<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AEROFLEX INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 11-1974412
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
35 SOUTH SERVICE ROAD MICHAEL GORIN, PRESIDENT
PLAINVIEW, NEW YORK 11803 AEROFLEX INCORPORATED
(516) 694-6700 35 SOUTH SERVICE ROAD
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE PLAINVIEW, NEW YORK 11803
NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S (516) 694-6700
PRINCIPAL EXECUTIVE OFFICES) (NAME ADDRESS AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
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COPIES TO:
<TABLE>
<S> <C>
NANCY D. LIEBERMAN, ESQ. RICHARD H. GILDEN, ESQ.
BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C. FULBRIGHT & JAWORSKI L.L.P.
100 JERICHO QUADRANGLE 666 FIFTH AVENUE
JERICHO, NEW YORK 11753 NEW YORK, NEW YORK 10103
(516) 822-4820 (212) 318-3000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box [ ].
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [ ].
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [ ].
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY(1) OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.10 par
value....................... 3,737,500 46.56(2) $174,018,000 $45,940
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended.
(2) Pursuant to Rule 457(c) under the Securities Act of 1933, the proposed
maximum offering price of each share of the Registrant's Common Stock is
estimated to be the average of the high and low sale prices of a share as of
a date five business days before the filing of this Registration Statement.
Accordingly, the Registrant has used $46.56 as such price per share, which
is the average of the high bid of $49.00 and the low ask of $44.125 reported
by the Nasdaq National Market on April 3, 2000.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED APRIL , 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
3,250,000 SHARES
[AEROFLEX LOGO]
COMMON STOCK
$ PER SHARE
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Aeroflex Incorporated is offering 2,500,000 shares of common stock and selling
stockholders are offering 750,000 shares of common stock with this prospectus.
We will not receive any of the proceeds from the sale of shares by the selling
stockholders.
Our common stock is quoted on the Nasdaq National Market under the symbol ARXX.
On April 3, 2000, the last reported sale price of the common stock on the Nasdaq
National Market was $45.4375 per share.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Price to the public....................... $ $
Underwriting discount.....................
Proceeds to Aeroflex......................
Proceeds to selling stockholders..........
</TABLE>
The selling stockholders have granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to purchase a
maximum of 487,500 additional shares from the selling stockholders within 30
days following the date of this prospectus to cover over-allotments.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
A.G. EDWARDS & SONS, INC.
WIT SOUNDVIEW
WASSERSTEIN PERELLA SECURITIES, INC.
The date of this prospectus is , 2000.
<PAGE> 3
The artwork includes a collage of five pictures on a background of illuminated
fiber optic cable. The upper left-hand picture is of a 68-up array wafer of
fiber optic termination boards. The upper right-hand picture is of a single
fiber optic termination board. The picture on the far right is of a source laser
assembly. The lower right-hand picture is of a router. The lower left-hand
picture is of a baby at a monitor and keyboard.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 4
Risk Factors................................................ 6
Forward-Looking Statements.................................. 11
Use of Proceeds............................................. 12
Dividend Policy............................................. 13
Price Range of Common Stock................................. 13
Capitalization.............................................. 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 27
Management.................................................. 35
Principal and Selling Stockholders.......................... 37
Shares Eligible for Future Sale............................. 39
Underwriting................................................ 40
Legal Matters............................................... 42
Experts..................................................... 42
Where You Can Find More Information......................... 42
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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As used in this prospectus, the terms "we," "us," "our," and "Aeroflex" mean
Aeroflex Incorporated and its subsidiaries, unless we specify otherwise. Unless
we indicate otherwise, the information in this prospectus assumes no exercise of
the underwriters' over-allotment option or any other option or warrant.
PIMIC(TM) and Commercial RadHard(TM) are our trademarks. All other trademarks
mentioned in this prospectus are the property of their respective owners.
We are incorporated under the laws of the state of Delaware. Our executive
offices are located at 35 South Service Road, Plainview, New York, 11803 and our
telephone number is (516) 694-6700.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The shares should be ready for delivery on or
about , 2000, against payment in immediately available funds.
3
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and accompanying notes that
appear elsewhere in this prospectus.
ABOUT AEROFLEX
We design, develop and manufacture microelectronic products and automated
testing equipment for the communications market. Using our technology base, our
products support and enhance the bandwidth, speed and mobility for all sectors
of the broadband communications market, including fiber optics, broadband cable,
fixed broadband wireless and satellite communications systems. We have also
developed advanced technologies in high-speed stimulus/response measurement
systems which are used as the basis for increased testing speed of
communications systems.
Worldwide demand for integrated voice, data and video communications services is
growing rapidly. The volume of high speed data traffic across global
communications networks has grown dramatically as the public Internet and
private business intranets have become essential for daily communications and
electronic commerce. Servicing the increasing demand for higher bandwidth
content and applications requires cost-effective and high-speed connections
which are often unavailable or inadequate over existing wire-based networks.
Other new communications technologies, such as fiber optics, broadband cable and
wireless, and satellite, are being used to expand the capabilities of existing
networks or build new broadband data networks. In order to meet the demand for
broadband services, service providers are turning to systems integrators or
original equipment manufacturers, or OEMs, to build out infrastructure quickly,
efficiently and in accordance with exacting performance specifications. OEMs, in
turn, are looking to outsource the design and manufacture of highly integrated,
reliable subsystems and components in a cost-effective manner.
Our products provide advanced technology solutions for bandwidth and capacity
needs. Our products are incorporated into systems and subsystems of the
communications infrastructure. Our interconnect products are based on our thin
film manufacturing technology which, among other things, allows fiber optic
module manufacturers to achieve maximum performance with a low cost of ownership
and a high level of quality. Due to the unique dimensional, thermal and
electrical capabilities of our passive integrated microelectronic interconnect
circuit technology, our products have become essential components in:
-- fiber optic transmitters, receivers and amplifiers;
-- cable amplifiers; and
-- point-to-point and point-to-multipoint microwave radios.
We have combined our microelectronic circuit technology with our thin film
capabilities to offer complete modules and sub-assemblies for fiber optic and
other communication applications. We have pioneered the use of commercial
foundries to produce radiation tolerant components, known as Commercial RadHard,
for the commercial space marketplace. Our satellite products include both custom
and standard integrated circuits.
Our high-speed test systems provide communication system manufacturers with
faster, smaller and more economical testing solutions. Our line of frequency
synthesizers offers the best combination of high-speed and low phase noise
available covering all communications frequencies.
Our customers include:
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<S> <C>
-- Nortel Networks -- Agilent Technologies
-- Lucent Technologies -- Teradyne
-- Motorola -- Lockheed Martin
-- JDS Uniphase -- Ortel
</TABLE>
Our strategy is to maintain our market leadership in advanced microelectronics,
interconnects, radiation tolerant integrated circuits and testing solutions for
the broadband communications market. The key elements of our strategy are:
-- to continue to provide advanced technology products for the broadband
communications market;
-- to increase our content in our customers products;
-- to maintain and enhance our technological leadership and manufacturing
capability; and
-- to continue to pursue strategic acquisitions.
4
<PAGE> 6
THE OFFERING
Common stock offered by us...................... 2,500,000 shares
Common stock offered by the selling
stockholders.................................... 750,000 shares
Common stock to be outstanding after the
offering........................................ 21,354,109 shares
Use of proceeds................................. To repay debt, for working
capital, including research
and development, and expansion
of our facilities, and for
other general corporate
purposes, which may include
acquisitions.
Nasdaq National Market symbol................... ARXX
The number of shares outstanding after the offering does not include 4,941,816
shares subject to stock options and warrants outstanding as of April 1, 2000
with a weighted average exercise price of $17.88.
SUMMARY CONSOLIDATED FINANCIAL DATA
The special charge of $3.5 million ($0.18 per share diluted and $0.20 basic) in
fiscal 1999 is for the write-off of in-process research and development acquired
in connection with the purchase of UTMC Microelectronic Systems Inc. in February
1999. The as adjusted balance sheet data in the table below gives effect to our
sale of 2,500,000 shares of common stock in this offering at an assumed offering
price of $45.4375 per share and the application of the net proceeds from the
sale of shares, after deducting the underwriting discount and our estimated
offering expenses. The as adjusted number excludes 541,016 shares issued upon
the exercise of stock options and warrants after December 31, 1999 and through
April 1, 2000, the 570,000 shares to be issued to certain selling stockholders
upon the exercise of stock options and sold under this prospectus and the
related tax benefit to us.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
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1997 1998 1999 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $94,299 $118,861 $157,104 $67,826 $83,603
Gross profit................................. 31,190 41,575 58,459 23,527 28,698
Special charge............................... -- -- 3,500 -- --
Operating income............................. 9,736 14,858 17,584 7,841 8,055
Net income................................... $ 4,420 $ 8,406 $ 9,757 $ 5,068 $ 4,271
======= ======== ======== ======= =======
Net income per common share:
Basic...................................... $ 0.36 $ 0.57 $ 0.55 $ 0.29 $ 0.23
======= ======== ======== ======= =======
Diluted.................................... $ 0.34 $ 0.51 $ 0.51 $ 0.27 $ 0.22
======= ======== ======== ======= =======
Weighted average number of common shares
outstanding:
Basic...................................... 12,446 14,802 17,784 17,523 18,528
Diluted.................................... 14,620 16,527 19,128 18,751 19,441
</TABLE>
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<CAPTION>
DECEMBER 31, 1999
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ACTUAL AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,493 $ 97,039
Working capital............................................. 53,028 152,574
Total assets................................................ 161,954 256,500
Total debt.................................................. 27,960 14,960
Stockholders' equity........................................ 105,532 213,078
</TABLE>
5
<PAGE> 7
RISK FACTORS
You should carefully consider the factors described below and other information
contained in this prospectus before making a decision to buy our common stock.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us, which we currently
deem immaterial or which are similar to those faced by other companies in our
industry or business in general, may also impair our business operations. If any
of the following risks actually occurs, our business, financial condition or
results of future operations could be materially and adversely affected. In such
case, the trading price of our common stock could decline, and you may lose all
or part of your investment. This prospectus also contains forward-looking
statements that involve risks and uncertainties. Please refer to
"Forward-Looking Statements" on page 11.
CHANGES IN TECHNOLOGY MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
The markets for most of our products change rapidly because of technological
innovation, evolving industry standards and new product introductions and
enhancements. Sales of our products depend in part on the continuing development
and use of microelectronic modules, integrated circuits, interconnect and
testing products. We cannot guarantee that demand for our products will not be
reduced by new developments in the
-- fiber optics;
-- broadband cable;
-- wireless; and
-- satellite markets.
Our success depends on our ability to enhance our existing products and to
develop and introduce innovative new products on a timely basis that gain market
acceptance. We cannot guarantee that we will successfully integrate new
technologies into our products or develop new products in a timely manner.
GROSS MARGINS FOR OUR PRODUCTS MAY DECLINE OVER TIME.
Average selling prices for some of our products decline over time. Many of our
manufacturing costs are fixed. For a given level of sales, when our
manufacturing costs decline, our gross margins improve, and when our
manufacturing costs increase, our gross margins decline. Our operating results
suffer when gross margins decline. We have also experienced cost overruns on
some of our fixed-price contracts in the past and we cannot guarantee that we
will not have cost overruns in the future. We may experience these problems in
the future and we cannot predict when they may occur or their severity.
OUR FAILURE TO OBTAIN A RETURN ON OUR INVESTMENTS IN DESIGN AND ENGINEERING MAY
CAUSE OUR BUSINESS TO SUFFER.
We make significant investments in design and engineering of new products for
our customers without requiring them to commit to any future purchase of such
products. If we fail to receive initial or follow-on orders, it may have a
material adverse effect on our business, results of operations and financial
condition.
OUR PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD SUBJECT US TO PRODUCT LIABILITY
CLAIMS OR REDUCE PRODUCT SALES.
Our sales of products and systems may subject us to product liability and
related claims. A product liability claim brought against us could have a
material adverse effect upon our business, operating results and financial
condition. Complex products, like those we sell, may contain defects or
failures. There can be no assurance that, despite testing of our products,
errors will not be found in products after shipment, resulting in
-- loss of market share;
-- failure to achieve market acceptance; or
-- product liability claims.
6
<PAGE> 8
Although we have product liability insurance, we cannot guarantee that our
insurance coverage will apply to a particular claim or that we have enough
insurance coverage if someone makes a significant claim.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY ON A QUARTERLY BASIS.
Our sales, earnings and other operating results have fluctuated significantly in
the past, and we expect this trend will continue. Factors which affect our
results include:
-- the timing, cancellation or rescheduling of customer estimates, orders
and shipments;
-- the pricing and mix of products sold;
-- new product introductions by us;
-- our ability to obtain components and subassemblies from contract
manufacturers and suppliers; and
-- variations in manufacturing efficiencies.
Many of these factors are beyond our control. Historically, the fourth quarter
of our fiscal year has been our strongest. Our performance in any one fiscal
quarter is not necessarily indicative of any financial trends or future
performance.
WE FACE CHALLENGES IN MANAGING OUR GROWTH.
We develop, manufacture and market diverse products. The growth in the size and
complexity of our business and the expansion of our product lines and customer
base have placed significant demands on our management and operations, and we
expect that they will continue to place such demands. Our ability to compete
effectively and to manage future growth will depend on our ability to continue
to implement and improve operational and financial systems on a timely basis. We
cannot guarantee that we will be able to manage our future growth. If we cannot,
it could have a material adverse effect on our business, operating results and
financial condition.
OUR BUSINESS MAY SUFFER IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success depends upon our intellectual property rights. We own several
patents, patent licenses and trademarks. We rely on a combination of:
-- trade secret, patent, copyright and trademark laws;
-- employee and third-party nondisclosure agreements; and
-- limiting access to and distribution of proprietary information.
Trade secret, patent, copyright and trademark laws provide limited protection.
