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 September 30, 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.
November 11, 1999 18,391,427 shares(excluding 260,845 shares held in treasury)
- ----------------- ------------------------------------------------------------
(Date) (Number of Shares)
NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 18 PAGES.
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and June 30, 1999 3-4
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended September 30, 1999 and 1998 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1999 and 1998 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998 12-16
PART II: OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 17
SIGNATURES 18
-2-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------------
(In thousands)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 907 $ 2,714
Accounts receivable, less allowance for
doubtful accounts of $404,000 and $381,000 40,398 39,967
Inventories 33,327 32,637
Deferred income taxes 5,113 5,291
Prepaid expenses and other current assets 3,247 2,314
-------- --------
Total current assets 82,992 82,923
Property, plant and equipment, at cost, net 50,782 50,802
Intangible assets acquired in connection with
the purchase of businesses, net 13,380 13,777
Cost in excess of fair value of net assets
of businesses acquired, net 13,859 14,019
Other assets 3,714 3,695
-------- --------
Total assets $164,727 $165,216
======== ========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
-------------- --------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 6,471 $ 6,509
Accounts payable 7,134 8,070
Accrued expenses and other current liabilities 13,861 16,923
Income taxes payable 2,413 1,055
-------- --------
Total current liabilities 29,879 32,557
Long-term debt 23,068 24,608
Deferred income taxes 3,413 3,582
Other long-term liabilities 2,328 2,376
-------- --------
Total liabilities 58,688 63,123
-------- --------
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; none issued - -
Common Stock, par value $.10 per share;
authorized 40,000,000 shares; issued
18,651,000 and 18,429,000 shares 1,865 1,843
Additional paid-in capital 107,462 105,720
Accumulated deficit (2,491) (5,421)
-------- --------
106,836 102,142
Less: Treasury stock, at cost (43,000 and
6,000 shares) 797 49
-------- --------
Total stockholders' equity 106,039 102,093
-------- --------
Total liabilities and stockholders' equity $164,727 $165,216
======== ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------
1999 1998
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 42,072 $ 31,629
Cost of sales 26,933 20,504
-------- --------
Gross profit 15,139 11,125
-------- --------
Selling, general and administrative costs 7,330 5,630
Research and development costs 2,430 1,991
-------- --------
9,760 7,621
-------- --------
Operating income 5,379 3,504
-------- --------
Other expense (income)
Interest expense 612 299
Other expense (income) 262 (303)
-------- --------
Total other expense (income) 874 (4)
-------- --------
Income before income taxes 4,505 3,508
Provision for income taxes 1,575 1,250
-------- --------
Net income $ 2,930 $ 2,258
======== ========
Net income per common share and common
share equivalent:
- Basic $ .16 $ .13
======== ========
- Diluted $ .15 $ .12
======== ========
Weighted average number of common shares
and common share equivalents outstanding:
- Basic 18,586 17,447
======== ========
- Diluted 19,882 18,562
======== ========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 2,930 $ 2,258
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,265 1,427
Amortization of deferred gain (147) (147)
Deferred income taxes 8 (289)
Other, net 118 53
Change in operating assets and liabilities,
net of effects from purchase of business:
Decrease (increase) in accounts receivable (466) 430
Decrease (increase) in inventories (690) (1,458)
Decrease (increase) in prepaid expenses
and other assets (963) (618)
Increase (decrease) in accounts payable, accrued
expenses and other long-term liabilities (3,900) (2,146)
Increase (decrease) in income taxes payable 1,487 1,014
------- -------
Net Cash Provided By (Used In)
Operating Activities 642 524
------- -------
Cash Flows From Investing Activities:
Payment for purchase of business, net of cash acquired - (929)
Capital expenditures (1,687) (3,877)
Proceeds from sale of equipment 3 967
Other, net 9 164
------- -------
Net Cash Provided By (Used In)
Investing Activities (1,675) (3,675)
------- -------
Cash Flows From Financing Activities:
Debt repayments (1,578) (558)
Proceeds from the exercise of stock options
and warrants 805 20
Amounts paid for withholding taxes on stock
option exercises (41) (502)
Withholding taxes collected for stock option
exercises 40 11
Purchase of treasury stock - (343)
------- -------
Net Cash Provided By (Used In)
Financing Activities (774) (1,372)
------- -------
Net Increase (Decrease) In Cash
And Cash Equivalents (1,807) (4,523)
Cash And Cash Equivalents At Beginning Of Period 2,714 24,408
------- -------
Cash And Cash Equivalents At End Of Period $ 907 $19,885
======= =======
</TABLE>
See notes to consolidated financial statements.
-6-
<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 September 30, 1999 and the related
consolidated statements of earnings for the three months ended
September 30, 1999 and 1998 and the consolidated statements of cash
flows for the three months ended September 30, 1999 and 1998 have been
prepared by the Company and are unaudited. In the opinion of
management, all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at September 30, 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, 1999 annual report to shareholders.
There have been no changes of significant accounting policies since
June 30, 1999. Certain reclassifications have been made to previously
reported financial statements to conform to current classifications.
Results of operations for the 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 designs, develops and manufactures
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, including acquisition costs of
approximately $500,000, as follows:
<TABLE>
(In thousands)
<S> <C>
Net tangible assets $28,771
Identifiable intangible assets 6,300
Excess costs over fair value of net assets 4,429
In-process research and development 3,500
-------
$43,000
=======
</TABLE>
The identifiable intangible assets include existing technology,
customer relationships and assembled work force. The identifiable
intangibles and costs in excess of fair value of net assets 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.
-7-
<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 June 30, 1999 pro forma income but not the September 30, 1998
pro forma income in order to provide comparability to the respective
actual results.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Ended Three Months Ended
June 30, 1999 September 30, 1998
------------- ------------------
(In thousands, except per share data)
<S> <C> <C>
Net Sales $ 177,149 $ 39,983
Net Income 9,469 2,745
Net Income Per Share
Basic $ .53 $ .16
Diluted .50 .15
</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. Earnings Per Share
------------------
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share", net income per common share ("Basic EPS") is
computed by dividing net income by the weighted average common shares
outstanding. Net income per common share, assuming dilution ("Diluted
EPS") is computed by dividing net income by the weighted average
common shares outstanding plus potential dilution from the exercise of
stock options and warrants.
