two accounting firms cannot agree upon the computations,
Blau and Aeroflex shall jointly appoint a third certified public accounting firm
of national reputation within 10 calendar days after the two conflicting
computations have been rendered. Such third accounting firm shall be asked to
determine within 30 calendar days the computation of the Parachute Gross-up to
be paid to Blau, and payments shall be made accordingly.
(c) Payment. In any event, Aeroflex shall pay to Blau or pay on his behalf
the Parachute Gross-up as computed by the accounting firm initially selected by
Blau by the time any taxes payable by him as a result of the Parachute Payments
become due, with Blau agreeing to return the excess amount of such payment over
the final computation rendered from the process described in Section 12(b). Blau
and Aeroflex shall provide the accounting firms with all information that any of
them reasonably deems necessary in order to compute the Parachute Gross-up. The
cost and expenses of all the accounting firms retained to perform the
computations described above shall be borne by Aeroflex.
In the event that the Internal Revenue Service ("IRS") or the accounting
firm computing the Parachute Gross-up finally determines that the amount of
excise taxes thereon initially paid was insufficient to discharge Blau's excise
tax liability, Aeroflex shall make additional payments to him as may be
necessary to reimburse him for discharging the full liability.
Blau shall apply to the IRS for a refund of any excise taxes paid and remit
to Aeroflex the amount of any such refund that he receives. Aeroflex shall
reimburse Blau for his expenses in seeking a refund of excise taxes and for any
interest and penalties imposed on excise taxes that he is required to pay.
<PAGE>
13. CONSULTING PERIOD.
(a) General. Effective upon the end of the Employment Term (but only if the
Employment Term ends by reason of its expiration or, if earlier, upon
termination of Blau's employment (i) by mutual agreement or (ii) by Retirement),
Blau shall become a consultant to Aeroflex, in recognition of the continued
value to Aeroflex of his extensive knowledge and expertise. Unless earlier
terminated, as provided in Section 13(e), the Consulting Period shall continue
for three years.
(b) Duties and Extent of Services.
(i) During the Consulting Period, Blau shall consult with Aeroflex and its
senior executive officers regarding its respective businesses and operations.
Such consulting services shall not require more than 50 days in any calendar
year, nor more than one day in any week, it being understood and agreed that
during the Consulting Period Blau shall have the right, consistent with the
prohibitions of Sections 14 and 15 below, to engage in full-time or part-time
employment with any business enterprise that is not a competitor of Aeroflex.
(ii) Blau's service as a consultant shall only be required at such times
and such places as shall not result in unreasonable inconvenience to him,
recognizing his other business commitments that he may have to accord priority
over the performance of services for Aeroflex. In order to minimize interference
with Blau's other commitments, his consulting services may be rendered by
personal consultation at his residence or office wherever maintained, or by
correspondence through mail, telephone, fax or other similar mode of
communication at times, including weekends and evenings, most convenient to him.
(iii) During the Consulting Period, Blau shall not be obligated to serve as
a member of the Board or to occupy any office on behalf of Aeroflex or any of
its Subsidiaries.
(c) Compensation. During the Consulting Period, Blau shall receive from
Aeroflex each year an amount equivalent to two-thirds of his Salary at the end
of the Employment Term, payable and subject to annual increase as provided in
Section 3 above.
(d) Disability. In the event of Disability during the Consulting Period,
Aeroflex or Blau may terminate Blau's consulting services. If Blau's consulting
services are terminated due to Disability, he shall be entitled to compensation,
in accordance with Section 13(c), for the remainder of the Consulting Period.
(e) Termination. The Consulting Period shall terminate after three years
or, if earlier, upon Blau's death or upon his failure to perform consulting
services as provided in Section 13(b), pursuant to 30 days' written notice by
Aeroflex to Blau of the grounds constituting such failure and reasonable
opportunity afforded Blau to cure the alleged failure. Upon any such
termination, payment of consulting fees and benefits (with the exception of
lifetime medical benefits under Section 9(b) above) shall cease.
(f) Other. During the Consulting Period, Blau shall be entitled to expense
reimbursement (including secretarial, telephone and similar support services)
and perquisites and medical benefits, pursuant to the terms of Sections 7, 8 and
9(b), respectively.
<PAGE>
14. CONFIDENTIAL INFORMATION.
(a) General.
(i) Blau understands and hereby acknowledges that as a result of his
employment with Aeroflex he will necessarily become informed of and have access
to certain valuable and confidential information of Aeroflex and any of its
Subsidiaries, joint ventures and affiliates, including, without limitation,
inventions, trade secrets, technical information, computer software and
programs, know-how and plans ("Confidential Information"), and that any such
Confidential Information, even though it may be developed or otherwise acquired
by Blau, is the exclusive property of Aeroflex to be held by him in trust solely
for Aeroflex's benefit.
(ii) Accordingly, Blau hereby agrees that, during the Employment Term and
the Consulting Period and subsequent to both, he shall not, and shall not cause
others to, use, reveal, report, publish, transfer or otherwise disclose to any
person, corporation or other entity any Confidential Information without prior
written consent of the Board, except to (A) responsible officers and employees
of Aeroflex or (B) responsible persons who are in a contractual or fiduciary
relationship with Aeroflex or who need such information for purposes in the
interest of Aeroflex. Notwithstanding the foregoing, the prohibitions of this
clause (ii) shall not apply to any Confidential Information that becomes of
general public knowledge other than from Blau or is required to be divulged by
court order or administrative process.
(b) Return of Documents. Upon termination of his employment with Aeroflex
for any reason or, if applicable, upon expiration of the Consulting Period, Blau
shall promptly deliver to Aeroflex all plans, drawings, manuals, letters, notes,
notebooks, reports, computer programs and copies thereof and all other
materials, including without limitation those of a secret or confidential
nature, relating to Aeroflex's business that are then in his possession or
control.
(c) Remedies and Sanctions. In the event that Blau is found to be in
violation of Section 14(a) or (b) above, Aeroflex shall be entitled to relief as
provided in Section 16 below.
15. NONCOMPETITION/NONSOLICITATION.
(a) Prohibitions. During the Employment Term and, if applicable, the
Consulting Period, Blau shall not, without prior written authorization of the
Board, directly or indirectly, through any other individual or entity:
(i) become on officer or employee of, or render any service to, any direct
competitor of Aeroflex;
(ii) solicit or induce any customer of Aeroflex to cease purchasing goods
or services from Aeroflex or to become a customer of any competitor of Aeroflex;
or
(iii) solicit or induce any employee of Aeroflex to become employed by any
competitor of Aeroflex.
(b) Remedies and Sanctions. In the event that Blau is found to be in
violation of Section 15(a) above, Aeroflex shall be entitled to relief as
provided in Section 16 below.
(c) Exceptions. Notwithstanding anything to the contrary in Section 15(a)
above, its provisions shall not:
<PAGE>
(i) apply if Aeroflex terminates Blau's employment without Cause or Blau
terminates his employment for Good Reason, each as provided in Section 10(g)
above;
(ii) be construed as preventing Blau from investing his assets in any
business that is not a direct competitor of Aeroflex; or
(iii) be construed as preventing Blau from maintaining the same level of
involvement in the affairs of Griffon Corporation that he has as of the
Effective Date.
16. REMEDIES/SANCTIONS.
Blau acknowledges that the services he is to render under this Agreement
are of a unique and special nature, the loss of which cannot reasonably or
adequately be compensated for in monetary damages, and that irreparable injury
and damage may result to Aeroflex in the event of any breach of this Agreement
or default by Blau. Because of the unique nature of the Confidential Information
and the importance of the prohibitions against competition and solicitation,
Blau further acknowledges and agrees that Aeroflex will suffer irreparable harm
if he fails to comply with his obligations under Section 14(a) or (b) above or
Section 15(a) above and that monetary damages would be inadequate to compensate
Aeroflex for any such breach. Accordingly, Blau agrees that, in addition to any
other remedies available to either Party at law, in equity or otherwise,
Aeroflex will be entitled to seek injunctive relief or specific performance to
enforce the terms, or prevent or remedy the violation, of any provisions of this
Agreement.
17. BENEFICIARIES/REFERENCES.
Blau shall be entitled to select (and change, to the extent permitted under
any applicable law) a beneficiary or beneficiaries to receive any compensation
or benefit payable under this Agreement following his death by giving Aeroflex
written notice thereof; provided, however, that absent any then effective
contrary notice, his beneficiary shall be his surviving Spouse. In the event of
Blau's death, or of a judicial determination of his incompetence, reference in
this Agreement to Blau shall be deemed to refer, as appropriate, to his
beneficiary, estate or other legal representative.
18. WITHHOLDING TAXES.
All payments to Blau or his Beneficiary under this Agreement shall be
subject to withholding on account of federal, state and local taxes as required
by law.
19. INDEMNIFICATION AND LIABILITY INSURANCE.
Nothing herein is intended to limit Aeroflex's indemnification of Blau, and
Aeroflex shall indemnify him to the fullest extent permitted by applicable law
consistent with Aeroflex's Certificate of Incorporation and By-Laws as in effect
on the Effective Date, with respect to any action or failure to act on his part
while he is an officer, director or employee of Aeroflex or any Subsidiary.
Aeroflex shall cause Blau to be covered at all times by directors' and officers'
liability insurance on terms no less favorable than the directors' and officers'
liability insurance maintained by Aeroflex as in effect on the Effective Date in
terms of coverage and amounts. Aeroflex shall continue to indemnify Blau as
provided above and maintain such liability insurance coverage for him after the
Employment Term and, if applicable, the Consulting Period for any claims that
may be made against him with respect to his service as a director or officer of
Aeroflex or a consultant to Aeroflex.
<PAGE>
20. EFFECT OF AGREEMENT ON OTHER BENEFITS.
The existence of this Agreement shall not prohibit or restrict Blau's
entitlement to participate fully in compensation, employee benefit and other
plans of Aeroflex in which senior executives are eligible to participate.
21. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of Blau) and
assigns. No rights or obligations of Aeroflex under this Agreement may be
assigned or transferred by Aeroflex except pursuant to (a) a merger or
consolidation in which Aeroflex is not the continuing entity or (b) sale or
liquidation of all or substantially all of the assets of Aeroflex, provided that
the surviving entity or assignee or transferee is the successor to all or
substantially all of the assets of Aeroflex and such surviving entity or
assignee or transferee assumes the liabilities, obligations and duties of
Aeroflex under this Agreement, either contractually or as a matter of law.
Aeroflex further agrees that, in the event of a sale of assets or
liquidation as described in the preceding sentence, it shall use its best
efforts to have such assignee or transferee expressly agree to assume the
liabilities, obligations and duties of Aeroflex hereunder; provided, however,
that notwithstanding such assumption, Aeroflex shall remain liable and
responsible for fulfillment of the terms and conditions of this Agreement; and
provided, further, that in no event shall such assignment and assumption of this
Agreement adversely affect Blau's rights upon a Change in Control, as provided
in Section 10(h) above. No rights or obligations of Blau under this Agreement
may be assigned or transferred by him.