These laws, combined with the steps we take to protect our proprietary rights,
may not be enough to prevent our loss of those rights. Also, these protections
do not prevent our competitors from independently developing products similar or
superior to our products and technologies. To further develop our services or
products, we may need to acquire licenses for intellectual property to avoid
infringing on a third party's product. These licenses may not be available on
commercially reasonable terms, if at all. Our failure or inability to protect
our proprietary technology or to obtain appropriate licenses could have a
material adverse effect on our business, operating results or financial
condition.
We also cannot guarantee that in the future, third parties will not claim that
we infringed on their intellectual property. Asserting our rights or defending
against third party claims could involve substantial costs and diversion of
resources, which could materially and adversely affect us. If a third party is
successful in a claim that one of our products infringed its proprietary rights,
we may have to
-- pay substantial royalties or damages;
-- remove our product from the marketplace; or
-- spend substantial amounts to modify the product so that it no longer
infringes those proprietary rights.
7
<PAGE> 9
A LARGE PERCENTAGE OF OUR SALES ARE TO A SMALL GROUP OF CUSTOMERS.
In fiscal 1999, our sales to Lockheed Martin Corp. were 12.2% and our sales to
Lucent Technologies Inc. were 11.4% of our total net sales. For the six months
ended December 31, 1999, our sales to Teradyne Inc. were 11.6% of our total net
sales. In addition, a significant amount of our sales are to a limited group of
customers, including
-- contractors of the United States Department of Defense;
-- Nortel Networks;
-- Motorola;
-- Hughes Space & Communications;
-- Raytheon; and
-- Northrop Grumman.
We expect that we will continue to sell products to a relatively small group of
customers. As a result, any cancellation, reduction or delay in orders by or
shipments to any significant customer, as a result of manufacturing or supply
difficulties or otherwise, or the inability of any customer to finance its
purchases of our products would materially adversely affect our business,
operating results and financial condition.
In addition, although our sales to the defense market have declined from 74% in
fiscal 1995 to 41% in fiscal 1999, our sales could be materially adversely
impacted by a decrease in defense spending by the United States government
because of defense budget cuts, general budgetary constraints or otherwise. The
United States defense budget has been reduced and may be further reduced. Fewer
available defense industry production programs, together with continued pricing
pressure on follow-on orders for programs on which we participate, may result in
decreased sales of our defense products. Also, defense contracts frequently
contain provisions that are not standard in commercial transactions, such as
provisions which allow a contract to be canceled if funding for a program is
reduced or canceled.
WE MAY NOT BE ABLE TO CONTINUE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES.
Our future success depends on our ability to attract and retain qualified:
-- engineering;
-- management;
-- manufacturing;
-- quality assurance;
-- marketing; and
-- support personnel.
Competition for these personnel is intense. We cannot guarantee that we will be
able to continue to attract and retain these personnel.
POSSIBLE ACQUISITIONS MAY DISRUPT OUR BUSINESS.
In the normal course of our business, we evaluate potential acquisitions of
businesses, product lines and technologies that could complement or expand our
business. In connection with any acquisition we do not know whether we will be
able to
-- successfully negotiate the terms of the acquisition;
-- successfully finance the acquisition;
-- successfully integrate an acquired business, product line, or technology
into our existing business or product lines to fully benefit from an
acquisition; or
-- retain key personnel previously associated with the acquired businesses.
Negotiating potential acquisitions and integrating acquired businesses could
divert management's time and resources. We may use proceeds from the offering to
consummate a potential acquisition. In addition, in completing future mergers or
acquisitions, we may issue a significant number of shares of common stock or
incur significant additional indebtedness, which could dilute our earnings or
the book value per share of our common stock.
8
<PAGE> 10
WE RELY ON A LIMITED NUMBER OF SUPPLIERS AND CONTRACT MANUFACTURERS.
We rely on contract manufacturers and suppliers to provide us with services and
materials necessary for our manufacture of products. In some cases we rely on
sole suppliers or limited groups of suppliers. Selected ceramic substrates which
are supplied to us by Coors Ceramics Co. are sole source items. Our reliance on
contract manufacturers and on sole source suppliers involves several risks,
including a potential inability to obtain critical materials or services and
reduced control over:
-- production costs;
-- delivery schedules;
-- reliability; and
-- quality of components or subassemblies.
Our inability to obtain timely deliveries of acceptable quality, or any other
circumstance that would require us to seek alternative contract manufacturers or
suppliers, could affect our ability to timely deliver products to customers.
This in turn would have a material adverse affect on our business, operating
results and financial condition. In addition, if our contract manufacturers' or
suppliers' costs increase and they pass their cost increase through to us, we
may suffer losses if we cannot recover those cost increases under fixed price
production commitments to our customers.
OUR STOCK PRICE MAY BE VOLATILE.
The stock market in general, and the market for shares of technology companies
in particular, have experienced extreme price fluctuations. These price
fluctuations are often unrelated to the operating performance of the affected
companies. Many technology companies, including us, have experienced dramatic
volatility in the market prices of their common stock. If our future operating
results are below the expectations of stock market analysts and investors, our
stock price may decline. We cannot be certain that the market price of our
common stock will remain stable in the future. Our stock price may undergo
fluctuations that are material, adverse and unrelated to our performance. In
addition, our stock has recently begun trading on the Nasdaq Stock Market and we
have no trading history on that market.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS INCLUDE ANTI-TAKEOVER PROVISIONS
WHICH MAY DETER OR PREVENT A TAKEOVER ATTEMPT.
Some provisions of our certificate of incorporation and bylaws and provisions of
Delaware law may discourage takeover attempts and hinder a merger, tender offer
or proxy contest targeting us, including transactions in which stockholders
might receive a premium for their shares. This may limit your ability as a
stockholder to approve a transaction that you may think is in your best
interest. These provisions include:
-- Classified Board of Directors. Our certificate of incorporation
provides for a board which is divided into three classes so not all of
the directors are subject to election at the same time. As a result,
someone who wishes to take control of our company by electing a
majority of the board of directors must do so over a two year period.
-- Shareholder Rights Plan. We adopted a rights plan which provided for a
dividend distribution of one right for each share to holders of record
of common stock on August 31, 1998. The rights become exercisable in
the event any person or group accumulates 15% or more of our common
stock, or if any person or group announces an offer which would result
in it owning 15% or more of our common stock and our management does
not approve of the proposed ownership.
-- Employment Contracts. The employment agreements between us and each of
Harvey R. Blau, Michael Gorin, Leonard Borow and Carl Caruso provide
that in the event there is a change in control of Aeroflex, the
employee has the option, exercisable within one year in the case of
Messrs. Blau, Gorin and Borow and six months in the case of Mr. Caruso
of his becoming aware of the change in control,
9
<PAGE> 11
to terminate his employment agreement. Upon such termination, each of
Messrs. Blau, Gorin and Borow has the right to receive a lump sum
payment equal to his compensation, including any incentive payment,
for the remainder of the term of his contract, as well as a tax
gross-up payment to cover any excise tax due and Mr. Caruso has the
right to receive a lump sum payment equal to his base salary for the
remainder of the term of his contract.
-- Delaware anti-takeover statute. Delaware law restricts business
combinations with stockholders who acquire 15% or more of a company's
common stock without the consent of the company's board of directors.
These provisions could reduce the price that certain investors might be willing
to pay in the future for shares of our common stock. Moreover, although our
ability to issue preferred stock may provide flexibility in connection with
possible acquisitions and other corporate purposes, such issuance may make it
more difficult for a third party to acquire, or may discourage a third party
from acquiring, a majority of our voting stock.
10
<PAGE> 12
FORWARD-LOOKING STATEMENTS
This prospectus and the documents we have filed with the Securities and Exchange
Commission which we have referenced under "Where You Can Find More Information"
on page 42 contain forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements represent our judgment regarding future events.
Although we would not make forward-looking statements unless we believe we have
a reasonable basis for doing so, we cannot guarantee their accuracy and actual
results may differ materially from those we anticipated due to a number of
uncertainties, many of which we are not aware. We urge you to consider the risks
and uncertainties discussed under "Risk Factors" and elsewhere in this
prospectus and in the other documents filed with the Commission in evaluating
our forward-looking statements. We have no plans to update our forward-looking
statements to reflect events or circumstances after the date of this prospectus.
We generally identify forward-looking statements with the words "believe",
"intend," "plan," "expect," "anticipate," "estimate," "will," "should" and
similar expressions.
11
<PAGE> 13
USE OF PROCEEDS
We estimate that the net proceeds from the sale of common stock we are offering
will be approximately $107.5 million. "Net proceeds" is what we expect to
receive after paying the underwriting discount and other expenses of the
offering. We will not receive any proceeds from the sale of shares by the
selling stockholders. We have agreed to pay the expenses, other than the
underwriting discount, relating to the sale of these shares.
We intend to use the net proceeds of this offering to pay down $13.0 million of
our debt. This debt was incurred to finance our purchase of UTMC Microelectronic
Systems and currently bears interest at 7.9% per year. We intend to use the
balance of the net proceeds for additional working capital, including research
and development, and expansion of our facilities, and for general corporate
purposes. We also may make one or more acquisitions of technologies, product
lines or businesses which broaden or enhance our current product offerings.
While we have been engaged in preliminary discussions with certain companies, we
currently have no commitment or agreement with respect to any acquisition.
We will retain broad discretion in the allocation of the net proceeds from this
offering. Pending the uses described above, the net proceeds will be invested in
interest-bearing, investment-grade securities, U.S. Government securities, money
market investments and short-term, interest-bearing deposits in major banks.
12
<PAGE> 14
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We have
not declared or paid stock dividends on our common stock during the past four
years. We intend to retain any future earnings for the development and expansion
of our business and for acquisitions and so do not intend to declare or pay any
cash dividends in the foreseeable future. In addition, we are a party to a
revolving credit, term loan and mortgage agreement which prohibits us from
paying cash dividends.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"ARXX." Prior to March 21, 2000, our common stock was traded on the New York
Stock Exchange under the symbol "ARX." The following table sets forth, for the
calendar periods indicated, the high and low closing sales prices of our common
stock as reported by the Nasdaq National Market since March 21, 2000 and, prior
to March 21, 2000, the high and low closing sales prices of our common stock as
reported by the New York Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998:
First Quarter............................................... $14.63 $ 7.88
Second Quarter.............................................. 14.31 8.50
Third Quarter............................................... 11.56 6.69
Fourth Quarter.............................................. 15.13 7.50
1999:
First Quarter............................................... $18.38 $12.06
Second Quarter.............................................. 19.75 13.00
Third Quarter............................................... 21.56 12.19
Fourth Quarter.............................................. 13.56 5.56
2000:
First Quarter............................................... $70.00 $ 9.69
Second Quarter (through April 3, 2000)...................... 45.44 45.44
</TABLE>
On April 3, 2000, the last reported sale price on the Nasdaq National Market for
our common stock was $45.44 per share. As of April 1, 2000, there were
approximately 750 holders of record of our common stock.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on an
actual basis, and as adjusted to reflect our sale of the 2,500,000 shares of
common stock that we are offering with this prospectus at an assumed price of
$45.4375 per share, after deducting the underwriting discount and our estimated
offering expenses and applying the net proceeds. The as adjusted number excludes
541,016 shares issued upon the exercise of stock options and warrants after
December 31, 1999 and through April 1, 2000, the 570,000 shares to be issued to
certain selling stockholders upon the exercise of stock options and sold under
this prospectus and the related tax benefit to us.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 6,456 $ 1,456
======== ========
Long-term debt, net of current portion:
Revolving credit, term loan and mortgage agreement........ $ 13,897 $ 5,897
Building Mortgage......................................... 3,965 3,965
Equipment loans........................................... 3,642 3,642
-------- --------
Total long-term debt...................................... 21,504 13,504
-------- --------
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 actual 18,652,272 shares; and as
adjusted, 21,152,272 shares............................... 1,865 2,115
Additional paid-in capital.................................. 107,570 214,866
Accumulated deficit......................................... (1,150) (1,150)
-------- --------
108,285 215,831
Less: Treasury stock, 339,179 shares, at cost............... 2,753 2,753
-------- --------
Total stockholders' equity................................ 105,532 213,078
-------- --------
Total capitalization...................................... $127,036 $226,582
======== ========
</TABLE>
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the five fiscal years
ended June 30, 1995, 1996, 1997, 1998 and 1999 are derived from our audited
financial statements. The financial information as of December 31, 1999 and for
the six months ended December 31, 1998 and 1999 has been derived from our
unaudited financial information, which, we believe, includes all recurring
adjustments necessary for a fair presentation of that financial information. The
special charge of $23.2 million ($1.94 per share) in 1996 is for the write-off
of in-process research and development acquired in connection with the purchase
of MIC Technology Corporation and of $3.5 million ($0.18 per share diluted and
$0.20 basic) in 1999 is for the write-off of in-process research and development
acquired in connection with the purchase of UTMC Microelectronic Systems, Inc.