-8-
<PAGE>
A reconciliation of the numerators and denominators of the Basic EPS
and Diluted EPS calculations is as follows:
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------------------
1999 1998
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net income for basic and diluted earnings
per common share $ 2,930 $ 2,258
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 18,586 17,447
Add: Effect of dilutive options and warrants
outstanding 1,296 1,115
-------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 19,882 18,562
======== ========
Net Income Per Common Share and Common Share
Equivalent:
Basic $ .16 $ .13
======== ========
Diluted $ .15 $ .12
======== ========
</TABLE>
4. 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 with final payment on December 31, 2002. As of September 30, 1999,
the outstanding term loan was $16.3 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 90-day
LIBOR (approximately 6.0% at September 30, 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 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 Company has entered into an interest rate swap
agreement for the outstanding amount under the mortgage agreement at
approximately 7.6% in order to reduce the interest rate risk associated
with these borrowings.
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 September 30, 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.
-9-
<PAGE>
5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- ---------
(In thousands)
<S> <C> <C>
Raw Materials $ 18,837 $ 18,441
Work in Process 11,038 11,148
Finished Goods 3,452 3,048
-------- --------
$ 33,327 $ 32,637
======== ========
</TABLE>
6. 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.
7. 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.
8. Business Segments
-----------------
The Company's business segments and major products included in each
segment, are as follows:
Microelectronics: Isolator Products:
a) Microelectronic Modules a) Commercial spring and rubber isolators
b) Thin Film Interconnects b) Industrial spring and rubber isolators
c) Integrated Circuits c) Military wire-rope isolators
Test, Measurement and
Other Electronics:
a) Instrument Products
b) Motion Control Systems
- Scanning devices
- Stabilization and tracking
devices
- Magnetic devices
-10-
<PAGE>
<TABLE>
<CAPTION>
For The Three Months Ended
September 30,
---------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Business Segment Data:
Net sales:
Microelectronics $ 25,036 $ 21,499
Test, Measurement and
Other Electronics 12,543 5,703
Isolator Products 4,493 4,427
-------- --------
Net sales $ 42,072 $ 31,629
======== ========
Operating income:
Microelectronics $ 4,935 $ 3,554
Test, Measurement and
Other Electronics 843 126
Isolator Products 528 724
General corporate expenses (927) (900)
-------- --------
5,379 3,504
Interest expense (612) (299)
Other income (expense), net (262) 303
-------- --------
Income before income taxes $ 4,505 $ 3,508
======== ========
</TABLE>
-11-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We use our advanced design, engineering and manufacturing abilities to
produce state-of-the-art microelectronic module, integrated circuit,
interconnect and testing solutions. Our products are used in satellite,
wireless, wireline (including fiber optic), cable television ("CATV") and
defense communications markets. We also design and manufacture motion control
systems and shock and vibration isolation systems which are used for commercial,
industrial and defense applications. Our operations are grouped into three
segments
-- microelectronics
-- test, measurement and other electronics
-- isolator products
Our consolidated financial statements include the accounts of Aeroflex
Incorporated and all of our subsidiaries. All of our subsidiaries are
wholly-owned, except for Europtest, S.A., of which we own 90%.
Effective February 25, 1999, we acquired all of the outstanding stock of
UTMC Microelectronic Systems, Inc. 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 our 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, we acquired 90% of the stock of Europtest,
S.A. (France) for approximately $1.1 million. The purchase agreement also
requires that we 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 41% of our sales for fiscal 1999 and 42% of our sales for
fiscal 1998, were to agencies of the United States Government or to prime
defense contractors or subcontractors of the United States Government. Our
overall dependence on the military has been declining due to the acquisition of
MIC Technology in fiscal 1996 which is more commercially oriented, and a
focusing of resources towards developing standard products for the commercial
markets.
We believe that potential reductions in defense spending will not
materially affect our operations. In certain product areas, we have suffered
reductions in sales volume due to cutbacks in the military budget. In other
product areas, we have 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 our operations.
-12-
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, which is effective for fiscal years
beginning after June 15, 2000. 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. We believe that the impact of this
statement will not have a material effect on our consolidated financial
statements.
Market Risk
We are exposed to market risk related to changes in interest rates and, to
an immaterial extent, to foreign currency exchange rates. Some of the our debt
is at fixed rates of interest or at a variable rate with an interest rate swap
agreement which effectively converts the variable rate debt into a fixed rate of
debt. Our debt which is subject to a floating rate of interest and is not hedged
by an interest rate swap amounts to approximately $20.9 million at September 30,
1999. If market interest rates increase by 10 percent from levels at September
30, 1999, the effect on our net income would be a reduction of approximately
$100,000 per year.
Year 2000 Readiness
We have initiated a company-wide program and have developed a formal plan
of implementation to prepare us for the year 2000. This includes taking actions
designed to ensure that our information technology systems, products and
infrastructure are year 2000 compliant and that our customers, suppliers and
service providers have taken similar action. We have evaluated all of our:
-- information technology systems
-- products
-- equipment
-- other facilities systems
We have completed substantially all of our remediation and contingency
planning activities for all mission critical systems and areas. We have incurred
internal staff costs, as well as consulting and other expenses in connection
with our internal year 2000 compliance and expect to continue to do so. We have
spent an aggregate $54,000 on third-party costs for year 2000 compliance and do
not expect total costs to exceed $100,000. Accordingly, we believe the total
costs incurred and to be incurred for all internal year 2000 readiness related
projects will not have a material impact on our business, results of operations
or financial condition.
We have surveyed our customers, suppliers and service providers through
written correspondence regarding their year 2000 readiness. We have received
written correspondence from substantially all mission critical third parties
indicating their compliance but have also created contingency plans such as
increasing inventory levels and identifying alternative sources. Our risks
involved with not solving the year 2000 problem include, but are not limited to,
the following: loss of local or regional electrical power, loss of
telecommunication services, delays or cancellations of merchandise shipments,
manufacturing shutdowns, delays in processing customer transactions, bank errors
and computer errors by suppliers. Despite our efforts to survey customers,
suppliers and service providers, we cannot be certain as to the actual year 2000
readiness of these third parties and because our year 2000 compliance is
dependent upon certain third parties (including infrastructure providers) also
being year 2000 compliant on a timely basis, there is no assurance that our
efforts will prevent a material adverse impact on our business, results of
operations or financial condition.