22. REPRESENTATIONS.
The Parties respectively represent and warrant that each is fully
authorized and empowered to enter into this Agreement and that the performance
of its or his obligations, as the case may be, under this Agreement will not
violate any agreement between such Party and any other person, firm or
organization. Aeroflex represents and warrants that this Agreement has been duly
authorized by all necessary corporate action and is valid, binding and
enforceable in accordance with its terms.
23. ENTIRE AGREEMENT.
Except to the extent otherwise provided herein, this Agreement contains the
entire understanding and agreement between the Parties concerning the subject
matter hereof and supersedes any prior agreements, whether written or oral,
between the Parties concerning the subject matter hereof, including without
limitation the Prior Agreement. Payments and benefits provided under this
Agreement are in lieu of any payments or other benefits under any severance
program or policy of Aeroflex to which Blau would otherwise be entitled.
<PAGE>
24. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by both Blau and an authorized officer of
Aeroflex. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Party to be charged with the waiver. No delay by either Party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof.
25. SEVERABILITY.
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
26. SURVIVAL.
The respective rights and obligations of the Parties under this Agreement
shall survive any termination of Blau's employment with Aeroflex.
27. GOVERNING LAW/JURISDICTION.
This Agreement shall be governed by and construed and interpreted in
accordance with the laws of New York, without reference to principles of
conflict of laws.
28. COSTS OF DISPUTES.
Aeroflex shall pay, at least monthly, all costs and expenses, including
attorneys' fees and disbursements, of Blau in connection with any proceeding,
whether or not instituted by Aeroflex or Blau, relating to any provision of this
Agreement, including but not limited to the interpretation, enforcement or
reasonableness thereof; provided, however, that, if Blau institutes the
proceeding and the judge or other decision-maker presiding over the proceeding
affirmatively finds that his claims were frivolous or were made in bad faith, he
shall pay his own costs and expenses and, if applicable, return any amounts
theretofore paid to him or on his behalf under this Section 28. Pending the
outcome of any proceeding, Aeroflex shall pay Blau all amounts due to him
without regard to the dispute; provided, however, that if Aeroflex shall be the
prevailing party in such a proceeding, Blau shall promptly repay all amounts
that he received during pendency of the proceeding.
29. NOTICES.
Any notice given to either Party shall be in writing and shall be deemed to
have been given when delivered either personally, by fax, by overnight delivery
service (such as Federal Express) or sent by certified or registered mail
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as the Party may
subsequently give notice of.
<PAGE>
If to Aeroflex or the Board:
Aeroflex Incorporated
35 South Service Road
Plainview, NY 11803
Attention: ________________
FAX: (516) 694-4823
If to Blau:
Harvey R. Blau, Esq.
125 Wheatley Road
Old Westbury, NY 11568
30. HEADINGS.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
31. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which when so executed
and delivered shall be an original, but all such counterparts together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
Aeroflex Incorporated
Attest: /s/ Charles Badlato By: /s/ Michael Gorin
-------------------------- --------------------------
Witness:/s/ Nancy D. Lieberman /s/ Harvey R. Blau
-------------------------- --------------------------
Harvey R. Blau
April 15, 1999
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of March
1, 1999 (the "Effective Date"), by and between Aeroflex Incorporated, a Delaware
corporation, with its principal office located at 35 South Service Road,
Plainview, New York 11803 (together with its successors and assigns permitted
under this Agreement, "Aeroflex") and Michael Gorin, who resides at 112B East
Long Beach Road, Nissequogue, New York 11780 ("Gorin"), amends and restates in
its entirety the original agreement made and entered into as of July 1, 1994
between Aeroflex and Gorin, as subsequently amended through July 1, 1998 (the
"Prior Agreement").
WITNESSETH:
WHEREAS, Aeroflex has determined that it is in the best interests of
Aeroflex and its stockholders to continue to employ Gorin and to set forth in
this Agreement the obligations and duties of both Aeroflex and Gorin; and
WHEREAS, Aeroflex wishes to assure itself of the services of Gorin for the
period hereinafter provided, and Gorin is willing to be employed by Aeroflex for
said period, upon the terms and conditions provided in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, Aeroflex and Gorin (individually a "Party" and
together the "Parties") agree as follows:
1. DEFINITIONS.
(a) "Beneficiary" shall mean the person or persons named by Gorin pursuant
to Section 17 below or, in the event that no such person is named who survives
Gorin, his estate.
(b) "Board" shall mean the Board of Directors of Aeroflex.
(c) "Cause" shall mean:
(i) Gorin's conviction of a felony involving an act or acts of dishonesty
on his part and resulting or intended to result directly or indirectly in gain
or personal enrichment at the expense of Aeroflex;
(ii) willful and continued failure of Gorin to perform his obligations
under this Agreement, resulting in demonstrable material economic harm to
Aeroflex, or
(iii) a material breach by Gorin of the provisions of Sections 14 or 15
below to the demonstrable and material detriment of Aeroflex.
Notwithstanding the foregoing, in no event shall Gorin's failure to perform
the duties associated with his position caused by his mental or physical
disability constitute Cause for his termination.
For purposes of this Section 1(c), no act or failure to act on the part of
Gorin shall be considered "willful" unless it is done, or omitted to be done, by
him in bad faith or without reasonable belief that his action or omission was in
the best interests of Aeroflex. Any act or failure to act based upon authority
given pursuant to a resolution adopted by the Board or based upon the advice of
counsel for Aeroflex shall be conclusively presumed to be done, or omitted to be
done, by Gorin in good faith and in the best interests of Aeroflex.
<PAGE>
(d) "Change in Control" shall mean the occurrence of any of the following
events:
(i) the acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as
amended (the "Exchange Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d- 3 promulgated under the Exchange Act) of voting securities
of Aeroflex when such acquisition causes such Person to own 20 percent or more
of the combined voting power of the then outstanding voting securities of
Aeroflex entitled to vote generally in the election of directors (the
"Outstanding Aeroflex Voting Securities"); provided, however, that for purposes
of this subsection (i), the following acquisitions shall not be deemed to result
in a Change in Control: (A) any acquisition directly from Aeroflex, (B) any
acquisition by Aeroflex, (C) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by Aeroflex or any corporation controlled
by Aeroflex or (D) any acquisition pursuant to a transaction that complies with
clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that
if any Person's beneficial ownership of the Outstanding Aeroflex Voting
Securities reaches or exceeds 20 percent as a result of a transaction described
in clause (A) or (B) above, and such Person subsequently acquires beneficial
ownership of additional voting securities of Aeroflex, such subsequent
acquisition shall be treated as an acquisition that causes such Person to own 20
percent or more of the Outstanding Aeroflex Voting Securities; or
(ii) individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the Effective Date whose election, or nomination for election by Aeroflex's
stockholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding for this purpose
any such individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(iii) consummation of a reorganization, merger or consolidation or sale or
other disposition of all or subsequently all of the assets of Aeroflex or the
acquisition of assets of another entity ("Business Combination"); excluding,
however, such a Business Combination pursuant to which (A) all or substantially
all of the individuals and entities who were the beneficial owners of the
Outstanding Aeroflex Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 60 percent of,
respectively, the then outstanding shares of common stock or the combined voting
power of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation resulting from
such Business Combination (including, without limitation, a corporation that as
a result of such transaction owns Aeroflex or all or substantially all of
Aeroflex's assets either directly or through one or more subsidiaries) in
<PAGE>
substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Aeroflex Voting Securities, (B) no
Person (excluding any employee benefit plan (or related trust) of Aeroflex or
such corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20 percent or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(iv) approval by the stockholders of Aeroflex of a complete liquidation or
dissolution of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Committee" shall mean the Compensation Committee of the Board.
(g) "Consulting Period" shall mean the period specified in Section 13 below
during which Gorin serves as a consultant to Aeroflex.
(h) "Disability" shall mean the illness or other mental or physical
disability of Gorin, as determined by a physician acceptable to Aeroflex and
Gorin, resulting in his failure during the Employment Term or the Consulting
Period, as the case may be, (i) to perform substantially his applicable material
duties under this Agreement for a period of nine consecutive months and (ii) to
return to the performance of his duties within 30 days after receiving written
notice of termination.
(i) "Employment Term" shall mean the period specified in Section 2(b)
below.
(j) "Fiscal Year" shall mean the 12-month period beginning on July 1 and
ending on the next subsequent June 30, or such other 12-month period as may
constitute Aeroflex's fiscal year at any time hereafter.
(k) "Good Reason" shall mean, at any time during the Employment Term,
without Gorin's prior written consent or his acquiescence:
(i) reduction in his then current Salary;
(ii) diminution, reduction or other adverse change in the bonus or
incentive compensation opportunities available to Gorin (with respect to the
level of bonus or incentive compensation opportunities, the applicable
performance criteria and otherwise the manner in which bonuses and incentive
compensation are determined) in the aggregate from those available as of the
Effective Date in accordance with Section 4(a) below;
(iii) Aeroflex's failure to pay Gorin any amounts otherwise vested and due
him hereunder or under any plan or policy of Aeroflex;
(iv) diminution of Gorin's titles, position, authorities or
responsibilities, including not serving on the Board;
(v) assignment to Gorin of duties incompatible with his position as a
senior executive officer;
<PAGE>
(vi) termination by Gorin of his employment within one year following a
Change in Control other than (a) by mutual agreement, (b) for Cause or (c) by
reason of Retirement, death or Disability;
(vii) imposition of a requirement that Gorin report other than directly to
Aeroflex's Chief Executive Officer or to the full Board;
(viii) a material breach of the Agreement by Aeroflex that is not cured
within 10 business days after written notification by Gorin of such breach; or
(ix)relocation of Aeroflex's corporate headquarters to a location more than
35 miles from the location first above described.
(l) "Retirement" shall mean termination of Gorin's employment, other than
due to death, with eligibility to receive a benefit under the terms of
Aeroflex's Supplemental Executive Retirement Plan as then in effect.
(m) "Salary" shall mean the annual salary provided for in Section 3 below,
as adjusted from time to time.
(n) "Spouse" shall mean, during the Employment Term and the Consulting
Period, the woman who as of any relevant date is legally married to Gorin.
(o)"Subsidiary" shall mean any corporation of which Aeroflex owns, directly
or indirectly, more than 50 percent of its voting stock.
2. EMPLOYMENT TERM, POSITIONS AND DUTIES.
(a) Employment of Gorin. Aeroflex hereby continues to employ Gorin, and
Gorin hereby accepts continued employment with Aeroflex, in the positions and
with the duties and responsibilities set forth below and upon such other terms
and conditions as are hereinafter stated. Gorin shall render services to
Aeroflex principally at Aeroflex's corporate headquarters, but he shall do such
traveling on behalf of Aeroflex as shall be reasonably required in the course of
the performance of his duties hereunder.
(b) Employment Term. The Employment Term shall commence on the Effective
Date and shall terminate on June 30, 2004.
(c) Titles and Duties.