The restructuring charge of $1.7 million ($0.11 per share diluted and $0.13
basic, net of tax) in 1995 is for the consolidation of our Puerto Rico
operations into our domestic facilities. The life insurance proceeds of $2.0
million ($0.14 per share diluted and $0.17 basic) in 1995 is for insurance
proceeds received on the death of our former chairman. Other expense (income)
includes a $533,000 gain ($0.04 per share, net of tax) on the sale of securities
for the year ended June 30, 1996. As a result of the loss in fiscal 1996, all of
our options, warrants and convertible debentures were anti-dilutive for the year
ended June 30, 1996. This data should be read in conjunction with management's
discussion and analysis of financial condition, our consolidated financial
statements, related notes, and other financial information included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1998 1999
------- -------- ------- -------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $71,113 $ 74,367 $94,299 $118,861 $157,104 $ 67,826 $ 83,603
Cost of sales................................ 47,542 51,070 63,109 77,286 98,645 44,299 54,905
------- -------- ------- -------- -------- -------- --------
Gross profit............................... 23,571 23,297 31,190 41,575 58,459 23,527 28,698
------- -------- ------- -------- -------- -------- --------
Operating costs:
Selling, general and administrative
costs.................................... 13,363 14,119 18,175 21,545 27,763 11,392 15,705
Research and development costs............. 2,389 1,260 3,279 5,172 9,612 4,294 4,938
Special charge............................. -- 23,200 -- -- 3,500 -- --
Restructuring charge....................... 1,669 -- -- -- -- -- --
------- -------- ------- -------- -------- -------- --------
Total operating costs................ 17,421 38,579 21,454 26,717 40,875 15,686 20,643
------- -------- ------- -------- -------- -------- --------
Operating income (loss)...................... 6,150 (15,282) 9,736 14,858 17,584 7,841 8,055
------- -------- ------- -------- -------- -------- --------
Other expense (income):
Life insurance proceeds.................... (2,000) -- -- -- -- -- --
Interest expense........................... 1,464 1,939 2,974 2,011 1,454 567 1,249
Other expense (income)..................... (751) (1,075) (93) (309) (777) (544) 235
------- -------- ------- -------- -------- -------- --------
Total other expense (income)......... (1,287) 864 2,881 1,702 677 23 1,484
------- -------- ------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes........................ 7,437 (16,146) 6,855 13,156 16,907 7,818 6,571
Provision for income taxes................... 850 1,274 2,435 4,750 7,150 2,750 2,300
------- -------- ------- -------- -------- -------- --------
Income (loss) from continuing operations..... 6,587 (17,420) 4,420 8,406 9,757 5,068 4,271
Income from discontinued operations.......... 462 -- -- -- -- -- --
------- -------- ------- -------- -------- -------- --------
Net income (loss)............................ $ 7,049 $(17,420) $ 4,420 $ 8,406 $ 9,757 $ 5,068 $ 4,271
======= ======== ======= ======== ======== ======== ========
Net income (loss) per common share:
Basic:
Continuing operations.................... $ 0.56 $ (1.46) $ 0.36 $ 0.57 $ 0.55 $ 0.29 $ 0.23
Discontinued operations.................. 0.04 -- -- -- -- -- --
------- -------- ------- -------- -------- -------- --------
Net income (loss)........................ $ 0.60 $ (1.46) $ 0.36 $ 0.57 $ 0.55 $ 0.29 $ 0.23
======= ======== ======= ======== ======== ======== ========
Diluted:
Continuing operations.................... $ 0.52 $ (1.46) $ 0.34 $ 0.51 $ 0.51 $ 0.27 $ 0.22
Discontinued operations.................. 0.04 -- -- -- -- -- --
------- -------- ------- -------- -------- -------- --------
Net income (loss)........................ $ 0.56 $ (1.46) $ 0.34 $ 0.51 $ 0.51 $ 0.27 $ 0.22
======= ======== ======= ======== ======== ======== ========
Weighted average number of common shares
outstanding:
Basic...................................... 11,733 11,971 12,446 14,802 17,784 17,523 18,528
Diluted.................................... 14,052 11,971 14,620 16,527 19,128 18,751 19,441
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------------------------------------- ------------
1995 1996 1997 1998 1999 1999
-------- ------- -------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 11,330 $ 661 $ 600 $ 24,408 $ 2,714 $ 2,493
Working capital....................................... 31,721 25,300 25,872 53,965 50,366 53,028
Total assets.......................................... 71,936 81,169 81,047 124,101 165,216 161,954
Total debt............................................ 13,787 34,577 28,916 11,481 31,117 27,960
Stockholders' equity.................................. 46,344 30,472 35,040 87,036 102,093 105,532
</TABLE>
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read this discussion together with the consolidated financial
statements and other financial information included in this prospectus.
OVERVIEW
We use our advanced design, engineering and manufacturing abilities to produce
microelectronic, integrated circuit, interconnect and testing solutions. Our
products are used in the fiber optic, broadband cable, wireless and satellite
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; and
-- isolator products.
Our consolidated financial statements include the accounts of Aeroflex
Incorporated and our subsidiaries, all of which are wholly-owned other than
Europtest, S.A., which is 93.4% owned by us.
Our microelectronics segment has been designing, manufacturing and selling
microelectronics for the electronics industry since 1974. In January 1994, we
acquired substantially all of the net operating assets of the microelectronics
division of Marconi Circuit Technology Corporation, which manufactures a wide
variety of microelectronic assemblies. In March 1996, we acquired MIC Technology
Corporation which designs, develops, manufactures and markets microelectronics
products in the form of passive thin film circuits and interconnects. Effective
July 1, 1997, MIC Technology acquired certain equipment, inventory, licenses for
technology and patents of two of Lucent Technologies' telecommunications
component units--multi-chip modules and film integrated circuits. These units
manufacture microelectronic modules and interconnect products. In February 1999,
we acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc.,
consisting of UTMC's integrated circuit business.
Our test, measurement and other electronics segment consists of two divisions:
(1) instruments and (2) motion control products. Our instruments division
consists of:
-- Comstron, a leader in radio frequency and microwave technology used in
the manufacture of fast switching frequency signal generators and
components, which we acquired in November 1989. Comstron is currently
an operating division of Aeroflex Laboratories Incorporated, one of
our wholly-owned subsidiaries;
-- Lintek, a leader in high speed instrumentation measurement systems
which we acquired in January 1995; and
-- Europtest, S.A. (France), of which we acquired 90% effective September
1, 1998, under a purchase agreement which requires us to purchase the
remaining 10% of Europtest pro rata over a three-year period at prices
determined based upon net sales of Europtest products. In October
1999, we purchased an additional 3.4%. Europtest develops and sells
specialized software-driven test equipment used primarily in cellular,
satellite and other communications applications.
Our motion control products division has been engaged in the development and
manufacture of electro-optical scanning devices used in infra-red night vision
systems since 1975. This division has been engaged in the design, development
and production of stabilization tracking devices and systems and magnetic motors
since 1961.
16
<PAGE> 18
Our isolator products segment has been designing developing, manufacturing and
selling severe service shock and vibration isolation systems since 1961. In
October 1983, we acquired Vibration Mountings & Controls, Inc., which
manufactures a line of off-the-shelf rubber and spring shock, vibration and
structure borne noise control devices used in commercial applications. In
December 1986, we acquired the operating assets of Korfund Dynamics Corporation,
a manufacturer of an industrial line of heavy duty spring and rubber shock
mounts.
Our revenue is recognized based upon shipments or billings. We record costs on
our long-term contracts using percentage-of-completion accounting. Under
percentage of completion accounting, costs are recognized on revenues in the
same relation that total estimated manufacturing costs bear to total contract
value. Estimated costs at completion are based upon engineering and production
estimates. Provisions for estimated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
Approximately 41% of our sales for fiscal 1999, 42% of our sales for fiscal
1998, and 50% of our sales for fiscal 1997 were to agencies of the United States
Government or to prime defense contractors or subcontractors of the United
States Government. Our overall dependence on defense business has been declining
due to our acquisition of MIC Technology, which is more commercially oriented,
and our focusing of resources towards developing standard products for the
commercial markets. Our defense contracts have been awarded either on a bid
basis or after negotiation and are primarily fixed price contracts, although we
occasionally receive defense contracts providing for cost plus fixed fee. Our
defense contracts have customary provisions for termination at the convenience
of the government without cause. In the event of such termination, we are
entitled to reimbursement for our costs and to receive a reasonable profit on
the work done prior to termination.
We believe that potential reductions in defense spending will not materially
affect our operations. In certain product areas, we have experienced reductions
in sales volume due to cutbacks in the military budget. In other product areas,
we have 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 us.
Our product development efforts primarily involve engineering and design
relating to
-- developing new products;
-- improving existing products;
-- adapting existing products to new applications; or
-- developing prototype components to bid on specific programs.
Some of our development efforts are reimbursed under contractual arrangements.
Product development and similar costs which we cannot recover under contractual
arrangements are expensed in the period incurred.
17
<PAGE> 19
STATEMENT OF OPERATIONS
The following tables set forth our net sales and operating income by business
segment and certain items from our statement of earnings as a percentage of net
sales for the periods indicated. The special charge of $3.5 million or 2.2% of
net sales is for the write-off of in-process research and development acquired
in connection with the purchase of UTMC in February 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------- -----------------
1997 1998 1999 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales:
Microelectronics................................... $48,462 $ 74,263 $ 96,846 $42,317 $49,872
Test, Measurement and Other Electronics............ 28,144 25,685 41,515 16,827 24,697
Isolator Products.................................. 17,693 18,913 18,743 8,682 9,034
------- -------- -------- ------- -------
$94,299 $118,861 $157,104 $67,826 $83,603
======= ======== ======== ======= =======
Operating income:
Microelectronics................................... $ 6,644 $ 14,147 $ 20,104 $ 7,658 $ 8,368
Test, Measurement and Other Electronics............ 2,762 996 3,134 971 682
Isolator Products.................................. 2,844 3,063 2,108 1,013 992
General corporate expenses......................... (2,514) (3,348) (4,262) (1,801) (1,987)
------- -------- -------- ------- -------
9,736 14,858 21,084 7,841 8,055
Special charge....................................... -- -- (3,500) -- --
------- -------- -------- ------- -------
Operating income..................................... $ 9,736 $ 14,858 $ 17,584 $ 7,841 $ 8,055
======= ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------- -----------------
1997 1998 1999 1998 1999
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................ 66.9 65.0 62.8 65.3 65.7
------- -------- -------- ------- -------
Gross margin......................................... 33.1 35.0 37.2 34.7 34.3
------- -------- -------- ------- -------
Operating costs:
Selling, general and administrative costs.......... 19.3 18.1 17.7 16.8 18.8
Research and development costs..................... 3.5 4.4 6.1 6.3 5.9
Special charge..................................... -- -- 2.2 -- --
------- -------- -------- ------- -------
Total operating costs.............................. 22.8 22.5 26.0 23.1 24.7
------- -------- -------- ------- -------
Operating income..................................... 10.3 12.5 11.2 11.6 9.6
------- -------- -------- ------- -------
Other expense (income):
Interest expense................................... 3.1 1.7 0.9 0.8 1.5
Other expense (income)............................. (0.1) (0.3) (0.5) (0.8) 0.3
------- -------- -------- ------- -------
Total other expense (income)....................... 3.0 1.4 0.4 -- 1.8
------- -------- -------- ------- -------
Income before income taxes........................... 7.3 11.1 10.8 11.6 7.8
Provision for income taxes........................... 2.6 4.0 4.6 4.1 2.7
------- -------- -------- ------- -------
Net income........................................... 4.7% 7.1% 6.2% 7.5% 5.1%
======= ======== ======== ======= =======
</TABLE>
18
<PAGE> 20
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1998
Net Sales. Net sales increased 23.3% to $83.6 million for the six months ended
December 31, 1999 from $67.8 million for the six months ended December 31, 1998.
Net sales in the microelectronics segment increased 17.9% to $49.9 million for
the six months ended December 31, 1999 from $42.3 million for the six months
ended December 31, 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 46.8% to $24.7 million for the six months ended
December 31, 1999 from $16.8 million for the six months ended December 31, 1998
primarily due to increased sales volume in both frequency synthesizers
(primarily shipments of the new FS-1000 for use in commercial communications
test systems) and high speed automatic test systems (primarily satellite payload
test equipment for Hughes Space and Communications). Net sales in the isolator
products segment increased 4.1% to $9.0 million for the six months ended
December 31, 1999 from $8.7 million for the six months ended December 31, 1998.
We are seeing strengthening in several of our microelectronic product areas
which we believe demonstrates that the weakness in bookings and shipments we had
experienced in the second quarter is no longer a concern and that both our third
and fourth quarters should show sequential improvements in both sales and
operating income.
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 22.0% to $28.7
million for the six months ended December 31, 1999 from $23.5 million for the
six months ended December 31, 1998. Gross margin decreased to 34.3% for the six
months ended December 31, 1999 from 34.7% for the six months ended December 31,
1998 due to a change in the product mix. The increase in gross profit was
primarily a result of the increased sales.
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 37.9% to $15.7 million
(18.8% of net sales) for the six months ended December 31, 1999 from $11.4
million (16.8% of net sales) for the six months ended December 31, 1998. The
increase was primarily due to the additional costs relating to the operations 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 15.0% to $4.9 million (5.9% of net sales) for the
six months ended December 31, 1999 from $4.3 million (6.3% of net sales) for the
six months ended December 31, 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 the FS-1000, a new
low-cost, high speed, high performance frequency synthesizer intended for
commercial communication test systems which is complete.
Other Expense (Income). Interest expense increased to $1.2 million for the six
months ended December 31, 1999 from $567,000 for the six months ended December
31, 1998, primarily due to increased levels of borrowings. Other expense of
$235,000 for the six months ended December 31, 1999 consists primarily of a
$300,000 expense for the settlement of a lawsuit offset by $49,000 of interest
income. Other income of $544,000 for the six months ended December 31, 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.
Provision for Income Taxes. Income taxes decreased 16.4% to $2.3 million (an
effective income tax rate of 35.0%) for the six months ended December 31, 1999
from $2.8 million (an effective income tax rate of 35.2%) for the six months
ended December 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.
19
<PAGE> 21
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Net Sales. Net sales increased 32.2% to $157.1 million in fiscal 1999 from
$118.9 million in fiscal 1998. Net sales in our microelectronics segment
increased 30.4% to $96.9 million in fiscal 1999 from $74.3 million in fiscal
1998 due to increased sales volume in both thin film interconnects and
microelectronic modules and due to the acquisition of UTMC Microelectronic
Systems at the end of February 1999. Net sales in our test, measurement and
other electronics segment increased 61.6% to $41.5 million in fiscal 1999 from
$25.7 million in fiscal 1998 primarily due to increased sales volume in both
frequency synthesizers (including shipments under 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 of stabilization and
tracking devices. Net sales in our isolator products segment were $18.7 million
in fiscal 1999 and $18.9 million in fiscal 1998.