-13-
<PAGE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net Sales. Net sales increased 33.0% to $42.1 million for the three months
ended September 30, 1999 from $31.6 million for the three months ended September
30, 1998. Net sales in the microelectronics segment increased 16.5% to $25.0
million for the three months ended September 30, 1999 from $21.5 million for the
three months ended September 30, 1998 due to the acquisition of UTMC in February
1999 partially offset by reductions in sales in both thin film interconnects and
microelectronic modules. Net sales in the test, measurement and other
electronics segment increased 119.9% to $12.5 million for the three months ended
September 30, 1999 from $5.7 million for the three months ended September 30,
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). Net sales in the isolator products segment increased 1.5% to
$4.5 million for the three months ended September 30, 1999 from $4.4 million for
the three months ended September 30, 1998. We are experiencing softness in
bookings and shipments in the satellite communications and certain thin film
interconnect product areas which is expected to continue for the near term and
have an adverse impact on our sales and operating profits for the next several
quarters. We currently anticipate that our second quarter sales will be
approximately the same as in the first quarter.
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 36.1% to $15.1
million for the three months ended September 30, 1999 from $11.1 million for the
three months ended September 30, 1998. Gross margin increased to 36.0% for the
three months ended September 30, 1999 from 35.2% for the three months ended
September 30, 1998. The increase was primarily a result of increased margins in
the microelectronics segment due to product mix, partially offset by the impact
of a greater sales growth in the test, measurement and other electronics
segment, which has lower gross margins than our business as a whole, and further
reduced as a result of low margins on the satellite test system development
program.
Selling, General and Administrative Costs. Selling, general and
administrative costs include office and management salaries, fringe benefits and
commissions. Selling, general and administrative costs increased 30.2% to $7.3
million (17.4% of net sales) for the three months ended September 30, 1999 from
$5.6 million (17.8% of net sales) for the three months ended September 30, 1998.
The increase was primarily due to the additional costs of UTMC.
Research and Development Costs. Research and development costs consist of
material, engineering labor and allocated overhead. Our self-funded research and
development costs increased 22.0% to $2.4 million (5.8% of net sales) for the
three months ended September 30, 1999 from $2.0 million (6.3% of net sales) for
the three months ended September 30, 1998. The increase was primarily
attributable to the additional costs of UTMC partially offset by reduced costs
relative to the comparable period in the prior year for the development of a new
low-cost, high speed, high performance frequency synthesizer intended for
commercial communication test systems which is substantially complete.
Other Expense (Income). Interest expense increased to $612,000 for the
three months ended September 30, 1999 from $299,000 for the three months ended
September 30, 1998, primarily due to increased levels of borrowings. Other
expense of $262,000 for the three months ended September 30, 1999 consists
primarily of a $300,000 expense for the settlement of a lawsuit and $33,000 of
interest income. Other income of $303,000 for the three months ended September
30, 1998 consists primarily of interest income. Interest income decreased due to
decreased levels of cash equivalents. The increased levels of borrowings and the
decreased levels of cash equivalents were due to the acquisition of UTMC.
-14-
<PAGE>
Provision for Income Taxes. Income taxes increased 26.0% to $1.6 million
(an effective income tax rate of 35.0%) for the three months ended September 30,
1999 from $1.3 million (an effective income tax rate of 35.6%) for the three
months ended September 30, 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.
Liquidity and Capital Resources
As of February 25, 1999, we replaced a previous agreement with a revised
revolving credit, term loan and mortgage agreement with two banks which is
secured by substantially all of our 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 our 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 September 30, 1999, the
outstanding term loan was $16.3 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 90-day LIBOR (approximately 6.0% at
September 30, 1999) plus 1.50% on the revolving credit borrowings and LIBOR plus
1.75% on the term loan borrowings. The mortgage is payable in monthly
installments of approximately $26,000 through March 2008 and a balloon payment
of $1.6 million in April 2008. We have entered into an interest rate swap
agreement for the outstanding amount under the mortgage agreement at
approximately 7.6% in order to reduce the interest rate risk associated with
these borrowings.
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, we have a
letter of credit facility of $2.0 million.
In December 1998, we financed the acquisition and renovation of the land
and building of our 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, we sold 2.6 million shares of our 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 in February 1999.
Our backlog of orders was $93.6 million at September 30, 1999 and $78.5
million at September 30, 1998.
As of September 30, 1999, we had $53.1 million in working capital. Net cash
provided by operating activities was $642,000 for the three months ended
September 30, 1999. Net cash used in investing activities was $1.7 million for
the three months ended September 30, 1999, consisting primarily of capital
expenditures. Net cash used in financing activities was $774,000 for the three
months ended September 30, 1999, consisting primarily of debt payments of $1.6
million partially offset by proceeds from exercises of stock options and
warrants of $805,000.
We believe that internally generated funds and available lines of credit
will be sufficient for our working capital requirements, capital expenditure
needs and the servicing of our debt for at least the next twelve months.
-15-
<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 our financial position, business strategy and plans and objectives of
our management 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 us or our
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of our management, as well as assumptions made by and
information currently available to our 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 and general economic conditions. Such statements reflect our
current views with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity.
-16-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
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 Amendment No. 1 to Employment Agreement between Harvey R. Blau and
Aeroflex Incorporated dated as of September 1, 1999.
10.2 Amendment No. 1 to Employment Agreement between Michael Gorin and
Aeroflex Incorporated dated as of September 1, 1999.
10.3 Amendment No. 1 to Employment Agreement between Leonard Borow and
Aeroflex Incorporated dated as of September 1, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
-17-
<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)
/s/ Michael Gorin
---------------------------------------
November 11, 1999 By: Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
-18-
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 (this "Amendment") to the Employment Agreement (the
"Employment Agreement") dated as of March 1, 1999 by and between Harvey R. Blau
(the "Executive") and Aeroflex Incorporated (the "Company"), hereby amends the
Employment Agreement, effective as of September 1, 1999, as set forth below.