(i) Until the date of termination of his employment hereunder, Gorin shall
be employed as a senior executive officer of Aeroflex, reporting to the full
Board. In his capacity as a senior executive officer, Gorin shall have the
customary powers, responsibilities and authorities of senior executive officers
of corporations of the size, type and nature of Aeroflex including, without
limitation, authority, in conjunction with the Board as appropriate, to hire and
terminate other employees of Aeroflex.
(ii) During the Employment Term, Aeroflex shall uses its best efforts to
secure the election of Gorin to the Board. During the Employment Term, if the
Board forms an executive or similar committee, Gorin shall serve thereon.
(d) Time and Effort.
(i) Gorin agrees to devote his best efforts and abilities and his full
business time and attention to the affairs of Aeroflex in order to carry out his
duties and responsibilities under this Agreement.
(ii) Notwithstanding the foregoing, nothing shall preclude Gorin from (A)
serving on the boards of a reasonable number of trade associations, charitable
organizations and/or businesses not in competition with Aeroflex, (B) engaging
in charitable activities and community affairs and (C) managing his personal
investments and affairs; provided, however, that, such activities do not
materially interfere with the proper performance of his duties and
responsibilities specified in Section 2 (c) above.
<PAGE>
3. SALARY.
(a) Initial Salary. Gorin shall receive from Aeroflex a Salary, payable in
accordance with the regular payroll practices of Aeroflex, in a minimum amount
of $350,000.
(b) Cost-of-Living Increase. During the Employment Term, Gorin's Salary
shall be increased semiannually by an amount equal to the increase in the cost
of living for the immediately preceding calendar half-year, as reported in the
"Consumer Price Index, New York and Northeastern New Jersey, All Items,"
published by the United States Department of Labor, Bureau of Labor Statistics
(or, if such index is no longer published, a successor or comparable index that
is published). Such amount shall be calculated and paid to Gorin in a single sum
on or before the first day of the second month following the applicable calendar
half year, and thereafter his Salary shall be deemed to include the amount of
any such increase. The first calculation and payment shall be made on or before
August 1, 1999 with respect to the period July 1, 1998 through June 30, 1999. If
Gorin's employment shall terminate during any such six-month period, the
cost-of-living increase provided in this Section 3(b) shall be prorated
accordingly.
(c) Salary Increase. Any amount to which Gorin's Salary is increased, as
provided in Section 3(b) above or otherwise, shall not thereafter be reduced
without his consent, and the term "Salary" as used in this Agreement shall refer
to his Salary as thus increased.
4. BONUSES.
(a) Annual Bonus. For each Fiscal Year during the Employment Term Gorin
shall be eligible to receive an annual bonus equal to 3 percent of Aeroflex's
consolidated pre-tax earnings for such Fiscal Year, computed without regard to
any amount due under this Section 4(a). Any such bonus payable with respect to a
portion of a Fiscal Year shall be prorated accordingly. Gorin shall be entitled
to elect to defer, under the terms of any deferred compensation agreement or
annual incentive compensation plan applicable to him and then in effect, any
portion of his annual bonus that is not already subject to deferral thereunder.
(b) Special Bonus. Gorin shall be eligible to receive additional bonuses
during the Employment Term. The Committee shall determine, in its discretion,
the occasion for payment, and the amount, of any such bonus.
5. LONG-TERM INCENTIVE.
During the Employment Term, Gorin shall be eligible for an award under any
long-term incentive compensation plan established by Aeroflex for the benefit of
Gorin or, in the absence thereof, under any such plan established for the
benefit of members of the senior management of Aeroflex.
<PAGE>
6. EQUITY OPPORTUNITY.
During the Employment Term, Gorin shall be eligible to receive grants of
options to purchase shares of Aeroflex's stock and awards of shares of
Aeroflex's stock, either or both as determined by the Committee, under and in
accordance with the terms of applicable plans of Aeroflex and related option and
award agreements. It is the intention of Aeroflex to grant stock options to
Gorin during the Employment Term. Also, to the extent permitted by any such
plan, Gorin shall be eligible during any Consulting Period to receive grants of
options and awards of shares of Aeroflex's stock in the same manner.
7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS.
During the Employment Term and any Consulting Period, Gorin shall be
entitled to prompt reimbursement by Aeroflex for all reasonable out-of-pocket
expenses incurred by him in performing services under this Agreement, upon his
submission of such accounts and records as may be reasonably required by
Aeroflex. In addition, Gorin shall be entitled to payment by Aeroflex of all
reasonable costs and expenses, including attorneys' and consultants' fees and
disbursements, incurred by him in connection with adoption of this Agreement and
any related compensatory arrangements that Aeroflex adopts solely for his
benefit.
8. PERQUISITES.
During the Employment Term and, and any Consulting Period, Aeroflex shall
provide Gorin with the following perquisites:
(a) an office of a size and with furnishings and other appointments, and
exclusive personal secretarial and other assistance, at least equal to that
provided to Gorin by Aeroflex as of the Effective Date; and
(b) the use of an automobile and payment of related expenses on the same
terms as are in effect on the Effective Date or, if more favorable to Gorin, as
are made available generally to other executive officers of Aeroflex at any time
thereafter.
9. EMPLOYEE BENEFIT PLANS.
(a) General. During the Employment Term, Gorin shall be entitled to
participate in all employee benefit plans and programs that are made available
to Aeroflex's senior executives or to its employees generally, as such plans or
programs may be in effect from time to time, including, without limitation,
pension and other retirement plans, profit-sharing plans, savings and similar
plans, group life insurance, accidental death and dismemberment insurance,
travel accident insurance, hospitalization insurance, surgical insurance, major
and excess major medical insurance, dental insurance, short-term and long-term
disability insurance, sick leave (including salary continuation arrangements),
holidays, vacation (not less than four weeks in any calendar year) and any other
employee benefit plans or programs that may be sponsored by Aeroflex from time
to time, including plans that supplement the above-listed types of plans,
whether funded or unfunded.
(b) Medical Care Reimbursement and Insurance. During the Employment Term
and Consulting Period, Aeroflex shall reimburse Gorin for 100 percent of any
medical expenses incurred by him for himself and his Spouse that are not
reimbursed by insurance or otherwise, offset by any amounts that are
reimbursable by Medicare if Gorin and his Spouse, when eligible, elect to be
covered by Medicare. Aeroflex shall provide Gorin and his Spouse during his
lifetime with hospitalization insurance, surgical insurance, major and excess
major medical insurance and dental insurance in accordance with the most
favorable plans, policies, programs and practices of Aeroflex and its
Subsidiaries made available generally to other senior executive officers of
Aeroflex and its Subsidiaries as in effect from time to time.
<PAGE>
(c) Life Insurance Benefit. In addition to the group life insurance
available to employees generally, Aeroflex shall provide Gorin with an
individual permanent life insurance benefit in an initial amount of not less
than approximately $1,000,000, the terms and conditions of such benefit to be
more fully described in an insurance ownership agreement between Gorin and
Aeroflex.
(d) Disability Benefit. In consideration of the benefit payable to Gorin in
the event of termination of his employment due to Disability, as provided in
Section 10(e) below, or, if applicable, in the event of termination of Gorin's
consulting services due to Disability during the Consulting Period, as provided
in Section 13(d) below, Aeroflex shall not be obligated to provide Gorin with
long-term disability insurance. Notwithstanding the foregoing, if Aeroflex does
provide Gorin with such insurance, he shall be the owner of any individual
policies obtained and shall pay the premiums thereon.
(e) Retirement Benefit. Gorin shall be entitled to the benefits provided
under the Aeroflex Incorporated Supplemental Executive Retirement Plan (the
"SERP"); provided, however, that if Aeroflex fails to maintain the SERP, Gorin's
retirement benefit shall be determined as if the SERP had remained in effect
until termination of his employment with Aeroflex by retirement. These benefits
are in addition to the benefits provided under this Agreement, and no
modification, amendment or termination of this Agreement shall affect Gorin's
rights under the SERP as in effect on the Effective Date or, if more favorable
to Gorin, as in effect at any time thereafter.
10. TERMINATION OF EMPLOYMENT.
(a) Termination by Mutual Agreement. The Parties may terminate this
Agreement by mutual agreement at any time. If they do so, Gorin's entitlements
shall be as the Parties mutually agree.
(b) General. Notwithstanding anything to the contrary herein, in the event
of termination of Gorin's employment under this Agreement, he or his
Beneficiary, as the case may be, shall be entitled to receive (in addition to
payments and benefits under, and except as specifically provided in, subsections
(c) through (h) below, as applicable):
(i) his Salary through the date of termination;
(ii) any unused vacation from prior years;
(iii) any annual bonus for the current Fiscal Year, prorated to the date of
termination;
(iv) any annual or special bonus previously awarded but not yet paid to
him;
(v) any deferred compensation under any incentive compensation plan of
Aeroflex or any deferred compensation agreement then in effect;
<PAGE>
(vi) any other compensation or benefits, including without limitation
long-term incentive compensation described in Section 5 above, benefits under
equity grants and awards described in Section 6 above and employee benefits
under plans described in Section 9 above, that have vested through the date of
termination or to which he may then be entitled in accordance with the
applicable terms and conditions of each grant, award or plan; and
(vii) reimbursement in accordance with Sections 9(a) and (b) above of any
business and medical expenses incurred by Gorin or his Spouse, as applicable,
through the date of termination but not yet paid to him.
(c) Termination due to Retirement. In the event that Gorin's employment
terminates due to Retirement, he shall be entitled, in addition to the
compensation and benefits specified in Section 10(b), to the benefits provided
under the SERP, as provided in Section 9(e) above. The Consulting Period shall
begin on the day following termination of Gorin's employment by Retirement.
(d) Termination due to Death. In the event that Gorin's employment
terminates due to his death, his Beneficiary shall be entitled, in addition to
the compensation and benefits specified in Section 10(b), to his Salary payable
for the remainder of the Employment Term at the rate in effect immediately
before such termination.
(e) Termination due to Disability. In the event of Disability, Aeroflex or
Gorin may terminate Gorin's employment. If Gorin's employment terminates due to
Disability, he shall be entitled, in addition to the compensation and benefits
specified in Section 10(b), to his Salary payable for the remainder of the
Employment Term at the rate in effect immediately before such termination,
offset by any long-term disability insurance benefit that Aeroflex has provided
for him and for which it has paid the applicable group or individual insurance
premiums.
(f) Termination by Aeroflex for Cause. Aeroflex may terminate Gorin's
employment hereunder for Cause only upon written notice to Gorin not less than
30 days prior to any intended termination, which notice shall specify the
grounds for such termination in reasonable detail. Cause shall in no event be
deemed to exist except upon a finding reflected in a resolution approved by a
majority (excluding Gorin) of the members of the Board (whose findings shall not
be binding upon or entitled to any deference by any court, arbitrator or other
decision-maker ruling on this Agreement) at a meeting of which Gorin shall have
been given proper notice and at which Gorin (and his counsel) shall have a
reasonable opportunity to present his case.
In the event that Gorin's employment is terminated for Cause, he shall be
entitled only to the compensation and benefits specified in Section 10(b).
(g) Termination Without Cause or by Gorin for Good Reason.