Gross Profit. Gross profit increased 40.6% to $58.5 million in fiscal 1999 from
$41.6 million in fiscal 1998. Gross margin increased to 37.2% in fiscal 1999
from 35.0% in fiscal 1998. This increase was primarily as a result of increased
margins in our microelectronics segment and Comstron product line, reflecting
the greater efficiency of higher volume, as well as a favorable sales mix in our
microelectronics segment.
Selling, General and Administrative Costs. Selling, general and administrative
costs increased 28.9% to $27.8 million (17.7% of net sales) in fiscal 1999 from
$21.5 million (18.1% of net sales) in fiscal 1998. The increase was primarily
due to labor related expenses, including salaries for additional personnel, in
connection with our growth and the addition of the expenses of UTMC
Microelectronic Systems.
Research and Development Costs. Our self-funded research and development costs
increased 85.8% to $9.6 million (6.1% of net sales) in fiscal 1999 from $5.2
million (4.4% of net sales) in fiscal 1998. This increase was primarily
attributable to the addition of the expenses of UTMC Microelectronic Systems and
the costs for continued development of a 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 Microelectronic Systems, we 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 research
and development in progress had no alternative future uses. Accordingly, we
expensed these costs as of the acquisition date.
We 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 Microelectronic Systems, this
included the design, development, and testing activities associated with its
commercial products, data bus products, radiation hardened products and
application specific integrated circuits. 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 research and development 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,
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
20
<PAGE> 22
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 Microelectronic Systems were estimated by the
third party appraiser based on a detailed forecast we prepared, as well as the
appraiser's discussions with our finance, marketing and engineering personnel
and those of UTMC Microelectronic Systems. Allocation of total UTMC
Microelectronic Systems' projected revenues to in-process research and
development was based on the appraiser's discussions with UTMC Microelectronic
Systems' management and us. A significant portion of UTMC Microelectronic
Systems' future revenues was expected to originate from the sale of products
that were not yet completed at acquisition. However, UTMC Microelectronic
Systems' existing products and technologies are expected to generate sales
through 2008.
Selling, general and administrative expenses and profitability estimates were
determined based on our forecasts as well as an analysis of comparable
companies' margin expectations.
The projections utilized in the transaction pricing and purchase price
allocation exclude the potential synergetic benefits related specifically to our
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 Microelectronic Systems 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 was commensurate with UTMC Microelectronic Systems' 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 Microelectronic Systems' development stage
technologies obsolete.
We believe 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 Microelectronic Systems' research and
development include various phases of design, development and testing. Funding
for such projects is expected to come from internally generated sources.
As evidenced by the continued support of the development of its projects, we
believe we have a reasonable chance of successfully completing the research and
development programs. However, as with all of our technology development, there
is risk associated with the completion of the UTMC Microelectronic Systems'
research and development projects, and there is no assurance that technological
or commercial success will be achieved.
If the development of UTMC Microelectronic Systems' in-process research and
development project is unsuccessful, our sales and profitability may be
adversely affected in future periods. Commercial results are also subject to
certain market events and risks, which are beyond our 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 $1.5 million in fiscal
1999 from $2.0 million in fiscal 1998, primarily due to reduced levels of
borrowings throughout most of the current period. Other income of $777,000 in
fiscal 1999 and $309,000 in fiscal 1998 consisted primarily 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 our public offering completed in March 1998. In connection
21
<PAGE> 23
with our acquisition of UTMC Microelectronic Systems at the end of February
1999, we used most of our cash equivalents and increased our borrowings by $20.0
million.
Provision for Income Taxes. Income taxes increased 50.5% to $7.2 million (an
effective income tax rate of 35.0%, exclusive of the special charge) in fiscal
1999, from $4.8 million (an effective income tax rate of 36.1%) in fiscal 1998.
The income tax provisions for the years ended June 30, 1999 and 1998 were
different from the amounts 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, and for the year ended June 30, 1999, due to
the non-deductibility of the $3.5 million special charge.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Net Sales. Net sales increased 26.0% to $118.9 million in fiscal 1998 from $94.3
million in fiscal 1997. Net sales in our microelectronics segment increased
53.2% to $74.3 million for fiscal 1998 from $48.5 million for fiscal 1997 due to
increased sales volume in both thin film interconnects and microelectronic
modules. Sales of thin film interconnects increased primarily due to the
commencement of a strategic supply contract with Lucent Technologies effective
July 1, 1997. Net sales in our test, measurement and other electronics segment
decreased 8.7% to $25.7 million in fiscal 1998 from $28.1 million for fiscal
1997 primarily as a result of reduced sales volume of frequency synthesizers
partially offset by increased sales of high speed instrumentation test systems.
Net sales in our isolator products segment increased 6.9% to $18.9 million for
fiscal 1998 from $17.7 million for fiscal 1997 primarily due to higher sales
volume of industrial and commercial isolators.
Gross Profit. Gross profit increased 33.3% to $41.6 million in fiscal 1998 from
$31.2 million in fiscal 1997. Gross margin increased to 35.0% in fiscal 1998
from 33.1% in fiscal 1997. This increase was primarily as a result of increased
margins in our microelectronics segment reflecting the greater efficiency of
higher volume.
Selling, General and Administrative Costs. Selling, general and administrative
costs increased 18.5% to $21.5 million in fiscal 1998 from $18.2 million in
fiscal 1997. Selling, general and administrative expenses decreased as a
percentage of net sales to 18.1% from 19.3%. The increase in actual costs was
primarily due to labor related expenses including salaries for additional
personnel, recruitment and relocation costs in connection with our growth.
Research and Development Costs. Our self-funded research and development costs
increased 57.7% to $5.2 million (4.4% of net sales) in fiscal 1998 from $3.3
million (3.5% of net sales) in fiscal 1997. This 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.
Other Expense (Income). Other expense was $1.7 million in fiscal 1998 compared
to $2.9 million in fiscal 1997. Net interest expense decreased 43.9% to $1.6
million in fiscal 1998 from $2.9 million in fiscal 1997. The decrease in net
interest expense was primarily due to reduced levels of borrowings and increased
levels of cash equivalents due to the conversion of $10.0 million of debentures
and net proceeds of $31.3 million from stock issued in a public offering. Other
expense included $102,000 of debenture redemption costs in fiscal 1998.
Provision for Income Taxes. Income taxes increased 95.1% to $4.8 million (an
effective income tax rate of 36.1%) in fiscal 1998 from $2.4 million (an
effective income tax rate of 35.5%) in fiscal 1997. The income tax provisions
for the years ended June 30, 1998 and 1997 were different from the amounts
computed by applying the U.S. Federal income tax rate to income before income
taxes primarily due to state and local income taxes, and for the year ended June
30, 1998, due to research and development credits.
22
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following tables are our unaudited quarterly financial results of
operations, in dollars and as a percentage of net sales, for each of our last
eight quarters. The special charge of $3.5 million ($0.18 per share diluted and
$0.20 basic) in fiscal 1999 is for the write-off of in-process research and
development acquired in connection with the purchase of UTMC in February 1999.
We believe the unaudited consolidated financial statements have been prepared on
the same basis as our audited consolidated financial statements and include all
necessary recurring adjustments necessary for a fair presentation of the results
of operations for each period. Results of operations for any fiscal quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $31,221 $34,430 $31,629 $36,197 $40,604 $48,674 $42,072 $41,531
Cost of sales........................ 20,338 21,869 20,504 23,795 25,205 29,141 26,933 27,972
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......................... 10,883 12,561 11,125 12,402 15,399 19,533 15,139 13,559
------- ------- ------- ------- ------- ------- ------- -------
Operating costs:
Selling, general and administrative
costs............................ 5,655 5,525 5,630 5,762 6,914 9,457 7,330 8,375
Research and development costs..... 1,481 1,662 1,991 2,303 2,580 2,738 2,430 2,508
Special charge..................... -- -- -- -- 3,500 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating costs........ 7,136 7,187 7,621 8,065 12,994 12,195 9,760 10,883
------- ------- ------- ------- ------- ------- ------- -------
Operating income..................... 3,747 5,374 3,504 4,337 2,405 7,338 5,379 2,676
------- ------- ------- ------- ------- ------- ------- -------
Other expense (income):
Interest expense................... 548 213 299 268 457 430 612 637
Other expense (income)............. (33) (350) (303) (241) (190) (43) 262 (27)
------- ------- ------- ------- ------- ------- ------- -------
Total other expense
(income)................... 515 (137) (4) 27 267 387 874 610
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes........... 3,232 5,511 3,508 4,310 2,138 6,951 4,505 2,066
Provision for income taxes........... 1,175 2,000 1,250 1,500 1,950 2,450 1,575 725
------- ------- ------- ------- ------- ------- ------- -------
Net income........................... $ 2,057 $ 3,511 $ 2,258 $ 2,810 $ 188 $ 4,501 $ 2,930 $ 1,341
======= ======= ======= ======= ======= ======= ======= =======
Net income per common share:
Basic.............................. $ 0.14 $ 0.20 $ 0.13 $ 0.16 $ 0.01 $ 0.25 $ 0.16 $ 0.07
======= ======= ======= ======= ======= ======= ======= =======
Diluted............................ $ 0.13 $ 0.19 $ 0.12 $ 0.15 $ 0.01 $ 0.23 $ 0.15 $ 0.07
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 65.1 63.5 64.8 65.7 62.1 59.9 64.0 67.4
----- ----- ----- ----- ----- ----- ----- -----
Gross margin......................... 34.9 36.5 35.2 34.3 37.9 40.1 36.0 32.6
----- ----- ----- ----- ----- ----- ----- -----
Operating costs:
Selling, general and administrative
costs............................ 18.1 16.1 17.8 15.9 17.0 19.4 17.4 20.2
Research and development costs..... 4.8 4.8 6.3 6.4 6.4 5.6 5.8 6.0
Special charge..................... -- -- -- -- 8.6 -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating costs........ 22.9 20.9 24.1 22.3 32.0 25.0 23.2 26.2
----- ----- ----- ----- ----- ----- ----- -----
Operating income..................... 12.0 15.6 11.1 12.0 5.9 15.1 12.8 6.4
----- ----- ----- ----- ----- ----- ----- -----
Other expense (income):
Interest expense................... 1.7 0.6 1.0 0.7 1.1 0.9 1.5 1.5
Other expense (income)............. (0.1) (1.0) (1.0) (0.6) (0.5) (0.1) 0.6 (0.1)
----- ----- ----- ----- ----- ----- ----- -----
Total other expense
(income)................... 1.6 (0.4) -- 0.1 0.6 0.8 2.1 1.4
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes........... 10.4 16.0 11.1 11.9 5.3 14.3 10.7 5.0
Provision for income taxes........... 3.8 5.8 4.0 4.1 4.8 5.1 3.7 1.8
----- ----- ----- ----- ----- ----- ----- -----
Net income........................... 6.6% 10.2% 7.1% 7.8% 0.5% 9.2% 7.0% 3.2%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
23
<PAGE> 25
Although our business is not affected by seasonality, historically our revenues
and earnings increase sequentially from quarter to quarter within a fiscal year,
but the first quarter of our fiscal year is less than our previous year's fiscal
fourth quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had $53.0 million in working capital. Our current
ratio was 2.8 to 1 at December 31, 1999. 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 with final payment on December 31, 2002. As of December 31, 1999, the
outstanding term loan was $15.0 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 30-day LIBOR (approximately 6.5% at
December 31, 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. 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, we have a letter of
credit facility of $2.0 million.
During June 1994, we completed a sale of $10.0 million principal amount of
7 1/2% Senior Subordinated Convertible Debentures to non-U.S. persons. On
September 8, 1997, we called for the redemption of all of the outstanding 7 1/2%
Senior Subordinated Convertible Debentures at 104 1/2% of the principal amount.
The Debentures were convertible into shares of our common stock at a price of
$5 5/8 per share through October 6, 1997. All of the principal amount was
converted. In connection with the conversions, $599,000 of deferred bond
issuance costs were charged to additional paid-in capital.
Effective July 1, 1997, our subsidiary, MIC Technology, acquired certain
equipment, inventory, licenses for technology and patents of two of Lucent
Technologies' telecommunications component units--multi-chip modules and film
integrated circuits--for approximately $4.4 million in cash. These units
manufacture microelectronic modules and interconnect products. We also signed a
multi-year supply agreement to provide Lucent with film integrated circuits for
use in the telecommunications industry. The purchase price has been allocated to
the assets acquired, based on their fair values, and certain obligations assumed
relating to the various agreements.
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
24
<PAGE> 26
million was used to repay bank indebtedness. The balance of the net proceeds was
used primarily for our purchase of UTMC Microelectronic Systems in February
1999.
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. In
October 1999, we purchased an additional 3.4% of Europtest's stock for
approximately $54,000. 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.
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 through 2019.
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 Microelectronic Systems 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
Microelectronic Systems 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 Microelectronic Systems 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.
In fiscal 1999, our operations provided cash of $11.4 million from our continued
profitability, partially offset by an increase in receivables due to our higher
sales volume and timing of billings. In fiscal 1999, our investing activities
used cash of $51.6 million primarily for our acquisition of UTMC Microelectronic
Systems and for capital expenditures. In fiscal 1999, our financing activities
provided cash of $18.5 million primarily from bank financing for the acquisition
of UTMC Microelectronic Systems.
Net cash provided by operating activities was $5.5 million for the six months
ended December 31, 1999. Net cash used in investing activities was $1.4 million
for the six months ended December 31, 1999, consisting primarily of capital
expenditures of $3.0 million offset, in part, by the proceeds from the sale of
equipment of $1.7 million under a sale-leaseback arrangement. Net cash used in
financing activities was $4.3 million for the six months ended December 31,
1999, consisting primarily of debt payments of $3.2 million and the purchase of
treasury stock of $2.0 million partially offset by proceeds from exercises of
stock options and warrants of $827,000.