1. Requirement of Deferral. To the extent that any Bonus Amount would be
nondeductible by the Company in the Relevant Tax Year solely by reason of
Section 162(m), and if a Change in Control (as defined in the Employment
Agreement) has not occurred on or before the last day of the Relevant Tax Year,
then the Deferred Amount (if any) shall not be paid at the time provided for in
Section 4 of the Employment Agreement, but instead shall be deferred and paid in
accordance with this Amendment.
2. Credits to Account. The Company shall credit each Deferred Amount to a
bookkeeping account in the name of the Executive (the "Account") on the date the
Deferred Amount would (absent this Amendment) have been paid to the Executive.
The Company shall also credit the Account monthly with interest on the balance
therein at the prime rate as pub lished in the Wall Street Journal, as in effect
from time to time, less one percentage point. The Account shall be reduced as
and to the extent distributions are made from the Account pursuant to Sections
4, 6 and 7 of this Amendment.
3. Election Form for Time and Form of Payments and Beneficiaries. The
Executive may elect, on an Election Form, or such other form as the Committee or
its delegee may from time to time prescribe, the time or times at which the
balance in the Account shall be paid to the Executive; provided, that except as
provided in Sections 6 and 7 of this Amendment, in no event shall any portion of
the balance of the Account be paid to the Executive before the 10th business day
following the termination of the Executive's employment with the Company and its
affiliates. The Election Form shall permit the Executive to elect a beneficiary
or beneficiaries to receive the balance in his Account in the event of his death
before payment of such balance in full. Any Election Form filed by the Executive
within 30 days after the date of this Amendment shall be immediately effective
and shall remain in effect until superseded as set forth in the next sentence.
Any Election Form filed by the Executive more than 30 days after the date of
this Amendment shall become effective on the first anniversary of its filing, at
which time it shall supersede any election form previously filed by the
Executive and shall remain in effect until superseded as set forth in this
sentence. Notwithstanding the foregoing, no Election Form shall become effective
after any payments from the Account have been made pursuant to Section 4 of this
Amendment, other than payments pursuant to Sections 6 and 7.
4. Payments from Account. If at the time of the termination of the Execu
tive's employment with the Company and its affiliates, there is no election form
in effect for the Executive, the Company shall pay him (or his estate, if
applicable) the balance in his Account in a single lump-sum cash payment, as
promptly as practicable following the 10th business day after the termination of
the Executive's employment with the Company and its affiliates for any reason.
In all other cases, the Company shall pay the Executive (or his beneficiary or
beneficia ries, if applicable) the balance in his Account in accordance with the
election form that is in effect for the Executive.
<PAGE>
5. Incompetence of the Executive. Notwithstanding the foregoing, if at the
time any portion of the Account becomes payable to the Executive, the Executive
has been determined to be legally incompetent, the Committee may cause the
Company to make payment of such portion to the Executive's legal guardian or
such other person or persons as the Commit tee considers appropriate on behalf
of the Executive, and such payment shall fully discharge the Company's
obligations with respect to the Account and all persons having or claiming to
have an interest therein, including without limitation the Executive.
6. Hardship Withdrawals. Notwithstanding any other provision of this
Amendment, the Executive or any of his beneficiaries may withdraw all or a
portion of his Account in the event of unforeseeable emergency. For this
purpose, unforeseeable emergency means that funds are necessary in light of the
immediate and heavy unexpected financial needs of the Executive or beneficiary.
Any such withdrawal shall be limited to the amount required (taking into account
the net after-tax amount that will be available from such withdrawal) to meet
any immediate financial need that is not reasonably available from other
sources. All determina tions as to whether, and in what amounts, withdrawals are
permitted pursuant to this Section 6 shall be made by the Committee in its sole
discretion. Withdrawals shall be paid in cash as soon as practicable following
approval of the withdrawal request by the Committee.
7. Automatic Withdrawals. Notwithstanding any other provision of this
Amendment, if the Committee determines that it is possible for the Company to
pay the Executive all or any portion of the amounts credited to his Account at a
time when he is still employed with the Company or any of its affiliates,
without the amount so paid being nondeduct ible by reason of Section 162(m),
then such amount shall be paid to the Executive.
8. Unfunded Arrangement. The Account and the amounts credited thereto shall
be unfunded obligations of the Company, and neither the Executive nor any of his
benefi ciaries shall have any interest in the assets of the Company relating to
or arising out of the Account, except as general creditor, of the Company.
9. Definitions. (a) The "Bonus Amount" for a Relevant Tax Year means the
amount that would (absent this Amendment) become payable pursuant to Section 4
of the Employment Agreement and would (absent the application of Section 162(m))
be deductible by the Company in that Relevant Taxable Year.
(b) The Deferred Amount for a Relevant Tax Year means all or a portion of
the Bonus Amount for the Relevant Tax Year, equal to the lesser of the Bonus
Amount and the Nondeductible Amount for the Relevant Tax Year.
(c) The "Code" means the Internal Revenue Code of 1986, as amended.
(d) The "Committee" means the Compensation/Stock Option Committee of the
Board of Directors of the Company.
<PAGE>
(e) "Election Form" means a form substantially in the form attached hereto
as Exhibit A, or such other form as the Committee or its delegee may from time
to time prescribe, duly completed by the Executive and filed with the Committee
or its delegee.
(f) The "Nondeductible Amount" for a Relevant Tax Year means the excess of
(i) the "applicable employee remuneration" under Section 162(m) with respect to
the Execu tive for such Relevant Tax Year over (ii) the portion of such
applicable employee remuneration that does not exceed the dollar limitation set
forth in Section 162(m)(1) of the Code (without regard to Section 162(m)(4)(F)
of the Code); provided, that if there is no such excess, then the "Nondeductible
Amount" for that Relevant Tax Year is zero.
(g) The "Relevant Tax Year" with respect to any Bonus Amount or Nonde
ductible Amount means the taxable year of the Company in which the Company would
(absent Section 162(m) of the Code) be entitled to deduct such amount for
federal income tax purposes.