(i) Termination without Cause shall mean termination of Gorin's employment
by Aeroflex and shall exclude termination (A) due to Retirement, death,
Disability or Cause or (B) by mutual agreement of Gorin and Aeroflex. Aeroflex
shall provide Gorin 15 days' prior written notice of termination by it without
Cause, and Gorin shall provide Aeroflex 15 days' prior written notice of his
termination for Good Reason.
(ii) In the event of termination by Aeroflex of Gorin's employment without
Cause or of termination by Gorin of his employment for Good Reason, he shall be
entitled, in addition to the compensation and benefits specified in Section
10(b), to:
<PAGE>
(A) his Salary, payable for the remainder of the Employment Term at the
rate in effect immediately before such termination;
(B) annual bonuses for the remainder of the Employment Term (including a
prorated bonus for any partial Fiscal Year) equal to the average of the three
highest annual bonuses awarded to him during the ten Fiscal Years preceding the
Fiscal Year of termination, such bonuses to be paid at the same time annual
bonuses are regularly paid by Aeroflex to Gorin;
(C) continued medical reimbursement for the remainder of the Employment
Term and thereafter the lifetime medical benefits described in Section 9(b)
above;
(D) a lump-sum payment equal to the then present value of the excess, if
any, of (x) the retirement benefit to which Gorin would have been entitled if he
had remained employed under this Agreement until age 70 over (y) the early
retirement benefit actually payable to him, both as calculated and payable under
the SERP; and
(E) continued participation in all employee benefit plans or programs
available to Aeroflex employees generally in which Gorin was participating on
the date of termination of his employment until the end of the Employment Term;
provided; however, that (x) if Gorin is precluded from continuing his
participation in any employee benefit plan or program as provided in this clause
(E), he shall be entitled to the after-tax economic equivalent of the benefits
under the plan or program in which he is unable to participate until the end of
the Employment Term, and (y) the economic equivalent of any benefit foregone
shall be deemed to be the lowest cost that Gorin would incur in obtaining such
benefit on an individual basis; and
(F) other benefits in accordance with applicable plans and programs of the
Company.
(iii) Prior written consent by Gorin to any of the events described in
Section 1(k) above shall be deemed a waiver by him of his right to terminate for
Good Reason under this Section 10(g) solely by reason of the events set forth in
such waiver.
(h) Change in Control. Notwithstanding anything to the contrary in this
Section 10, termination of Gorin's employment within the one-year period
following a Change in Control for any reason other than Cause, Retirement, death
or Disability, shall be governed by Section 10(g). In the event of any such
termination, Gorin shall be entitled to compensation and benefits in accordance
with the provisions of Section 10(g)(ii).
11. NO DUTY TO MITIGATE; NO OFFSET.
Gorin shall not be required to mitigate damages or the amount of any
payment provided for under this Agreement by seeking other employment or
otherwise, nor will any payment hereunder be subject to offset in the event
Gorin does receive compensation for services from any other source.
<PAGE>
12. PARACHUTES.
(a) Application. If all, or any portion, of the payments provided under
this Agreement, and/or any other payments and benefits that Gorin receives or is
entitled to receive from Aeroflex or a Subsidiary, whether or not under an
existing plan, arrangement or other agreement, constitutes an "excess parachute
payment" within the meaning of Section 280G(b) of the Code (each such parachute
payment, a "Parachute Payment") and will result in the imposition on Gorin of an
excise tax under Section 4999 of the Code, then, in addition to any other
benefits to which Gorin is entitled under this Agreement, Aeroflex shall pay him
an amount in cash equal to the sum of the excise taxes payable by him by reason
of receiving Parachute Payments, plus the amount necessary to put him in the
same after-tax position (taking into account any and all applicable federal,
state and local excise, income or other taxes at the highest possible applicable
rates on such Parachute Payments (including without limitation any payments
under this Section 12) as if no excise taxes had been imposed with respect to
Parachute Payments (the "Parachute Gross-up").
(b) Computation. The amount of any payment under this Section 12 shall be
computed by a certified public accounting firm of national reputation selected
by Aeroflex and acceptable to Gorin. If Aeroflex or Gorin disputes the
computation rendered by such accounting firm, Aeroflex shall select an
alternative certified public accounting firm of national reputation to perform
the applicable computation. If the two accounting firms cannot agree upon the
computations, Gorin and Aeroflex shall jointly appoint a third certified public
accounting firm of national reputation within 10 calendar days after the two
conflicting computations have been rendered. Such third accounting firm shall be
asked to determine within 30 calendar days the computation of the Parachute
Gross-up to be paid to Gorin, and payments shall be made accordingly.
(c) Payment. In any event, Aeroflex shall pay to Gorin or pay on his behalf
the Parachute Gross-up as computed by the accounting firm initially selected by
Gorin by the time any taxes payable by him as a result of the Parachute Payments
become due, with Gorin agreeing to return the excess amount of such payment over
the final computation rendered from the process described in Section 12(b).
Gorin and Aeroflex shall provide the accounting firms with all information that
any of them reasonably deems necessary in order to compute the Parachute
Gross-up. The cost and expenses of all the accounting firms retained to perform
the computations described above shall be borne by Aeroflex.
In the event that the Internal Revenue Service ("IRS") or the accounting
firm computing the Parachute Gross-up finally determines that the amount of
excise taxes thereon initially paid was insufficient to discharge Gorin's excise
tax liability, Aeroflex shall make additional payments to him as may be
necessary to reimburse him for discharging the full liability.
Gorin shall apply to the IRS for a refund of any excise taxes paid and
remit to Aeroflex the amount of any such refund that he receives. Aeroflex shall
reimburse Gorin for his expenses in seeking a refund of excise taxes and for any
interest and penalties imposed on excise taxes that he is required to pay.
<PAGE>
13. CONSULTING PERIOD.
(a) General. Effective upon the end of the Employment Term (but only if the
Employment Term ends by reason of its expiration or, if earlier, upon
termination of Gorin's employment (i) by mutual agreement or (ii) by
Retirement), Gorin shall become a consultant to Aeroflex, in recognition of the
continued value to Aeroflex of his extensive knowledge and expertise. Unless
earlier terminated, as provided in Section 13(e), the Consulting Period shall
continue for three years.
(b) Duties and Extent of Services.
(i) During the Consulting Period, Gorin shall consult with Aeroflex and its
senior executive officers regarding its respective businesses and operations.
Such consulting services shall not require more than 50 days in any calendar
year, nor more than one day in any week, it being understood and agreed that
during the Consulting Period Gorin shall have the right, consistent with the
prohibitions of Sections 14 and 15 below, to engage in full-time or part-time
employment with any business enterprise that is not a competitor of Aeroflex.
(ii) Gorin's service as a consultant shall only be required at such times
and such places as shall not result in unreasonable inconvenience to him,
recognizing his other business commitments that he may have to accord priority
over the performance of services for Aeroflex. In order to minimize interference
with Gorin's other commitments, his consulting services may be rendered by
personal consultation at his residence or office wherever maintained, or by
correspondence through mail, telephone, fax or other similar mode of
communication at times, including weekends and evenings, most convenient to him.
(iii) During the Consulting Period, Gorin shall not be obligated to serve
as a member of the Board or to occupy any office on behalf of Aeroflex or any of
its Subsidiaries.
(c) Compensation. During the Consulting Period, Gorin shall receive from
Aeroflex each year an amount equivalent to two-thirds of his Salary at the end
of the Employment Term, payable and subject to annual increase as provided in
Section 3 above.
(d) Disability. In the event of Disability during the Consulting Period,
Aeroflex or Gorin may terminate Gorin's consulting services. If Gorin's
consulting services are terminated due to Disability, he shall be entitled to
compensation, in accordance with Section 13(c), for the remainder of the
Consulting Period.
(e) Termination. The Consulting Period shall terminate after three years
or, if earlier, upon Gorin's death or upon his failure to perform consulting
services as provided in Section 13(b), pursuant to 30 days' written notice by
Aeroflex to Gorin of the grounds constituting such failure and reasonable
opportunity afforded Gorin to cure the alleged failure. Upon any such
termination, payment of consulting fees and benefits (with the exception of
lifetime medical benefits under Section 9(b) above) shall cease.
(f) Other. During the Consulting Period, Gorin shall be entitled to expense
reimbursement (including secretarial, telephone and similar support services)
and perquisites and medical benefits, pursuant to the terms of Sections 7, 8 and
9(b), respectively.
<PAGE>
14. CONFIDENTIAL INFORMATION.
(a) General.
(i) Gorin understands and hereby acknowledges that as a result of his
employment with Aeroflex he will necessarily become informed of and have access
to certain valuable and confidential information of Aeroflex and any of its
Subsidiaries, joint ventures and affiliates, including, without limitation,
inventions, trade secrets, technical information, computer software and
programs, know-how and plans ("Confidential Information"), and that any such
Confidential Information, even though it may be developed or otherwise acquired
by Gorin, is the exclusive property of Aeroflex to be held by him in trust
solely for Aeroflex's benefit.
(ii) Accordingly, Gorin hereby agrees that, during the Employment Term and
the Consulting Period and subsequent to both, he shall not, and shall not cause
others to, use, reveal, report, publish, transfer or otherwise disclose to any
person, corporation or other entity any Confidential Information without prior
written consent of the Board, except to (A) responsible officers and employees
of Aeroflex or (B)_responsible persons who are in a contractual or fiduciary
relationship with Aeroflex or who need such information for purposes in the
interest of Aeroflex. Notwithstanding the foregoing, the prohibitions of this
clause (ii) shall not apply to any Confidential Information that becomes of
general public knowledge other than from Gorin or is required to be divulged by
court order or administrative process.
(b) Return of Documents. Upon termination of his employment with Aeroflex
for any reason or, if applicable, upon expiration of the Consulting Period,
Gorin shall promptly deliver to Aeroflex all plans, drawings, manuals, letters,
notes, notebooks, reports, computer programs and copies thereof and all other
materials, including without limitation those of a secret or confidential
nature, relating to Aeroflex's business that are then in his possession or
control.
(c) Remedies and Sanctions. In the event that Gorin is found to be in
violation of Section 14(a) or (b) above, Aeroflex shall be entitled to relief as
provided in Section 16 below.
15. NONCOMPETITION/NONSOLICITATION.
(a) Prohibitions. During the Employment Term and, if applicable, the
Consulting Period, Gorin shall not, without prior written authorization of the
Board, directly or indirectly, through any other individual or entity:
(i) become on officer or employee of, or render any service to, any direct
competitor of Aeroflex;
(ii) solicit or induce any customer of Aeroflex to cease purchasing goods
or services from Aeroflex or to become a customer of any competitor of Aeroflex;
or
(iii) solicit or induce any employee of Aeroflex to become employed by any
competitor of Aeroflex.
(b) Remedies and Sanctions. In the event that Gorin is found to be in
violation of Section 15(a) above, Aeroflex shall be entitled to relief as
provided in Section 16 below.