We believe that the proceeds of this offering, together with 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. At December 31, 1999, our available
unused line of credit was $21.0 million after consideration of the letter of
credit.
One of our subsidiaries 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
may exceed $500 million. The complaint alleges, among other things, that the
plaintiffs suffered injuries from exposure to substances contained in products
sold by our subsidiary to one of its customers. This action is in the discovery
stage. Based upon available information and considering our various defenses,
together with our product liability insurance, in our opinion, the outcome of
the action against our subsidiary will not have a materially adverse effect on
our consolidated financial statements.
We are involved in various other routine legal matters. We believe the outcome
of these matters will not have a materially adverse effect on our consolidated
financial statements.
25
<PAGE> 27
We are undergoing routine audits by various taxing authorities of our state and
local income tax returns covering periods from 1994 to 1996. We believe that the
probable outcome of these various audits should not materially affect our
consolidated financial statements.
Our backlog of orders was $80.1 million at June 30, 1998, $93.8 million at June
30, 1999 and $99.5 million at December 31, 1999.
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 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 fixed rate
debt. Our debt which is subject to a floating rate of interest and is not hedged
by an interest rate swap amounts to approximately $19.5 million at December 31,
1999. If market interest rates increase by 10 percent from levels at December
31, 1999, the effect on our net income would be a reduction of approximately
$100,000 per year.
26
<PAGE> 28
BUSINESS
OVERVIEW
We design, develop and manufacture microelectronic products and automated
testing equipment for the communications market. Using our technology base, our
products support and enhance the bandwidth, speed and mobility for all sectors
of the broadband communications market, including fiber optics, broadband cable,
fixed broadband wireless and satellite communications systems. We have also
developed advanced technologies in high-speed stimulus/response measurement
systems which are used as the basis for increased testing speed of
communications systems and products.
INDUSTRY BACKGROUND
Worldwide demand for integrated voice, data and video communications services is
growing rapidly. The volume of high speed data traffic across global
communications networks has grown dramatically as the public Internet and
private business intranets have become essential for daily communications and
electronic commerce. Network-based businesses and consumer activities require
the transmission of increasingly large amounts of data quickly and reliably.
Traditional voice telecommunications have been carried as an electrical signal
over copper wire. Since this technology was designed for low-capacity voice
transmission, it is unable to meet the high-volume transmission requirements of
Internet access and other forms of high-speed, digital data communications.
Increased bandwidth is critically important to the transmission of high-volume
data and is the driving force behind the deployment of the high-speed, high-
capacity, digital network infrastructure that can provide broadband access.
Servicing the increasing demand for higher bandwidth content and applications
requires cost-effective and high-speed connections, which are often unavailable
or inadequate over existing wire-based networks causing a bottleneck in the last
mile of delivery to the end-user. Other new communications technologies, such as
fiber optics, digital subscriber line, or DSL, broadband cable and wireless, and
satellite are being deployed to expand the capabilities of existing networks or
build new broadband data networks. Fiber optic networks are increasingly
replacing copper-based technologies in local area and wide area networks. Fiber
optics enable digital information, such as coded data, voice or video, to be
transmitted as pulses of light. The light being transmitted along each
fiber-optic cable can be divided up into multiple frequencies, and each
frequency can be used as a separate transmission path. Thus each fiber optic
cable can simultaneously carry multiple transmissions.
Additionally, cable operators worldwide have begun upgrading their existing
networks to offer high-speed, two-way broadband digital transmission for new
interactive services, such as always-on Internet, telephony, video-on-demand and
digital television. Hybrid fiber coax, or HFC, networks require advanced return
path equipment for transmission of voice and data from the subscriber to the
headend to accommodate the interactive nature of telephony and Internet
services. In addition, the growth of telephony and Internet service will require
extending fiber further in the network and increasing the amount of fiber optic
equipment in an HFC network.
For many users, wireless communications provide an advantageous access solution
for high-speed Internet and multimedia services. Since each cellular or personal
communication system, or PCS, base station has a finite capacity, the demand
created by increased subscribers will require a substantial increase in capital
investment in wireless communications infrastructure equipment.
New fixed access broadband wireless technology can provide quality of service
comparable to land line network alternatives at speeds that are significantly
faster than conventional copper wire-based networks. Fixed access broadband
wireless technology is designed to be integrated with the existing network
backbone to address the last mile bottleneck problem. In addition, certain types
of fixed access broadband
27
<PAGE> 29
wireless technology provide an alternative for selective network backbone
applications. Broadband wireless systems include point-to-point,
point-to-multipoint and satellite-to-multipoint broadband technologies.
As demand for Internet access and other data-driven applications expands
rapidly, and as both commercial and residential consumers are increasingly
seeking efficient and effective means of access, satellite service providers are
entering the broadband wireless market. Some of the advantages of satellite
communications for this market are: global access to an existing satellite
infrastructure, the ability to cover large geographic areas, scalable deployment
and the ability to quickly reallocate capacity. Pioneer Consulting has estimated
that the number of subscribers to broadband satellite services will grow from
approximately 150,000 at the end of 1999 to approximately 21 million by the end
of 2005. There are several large-scale satellite communications projects in
various stages of development or implementation that are attempting to meet this
demand. These projects include Astrolink, ICO, SkyBridge, Spaceway and
Teledesic.
In order to meet the demand for broadband services, service providers are
turning to systems integrators or OEMs to build out infrastructure quickly,
efficiently and in accordance with exacting performance specifications. OEMs, in
turn, are looking to outsource the design and manufacture of highly integrated,
reliable subsystems and components in a cost-effective manner. This permits OEMs
to shorten their time to market and allows them to leverage their core
competencies of full system design and integration. By outsourcing subsystems
and components, OEMs promote competition among developers and manufacturers,
which leads to technological innovations in infrastructure equipment.
Concurrently, OEMs are seeking to select a core group of subsystem and component
providers in order to reduce the supply and management risks associated with the
currently fragmented supplier base.
OUR SOLUTION
We design, develop and manufacture microelectronic products and automated test
equipment for the communications market. Using our technology base, our products
support and enhance the bandwidth, speed and mobility for all sectors of the
broadband communications market, including fiber optics, cable, fixed broadband
wireless and satellite communications systems. Regardless of our customers'
choice of broadband deployment, we provide them with a complete solution for
their broadband component needs through our capabilities in thin film
interconnects, microelectronic modules and assemblies, proprietary radiation
tolerant technology and high speed test systems.
Due to the unique dimensional, thermal and electrical capabilities of our
passive integrated microelectronic interconnect circuitry, or PIMIC, technology,
our products have become an essential component in fiber optic transmitters,
receivers and amplifiers, cable amplifiers and point-to-point and
point-to-multipoint microwave radios. We produce radiation tolerant integrated
circuits. These circuits are used in satellite and other space applications
where radiation tolerance is necessary to protect the integrity of the data and
the reliability of the components. We are one of the world's leading
manufacturers of space hybrid microcircuits. We hold several prime space
contractor certifications.
We have developed advanced technologies in high speed stimulus/response
measurement systems which are used as the basis for increased testing speed of
high frequency system on a chip integrated circuits which operate in radio
frequency, or RF, and microwave frequency bands. We have also developed high-
speed receiver, digital signal processing, proprietary software and firmware
technology to support data acquisition and presentation measurement systems for
satellite payloads, transmit and receive modules and base station testing.
28
<PAGE> 30
OUR STRATEGY
We intend to continue to be a market leader in advanced microelectronics,
interconnects, radiation tolerant integrated circuits and testing solutions for
the broadband communications market. The key elements of our strategy are to:
-- Continue to Provide Advanced Technology Products for Broadband
Communications. Our technologies are used to supply components to the
broadband communications markets, including fiber optics, cable,
wireless and satellite. We have also developed fast switching
frequency synthesizers and high-speed testing systems which enable
communications manufacturers to test their products more efficiently.
Recently, our technology has enabled us to penetrate the fiber optics
market. We will continue to use our technologies to further penetrate
the expanding broadband communications markets.
-- Increase Our Content in Our Customers' Products. We intend to continue
developing products with increased performance while providing the
best value to customers. For example, we have combined our
microelectronic circuit technology with our thin film capabilities to
offer complete modules and sub-assemblies for fiber optic and other
communication applications. We also combined our high-speed automatic
measurement capabilities and our high-speed instrument capability to
develop a family of automatic communication test systems which allows
us to sell entire test systems, rather than component parts, to
systems users.
-- Maintain and Enhance Our Technological Leadership and Manufacturing
Capabilities. Our investments in technological development, as well as
our facilities, manufacturing capabilities and capacity, allow us to
support our customers' advanced development needs, as well as their
manufacturing and cost requirements. We believe that our technology,
manufacturing capabilities and manufacturing capacity enable us to
satisfy the broadband communications market's increasing demand for
products and services.
-- Continue to Pursue Strategic Acquisitions. We have historically
supplemented our internal growth and product development by purchasing
complementary businesses. For example, since 1995, we have acquired
UTMC, MIC, Lintek and Europtest. We intend to continue to identify and
acquire companies or lines of business which are complementary to our
existing businesses.
PRODUCTS
Our products are used in the rapidly expanding fiber optics, broadband cable,
wireless and satellite markets. Our products provide advanced technology
solutions for bandwidth and capacity needs. Our products are usually
incorporated into the systems and subsystems of the communications
infrastructure.
29
<PAGE> 31
The table below lists some of our products.
<TABLE>
<CAPTION>
INTEGRATED
MARKET SUBSTRATES ASSEMBLIES/MODULES CIRCUITS TESTING SOLUTIONS
<S> <C> <C> <C> <C>
Fiber Optics Laser Diodes Application Specific -- Automatic Phase
PIN Pre-Amplifiers Carrier Assemblies Noise Test
Transimpedance Amplifiers APD Receiver Systems
Pre-Amplifiers Sub-Assemblies
Post-Amplifiers Clock Recovery Synthesizers
Lithium Niobate Laser Diode Assemblies
Terminations Transmitter Assemblies
Mach-Zender Modulators Modulator Assemblies
Clock Recovery
PIN Receivers
APD Receivers
Cable 1 Ghz Pre- and Post- -- -- --
Amplifiers
Trunk Amplifiers
Line Extenders
Power Doublers
Wireless Receivers -- -- High-Speed
Handset Diplexers Frequency
Handset Triplexers Synthesizers
Satellite S, L, Ka, Ku Band Memory Modules Application Automatic
Transmit and Receive Multiplexers Specific Payload Test
Modules Data Communication Integrated Systems
Amplifiers Modules Circuits
Filters Micro Controllers Controllers
DC to DC Converters Memories
Voltages Regulators LVDS Interconnects
IF Switches Programmable Logic
</TABLE>
Fiber Optics, Cable and Wireless Markets
We design, develop, manufacture and market advanced integrated fiber optic,
broadband cable and wireless interconnect products based on thin film
manufacturing technology. Primary product requirements for this advanced
technology include the following attributes:
-- miniaturization;
-- ease of assembly;
-- improved thermal management;
-- reduced power consumption; and
-- critical component (laser) alignment.
Due to the unique dimensional, thermal and electrical capabilities of our PIMIC
interconnect technology, our products have become an essential component in:
-- fiber optic transmitters, receivers and amplifiers;
-- cable trunk amplifiers, line extenders, pre-amplifiers and power
doublers; and
-- point-to-point and point-to-multipoint microwave radios.
Thin film interconnect technology allows fiber optic module manufacturers such
as Nortel Networks, Lucent Technologies and JDS Uniphase to achieve maximum
performance with a low cost of ownership and a high level of quality. Exacting
laser, optical lens and diode placement requirements, coupled with stringent
thermal management needs, make our advanced optical interconnect technology a
market leading choice among the major fiber optic module manufacturers.
Continued migration from 2.5 gigabit, or Gbit,
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<PAGE> 32
transmission rates to 10 Gbit and 40 Gbit transmission rates results in
increased output power levels and operating frequencies further driving the need
for our advanced optical interconnect technology.
Our products also play an increasingly important role in the development and
expansion of the broadband cable and HFC architecture. Applications in trunk
amplifiers, line extenders, pre-amplifiers, post-amplifiers and power doublers
has enabled greater bandwidth, improved loss characteristics and increased
channel capability at the systems level. Additionally, in the wireless
marketplace, the advance of dual and tri-mode handsets has resulted in our
design of a series of miniaturized diplexers and triplexers for these
communications devices.
Our high-speed test equipment provides product enhancements to communications
systems manufacturers. Our line of frequency synthesizers offers the best
combination of high-speed and low phase noise available covering all
communications frequencies. Our FS1000 is a microwave frequency synthesizer that
has been developed to support the requirements of mixed signal test systems used
in the semiconductor market. Our test systems are designed to dramatically
reduce test time for radio frequency semiconductors which allows end users to
increase throughput without increasing costs. These benefits are derived from a
design architecture that yields superior phase noise and switching speed
performance--technology for which we believe we are well-known in the industry.
Satellite Market
We have been a designer and supplier of silicon integrated circuits for almost
20 years. Our products include both custom and standard integrated circuits such
as databuses, transceivers, microcontrollers, microprocessors and memories. Many
of these circuits are radiation tolerant for satellite and space applications.
Our products are on over 100 aerospace platforms. Our standard and semicustom
circuits are available in the latest 0.6 and 0.25 micron silicon wafer
technologies. The standard circuits include the primary processor, memory and
databus functionality, and the semi-custom gate arrays are available with up to
three million usable gates. These gate arrays are available in both radiation
tolerant and non-radiation tolerant technologies and have been used frequently
to replace field programmable gate array implementations. We have pioneered the
use of commercial foundries to produce radiation tolerant components, known as
Commercial RadHard, for the commercial space marketplace.