(h) "Section 162(m)" means Section 162(m) of the Code and the Treasury
Regulations thereunder.
10. Except as specifically provided in this Amendment, the Employment
Agreement is in all other respects ratified and confirmed without amendment.
11. For purposes of this Amendment, any provisions of the Code other than
Section 162(m) that might result in a denial of a tax deduction (as opposed to
such provisions affecting the timing of such deduction) shall be ignored,
including without limitation Section 280G of the Code.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the
date first above written.
AEROFLEX INCORPORATED
By:/s/ Michael Gorin
-------------------------------
Name: Michael Gorin
Title: President
/s/ Harvey R. Blau
-------------------------------
Harvey R. Blau
<PAGE>
EXHIBIT A
ELECTION FORM
To: Chairman, Compensation/Stock Option Committee
Aeroflex Incorporated
35 South Service Road
Plainview, New York 11803
cc: Charles Badlato
From: Harvey R. Blau
Date: ______________
Pursuant to Amendment No. 1 dated as of September 1, 1999 (the "Amendment")
to the Employment Agreement (the "Employment Agreement") dated as of March 1,
1999 by and between me and Aeroflex Incorporated (the "Company"), I hereby make
the following elections with respect to the payment of the Account (as defined
in the Amendment):
1. Time of payments (other than in the event of my death)
The balance in my Account shall become payable (or begin to be
payable) as promptly as practicable following the date indicated below
(choose one):
( ) the 10th business day after the termination of my employment
with the Company and its affiliates
( ) the later of ________ (fill in a specific date) or the 10th
business day after the termination of my employment with the
Company and its affiliates
2. Form of payments (other than in the event of my death)
The balance in my Account shall be payable to me in the form indicated
below (choose one):
( ) a single lump-sum payment
( ) monthly over a period of __ years (fill in number, not to
exceed 15), with each monthly payment representing an
approximately equal portion of the balance in my account on the
date payments begins, plus an appropriate share of interest
credited to the Account after that date
<PAGE>
3. Beneficiary for payments in the event of my death
Upon my death, any balance in my Account that has not already been
paid to me shall be payable to the following individual(s) in the
proportions indicated:
Name Address Percentage
4. Form of payments in the event of my death The balance in my
Account that becomes payable to the individual(s) indicated in
Section 3 above upon my death shall be payable in the form
indicated below (choose one):
( ) a single lump-sum payment
( ) in continuing monthly installments in accordance with my
election in Section 2 above
( ) monthly over a period of __ years (fill in number, not to
exceed 15), with each monthly payment representing an
approximately equal portion of the balance in my account on the
date of my death, plus an appropriate share of interest credited
to the Account after that date
5. Change in Control override:
If there is a "Change in Control" (as defined in the Employment
Agreement), then I elect as follows (choose one):
( ) the balance in my Account shall be paid to me (or my
beneficiary if I have previously died) in a single lump-sum
payment as soon as practi cable after the Change in Control
( ) the balance in my Account shall continue to be payable in
accordance with Sections 1-4 above, as applicable
I recognize and acknowledge that: (i) if I fail to complete Section 3 above, any
balance in my Account upon my death will be paid to my estate in a single lump
sum; (ii) if I other wise fill out this form incorrectly or incompletely, the
Committee reserves the right to declare it ineffective or to deem it to have
been completed in such manner as it determines, in its sole discretion, to be
consistent with my intent; and (iii) if this form is filed more than 30 days
after [insert date of Amendment], it will become effective on the first
anniversary of the date it is filed, except that if any payments from my Account
have previously been made, it shall not become effective.
-------------------------------
Harvey R. Blau
Received by ___________________ on __________[Committee or its delegee to insert
name and date]
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 (this "Amendment") to the Employment Agreement (the
"Employment Agreement") dated as of March 1, 1999 by and between Michael Gorin
(the "Executive") and Aeroflex Incorporated (the "Company"), hereby amends the
Employment Agreement, effective as of September 1, 1999, as set forth below.
1. Requirement of Deferral. To the extent that any Bonus Amount would be
nondeductible by the Company in the Relevant Tax Year solely by reason of
Section 162(m), and if a Change in Control (as defined in the Employment
Agreement) has not occurred on or before the last day of the Relevant Tax Year,
then the Deferred Amount (if any) shall not be paid at the time provided for in
Section 4 of the Employment Agreement, but instead shall be deferred and paid in
accordance with this Amendment.
2. Credits to Account. The Company shall credit each Deferred Amount to a
bookkeeping account in the name of the Executive (the "Account") on the date the
Deferred Amount would (absent this Amendment) have been paid to the Executive.
The Company shall also credit the Account monthly with interest on the balance
therein at the prime rate as pub lished in the Wall Street Journal, as in effect
from time to time, less one percentage point. The Account shall be reduced as
and to the extent distributions are made from the Account pursuant to Sections
4, 6 and 7 of this Amendment.
3. Election Form for Time and Form of Payments and Beneficiaries. The
Executive may elect, on an Election Form, or such other form as the Committee or
its delegee may from time to time prescribe, the time or times at which the
balance in the Account shall be paid to the Executive; provided, that except as
provided in Sections 6 and 7 of this Amendment, in no event shall any portion of
the balance of the Account be paid to the Executive before the 10th business day
following the termination of the Executive's employment with the Company and its
affiliates. The Election Form shall permit the Executive to elect a beneficiary
or beneficiaries to receive the balance in his Account in the event of his death
before payment of such balance in full. Any Election Form filed by the Executive
within 30 days after the date of this Amendment shall be immediately effective
and shall remain in effect until superseded as set forth in the next sentence.
Any Election Form filed by the Executive more than 30 days after the date of
this Amendment shall become effective on the first anniversary of its filing, at
which time it shall supersede any election form previously filed by the
Executive and shall remain in effect until superseded as set forth in this
sentence. Notwithstanding the foregoing, no Election Form shall become effective
after any payments from the Account have been made pursuant to Section 4 of this
Amendment, other than payments pursuant to Sections 6 and 7.