(c) Exceptions. Notwithstanding anything to the contrary in Section 15(a)
above, its provisions shall not:
<PAGE>
(i) apply if Aeroflex terminates Gorin's employment without Cause or Gorin
terminates his employment for Good Reason, each as provided in Section 10(g)
above; or
(ii) be construed as preventing Gorin from investing his assets in any
business that is not a direct competitor of Aeroflex.
16. REMEDIES/SANCTIONS.
Gorin acknowledges that the services he is to render under this Agreement
are of a unique and special nature, the loss of which cannot reasonably or
adequately be compensated for in monetary damages, and that irreparable injury
and damage may result to Aeroflex in the event of any breach of this Agreement
or default by Gorin. Because of the unique nature of the Confidential
Information and the importance of the prohibitions against competition and
solicitation, Gorin further acknowledges and agrees that Aeroflex will suffer
irreparable harm if he fails to comply with his obligations under Section 14(a)
or (b) above or Section 15(a) above and that monetary damages would be
inadequate to compensate Aeroflex for any such breach. Accordingly, Gorin agrees
that, in addition to any other remedies available to either Party at law, in
equity or otherwise, Aeroflex will be entitled to seek injunctive relief or
specific performance to enforce the terms, or prevent or remedy the violation,
of any provisions of this Agreement.
17. BENEFICIARIES/REFERENCES.
Gorin shall be entitled to select (and change, to the extent permitted
under any applicable law) a beneficiary or beneficiaries to receive any
compensation or benefit payable under this Agreement following his death by
giving Aeroflex written notice thereof; provided, however, that absent any then
effective contrary notice, his beneficiary shall be his surviving Spouse. In the
event of Gorin's death, or of a judicial determination of his incompetence,
reference in this Agreement to Gorin shall be deemed to refer, as appropriate,
to his beneficiary, estate or other legal representative.
18. WITHHOLDING TAXES.
All payments to Gorin or his Beneficiary under this Agreement shall be
subject to withholding on account of federal, state and local taxes as required
by law.
19. INDEMNIFICATION AND LIABILITY INSURANCE.
Nothing herein is intended to limit Aeroflex's indemnification of Gorin,
and Aeroflex shall indemnify him to the fullest extent permitted by applicable
law consistent with Aeroflex's Certificate of Incorporation and By-Laws as in
effect on the Effective Date, with respect to any action or failure to act on
his part while he is an officer, director or employee of Aeroflex or any
Subsidiary. Aeroflex shall cause Gorin to be covered at all times by directors'
and officers' liability insurance on terms no less favorable than the directors'
and officers' liability insurance maintained by Aeroflex as in effect on the
Effective Date in terms of coverage and amounts. Aeroflex shall continue to
indemnify Gorin as provided above and maintain such liability insurance coverage
for him after the Employment Term and, if applicable, the Consulting Period for
any claims that may be made against him with respect to his service as a
director or officer of Aeroflex or a consultant to Aeroflex.
<PAGE>
20. EFFECT OF AGREEMENT ON OTHER BENEFITS.
The existence of this Agreement shall not prohibit or restrict Gorin's
entitlement to participate fully in compensation, employee benefit and other
plans of Aeroflex in which senior executives are eligible to participate.
21. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of Gorin) and
assigns. No rights or obligations of Aeroflex under this Agreement may be
assigned or transferred by Aeroflex except pursuant to (a) a merger or
consolidation in which Aeroflex is not the continuing entity or (b) sale or
liquidation of all or substantially all of the assets of Aeroflex, provided that
the surviving entity or assignee or transferee is the successor to all or
substantially all of the assets of Aeroflex and such surviving entity or
assignee or transferee assumes the liabilities, obligations and duties of
Aeroflex under this Agreement, either contractually or as a matter of law.
Aeroflex further agrees that, in the event of a sale of assets or
liquidation as described in the preceding sentence, it shall use its best
efforts to have such assignee or transferee expressly agree to assume the
liabilities, obligations and duties of Aeroflex hereunder; provided, however,
that notwithstanding such assumption, Aeroflex shall remain liable and
responsible for fulfillment of the terms and conditions of this Agreement; and
provided, further, that in no event shall such assignment and assumption of this
Agreement adversely affect Gorin's right upon a Change in Control, as provided
in Section 10(h) above. No rights or obligations of Gorin under this Agreement
may be assigned or transferred by him.
22. REPRESENTATIONS.
The Parties respectively represent and warrant that each is fully
authorized and empowered to enter into this Agreement and that the performance
of its or his obligations, as the case may be, under this Agreement will not
violate any agreement between such Party and any other person, firm or
organization. Aeroflex represents and warrants that this Agreement has been
duly authorized by all necessary corporate action and is valid, binding and
enforceable in accordance with its terms.
23. ENTIRE AGREEMENT.
Except to the extent otherwise provided herein, this Agreement contains the
entire understanding and agreement between the Parties concerning the subject
matter hereof and supersedes any prior agreements, whether written or oral,
between the Parties concerning the subject matter hereof, including without
limitation the Prior Agreement. Payments and benefits provided under this
Agreement are in lieu of any payments or other benefits under any severance
program or policy of Aeroflex to which Gorin would otherwise be entitled.
<PAGE>
24. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by both Gorin and an authorized officer of
Aeroflex. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Party to be charged with the waiver. No delay by either Party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof.
25. SEVERABILITY.
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
26. SURVIVAL.
The respective rights and obligations of the Parties under this Agreement
shall survive any termination of Gorin's employment with Aeroflex.
27. GOVERNING LAW/JURISDICTION.
This Agreement shall be governed by and construed and interpreted in
accordance with the laws of New York, without reference to principles of
conflict of laws.
28. COSTS OF DISPUTES.
Aeroflex shall pay, at least monthly, all costs and expenses, including
attorneys' fees and disbursements, of Gorin in connection with any proceeding,
whether or not instituted by Aeroflex or Gorin, relating to any provision of
this Agreement, including but not limited to the interpretation, enforcement or
reasonableness thereof; provided, however, that, if Gorin institutes the
proceeding and the judge or other decision-maker presiding over the proceeding
affirmatively finds that his claims were frivolous or were made in bad faith, he
shall pay his own costs and expenses and, if applicable, return any amounts
theretofore paid to him or on his behalf under this Section 28. Pending the
outcome of any proceeding, Aeroflex shall pay Gorin all amounts due to him
without regard to the dispute; provided, however, that if Aeroflex shall be the
prevailing party in such a proceeding, Gorin shall promptly repay all amounts
that he received during pendency of the proceeding.
<PAGE>
29. NOTICES.
Any notice given to either Party shall be in writing and shall be deemed to
have been given when delivered either personally, by fax, by overnight delivery
service (such as Federal Express) or sent by certified or registered mail
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as the Party may
subsequently give notice of.
If to Aeroflex or the Board:
Aeroflex Incorporated
35 South Service Road
Plainview, NY 11803
Attention: Harvey Blau
FAX: (516) 694-4823
If to Gorin:
Michael Gorin
112B East Long Beach Road
Nissequogue, New York 11780
30. HEADINGS.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
31. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which when so
executed and delivered shall be an original, but all such counterparts together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
Aeroflex Incorporated
Attest: /s/ Charles Badlato By: /s/ Harvey R. Blau
------------------- ----------------------
Chairman of The Board
Witness:/s/ Nancy D. Lieberman /s/ Michael Gorin
---------------------- ----------------------
Michael Gorin
April 15, 1999
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of March
1, 1999 (the "Effective Date"), by and between Aeroflex Incorporated, a Delaware
corporation, with its principal office located at 35 South Service Road,
Plainview, New York 11803 (together with its successors and assigns permitted
under this Agreement, "Aeroflex") and Leonard Borow, who resides at 125 Rodeo
Drive, Oyster Bay Cove, New York 11791 ("Borow"), amends and restates in its
entirety the original agreement made and entered into as of July 1, 1994 between
Aeroflex and Borow, as subsequently amended through July 1, 1998 (the "Prior
Agreement").
WITNESSETH:
WHEREAS, Aeroflex has determined that it is in the best interests of
Aeroflex and its stockholders to continue to employ Borow and to set forth in
this Agreement the obligations and duties of both Aeroflex and Borow; and
WHEREAS, Aeroflex wishes to assure itself of the services of Borow for the
period hereinafter provided, and Borow is willing to be employed by Aeroflex for
said period, upon the terms and conditions provided in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, Aeroflex and Borow (individually a "Party" and
together the "Parties") agree as follows:
1. DEFINITIONS.
(a) "Beneficiary" shall mean the person or persons named by Borow pursuant
to Section 17 below or, in the event that no such person is named who survives
Borow, his estate.
(b) "Board" shall mean the Board of Directors of Aeroflex.
(c) "Cause" shall mean:
(i) Borow's conviction of a felony involving an act or acts of dishonesty
on his part and resulting or intended to result directly or indirectly in gain
or personal enrichment at the expense of Aeroflex;
(ii) willful and continued failure of Borow to perform his obligations
under this Agreement, resulting in demonstrable material economic harm to
Aeroflex, or
(iii) a material breach by Borow of the provisions of Sections 14 or 15
below to the demonstrable and material detriment of Aeroflex.
Notwithstanding the foregoing, in no event shall Borow's failure to perform
the duties associated with his position caused by his mental or physical
disability constitute Cause for his termination.
For purposes of this Section 1(c), no act or failure to act on the part of
Borow shall be considered "willful" unless it is done, or omitted to be done, by
him in bad faith or without reasonable belief that his action or omission was in
the best interests of Aeroflex. Any act or failure to act based upon authority
given pursuant to a resolution adopted by the Board or based upon the advice of
counsel for Aeroflex shall be conclusively presumed to be done, or omitted to be
done, by Borow in good faith and in the best interests of Aeroflex.
<PAGE>
(d) "Change in Control" shall mean the occurrence of any of the following
events:
(i) the acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as
amended (the "Exchange Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d- 3 promulgated under the Exchange Act) of voting securities
of Aeroflex when such acquisition causes such Person to own 20 percent or more
of the combined voting power of the then outstanding voting securities of
Aeroflex entitled to vote generally in the election of directors (the
"Outstanding Aeroflex Voting Securities"); provided, however, that for purposes
of this subsection (i), the following acquisitions shall not be deemed to result
in a Change in Control: (A) any acquisition directly from Aeroflex, (B) any
acquisition by Aeroflex, (C) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by Aeroflex or any corporation controlled
by Aeroflex or (D) any acquisition pursuant to a transaction that complies with
clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that
if any Person's beneficial ownership of the Outstanding Aeroflex Voting
Securities reaches or exceeds 20 percent as a result of a transaction described
in clause (A) or (B) above, and such Person subsequently acquires beneficial
ownership of additional voting securities of Aeroflex, such subsequent
acquisition shall be treated as an acquisition that causes such Person to own 20
percent or more of the Outstanding Aeroflex Voting Securities; or
(ii) individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the Effective Date whose election, or nomination for election by Aeroflex's
stockholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding for this purpose
any such individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(iii) consummation of a reorganization, merger or consolidation or sale or
other disposition of all or subsequently all of the assets of Aeroflex or the
acquisition of assets of another entity ("Business Combination"); excluding,
however, such a Business Combination pursuant to which (A) all or substantially
all of the individuals and entities who were the beneficial owners of the
Outstanding Aeroflex Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 60 percent of,
respectively, the then outstanding shares of common stock or the combined voting
power of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation resulting from
such Business Combination (including, without limitation, a corporation that as
<PAGE>
a result of such transaction owns Aeroflex or all or substantially all of
Aeroflex's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Aeroflex Voting Securities, (B) no
Person (excluding any employee benefit plan (or related trust) of Aeroflex or
such corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20 percent or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(iv) approval by the stockholders of Aeroflex of a complete liquidation or
dissolution of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Committee" shall mean the Compensation Committee of the Board.