We are one of the world's leading manufacturers of space hybrid microcircuits.
We hold several prime space contractor certifications. We offer numerous
application specific multi-function modules and hybrid designs which are highly
reliable, small and lightweight, attributes that are significant for space
components.
Our test system products allow communication manufacturers to test communication
satellite payloads and transmit/receive modules faster and more economically
than ever before. Our digital signal processing equipment and proprietary
software algorithms allow users to simultaneously measure multiple functions,
eliminating the need for individual instruments. These testers are based on our
proprietary software, firmware, frequency conversion and high speed data
acquisition technologies and allow for higher throughputs and increased
flexibility.
Isolator Products
We also design, develop, manufacture and sell shock and vibration isolation
systems. These devices include rubber and spring shock, vibration and noise
control devices. Purchasers of isolators are manufacturers or users of equipment
sensitive to shock and vibration who need to reduce shock/vibration to levels
compatible with equipment fragility to extend the useful life of their
equipment. There are multiple markets for isolation systems including
commercial, industrial and defense.
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<PAGE> 33
CUSTOMERS
We have hundreds of customers in the communications, aerospace/defense and
transportation industries. In fiscal 1999, except for Lockheed Martin and Lucent
Technologies, no one customer accounted for more than 10% of our net sales. The
table below lists some of our customers.
<TABLE>
<CAPTION>
BROADBAND MARKET CUSTOMERS
- ----------------------------------------------------------------------------
<S> <C>
Fiber Optics Nortel Networks
Lucent Technologies
JDS Uniphase
Agilent Technologies
Ortel
Tyco International
- ----------------------------------------------------------------------------
Cable Motorola
Ortel
REMEC
- ----------------------------------------------------------------------------
Wireless Agilent Technologies
Motorola
Algon
Teradyne
- ----------------------------------------------------------------------------
Satellite Hughes Space & Communications
Loral Space & Communications
TRW
Alcatel
Matra Marconi
</TABLE>
MARKETING AND DISTRIBUTION
We use a team-based sales approach to assist our personnel to closely manage
relationships at multiple levels of the customer's organization, including
management, engineering and purchasing personnel. Our integrated sales approach
involves a team consisting of a senior executive, a business development
specialist and members of our engineering department. Our use of experienced
engineering personnel as part of the sales effort enables close technical
collaboration with our customers during the design and qualification phase of
new communications equipment. We believe that this is critical to the
integration of our product into our customers' equipment. Some of our executive
officers are also involved in all aspects of our relationships with our major
customers and work closely with their senior management. We also use
manufacturers' representatives and independent sales representatives as needed.
RESEARCH AND DEVELOPMENT
Our research and development efforts primarily involve engineering and design
relating to:
-- developing new products;
-- improving existing products;
-- adapting such products to new applications; and
-- developing prototype components to bid on specific programs.
Certain product development costs are recoverable under contractual
arrangements. The costs of our self-funded research activities were
approximately $3.3 million for fiscal 1997, $5.2 million for fiscal 1998 and
$9.6 million for fiscal 1999. The increases are primarily attributable to our
development of a low-cost, high speed, high performance frequency synthesizer
intended for commercial communication test systems. In
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<PAGE> 34
addition, in fiscal 1999, our research and development expenses included those
of UTMC Microelectronic Systems from February 1999. Also, in connection with our
acquisition of UTMC Microelectronic Systems in February 1999, we allocated $3.5
million of the purchase price to incomplete research and development projects.
Since the research and development projects had not reached technological
feasibility, we expensed $3.5 million in addition to the $9.6 million in fiscal
1999, in accordance with generally accepted accounting principles.
BACKLOG
We include in backlog firm purchase orders or contracts providing for delivery
of products and services. At December 31, 1999, our order backlog was
approximately $99.5 million. At June 30, 1999, our order backlog was
approximately $93.8 million, approximately 85% of which was scheduled to be
delivered on or before June 30, 2000, compared to an order backlog of
approximately $80.1 million at June 30, 1998. Approximately 58% of our backlog
at June 30, 1999 represented commercial contracts and approximately 42% of this
backlog represented defense contracts. Generally, government contracts are
cancellable with payment to us of amounts which we have spent under the contract
together with a reasonable profit, if any, while commercial contracts are not
cancellable.
COMPETITION
In all phases of our operations, we compete primarily based on performance and
price. In the manufacture of microelectronics, we believe our primary
competitors are NTK, Texas Instruments, ILC/Data Devices, Lockheed Martin,
Honeywell International and Kyocera International. In the manufacture of
instrument products, we believe our primary competitors are Agilent Technologies
and Rhode & Schwarz. In the manufacture of isolators, we believe our primary
competitor is Barry Controls. We also experience significant competition from
the in-house capabilities of our current and potential customers. We believe
that in all of our operations we compete favorably in the principal areas of:
-- technology;
-- performance;
-- reliability;
-- quality;
-- customer service; and
-- price.
MANUFACTURING
We assemble, test, package and ship products at our manufacturing facilities
located in:
-- Colorado Springs, Colorado;
-- Boca Raton, Florida;
-- Bloomingdale, New Jersey;
-- Farmingdale, New York;
-- Pearl River, New York;
-- Plainview, New York;
-- Powell, Ohio;
-- Richardson, Texas; and
-- Elancourt, France.
We have been manufacturing products for defense programs for many years in
compliance with stringent military specifications. Our microelectronic module
manufacturing is certified to the status of Class "K," which means qualified for
space. We believe we have brought to the commercial market the manufacturing
quality and discipline we have demonstrated in the defense market. For example,
our
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<PAGE> 35
Plainview and Farmingdale manufacturing plants are international standards
organization, or ISO, -9001 certified, as well as certified to the more
stringent Boeing D1-9000 standard, our Colorado Springs plant is ISO-9000
certified and all three of these plants are qualified manufacturers list, or
QML, suppliers at various levels.
Historically, our volume production requirements for the defense market did not
justify our widespread implementation of highly automated manufacturing
processes. Over the last several years, we have expanded our use of high volume
manufacturing techniques for product assembly and testing. Accordingly, we
believe that we have the manufacturing capacity required to meet the growing
demand for communications products.
Although we have several sole source arrangements, all the materials and
components we use, including those purchased from a sole source, are readily
available and are or can be purchased from time to time in the open market. We
have no long-term commitments for their purchase. No supplier provides more than
10% of our raw materials.
LEGAL PROCEEDINGS
Our former subsidiary Filtron Co. Inc., was one of several defendants named in a
personal injury action initiated in 1994 by several plaintiffs in the Supreme
Court of the State of New York, County of Kings. Filtron's operations were
discontinued in October 1991.
The plaintiffs in the action are current or former employees of a company to
whom Filtron sold RFI filters/capacitors. According to the allegations of the
amended verified complaint, the plaintiffs and their dependents are seeking to
recover, respectively, directly and derivatively, on diverse theories of
negligence, strict liability and breach of warranty, for injuries allegedly
suffered from exposure to a liquid substance or material which Filtron
incorporated for a period of time in the RFI filters/capacitors which it
manufactured. The plaintiffs are seeking damages which cumulatively may exceed
$500 million. This action is in the discovery stage. We intend to continue to
defend against this action vigorously. We believe that, considering our various
defenses and that we have product liability insurance, the outcome of this
action will not have a material adverse effect on us, however we cannot
guarantee that will be the case.
We are involved in various other routine legal matters. We believe the outcome
of these matters will not have a material adverse effect on us.
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<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Harvey R. Blau.................... 64 Chairman of the Board and Chief Executive Officer
Michael Gorin..................... 58 President, Chief Financial Officer and Director
Leonard Borow..................... 52 Executive Vice President, Chief Operating Officer,
Secretary and Director
Carl Caruso....................... 56 Vice President--Manufacturing
Charles Badlato................... 41 Treasurer and Assistant Secretary
Paul Abecassis.................... 49 Director
Milton Brenner.................... 72 Director
Ernest E. Courchene, Jr........... 68 Director(1)(2)
Donald S. Jones................... 71 Director(2)(3)
Eugene Novikoff................... 76 Director(1)(2)
John S. Patton.................... 82 Director(1)(3)
</TABLE>
- ---------------------------
(1) Member, Compensation/Stock Option Committee
(2) Member, Audit Committee
(3) Member, Ethics Committee
Harvey R. Blau was appointed as our Chairman of the Board and Chief Executive
Officer in October 1991. Mr. Blau had previously served as our Vice Chairman
from November 1983 until October 1991 and has been a director since July 1980.
Mr. Blau is also Chairman of the Board and Chief Executive Officer of Griffon
Corporation and a director of Nu Horizons Electronics Corp. and Reckson
Associates Realty Corp. During fiscal 1999, a subsidiary of Griffon Corporation
purchased products from us for an aggregate $409,000 in various arms length
transactions. Mr. Blau has been a practicing attorney in the State of New York
since 1961, and is a member of the law firm of Blau, Kramer, Wactlar &
Lieberman, P.C., our general counsel. We have engaged Blau, Kramer, Wactlar &
Lieberman, P. C. in the past and intend to continue to retain them on an ongoing
basis. During fiscal 1999, we paid Blau, Kramer, Wactlar & Lieberman
approximately $393,000 in legal fees.
Michael Gorin has been employed by us in various executive positions since July
1985 and has been our President since October 1988, a director since August 1990
and Chief Financial Officer since 1991. From 1986 to October 1988, Mr. Gorin was
our Vice President--Finance. From May 1980 to July 1985, Mr. Gorin was Senior
Vice President of Republic National Bank of New York. For more than ten years
prior to that, he was employed by Arthur Andersen & Co., becoming a partner in
April 1973. Mr. Gorin is licensed as a Certified Public Accountant in the State
of New York.
Leonard Borow has been employed by us in various executive positions since
November 1989, has been Executive Vice President and Chief Operating Officer
since October 1991, a director since November 1992 and Secretary since November
1993. Prior to joining us, Mr. Borow was President of Comstron Corporation, a
manufacturer of fast switching frequency synthesizers and components, which we
acquired in November 1989.
Carl Caruso has been employed by us as Vice President of Aeroflex Laboratories
Incorporated since November 1989 and has been our Vice President--Manufacturing
since February 1997. Prior to joining us, Mr. Caruso was Vice President of
Comstron Corporation.
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<PAGE> 37
Charles Badlato has been employed by us in various financial positions since
December 1987 and has been Treasurer since February 1994. From May 1981 until
December 1987, Mr. Badlato was employed by various certified public accounting
firms, most recently as an audit manager with Touche Ross & Co. Mr. Badlato is
licensed as a Certified Public Accountant in the State of New York.
Paul Abecassis has been a director since August 1998. Mr. Abecassis has been an
investment banker for the past 20 years. He joined Bear Stearns International
Limited as a Managing Director in May 1991 and became a Senior Managing Director
in September 1992. He is also a director of Bracco Diagnostics Incorporated.
Milton Brenner, until his retirement in September 1988, had been President of
Aeroflex Laboratories Incorporated, one of our subsidiaries, for more than 15
years. Mr. Brenner was previously a director from 1973 to 1986 and was again
elected a director in August 1988.
Ernest E. Courchene, Jr. has been a director since April 1980. Mr. Courchene
currently works as a business consultant. He served from May 1987 to May 1992 as
Vice Chairman and a director of Digitech Industries, Inc., a manufacturer of
data communications diagnostic equipment. From May 1983 to May 1987, Mr.
Courchene was President of Southport Capital Group Ltd., an investment banking
firm and from March 1980 to November 1985, he was Chairman of the Board of
Harbor Electronics Inc., a manufacturer of cable assemblies for the electronics
industry.
Vice Admiral Donald S. Jones (USN Ret.) has been a director since November 1993.
He retired from the United States government in 1987 after more than 37 years of
service. From March 1988 to March 1990, Admiral Jones was Vice President for
Government and International Affairs for Tracor Inc., a manufacturer of
electronic products and a provider of aircraft service and repair. Since
retirement, Admiral Jones also has acted as an independent consultant.
Eugene Novikoff has been a director since June 1979. Mr. Novikoff is a
professional engineer and is a self-employed engineering consultant. During the
period from 1972 to 1978, Mr. Novikoff was a director and Vice President in
charge of development and engineering for Knogo Corporation, a manufacturing and
service organization engaged in providing equipment and devices to libraries and
retail businesses to reduce losses from pilferage. Since January 1979, Mr.
Novikoff has been a self-employed consulting engineer.
Major General John S. Patton (USAF Ret.) has been a director since August 1985.
General Patton retired from the United States government in 1978 after more than
36 years of service. Since retirement, he has acted as an independent analytical
technical consultant.
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<PAGE> 38
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock as
of April 1, 2000 of each of our executive officers and directors, all of our
executive officers and directors as a group and each person we know to
beneficially own 5% or more of our outstanding common stock based solely on
filings with the SEC.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THIS OWNED AFTER THIS
OFFERING(1) SHARES TO BE OFFERING
------------------- SOLD IN THIS -------------------
SHARES PERCENT OFFERING SHARES PERCENT
--------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Harvey R. Blau(2)...................... 1,036,084 5.3% 285,000 751,084 3.4%
Michael Gorin(3)....................... 542,537 2.8 155,000 387,537 1.8
Leonard Borow(4)....................... 858,126 4.5 215,000 643,126 3.0
Carl Caruso(5)......................... 149,418 * 38,000 111,418 *
Charles Badlato(6)..................... 75,548 * 25,000 50,548 *
Paul Abecassis(7)...................... 36,333 * 7,000 29,333 *
Milton Brenner(8)...................... 176,866 * 25,000 151,866 *
Ernest E. Courchene, Jr.(9)............ 133,440 * -- 133,440 *
Donald S. Jones(10).................... 43,400 * -- 43,400 *
Eugene Novikoff(10).................... 41,183 * -- 41,183 *
John S. Patton(11)..................... 60,500 * -- 60,500 *
--------- ------- ---------
All directors and officers as a group
(11 persons)(12)..................... 3,153,435 15.2% 750,000 2,403,435 10.7%
5% STOCKHOLDER
State of Wisconsin Investment
Board(13)............................ 1,894,300 10.0% 1,894,300 8.9%
</TABLE>
- ---------------------------
* less than 1%.