4. Payments from Account. If at the time of the termination of the Execu
tive's employment with the Company and its affiliates, there is no election form
in effect for the Executive, the Company shall pay him (or his estate, if
applicable) the balance in his Account in a single lump-sum cash payment, as
promptly as practicable following the 10th business day after the termination of
the Executive's employment with the Company and its affiliates for any reason.
In all other cases, the Company shall pay the Executive (or his beneficiary or
beneficia ries, if applicable) the balance in his Account in accordance with the
election form that is in effect for the Executive.
<PAGE>
5. Incompetence of the Executive. Notwithstanding the foregoing, if at the
time any portion of the Account becomes payable to the Executive, the Executive
has been determined to be legally incompetent, the Committee may cause the
Company to make payment of such portion to the Executive's legal guardian or
such other person or persons as the Commit tee considers appropriate on behalf
of the Executive, and such payment shall fully discharge the Company's
obligations with respect to the Account and all persons having or claiming to
have an interest therein, including without limitation the Executive.
6. Hardship Withdrawals. Notwithstanding any other provision of this
Amendment, the Executive or any of his beneficiaries may withdraw all or a
portion of his Account in the event of unforeseeable emergency. For this
purpose, unforeseeable emergency means that funds are necessary in light of the
immediate and heavy unexpected financial needs of the Executive or beneficiary.
Any such withdrawal shall be limited to the amount required (taking into account
the net after-tax amount that will be available from such withdrawal) to meet
any immediate financial need that is not reasonably available from other
sources. All determina tions as to whether, and in what amounts, withdrawals are
permitted pursuant to this Section 6 shall be made by the Committee in its sole
discretion. Withdrawals shall be paid in cash as soon as practicable following
approval of the withdrawal request by the Committee.
7. Automatic Withdrawals. Notwithstanding any other provision of this
Amendment, if the Committee determines that it is possible for the Company to
pay the Executive all or any portion of the amounts credited to his Account at a
time when he is still employed with the Company or any of its affiliates,
without the amount so paid being nondeduct ible by reason of Section 162(m),
then such amount shall be paid to the Executive.
8. Unfunded Arrangement. The Account and the amounts credited thereto shall
be unfunded obligations of the Company, and neither the Executive nor any of his
benefi ciaries shall have any interest in the assets of the Company relating to
or arising out of the Account, except as general creditor, of the Company.
9. Definitions. (a) The "Bonus Amount" for a Relevant Tax Year means the
amount that would (absent this Amendment) become payable pursuant to Section 4
of the Employment Agreement and would (absent the application of Section 162(m))
be deductible by the Company in that Relevant Taxable Year.
(b) The Deferred Amount for a Relevant Tax Year means all or a portion of
the Bonus Amount for the Relevant Tax Year, equal to the lesser of the Bonus
Amount and the Nondeductible Amount for the Relevant Tax Year.
(c) The "Code" means the Internal Revenue Code of 1986, as amended.
(d) The "Committee" means the Compensation/Stock Option Committee of the
Board of Directors of the Company.
<PAGE>
(d) "Election Form" means a form substantially in the form attached hereto
as Exhibit A, or such other form as the Committee or its delegee may from time
to time prescribe, duly completed by the Executive and filed with the Committee
or its delegee.
(e) The "Nondeductible Amount" for a Relevant Tax Year means the excess of
(i) the "applicable employee remuneration" under Section 162(m) with respect to
the Execu tive for such Relevant Tax Year over (ii) the portion of such
applicable employee remuneration that does not exceed the dollar limitation set
forth in Section 162(m)(1) of the Code (without regard to Section 162(m)(4)(F)
of the Code); provided, that if there is no such excess, then the "Nondeductible
Amount" for that Relevant Tax Year is zero.
(f) The "Relevant Tax Year" with respect to any Bonus Amount or Nonde
ductible Amount means the taxable year of the Company in which the Company would
(absent Section 162(m) of the Code) be entitled to deduct such amount for
federal income tax purposes.
(g) "Section 162(m)" means Section 162(m) of the Code and the Treasury
Regulations thereunder.
9. Except as specifically provided in this Amendment, the Employment
Agreement is in all other respects ratified and confirmed without amendment.
10. For purposes of this Amendment, any provisions of the Code other than
Section 162(m) that might result in a denial of a tax deduction (as opposed to
such provisions affecting the timing of such deduction) shall be ignored,
including without limitation Section 280G of the Code.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the
date first above written.
AEROFLEX INCORPORATED
By: /s/ Harvey R. Blau
---------------------------------
Name: Harvey R. Blau
Title: Chairman of the Board
/s/ Michael Gorin
---------------------------------
Michael Gorin
<PAGE>
EXHIBIT A
ELECTION FORM
To: Chairman, Compensation/Stock Option Committee
Aeroflex Incorporated
35 South Service Road
Plainview, New York 11803
cc: Charles Badlato
From: Michael Gorin
Date: 6/15/99
-------
Pursuant to Amendment No. 1 dated as of September 1, 1999 (the "Amendment") to
the Employment Agreement (the "Employment Agreement") dated as of March 1, 1999
by and between me and Aeroflex Incorporated (the "Company"), I hereby make the
following elections with respect to the payment of the Account (as defined in
the Amendment):
1. Time of payments (other than in the event of my death)
The balance in my Account shall become payable (or begin to be
payable) as promptly as practicable following the date indicated below
(choose one):
(x) the 10th business day after the termination of my employment
with the Company and its affiliates
( ) the later of ________ (fill in a specific date) or the 10th
business day after the termination of my employment with the
Company and its affiliates
2. Form of payments (other than in the event of my death)
The balance in my Account shall be payable to me in the form indicated
below (choose one):
(x) a single lump-sum payment
( ) monthly over a period of __ years (fill in number, not to
exceed 15), with each monthly payment representing an
approximately equal portion of the balance in my account on the
date payments begins, plus an appropriate share of interest
credited to the Account after that date
<PAGE>
3. Beneficiary for payments in the event of my death
Upon my death, any balance in my Account that has not already been
paid to me shall be payable to the following individual(s) in the
proportions indicated:
Name Address Percentage
Diane Gorin 1123 East Long Beach Rd. 100%
Nissequogue, NY 11780
4. Form of payments in the event of my death
The balance in my Account that becomes payable to the individual(s)
indicated in Section 3 above upon my death shall be payable in the
form indicated below (choose one):
(x) a single lump-sum payment
( ) in continuing monthly installments in accordance with my
election in Section 2 above
( ) monthly over a period of __ years (fill in number, not to
exceed 15), with each monthly payment representing an
approximately equal portion of the balance in my account on the
date of my death, plus an appropriate share of interest credited
to the Account after that date
5. Change in Control override:
If there is a "Change in Control" (as defined in the Employment
Agreement), then I elect as follows (choose one):
(x) the balance in my Account shall be paid to me (or my
beneficiary if I have previously died) in a single lump-sum
payment as soon as practi cable after the Change in Control
( ) the balance in my Account shall continue to be payable in
accordance with Sections 1-4 above, as applicable
I recognize and acknowledge that: (i) if I fail to complete
Section 3 above, any balance in my Account upon my death will be
paid to my estate in a single lump sum; (ii) if I other wise fill
out this form incorrectly or incompletely, the Committee reserves
the right to declare it ineffective or to deem it to have been
completed in such manner as it determines, in its sole
discretion, to be consistent with my intent; and (iii) if this
form is filed more than 30 days after [insert date of Amendment],
it will become effective on the first anniversary of the date it
is filed, except that if any payments from my Account have
previously been made, it shall not become effective.