(g) "Consulting Period" shall mean the period specified in Section 13 below
during which Borow serves as a consultant to Aeroflex.
(h) "Disability" shall mean the illness or other mental or physical
disability of Borow, as determined by a physician acceptable to Aeroflex and
Borow, resulting in his failure during the Employment Term or the Consulting
Period, as the case may be, (i) to perform substantially his applicable material
duties under this Agreement for a period of nine consecutive months and (ii) to
return to the performance of his duties within 30 days after receiving written
notice of termination.
(i) "Employment Term" shall mean the period specified in Section 2(b)
below.
(j) "Fiscal Year" shall mean the 12-month period beginning on July 1 and
ending on the next subsequent June 30, or such other 12-month period as may
constitute Aeroflex's fiscal year at any time hereafter.
(k) "Good Reason" shall mean, at any time during the Employment Term,
without Borow's prior written consent or his acquiescence:
(i) reduction in his then current Salary;
(ii) diminution, reduction or other adverse change in the bonus or
incentive compensation opportunities available to Borow (with respect to the
level of bonus or incentive compensation opportunities, the applicable
performance criteria and otherwise the manner in which bonuses and incentive
compensation are determined) in the aggregate from those available as of the
Effective Date in accordance with Section 4(a) below;
(iii) Aeroflex's failure to pay Borow any amounts otherwise vested and due
him hereunder or under any plan or policy of Aeroflex;
(iv) diminution of Borow's titles, position, authorities or
responsibilities, including not serving on the Board;
(v) assignment to Borow of duties incompatible with his position as a
senior executive officer;
<PAGE>
(vi) termination by Borow of his employment within one year following a
Change in Control other than (a) by mutual agreement, (b) for Cause or (c) by
reason of Retirement, death or Disability;
(vii) imposition of a requirement that Borow report other than directly to
Aeroflex's Chief Executive Officer or to the full Board;
(viii) a material breach of the Agreement by Aeroflex that is not cured
within 10 business days after written notification by Borow of such breach; or
(ix) relocation of Aeroflex's corporate headquarters to a location more
than 35 miles from the location first above described.
(l) "Retirement" shall mean termination of Borow's employment, other than
due to death, with eligibility to receive a benefit under the terms of
Aeroflex's Supplemental Executive Retirement Plan as then in effect.
(m) "Salary" shall mean the annual salary provided for in Section 3 below,
as adjusted from time to time.
(n) "Spouse" shall mean, during the Employment Term and the Consulting
Period, the woman who as of any relevant date is legally married to Borow.
(o)"Subsidiary" shall mean any corporation of which Aeroflex owns, directly
or indirectly, more than 50 percent of its voting stock.
2. EMPLOYMENT TERM, POSITIONS AND DUTIES.
(a) Employment of Borow. Aeroflex hereby continues to employ Borow, and
Borow hereby accepts continued employment with Aeroflex, in the positions and
with the duties and responsibilities set forth below and upon such other terms
and conditions as are hereinafter stated. Borow shall render services to
Aeroflex principally at Aeroflex's corporate headquarters, but he shall do such
traveling on behalf of Aeroflex as shall be reasonably required in the course of
the performance of his duties hereunder.
(b) Employment Term. The Employment Term shall commence on the Effective
Date and shall terminate on June 30, 2004.
(c) Titles and Duties.
(i) Until the date of termination of his employment hereunder, Borow shall
be employed as a senior executive officer of Aeroflex, reporting to the full
Board. In his capacity as a senior executive officer, Borow shall have the
customary powers, responsibilities and authorities of senior executive officers
of corporations of the size, type and nature of Aeroflex including, without
limitation, authority, in conjunction with the Board as appropriate, to hire and
terminate other employees of Aeroflex.
(ii) During the Employment Term, Aeroflex shall uses its best efforts to
secure the election of Borow to the Board. During the Employment Term, if the
Board forms an executive or similar committee, Borow shall serve thereon. (d)
(d)Time and Effort.
(i) Borow agrees to devote his best efforts and abilities and his full
business time and attention to the affairs of Aeroflex in order to carry out his
duties and responsibilities under this Agreement.
(ii) Notwithstanding the foregoing, nothing shall preclude Borow from (A)
serving on the boards of a reasonable number of trade associations, charitable
organizations and/or businesses not in competition with Aeroflex, (B) engaging
in charitable activities and community affairs and (C) managing his personal
investments and affairs; provided, however, that, such activities do not
materially interfere with the proper performance of his duties and
responsibilities specified in Section 2 (c) above.
<PAGE>
3. SALARY.
(a) Initial Salary. Borow shall receive from Aeroflex a Salary, payable in
accordance with the regular payroll practices of Aeroflex, in a minimum amount
of $350,000.
(b) Cost-of-Living Increase. During the Employment Term, Borow's Salary
shall be increased semiannually by an amount equal to the increase in the cost
of living for the immediately preceding calendar half-year, as reported in the
"Consumer Price Index, New York and Northeastern New Jersey, All Items,"
published by the United States Department of Labor, Bureau of Labor Statistics
(or, if such index is no longer published, a successor or comparable index that
is published). Such amount shall be calculated and paid to Borow in a single sum
on or before the first day of the second month following the applicable calendar
half year, and thereafter his Salary shall be deemed to include the amount of
any such increase. The first calculation and payment shall be made on or before
August 1, 1999 with respect to the period July 1, 1998 through June 30, 1999. If
Borow's employment shall terminate during any such six-month period, the
cost-of-living increase provided in this Section 3(b) shall be prorated
accordingly.
(c) Salary Increase. Any amount to which Borow's Salary is increased, as
provided in Section 3(b) above or otherwise, shall not thereafter be reduced
without his consent, and the term "Salary" as used in this Agreement shall refer
to his Salary as thus increased.
4. BONUSES.
(a) Annual Bonus. For each Fiscal Year during the Employment Term Borow
shall be eligible to receive an annual bonus equal to 3 percent of Aeroflex's
consolidated pre-tax earnings for such Fiscal Year, computed without regard to
any amount due under this Section 4(a). Any such bonus payable with respect to a
portion of a Fiscal Year shall be prorated accordingly. Borow shall be entitled
to elect to defer, under the terms of any deferred compensation agreement or
annual incentive compensation plan applicable to him and then in effect, any
portion of his annual bonus that is not already subject to deferral thereunder.
(b) Special Bonus. Borow shall be eligible to receive additional bonuses
during the Employment Term. The Committee shall determine, in its discretion,
the occasion for payment, and the amount, of any such bonus.
5. LONG-TERM INCENTIVE.
During the Employment Term, Borow shall be eligible for an award under any
long-term incentive compensation plan established by Aeroflex for the benefit of
Borow or, in the absence thereof, under any such plan established for the
benefit of members of the senior management of Aeroflex.
<PAGE>
6. EQUITY OPPORTUNITY.
During the Employment Term, Borow shall be eligible to receive grants of
options to purchase shares of Aeroflex's stock and awards of shares of
Aeroflex's stock, either or both as determined by the Committee, under and in
accordance with the terms of applicable plans of Aeroflex and related option and
award agreements. It is the intention of Aeroflex to grant stock options to
Borow during the Employment Term. Also, to the extent permitted by any such
plan, Borow shall be eligible during any Consulting Period to receive grants of
options and awards of shares of Aeroflex's stock in the same manner.
7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS.
During the Employment Term and any Consulting Period, Borow shall be
entitled to prompt reimbursement by Aeroflex for all reasonable out-of-pocket
expenses incurred by him in performing services under this Agreement, upon his
submission of such accounts and records as may be reasonably required by
Aeroflex. In addition, Borow shall be entitled to payment by Aeroflex of all
reasonable costs and expenses, including attorneys' and consultants' fees and
disbursements, incurred by him in connection with adoption of this Agreement and
any related compensatory arrangements that Aeroflex adopts solely for his
benefit.
8. PERQUISITES.
During the Employment Term and, and any Consulting Period, Aeroflex shall
provide Borow with the following perquisites:
(a) an office of a size and with furnishings and other appointments, and
exclusive personal secretarial and other assistance, at least equal to that
provided to Borow by Aeroflex as of the Effective Date; and
(b) the use of an automobile and payment of related expenses on the same
terms as are in effect on the Effective Date or, if more favorable to Borow, as
are made available generally to other executive officers of Aeroflex at any time
thereafter.
9. EMPLOYEE BENEFIT PLANS.
(a) General. During the Employment Term, Borow shall be entitled to
participate in all employee benefit plans and programs that are made available
to Aeroflex's senior executives or to its employees generally, as such plans or
programs may be in effect from time to time, including, without limitation,
pension and other retirement plans, profit-sharing plans, savings and similar
plans, group life insurance, accidental death and dismemberment insurance,
travel accident insurance, hospitalization insurance, surgical insurance, major
and excess major medical insurance, dental insurance, short-term and long-term
disability insurance, sick leave (including salary continuation arrangements),
holidays, vacation (not less than four weeks in any calendar year) and any other
employee benefit plans or programs that may be sponsored by Aeroflex from time
to time, including plans that supplement the above-listed types of plans,
whether funded or unfunded.
(b) Medical Care Reimbursement and Insurance. During the Employment Term
and Consulting Period, Aeroflex shall reimburse Borow for 100 percent of any
medical expenses incurred by him for himself and his Spouse that are not
reimbursed by insurance or otherwise, offset by any amounts that are
reimbursable by Medicare if Borow and his Spouse, when eligible, elect to be
covered by Medicare. Aeroflex shall provide Borow and his Spouse during his
lifetime with hospitalization insurance, surgical insurance, major and excess
major medical insurance and dental insurance in accordance with the most
favorable plans, policies, programs and practices of Aeroflex and its
Subsidiaries made available generally to other senior executive officers of
Aeroflex and its Subsidiaries as in effect from time to time.
<PAGE>
(c) Life Insurance Benefit. In addition to the group life insurance
available to employees generally, Aeroflex shall provide Borow with an
individual permanent life insurance benefit in an initial amount of not less
than approximately $1,000,000, the terms and conditions of such benefit to be
more fully described in an insurance ownership agreement between Borow and
Aeroflex.