(1) Ownership represents sole voting and investment power.
(2) Includes options currently exercisable or exercisable within 60 days to
purchase 716,667 shares of common stock. Also includes 4,651 shares held
by the Blau, Kramer, Wactlar & Lieberman, P.C. Profit Sharing Plan and
199,058 shares owned by his wife, to which Mr. Blau disclaims beneficial
ownership. Does not include options which are not currently exercisable or
exercisable within 60 days to purchase 483,333 shares of common stock. In
the event the underwriters exercise their over allotment option in full,
Mr. Blau will own 2.5% of our outstanding shares.
(3) Includes options currently exercisable or exercisable within 60 days to
purchase 408,333 shares of common stock. Does not include options which
are not currently exercisable or exercisable within 60 days to purchase
341,667 shares of common stock. In the event the underwriters exercise
their over allotment option in full, Mr. Gorin will own 1.3% of our
outstanding shares.
(4) Includes options currently exercisable or exercisable within 60 days to
purchase 408,333 shares of common stock. Also includes 8,888 shares owned
by his wife to which Mr. Borow disclaims beneficial ownership. Does not
include options which are not currently exercisable or exercisable within
60 days to purchase 341,667 shares of common stock. In the event the
underwriters exercise their over allotment option in full, Mr. Borow will
own 2.3% of our outstanding shares.
(5) Includes options currently exercisable or exercisable within 60 days to
purchase 82,917 shares of common stock. Does not include options which are
not currently exercisable or exercisable within 60 days to purchase 72,083
shares of common stock.
(6) Includes options currently exercisable or exercisable within 60 days to
purchase 64,583 shares of common stock. Does not include options which are
not currently exercisable or exercisable within 60 days to purchase 80,417
shares of common stock.
(7) Includes options currently exercisable or exercisable within 60 days to
purchase 18,333 shares of common stock. Does not include options which are
not currently exercisable or exercisable within 60 days to purchase 26,667
shares of common stock.
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<PAGE> 39
(8) Includes options currently exercisable or exercisable within 60 days to
purchase 60,000 shares of common stock and 3,000 shares owned by his wife.
Does not include options which are not currently exercisable or
exercisable within 60 days to purchase 10,000 shares of common stock.
(9) Includes options currently exercisable or exercisable within 60 days to
purchase 60,000 shares of common stock. Does not include options which are
not currently exercisable or exercisable within 60 days to purchase 10,000
shares of common stock.
(10) Includes options currently exercisable or exercisable within 60 days to
purchase 40,000 shares of common stock. Does not include options which are
not currently exercisable or exercisable within 60 days to purchase 10,000
shares of common stock.
(11) Includes options currently exercisable or exercisable within 60 days to
purchase 59,000 shares of common stock. Does not include options which are
not currently exercisable or exercisable within 60 days to purchase 10,000
shares of common stock.
(12) Includes options currently exercisable or exercisable within 60 days to
purchase an aggregate of 1,958,166 shares of common stock. Does not
include options which are not currently exercisable or exercisable within
60 days to purchase 1,411,834 shares of common stock. In the event the
underwriters' option is exercised in full, our officers and directors will
own an aggregate 8.6% of our outstanding shares.
(13) Based on information contained in a Schedule 13G, which states that the
stockholder has sole voting and dispositive power with respect to such
shares. The address of the stockholder is 121 East Wilson Street, Madison,
Wisconsin 53707.
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<PAGE> 40
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 21,354,109 shares of common stock
outstanding. Of these shares, 20,726,226 shares, including the 3,250,000 shares
of common stock sold in this offering (3,737,500 shares if the underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares purchased by someone who is our "affiliate", which will be subject to the
limitations of Rule 144 adopted under the Securities Act. An affiliate is a
person who has a control relationship with us. All of the remaining shares are
deemed to be "restricted securities," as that term is defined under Rule 144.
In general, under Rule 144 as currently in effect, subject to the satisfaction
of certain other conditions, a person, including our affiliate or persons whose
shares are aggregated with an affiliate, who has owned restricted shares of
common stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (1)
1% of the total number of outstanding shares of the same class or (2) the
average weekly trading volume of the common stock on all exchanges and/or
reported through the automated quotation system of a registered securities
association during the four calendar weeks preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Sales under Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about us. A person who has
not been an affiliate of ours for at least the three months immediately
preceding the sale and who has beneficially owned shares of common stock for at
least two years is entitled to sell such shares under Rule 144 without regard to
any of the limitations described above.
478,670 of the shares of restricted stock outstanding upon completion of this
offering have been held for more than one year. Our officers and directors which
own 443,464 of the restricted shares, have agreed that they will not, without
the prior written consent of CIBC World Markets, sell or otherwise dispose of
any shares of common stock beneficially owned by them for a period of ninety
days after the effective date of this prospectus. Following expiration of the
lock-up period (or earlier consent of CIBC World Markets), these shares will be
eligible for sale subject to the restrictions of Rule 144. The sale of a
substantial number of these shares in the public market could adversely affect
prevailing market price of our common stock following the offering.
39
<PAGE> 41
UNDERWRITING
We and the selling stockholders have entered into an underwriting agreement with
the underwriters named below. CIBC World Markets Corp., A.G. Edwards & Sons,
Inc., Wit SoundView Corporation and Wasserstein Perella Securities, Inc. are
acting as representatives of the underwriters. The underwriting agreement
provides for the purchase of a specific number of shares of common stock by each
of the underwriters. The underwriters' obligations are several, which means that
each underwriter is required to purchase a specified number of shares, but is
not responsible for the commitment of any other underwriter to purchase shares.
Subject to the terms and conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the number of shares of common
stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
CIBC World Markets Corp. ...................................
A.G. Edwards & Sons, Inc. ..................................
Wit SoundView Corporation...................................
Wasserstein Perella Securities, Inc. .......................
--------
Total.............................................
========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us and the selling stockholders that the
underwriters propose to offer the shares directly to the public at the public
offering price that appears on the cover page of this prospectus. In addition,
the representatives may offer some of the shares to certain securities dealers
at such price less a concession of $ per share. The underwriters may also
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.
The selling stockholders have granted the underwriters an over-allotment option.
This option, which is exercisable for up to 30 days after the date of this
prospectus, permits the underwriters to purchase a maximum of 487,500 additional
shares from the selling stockholders to cover over-allotments. If the
underwriters exercise all or part of this option, they will purchase shares
covered by the option at the public offering price that appears on the cover
page of this prospectus, less the underwriting discount. If this option is
exercised in full, the total price to the public will be $ million, and
the total proceeds to us will remain the same. The underwriters have severally
agreed that, to the extent the over-allotment option is exercised, they will
each purchase a number of additional shares proportionate to the underwriter's
initial amount reflected in the foregoing table.
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<PAGE> 42
The following table provides information regarding the amount of the discount to
be paid to the underwriters by us and the selling stockholders:
<TABLE>
<CAPTION>
TOTAL
--------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- ------------------- ---------------------
<S> <C> <C> <C>
Aeroflex................. $ $ $
Selling Stockholders.....
</TABLE>
We estimate that the total expenses of the offering, excluding the underwriting
discount, will be approximately $425,000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
We, as well as our executive officers and directors, have agreed to a 90-day
"lock up" with respect to approximately 2,400,000 shares of common stock, and
certain other of our securities that they beneficially own, including securities
that are convertible into shares of common stock and securities that are
exchangeable or exercisable for shares of common stock. This means that, subject
to certain exceptions, for a period of 90 days following the date of this
prospectus, we and such persons may not offer, sell, pledge or otherwise dispose
of these securities without the prior written consent of CIBC World Markets
Corp.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
-- Stabilizing transactions--The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the price
of the shares, so long as stabilizing bids do not exceed a specified
maximum.
-- Over-allotments and syndicate covering transactions--The underwriters
may create a short position in the shares by selling more shares than
are set forth on the cover page of this prospectus. If a short
position is created in connection with the offering, the
representatives may engage in syndicate covering transactions by
purchasing shares in the open market. The representatives may also
elect to reduce any short position by exercising all or part of the
over-allotment option.
-- Penalty bids--If the representatives purchase shares in the open
market in a stabilizing transaction or syndicate covering transaction,
they may reclaim a selling concession from the underwriters and
selling group members who sold those shares as part of this offering.
-- Passive market making--Market makers in the shares who are
underwriters or prospective underwriters may make bids for or
purchases of shares, subject to certain limitations, until the time,
if ever, at which a stabilizing bid is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
A prospectus in electronic format is being made available on an Internet web
site maintained by Wit SoundView's affiliate, Wit Capital Corporation. Other
than the prospectus in electronic format, the
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<PAGE> 43
information on Wit Capital Corporation's web site and any information contained
on any other web site maintained by Wit Capital Corporation is not part of the
prospectus or the registration statement of which this prospectus forms a part,
has not been approved and/or endorsed by us or any underwriter in its capacity
as underwriter and should not be relied upon by investors.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be passed
upon for us by the law firm of Blau, Kramer, Wactlar & Lieberman, P.C., Jericho,
New York. Harvey R. Blau, a member of the firm, is our Chairman and Chief
Executive Officer. Mr. Blau owns 1,514,766 shares of our common stock, including
options to purchase 1,200,000 shares of common stock granted pursuant to certain
of our stock option plans and 199,058 shares owned by his wife, to which Mr.
Blau disclaims beneficial ownership. The Blau, Kramer, Wactlar & Lieberman, P.C.
Profit Sharing Plan owns 4,651 shares of our common stock, 2,830 of which have
been allocated to Mr. Blau. Other members of the firm own an aggregate of 400
shares of our common stock. For the year ended June 30, 1999, we paid
approximately $393,000 in legal fees to the firm. Certain matters will be passed
upon for the underwriters by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
Our consolidated financial statements as of June 30, 1998 and 1999 and for each
of the years in the three-year period ended June 30, 1999 have been included in
this prospectus in reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, NW, Washington, D.C., 20549,
and at the SEC's public reference rooms in Chicago, Illinois and New York, New
York. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public on the
SEC's Website at "http://www.sec.gov."
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933, as amended, with respect to the shares to be sold in
this offering. This prospectus does not contain all of the information set forth
in the registration statement. We have omitted certain parts of the registration
statement in accordance with the rules and regulations of the SEC. For further
information about us and the shares, you should refer to the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document are not necessarily complete and, in each instance,
you should refer to the copy of such contract or document filed as an exhibit to
or incorporated by reference in the registration statement. Each statement as to
the contents of such contract or document is qualified in all respects by such
reference. You may obtain a copy of the registration statement, or any of our
other filings with the SEC, from the SEC's principal office in Washington, D.C.
upon payment of the fees prescribed by the SEC, or you may examine the
registration statement without charge at the offices of the SEC described above.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and information that we file later with the SEC
will automatically update and supersede this information. We incorporate by
reference the
42
<PAGE> 44
documents listed below and any future filings we will make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934. The
documents we are incorporating by reference are:
1. Our annual report on Form 10-K for our fiscal year ended June 30, 1999;
2. Our quarterly reports on Form 10-Q for our fiscal quarters ended
September 30, 1999 and December 31, 1999;
3. Our proxy statement filed on October 1, 1999; and
4. The description of our common stock contained in the registration
statement on Form 8-A (File No. 001-08037), including all amendments or
reports filed for the purpose of updating such description.