/s/ Michael Gorin
-------------------------
Michael Gorin
Received by on _______ [Committee or its delegee to insert name and date]
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 (this "Amendment") to the Employment Agreement (the
"Employment Agreement") dated as of March 1, 1999 by and between Leonard Borow
(the "Executive") and Aeroflex Incorporated (the "Company"), hereby amends the
Employment Agreement, effective as of September 1, 1999, as set forth below.
1. Requirement of Deferral. To the extent that any Bonus Amount would be
nondeductible by the Company in the Relevant Tax Year solely by reason of
Section 162(m), and if a Change in Control (as defined in the Employment
Agreement) has not occurred on or before the last day of the Relevant Tax Year,
then the Deferred Amount (if any) shall not be paid at the time provided for in
Section 4 of the Employment Agreement, but instead shall be deferred and paid in
accordance with this Amendment.
2. Credits to Account. The Company shall credit each Deferred Amount to a
bookkeeping account in the name of the Executive (the "Account") on the date the
Deferred Amount would (absent this Amendment) have been paid to the Executive.
The Company shall also credit the Account monthly with interest on the balance
therein at the prime rate as pub lished in the Wall Street Journal, as in effect
from time to time, less one percentage point. The Account shall be reduced as
and to the extent distributions are made from the Account pursuant to Sections
4, 6 and 7 of this Amendment.
3. Election Form for Time and Form of Payments and Beneficiaries. The
Executive may elect, on an Election Form, or such other form as the Committee or
its delegee may from time to time prescribe, the time or times at which the
balance in the Account shall be paid to the Executive; provided, that except as
provided in Sections 6 and 7 of this Amendment, in no event shall any portion of
the balance of the Account be paid to the Executive before the 10th business day
following the termination of the Executive's employment with the Company and its
affiliates. The Election Form shall permit the Executive to elect a beneficiary
or beneficiaries to receive the balance in his Account in the event of his death
before payment of such balance in full. Any Election Form filed by the Executive
within 30 days after the date of this Amendment shall be immediately effective
and shall remain in effect until superseded as set forth in the next sentence.
Any Election Form filed by the Executive more than 30 days after the date of
this Amendment shall become effective on the first anniversary of its filing, at
which time it shall supersede any election form previously filed by the
Executive and shall remain in effect until superseded as set forth in this
sentence. Notwithstanding the foregoing, no Election Form shall become effective
after any payments from the Account have been made pursuant to Section 4 of this
Amendment, other than payments pursuant to Sections 6 and 7.
4. Payments from Account. If at the time of the termination of the Execu
tive's employment with the Company and its affiliates, there is no election form
in effect for the Executive, the Company shall pay him (or his estate, if
applicable) the balance in his Account in a single lump-sum cash payment, as
promptly as practicable following the 10th business day after the termination of
the Executive's employment with the Company and its affiliates for any reason.
In all other cases, the Company shall pay the Executive (or his beneficiary or
beneficia ries, if applicable) the balance in his Account in accordance with the
election form that is in effect for the Executive.
<PAGE>
5. Incompetence of the Executive. Notwithstanding the foregoing, if at the
time any portion of the Account becomes payable to the Executive, the Executive
has been determined to be legally incompetent, the Committee may cause the
Company to make payment of such portion to the Executive's legal guardian or
such other person or persons as the Commit tee considers appropriate on behalf
of the Executive, and such payment shall fully discharge the Company's
obligations with respect to the Account and all persons having or claiming to
have an interest therein, including without limitation the Executive.
6. Hardship Withdrawals. Notwithstanding any other provision of this
Amendment, the Executive or any of his beneficiaries may withdraw all or a
portion of his Account in the event of unforeseeable emergency. For this
purpose, unforeseeable emergency means that funds are necessary in light of the
immediate and heavy unexpected financial needs of the Executive or beneficiary.
Any such withdrawal shall be limited to the amount required (taking into account
the net after-tax amount that will be available from such withdrawal) to meet
any immediate financial need that is not reasonably available from other
sources. All determina tions as to whether, and in what amounts, withdrawals are
permitted pursuant to this Section 6 shall be made by the Committee in its sole
discretion. Withdrawals shall be paid in cash as soon as practicable following
approval of the withdrawal request by the Committee.
7. Automatic Withdrawals. Notwithstanding any other provision of this
Amendment, if the Committee determines that it is possible for the Company to
pay the Executive all or any portion of the amounts credited to his Account at a
time when he is still employed with the Company or any of its affiliates,
without the amount so paid being nondeduct ible by reason of Section 162(m),
then such amount shall be paid to the Executive.
8. Unfunded Arrangement. The Account and the amounts credited thereto shall
be unfunded obligations of the Company, and neither the Executive nor any of his
benefi ciaries shall have any interest in the assets of the Company relating to
or arising out of the Account, except as general creditor, of the Company.