(d) Disability Benefit. In consideration of the benefit payable to Borow in
the event of termination of his employment due to Disability, as provided in
Section 10(e) below, or, if applicable, in the event of termination of Borow's
consulting services due to Disability during the Consulting Period, as provided
in Section 13(d) below, Aeroflex shall not be obligated to provide Borow with
long-term disability insurance. Notwithstanding the foregoing, if Aeroflex does
provide Borow with such insurance, he shall be the owner of any individual
policies obtained and shall pay the premiums thereon.
(e) Retirement Benefit. Borow shall be entitled to the benefits provided
under the Aeroflex Incorporated Supplemental Executive Retirement Plan (the
"SERP"); provided, however, that if Aeroflex fails to maintain the SERP, Borow's
retirement benefit shall be determined as if the SERP had remained in effect
until termination of his employment with Aeroflex by retirement. These benefits
are in addition to the benefits provided under this Agreement, and no
modification, amendment or termination of this Agreement shall affect Borow's
rights under the SERP as in effect on the Effective Date or, if more favorable
to Borow, as in effect at any time thereafter.
10. TERMINATION OF EMPLOYMENT.
(a) Termination by Mutual Agreement. The Parties may terminate this
Agreement by mutual agreement at any time. If they do so, Borow's entitlements
shall be as the Parties mutually agree.
(b) General. Notwithstanding anything to the contrary herein, in the event
of termination of Borow's employment under this Agreement, he or his
Beneficiary, as the case may be, shall be entitled to receive (in addition to
payments and benefits under, and except as specifically provided in, subsections
(c) through (h) below, as applicable):
(i) his Salary through the date of termination;
(ii) any unused vacation from prior years;
(iii) any annual bonus for the current Fiscal Year, prorated to the date of
termination;
(iv) any annual or special bonus previously awarded but not yet paid to
him;
(v) any deferred compensation under any incentive compensation plan of
Aeroflex or any deferred compensation agreement then in effect;
<PAGE>
(vi) any other compensation or benefits, including without limitation
long-term incentive compensation described in Section 5 above, benefits under
equity grants and awards described in Section 6 above and employee benefits
under plans described in Section 9 above, that have vested through the date of
termination or to which he may then be entitled in accordance with the
applicable terms and conditions of each grant, award or plan; and
(vii) reimbursement in accordance with Sections 9(a) and (b) above of any
business and medical expenses incurred by Borow or his Spouse, as applicable,
through the date of termination but not yet paid to him.
(c) Termination due to Retirement. In the event that Borow's employment
terminates due to Retirement, he shall be entitled, in addition to the
compensation and benefits specified in Section 10(b), to the benefits provided
under the SERP, as provided in Section 9(e) above. The Consulting Period shall
begin on the day following termination of Borow's employment by Retirement.
(d) Termination due to Death. In the event that Borow's employment
terminates due to his death, his Beneficiary shall be entitled, in addition to
the compensation and benefits specified in Section 10(b), to his Salary payable
for the remainder of the Employment Term at the rate in effect immediately
before such termination.
(e) Termination due to Disability. In the event of Disability, Aeroflex or
Borow may terminate Borow's employment. If Borow's employment terminates due to
Disability, he shall be entitled, in addition to the compensation and benefits
specified in Section 10(b), to his Salary payable for the remainder of the
Employment Term at the rate in effect immediately before such termination,
offset by any long-term disability insurance benefit that Aeroflex has provided
for him and for which it has paid the applicable group or individual insurance
premiums.
(f) Termination by Aeroflex for Cause. Aeroflex may terminate Borow's
employment hereunder for Cause only upon written notice to Borow not less than
30 days prior to any intended termination, which notice shall specify the
grounds for such termination in reasonable detail. Cause shall in no event be
deemed to exist except upon a finding reflected in a resolution approved by a
majority (excluding Borow) of the members of the Board (whose findings shall not
be binding upon or entitled to any deference by any court, arbitrator or other
decision-maker ruling on this Agreement) at a meeting of which Borow shall have
been given proper notice and at which Borow (and his counsel) shall have a
reasonable opportunity to present his case.
In the event that Borow's employment is terminated for Cause, he shall be
entitled only to the compensation and benefits specified in Section 10(b).
(g) Termination Without Cause or by Borow for Good Reason.
(i) Termination without Cause shall mean termination of Borow's employment
by Aeroflex and shall exclude termination (A) due to Retirement, death,
Disability or Cause or (B) by mutual agreement of Borow and Aeroflex. Aeroflex
shall provide Borow 15 days' prior written notice of termination by it without
Cause, and Borow shall provide Aeroflex 15 days' prior written notice of his
termination for Good Reason.
(ii) In the event of termination by Aeroflex of Borow's employment without
Cause or of termination by Borow of his employment for Good Reason, he shall be
entitled, in addition to the compensation and benefits specified in Section
10(b), to:
<PAGE>
(A) his Salary, payable for the remainder of the Employment Term at the
rate in effect immediately before such termination;
(B) annual bonuses for the remainder of the Employment Term (including a
prorated bonus for any partial Fiscal Year) equal to the average of the three
highest annual bonuses awarded to him during the ten Fiscal Years preceding the
Fiscal Year of termination, such bonuses to be paid at the same time annual
bonuses are regularly paid by Aeroflex to Borow;
(C) continued medical reimbursement for the remainder of the Employment
Term and thereafter the lifetime medical benefits described in Section 9(b)
above;
(D) a lump-sum payment equal to the then present value of the excess, if
any, of (x) the retirement benefit to which Borow would have been entitled if he
had remained employed under this Agreement until age 70 over (y) the early
retirement benefit actually payable to him, both as calculated and payable under
the SERP; and
(E) continued participation in all employee benefit plans or programs
available to Aeroflex employees generally in which Borow was participating on
the date of termination of his employment until the end of the Employment Term;
provided; however, that (x) if Borow is precluded from continuing his
participation in any employee benefit plan or program as provided in this clause
(E), he shall be entitled to the after-tax economic equivalent of the benefits
under the plan or program in which he is unable to participate until the end of
the Employment Term, and (y) the economic equivalent of any benefit foregone
shall be deemed to be the lowest cost that Borow would incur in obtaining such
benefit on an individual basis; and
(F) other benefits in accordance with applicable plans and programs of the
Company.
(iii) Prior written consent by Borow to any of the events described in
Section 1(k) above shall be deemed a waiver by him of his right to terminate for
Good Reason under this Section 10(g) solely by reason of the events set forth in
such waiver.
(h) Change in Control. Notwithstanding anything to the contrary in this
Section 10, termination of Borow's employment within the one-year period
following a Change in Control for any reason other than Cause, Retirement, death
or Disability, shall be governed by Section 10(g). In the event of any such
termination, Borow shall be entitled to compensation and benefits in accordance
with the provisions of Section 10(g)(ii).
11. NO DUTY TO MITIGATE; NO OFFSET.
Borow shall not be required to mitigate damages or the amount of any
payment provided for under this Agreement by seeking other employment or
otherwise, nor will any payment hereunder be subject to offset in the event
Borow does receive compensation for services from any other source.
<PAGE>
12. PARACHUTES.
(a) Application. If all, or any portion, of the payments provided under
this Agreement, and/or any other payments and benefits that Borow receives or is
entitled to receive from Aeroflex or a Subsidiary, whether or not under an
existing plan, arrangement or other agreement, constitutes an "excess parachute
payment" within the meaning of Section 280G(b) of the Code (each such parachute
payment, a "Parachute Payment") and will result in the imposition on Borow of an
excise tax under Section 4999 of the Code, then, in addition to any other
benefits to which Borow is entitled under this Agreement, Aeroflex shall pay him
an amount in cash equal to the sum of the excise taxes payable by him by reason
of receiving Parachute Payments, plus the amount necessary to put him in the
same after-tax position (taking into account any and all applicable federal,
state and local excise, income or other taxes at the highest possible applicable
rates on such Parachute Payments (including without limitation any payments
under this Section 12) as if no excise taxes had been imposed with respect to
Parachute Payments (the "Parachute Gross-up").
(b) Computation. The amount of any payment under this Section 12 shall be
computed by a certified public accounting firm of national reputation selected
by Aeroflex and acceptable to Borow. If Aeroflex or Borow disputes the
computation rendered by such accounting firm, Aeroflex shall select an
alternative certified public accounting firm of national reputation to perform
the applicable computation. If the two accounting firms cannot agree upon the
computations, Borow and Aeroflex shall jointly appoint a third certified public
accounting firm of national reputation within 10 calendar days after the two
conflicting computations have been rendered. Such third accounting firm shall be
asked to determine within 30 calendar days the computation of the Parachute
Gross-up to be paid to Borow, and payments shall be made accordingly.
(c) Payment. In any event, Aeroflex shall pay to Borow or pay on his behalf
the Parachute Gross-up as computed by the accounting firm initially selected by
Borow by the time any taxes payable by him as a result of the Parachute Payments
become due, with Borow agreeing to return the excess amount of such payment over
the final computation rendered from the process described in Section 12(b).
Borow and Aeroflex shall provide the accounting firms with all information that
any of them reasonably deems necessary in order to compute the Parachute
Gross-up. The cost and expenses of all the accounting firms retained to perform
the computations described above shall be borne by Aeroflex.
In the event that the Internal Revenue Service ("IRS") or the accounting
firm computing the Parachute Gross-up finally determines that the amount of
excise taxes thereon initially paid was insufficient to discharge Borow's excise
tax liability, Aeroflex shall make additional payments to him as may be
necessary to reimburse him for discharging the full liability.
Borow shall apply to the IRS for a refund of any excise taxes paid and
remit to Aeroflex the amount of any such refund that he receives. Aeroflex shall
reimburse Borow for his expenses in seeking a refund of excise taxes and for any
interest and penalties imposed on excise taxes that he is required to pay.
<PAGE>
13. CONSULTING PERIOD.
(a) General. Effective upon the end of the Employment Term (but only if the
Employment Term ends by reason of its expiration or, if earlier, upon
termination of Borow's employment (i) by mutual agreement or (ii) by
Retirement), Borow shall become a consultant to Aeroflex, in recognition of the
continued value to Aeroflex of his extensive knowledge and expertise. Unless
earlier terminated, as provided in Section 13(e), the Consulting Period shall
continue for three years.
(b) Duties and Extent of Services.
(i) During the Consulting Period, Borow shall consult with Aeroflex and its
senior executive officers regarding its respective businesses and operations.
Such consulting services shall not require more than 50 days in any calendar
year, nor more than one day in any week, it being understood and agreed that
during the Consulting Period Borow shall have the right, consistent with the
prohibitions of Sections 14 and 15 below, to engage in full-time or part-time
employment with any business enterprise that is not a competitor of Aeroflex.
(ii) Borow's service as a consultant shall only be required at such times
and such places as shall not result in unreasonable inconvenience to him,
recognizing his other business commitments that he may have to accord priority
over the performance of services for Aeroflex. In order to minimize interference
with Borow's other commitments, his consulting services may be rendered by
personal consultation at his residence or office wherever maintained, or by
correspondence through mail, telephone, fax or other similar mode of
communication at times, including weekends and evenings, most convenient to him.