9. Definitions. (a) The "Bonus Amount" for a Relevant Tax Year means the
amount that would (absent this Amendment) become payable pursuant to Section 4
of the Employment Agreement and would (absent the application of Section 162(m))
be deductible by the Company in that Relevant Taxable Year.
(b) The Deferred Amount for a Relevant Tax Year means all or a portion of
the Bonus Amount for the Relevant Tax Year, equal to the lesser of the Bonus
Amount and the Nondeductible Amount for the Relevant Tax Year.
(c) The "Code" means the Internal Revenue Code of 1986, as amended.
(d) The "Committee" means the Compensation/Stock Option Committee of the
Board of Directors of the Company.
<PAGE>
(d) "Election Form" means a form substantially in the form attached hereto
as Exhibit A, or such other form as the Committee or its delegee may from time
to time prescribe, duly completed by the Executive and filed with the Committee
or its delegee.
(e) The "Nondeductible Amount" for a Relevant Tax Year means the excess of
(i) the "applicable employee remuneration" under Section 162(m) with respect to
the Executive for such Relevant Tax Year over (ii) the portion of such
applicable employee remuneration that does not exceed the dollar limitation set
forth in Section 162(m)(1) of the Code (without regard to Section 162(m)(4)(F)
of the Code); provided, that if there is no such excess, then the "Nondeductible
Amount" for that Relevant Tax Year is zero.
(f) The "Relevant Tax Year" with respect to any Bonus Amount or Nonde
ductible Amount means the taxable year of the Company in which the Company would
(absent Section 162(m) of the Code) be entitled to deduct such amount for
federal income tax purposes.
(g) "Section 162(m)" means Section 162(m) of the Code and the Treasury
Regulations thereunder.
9. Except as specifically provided in this Amendment, the Employment
Agreement is in all other respects ratified and confirmed without amendment.
10. For purposes of this Amendment, any provisions of the Code other than
Section 162(m) that might result in a denial of a tax deduction (as opposed to
such provisions affecting the timing of such deduction) shall be ignored,
including without limitation Section 280G of the Code.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the
date first above written.
AEROFLEX INCORPORATED
By: /s/ Harvey R. Blau
---------------------------
Name: Harvey R. Blau
Title: Chairman of the Board
/s/ Leonard Borow
---------------------------
Leonard Borow
<PAGE>
EXHIBIT A
ELECTION FORM
To: Chairman, Compensation/Stock Option Committee
Aeroflex Incorporated
35 South Service Road
Plainview, New York 11803
cc: Charles Badlato
From: Leonard Borow
Date: _____________
Pursuant to Amendment No. 1 dated as of September 1, 1999 (the "Amendment")
to the Employment Agreement (the "Employment Agreement") dated as of March 1,
1999 by and between me and Aeroflex Incorporated (the "Company"), I hereby make
the following elections with respect to the payment of the Account (as defined
in the Amendment):
1. Time of payments (other than in the event of my death)
The balance in my Account shall become payable (or begin to be
payable) as promptly as practicable following the date indicated below
(choose one):
( ) the 10th business day after the termination of my employment
with the Company and its affiliates
( ) the later of ________ (fill in a specific date) or the 10th
business day after the termination of my employment with the
Company and its affiliates
2. Form of payments (other than in the event of my death)
The balance in my Account shall be payable to me in the form indicated
below (choose one): ( ) a single lump-sum payment
( ) monthly over a period of __ years (fill in number, not to
exceed 15), with each monthly payment representing an
approximately equal portion of the balance in my account on the
date payments begins, plus an appropriate share of interest
credited to the Account after that date
<PAGE>
3. Beneficiary for payments in the event of my death
Upon my death, any balance in my Account that has not already been
paid to me shall be payable to the following individual(s) in the
proportions indicated:
Name Address Percentage
4. Form of payments in the event of my death
The balance in my Account that becomes payable to the individual(s)
indicated in Section 3 above upon my death shall be payable in the
form indicated below (choose one): ( ) a single lump-sum payment
( ) in continuing monthly installments in accordance with my
election in Section 2 above
( ) monthly over a period of __ years (fill in number, not to
exceed 15), with each monthly payment representing an
approximately equal portion of the balance in my account on the
date of my death, plus an appropriate share of interest credited
to the Account after that date
5. Change in Control override:
If there is a "Change in Control" (as defined in the Employment
Agreement), then I elect as follows (choose one):
( ) the balance in my Account shall be paid to me (or my
beneficiary if I have previously died) in a single lump-sum
payment as soon as practi cable after the Change in Control
( ) the balance in my Account shall continue to be payable in
accor dance with Sections 1-4 above, as applicable
I recognize and acknowledge that: (i) if I fail to complete Section 3 above, any
balance in my Account upon my death will be paid to my estate in a single lump
sum; (ii) if I other wise fill out this form incorrectly or incompletely, the
Committee reserves the right to declare it ineffective or to deem it to have
been completed in such manner as it determines, in its sole discretion, to be
consistent with my intent; and (iii) if this form is filed more than 30 days
after [insert date of Amendment], it will become effective on the first
anniversary of the date it is filed, except that if any payments from my Account
have previously been made, it shall not become effective.
__________________________
Leonard Borow
Received by on _____[Committee or its delegee to insert name and date]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements for the three months ended September 30, 1999
and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 907,000
<SECURITIES> 0
<RECEIVABLES> 40,802,000
<ALLOWANCES> 404,000
<INVENTORY> 33,327,000
<CURRENT-ASSETS> 82,992,000
<PP&E> 86,328,000
<DEPRECIATION> 35,546,000
<TOTAL-ASSETS> 164,727,000
<CURRENT-LIABILITIES> 29,879,000
<BONDS> 0
0
0
<COMMON> 1,865,000
<OTHER-SE> 104,174,000
<TOTAL-LIABILITY-AND-EQUITY> 164,727,000
<SALES> 42,072,000
<TOTAL-REVENUES> 42,072,000
<CGS> 26,933,000
<TOTAL-COSTS> 36,693,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 612,000
<INCOME-PRETAX> 4,505,000
<INCOME-TAX> 1,575,000
<INCOME-CONTINUING> 2,930,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,930,000
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.15
</TABLE>