(iii) During the Consulting Period, Borow shall not be obligated to serve
as a member of the Board or to occupy any office on behalf of Aeroflex or any of
its Subsidiaries.
(c) Compensation. During the Consulting Period, Borow shall receive from
Aeroflex each year an amount equivalent to two-thirds of his Salary at the end
of the Employment Term, payable and subject to annual increase as provided in
Section 3 above.
(d) Disability. In the event of Disability during the Consulting Period,
Aeroflex or Borow may terminate Borow's consulting services. If Borow's
consulting services are terminated due to Disability, he shall be entitled to
compensation, in accordance with Section 13(c), for the remainder of the
Consulting Period.
(e) Termination. The Consulting Period shall terminate after three years
or, if earlier, upon Borow's death or upon his failure to perform consulting
services as provided in Section 13(b), pursuant to 30 days' written notice by
Aeroflex to Borow of the grounds constituting such failure and reasonable
opportunity afforded Borow to cure the alleged failure. Upon any such
termination, payment of consulting fees and benefits (with the exception of
lifetime medical benefits under Section 9(b) above) shall cease.
(f) Other. During the Consulting Period, Borow shall be entitled to expense
reimbursement (including secretarial, telephone and similar support services)
and perquisites and medical benefits, pursuant to the terms of Sections 7, 8 and
9(b), respectively.
<PAGE>
14. CONFIDENTIAL INFORMATION.
(a) General.
(i) Borow understands and hereby acknowledges that as a result of his
employment with Aeroflex he will necessarily become informed of and have access
to certain valuable and confidential information of Aeroflex and any of its
Subsidiaries, joint ventures and affiliates, including, without limitation,
inventions, trade secrets, technical information, computer software and
programs, know-how and plans ("Confidential Information"), and that any such
Confidential Information, even though it may be developed or otherwise acquired
by Borow, is the exclusive property of Aeroflex to be held by him in trust
solely for Aeroflex's benefit.
(ii) Accordingly, Borow hereby agrees that, during the Employment Term and
the Consulting Period and subsequent to both, he shall not, and shall not cause
others to, use, reveal, report, publish, transfer or otherwise disclose to any
person, corporation or other entity any Confidential Information without prior
written consent of the Board, except to (A) responsible officers and employees
of Aeroflex or (B)_responsible persons who are in a contractual or fiduciary
relationship with Aeroflex or who need such information for purposes in the
interest of Aeroflex. Notwithstanding the foregoing, the prohibitions of this
clause (ii) shall not apply to any Confidential Information that becomes of
general public knowledge other than from Borow or is required to be divulged by
court order or administrative process.
(b) Return of Documents. Upon termination of his employment with Aeroflex
for any reason or, if applicable, upon expiration of the Consulting Period,
Borow shall promptly deliver to Aeroflex all plans, drawings, manuals, letters,
notes, notebooks, reports, computer programs and copies thereof and all other
materials, including without limitation those of a secret or confidential
nature, relating to Aeroflex's business that are then in his possession or
control.
(c) Remedies and Sanctions. In the event that Borow is found to be in
violation of Section 14(a) or (b) above, Aeroflex shall be entitled to relief as
provided in Section 16 below.
15. NONCOMPETITION/NONSOLICITATION.
(a) Prohibitions. During the Employment Term and, if applicable, the
Consulting Period, Borow shall not, without prior written authorization of the
Board, directly or indirectly, through any other individual or entity:
(i) become on officer or employee of, or render any service to, any direct
competitor of Aeroflex;
(ii) solicit or induce any customer of Aeroflex to cease purchasing goods
or services from Aeroflex or to become a customer of any competitor of Aeroflex;
or
(iii) solicit or induce any employee of Aeroflex to become employed by any
competitor of Aeroflex.
(b) Remedies and Sanctions. In the event that Borow is found to be in
violation of Section 15(a) above, Aeroflex shall be entitled to relief as
provided in Section 16 below.
(c) Exceptions. Notwithstanding anything to the contrary in Section 15(a)
above, its provisions shall not:
<PAGE>
(i) apply if Aeroflex terminates Borow's employment without Cause or Borow
terminates his employment for Good Reason, each as provided in Section 10(g)
above; or
(ii) be construed as preventing Borow from investing his assets in any
business that is not a direct competitor of Aeroflex.
16. REMEDIES/SANCTIONS.
Borow acknowledges that the services he is to render under this Agreement
are of a unique and special nature, the loss of which cannot reasonably or
adequately be compensated for in monetary damages, and that irreparable injury
and damage may result to Aeroflex in the event of any breach of this Agreement
or default by Borow. Because of the unique nature of the Confidential
Information and the importance of the prohibitions against competition and
solicitation, Borow further acknowledges and agrees that Aeroflex will suffer
irreparable harm if he fails to comply with his obligations under Section 14(a)
or (b) above or Section 15(a) above and that monetary damages would be
inadequate to compensate Aeroflex for any such breach. Accordingly, Borow agrees
that, in addition to any other remedies available to either Party at law, in
equity or otherwise, Aeroflex will be entitled to seek injunctive relief or
specific performance to enforce the terms, or prevent or remedy the violation,
of any provisions of this Agreement.
17. BENEFICIARIES/REFERENCES.
Borow shall be entitled to select (and change, to the extent permitted
under any applicable law) a beneficiary or beneficiaries to receive any
compensation or benefit payable under this Agreement following his death by
giving Aeroflex written notice thereof; provided, however, that absent any then
effective contrary notice, his beneficiary shall be his surviving Spouse. In the
event of Borow's death, or of a judicial determination of his incompetence,
reference in this Agreement to Borow shall be deemed to refer, as appropriate,
to his beneficiary, estate or other legal representative.
18. WITHHOLDING TAXES.
All payments to Borow or his Beneficiary under this Agreement shall be
subject to withholding on account of federal, state and local taxes as required
by law.
19. INDEMNIFICATION AND LIABILITY INSURANCE.
Nothing herein is intended to limit Aeroflex's indemnification of Borow,
and Aeroflex shall indemnify him to the fullest extent permitted by applicable
law consistent with Aeroflex's Certificate of Incorporation and By-Laws as in
effect on the Effective Date, with respect to any action or failure to act on
his part while he is an officer, director or employee of Aeroflex or any
Subsidiary. Aeroflex shall cause Borow to be covered at all times by directors'
and officers' liability insurance on terms no less favorable than the directors'
and officers' liability insurance maintained by Aeroflex as in effect on the
Effective Date in terms of coverage and amounts. Aeroflex shall continue to
indemnify Borow as provided above and maintain such liability insurance coverage
for him after the Employment Term and, if applicable, the Consulting Period for
any claims that may be made against him with respect to his service as a
director or officer of Aeroflex or a consultant to Aeroflex.
<PAGE>
20. EFFECT OF AGREEMENT ON OTHER BENEFITS.
The existence of this Agreement shall not prohibit or restrict Borow's
entitlement to participate fully in compensation, employee benefit and other
plans of Aeroflex in which senior executives are eligible to participate.
21. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of Borow) and
assigns. No rights or obligations of Aeroflex under this Agreement may be
assigned or transferred by Aeroflex except pursuant to (a) a merger or
consolidation in which Aeroflex is not the continuing entity or (b) sale or
liquidation of all or substantially all of the assets of Aeroflex, provided that
the surviving entity or assignee or transferee is the successor to all or
substantially all of the assets of Aeroflex and such surviving entity or
assignee or transferee assumes the liabilities, obligations and duties of
Aeroflex under this Agreement, either contractually or as a matter of law.
Aeroflex further agrees that, in the event of a sale of assets or
liquidation as described in the preceding sentence, it shall use its best
efforts to have such assignee or transferee expressly agree to assume the
liabilities, obligations and duties of Aeroflex hereunder; provided, however,
that notwithstanding such assumption, Aeroflex shall remain liable and
responsible for fulfillment of the terms and conditions of this Agreement; and
provided, further, that in no event shall such assignment and assumption of this
Agreement adversely affect Borow's right upon a Change in Control, as provided
in Section 10(h) above. No rights or obligations of Borow under this Agreement
may be assigned or transferred by him.
22. REPRESENTATIONS.
The Parties respectively represent and warrant that each is fully
authorized and empowered to enter into this Agreement and that the performance
of its or his obligations, as the case may be, under this Agreement will not
violate any agreement between such Party and any other person, firm or
organization. Aeroflex represents and warrants that this Agreement has been duly
authorized by all necessary corporate action and is valid, binding and
enforceable in accordance with its terms.
23. ENTIRE AGREEMENT.
Except to the extent otherwise provided herein, this Agreement contains the
entire understanding and agreement between the Parties concerning the subject
matter hereof and supersedes any prior agreements, whether written or oral,
between the Parties concerning the subject matter hereof, including without
limitation the Prior Agreement. Payments and benefits provided under this
Agreement are in lieu of any payments or other benefits under any severance
program or policy of Aeroflex to which Borow would otherwise be entitled.
<PAGE>
24. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by both Borow and an authorized officer of
Aeroflex. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Party to be charged with the waiver. No delay by either Party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof.
25. SEVERABILITY.
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
26. SURVIVAL.
The respective rights and obligations of the Parties under this Agreement
shall survive any termination of Borow's employment with Aeroflex.
27. GOVERNING LAW/JURISDICTION.
This Agreement shall be governed by and construed and interpreted in
accordance with the laws of New York, without reference to principles of
conflict of laws.
28. COSTS OF DISPUTES.
Aeroflex shall pay, at least monthly, all costs and expenses, including
attorneys' fees and disbursements, of Borow in connection with any proceeding,
whether or not instituted by Aeroflex or Borow, relating to any provision of
this Agreement, including but not limited to the interpretation, enforcement or
reasonableness thereof; provided, however, that, if Borow institutes the
proceeding and the judge or other decision-maker presiding over the proceeding
affirmatively finds that his claims were frivolous or were made in bad faith, he
shall pay his own costs and expenses and, if applicable, return any amounts
theretofore paid to him or on his behalf under this Section 28. Pending the
outcome of any proceeding, Aeroflex shall pay Borow all amounts due to him
without regard to the dispute; provided, however, that if Aeroflex shall be the
prevailing party in such a proceeding, Borow shall promptly repay all amounts
that he received during pendency of the proceeding.
<PAGE>
29. NOTICES.
Any notice given to either Party shall be in writing and shall be deemed to
have been given when delivered either personally, by fax, by overnight delivery
service (such as Federal Express) or sent by certified or registered mail
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as the Party may
subsequently give notice of.
If to Aeroflex or the Board:
Aeroflex Incorporated
35 South Service Road
Plainview, NY 11803
Attention: Harvey Blau
FAX: (516) 694-4823
If to Borow:
Leonard Borow
at 125 Rodeo Drive
Oyster Bay Cove, New York 11791
30. HEADINGS.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
<PAGE>
31. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which when so
executed and delivered shall be an original, but all such counterparts together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
Aeroflex Incorporated
Attest: /s/ Charles Badlato By: /s/ Michael Gorin
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Witness:/s/ Nancy D. Lieberman /s/ Leonard Borow
---------------------- -------------------
Leonard Borow