You may request a copy of these filings at no cost, by writing or telephoning
our general counsel at the following address:
Aeroflex Incorporated
35 South Service Road
Plainview, New York 11803
(516) 694-6700
43
<PAGE> 45
AEROFLEX INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets at June 30, 1998 and 1999, and
December 31, 1999 (unaudited)............................. F-3
Consolidated Statements of Earnings for the years ended June
30, 1997, 1998 and 1999, and the six months ended December
31, 1998 and 1999 (unaudited)............................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1997, 1998 and 1999, and the six
months ended December 31, 1999 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1998 and 1999, and the six months ended
December 31, 1998 and 1999 (unaudited).................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 46
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Aeroflex Incorporated
Plainview, New York
We have audited the accompanying consolidated balance sheets of Aeroflex
Incorporated and subsidiaries as of June 30, 1998 and 1999 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three year period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aeroflex
Incorporated and subsidiaries as of June 30, 1998 and 1999 and the results of
their operations and their cash flows for each of the years in the three year
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Melville, New York
August 10, 1999
F-2
<PAGE> 47
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31,
1998 1999 1999
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 24,408 $ 2,714 $ 2,493
Accounts receivable, less allowance for doubtful accounts
of $317, $381 and $407 at June 30, 1998 and 1999 and
December 31, 1999, respectively......................... 19,853 39,967 36,946
Inventories, net.......................................... 29,851 32,637 35,718
Deferred income taxes..................................... 1,861 5,291 5,103
Prepaid expenses and other current assets................. 1,197 2,314 2,092
-------- -------- --------
Total current assets.................................... 77,170 82,923 82,352
Property, plant and equipment, net.......................... 26,994 50,802 48,824
Intangible assets acquired in connection with the purchase
of businesses, net of accumulated amortization of $1,993,
$3,084 and $3,856 at June 30, 1998 and 1999 and December
31, 1999, respectively.................................... 7,578 13,777 13,053
Cost in excess of fair value of net assets of businesses
acquired, net of accumulated amortization of $2,724,
$3,161 and $3,480 at June 30, 1998 and 1999 and December
31, 1999, respectively.................................... 9,827 14,019 13,700
Other assets................................................ 2,532 3,695 4,025
-------- -------- --------
Total assets............................................ $124,101 $165,216 $161,954
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,755 $ 6,509 $ 6,456
Accounts payable.......................................... 6,668 8,070 7,490
Accrued expenses and other current liabilities............ 12,932 16,923 13,871
Income taxes payable...................................... 1,850 1,055 1,507
-------- -------- --------
Total current liabilities............................... 23,205 32,557 29,324
Long-term debt.............................................. 9,726 24,608 21,504
Deferred income taxes....................................... 1,156 3,582 3,230
Other long-term liabilities................................. 2,978 2,376 2,364
-------- -------- --------
Total liabilities........................................... 37,065 63,123 56,422
-------- -------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.10 per share; authorized
1,000 shares: Series A Junior Participating Preferred
Stock, par value $.10 per share; authorized 40 shares;
none issued............................................. -- -- --
Common Stock, par value $.10 per share; authorized 40,000
shares; issued 17,378, 18,429 and 18,652 shares at June
30, 1998 and 1999 and December 31, 1999, respectively... 1,738 1,843 1,865
Additional paid-in capital................................ 100,481 105,720 107,570
Accumulated deficit....................................... (15,178) (5,421) (1,150)
-------- -------- --------
87,041 102,142 108,285
Less: Treasury stock, at cost (1, 6 and 339 shares at June
30, 1998, 1999 and December 31, 1999, respectively)..... 5 49 2,753
-------- -------- --------
Total stockholders' equity.................................. 87,036 102,093 105,532
-------- -------- --------
Total liabilities and stockholders' equity.................. $124,101 $165,216 $161,954
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 48
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------- ------------------
1997 1998 1999 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $94,299 $118,861 $157,104 $67,826 $83,603
Cost of sales.......................... 63,109 77,286 98,645 44,299 54,905
------- -------- -------- ------- -------
Gross profit...................... 31,190 41,575 58,459 23,527 28,698
------- -------- -------- ------- -------
Operating costs:
Selling, general and administrative
costs............................. 18,175 21,545 27,763 11,392 15,705
Research and development costs....... 3,279 5,172 9,612 4,294 4,938
Acquired in-process research and
development (note 2).............. -- -- 3,500 -- --
------- -------- -------- ------- -------
Total operating costs............. 21,454 26,717 40,875 15,686 20,643
------- -------- -------- ------- -------
Operating income....................... 9,736 14,858 17,584 7,841 8,055
------- -------- -------- ------- -------
Other expense (income):
Interest expense..................... 2,974 2,011 1,454 567 1,249
Other expense (income) (including
interest income and dividends of
$84, $389, $781, $545 and $49).... (93) (309) (777) (544) 235
------- -------- -------- ------- -------
Total other expense (income)...... 2,881 1,702 677 23 1,484
------- -------- -------- ------- -------
Income before income taxes............. 6,855 13,156 16,907 7,818 6,571
Provision for income taxes............. 2,435 4,750 7,150 2,750 2,300
------- -------- -------- ------- -------
Net income............................. $ 4,420 $ 8,406 $ 9,757 $ 5,068 $ 4,271
======= ======== ======== ======= =======
Net income per common share:
Basic................................ $ 0.36 $ 0.57 $ 0.55 $ 0.29 $ 0.23
======= ======== ======== ======= =======
Diluted.............................. $ 0.34 $ 0.51 $ 0.51 $ 0.27 $ 0.22
======= ======== ======== ======= =======
Weighted average number of common
shares outstanding:
Basic................................ 12,446 14,802 17,784 17,523 18,528
Diluted.............................. 14,620 16,527 19,128 18,751 19,441
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 49
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 (AUDITED)
AND THE SIX MONTHS ENDED DECEMBER 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------ PAID-IN ACCUMULATED ----------------
TOTAL SHARES PAR VALUE CAPITAL DEFICIT SHARES COST
-------- ------ --------- ---------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1996.............. $ 30,472 12,380 $1,238 $ 57,820 $(28,004) 129 $ (582)
Stock issued upon exercise of stock
options.......................... 586 278 28 290 -- (69) 268
Purchase of treasury stock......... (438) -- -- -- -- 109 (438)
Net income......................... 4,420 -- -- -- 4,420 -- --
-------- ------ ------ -------- -------- ---- -------
BALANCE, JUNE 30, 1997............. 35,040 12,658 1,266 58,110 (23,584) 169 (752)
Stock issued in public offering.... 31,285 2,597 260 31,025 -- -- --
Stock issued upon exercise of stock
options and warrants............. 2,923 349 35 2,141 -- (168) 747
Stock issued upon conversion of
debentures....................... 9,382 1,774 177 9,205 -- -- --
Net income......................... 8,406 -- -- -- 8,406 -- --
-------- ------ ------ -------- -------- ---- -------
BALANCE, JUNE 30, 1998............. 87,036 17,378 1,738 100,481 (15,178) 1 (5)
Stock issued upon exercise of stock
options and warrants............. 4,967 1,051 105 4,563 -- (34) 299
Purchase of treasury stock......... (343) -- -- -- -- 39 (343)
Deferred compensation.............. 676 -- -- 676 -- -- --
Net income......................... 9,757 -- -- -- 9,757 -- --
-------- ------ ------ -------- -------- ---- -------
BALANCE, JUNE 30, 1999............. 102,093 18,429 1,843 105,720 (5,421) 6 (49)
Stock issued upon exercise of stock
options and warrants............. 959 223 22 1,651 -- 33 (714)
Purchase of treasury stock......... (1,990) -- -- -- -- 300 (1,990)
Deferred compensation.............. 199 -- -- 199 -- -- --
Net income......................... 4,271 -- -- -- 4,271 -- --
-------- ------ ------ -------- -------- ---- -------
BALANCE, DECEMBER 31, 1999......... $105,532 18,652 $1,865 $107,570 $ (1,150) 339 $(2,753)
======== ====== ====== ======== ======== ==== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 50
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------- -----------------
1997 1998 1999 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 4,420 $ 8,406 $ 9,757 $ 5,068 $ 4,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Acquired in-process research and development........ -- -- 3,500 -- --
Depreciation and amortization....................... 4,322 4,884 6,554 3,046 4,499
Amortization of deferred gain....................... -- (588) (588) (294) (294)
Deferred income taxes............................... (10) 1,004 1,812 (525) (164)
Other............................................... 57 (10) 292 139 210
Change in operating assets and liabilities, net of
effects from purchase of businesses:
Decrease (increase) in accounts receivable.......... 1,421 1,975 (16,365) (4,556) 2,976
Decrease (increase) in inventories.................. (3,403) (8,397) 3,825 698 (3,081)
Decrease (increase) in prepaid expenses and other
assets............................................ 879 (633) (2,238) (1,777) (124)
Increase (decrease) in accounts payable, accrued
expenses and other long-term liabilities.......... 691 5,384 2,739 (4,103) (3,421)
Increase (decrease) in income taxes payable......... 668 1,648 2,090 1,559 586
------- -------- -------- ------- -------
Net cash provided by (used in) operating activities...... 9,045 13,673 11,378 (745) 5,458
------- -------- -------- ------- -------
Cash flows from investing activities:
Payment for purchase of businesses, net of cash
acquired............................................ (162) (249) (43,656) (968) --
Purchase of equipment, inventory and technology rights
from Lucent Technologies............................ -- (4,435) -- -- --
Capital expenditures................................... (2,931) (10,613) (9,104) (5,472) (3,009)
Proceeds from sale of property, plant and equipment.... 16 209 967 967 1,687
Other, net............................................. 81 110 198 (20) (34)
------- -------- -------- ------- -------
Net cash used in investing activities.................... (2,996) (14,978) (51,595) (5,493) (1,356)
------- -------- -------- ------- -------
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....................... 58 6,231 24,191 4,187 --
Debt repayments........................................ (5,719) (13,685) (4,663) (796) (3,158)
Bank debt financing costs.............................. -- -- (438) -- --
Purchase of treasury stock............................. (438) -- (343) (343) (1,990)
Proceeds from the exercise of stock options and
warrants............................................ 305 1,292 2,539 675 827
Amounts paid for withholding taxes on stock option
exercises........................................... (663) (1,512) (5,434) (1,260) (47)
Withholding taxes collected for stock option
exercises........................................... 347 1,502 2,671 769 45
------- -------- -------- ------- -------
Net cash provided by (used in) financing activities...... (6,110) 25,113 18,523 3,232 (4,323)
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash equivalents..... (61) 23,808 (21,694) (3,006) (221)
Cash and cash equivalents at beginning of period......... 661 600 24,408 24,408 2,714
------- -------- -------- ------- -------
Cash and cash equivalents at end of period............... $ 600 $ 24,408 $ 2,714 $21,402 $ 2,493
======= ======== ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 51
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
1. a. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Aeroflex Incorporated and its subsidiaries (the "Company"), all of which are
wholly-owned with the exception of Europtest which is 93.4% owned as of December
31, 1999 (see Note 2). All intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management of the Company make a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities. Among the more
significant estimates included in the financial statements are the estimated
costs to complete contracts in process. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having maturities of three
months or less at the date of acquisition to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories related to long-term contracts are recorded at cost less amounts
expensed under percentage-of-completion accounting.
Financial Instruments
The fair values of all on-balance sheet financial instruments, other than
long-term debt (see Note 7), approximate book values because of the short
maturity of these instruments. Amounts receivable or payable under interest rate
swap agreements are accounted for as adjustments to interest expense.
Revenue and Cost Recognition on Contracts
Revenue is recognized based upon shipments or billings. The Company records
gross profit on its long-term contracts using percentage-of-completion
accounting under which costs are recognized on revenues in the same relation
that total estimated manufacturing costs bear to total contract value. Estimated
costs at completion are based upon engineering and production estimates.
Provisions for estimated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
F-7
<PAGE> 52
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation
computed on a straight-line basis over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the life of the lease or the
estimated life of the asset, whichever is shorter.
Research and Development Costs
All research and development costs are charged to expense as incurred. See Note
2 for a discussion of acquired in-process research and development.
Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization. The
excess of purchase price over the fair value of tangible assets acquired is
being amortized on a straight-line basis over periods ranging from 15 to 40
years except for certain costs allocated to existing technology, assembled
workforce, customer relationships and patents which are amortized over 6 to 15
years, the estimated remaining lives of the intangibles at the time they were
acquired by the Company. The Company periodically evaluates the recoverability
of the carrying value of its intangible assets and the related amortization
periods. The Company assesses the recoverability of unamortized goodwill based
on the undiscounted projected future earnings of the related businesses.
Income Per Share
Beginning with the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." In
accordance with SFAS No. 128, income per common share ("Basic EPS") is computed
by dividing net income by the weighted average common shares outstanding. Income
per common share assuming dilution ("Diluted EPS") is computed by dividing net
income plus a pro forma addback of debenture interest by weighted average common
shares outstanding plus potential dilution from the conversion of debentures and
the exercise of stock options and warrants. Income per share amounts for prior
periods have been restated to conform to the provisions of SFAS No. 128.
Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock options
only if the current market price of the underlying stock exceeds the exercise
price on the date of the grant. Effective July 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation." The Company has elected not
to implement the fair value based accounting method for employee and director
stock options, but instead has elected to disclose the pro forma net income and
pro forma net income per share for employee and director stock option grants
made beginning in fiscal 1996 as if such method had been used to account for
stock-based compensation cost as described in SFAS No. 123.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes," the Company
measures deferred tax assets and liabilities based upon the differences between
the financial accounting and tax bases of assets and liabilities.
F-8
<PAGE> 53
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Reclassifications have been made to the 1997, 1998 and 1999 consolidated
financial statements to conform to the six months ended December 31, 1999
presentation.
Recent Accounting Pronouncements
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires presentation of comprehensive
income and its components in the financial statements. The adoption of this
statement did not have a material effect on our consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board issued 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," 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.
Management believes that the impact of this statement will not have a material
effect on the Company's consolidated financial statements.
b. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The consolidated balance sheet of the Company as of December 31, 1999 and the
related consolidated statements of earnings, stockholders' equity and cash flows
for the six months ended December 31, 1998 and 1999 have been prepared by the
Company and are unaudited. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at December 31, 1999
and for all the aforementioned periods have been made.
The Company's effective income tax rates for the six month periods ended
December 31, 1998 and 1999 are based on management's expectations of the tax
rates for the respective full years.
Results of operations for the six month periods are not necessarily indicative
of results of operations for the corresponding years.
2. ACQUISITION OF BUSINESSES
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.
F-9
<PAGE> 54
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company commissioned an independent asset valuation study of acquired
tangible and identifiable intangible assets to serve as a basis for allocation
of the purchase price. Based on this study, the Company allocated the purchase
price, including acquisition costs of approximately $500,000, as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Net tangible assets......................................... $28,771
Identifiable intangible assets.............................. 6,300
Costs in excess of 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.
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 June 30, 1998 or December 31, 1998 pro forma income in
order to provide comparability to the respective actual results.
<TABLE>
<CAPTION>
PRO FORMA YEARS ENDED
JUNE 30, PRO FORMA SIX MONTHS
---------------------- ENDED DECEMBER 31,
1998 1999 1998
--------- --------- --------------------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales...................................... $155,371 $177,149 $84,127
Net income..................................... 11,267 9,469 5,010
Net income per share
Basic........................................ $ 0.76 $ 0.53 $ 0.29
Diluted...................................... $ 0.69 $ 0.50 $ 0.27
</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. In October 1999, the Company purchased an additional 3.4% of
Europtest's stock for approximately $54,000. 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
F-10
<PAGE> 55
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Lintek
In January 1995, the Company acquired substantially all of the net operating
assets of Lintek, Inc. ("Lintek") for $537,000 plus contingent consideration
based on the next five years' earnings to a maximum of an additional $675,000.
Additional consideration of $63,000, $162,000, $250,000 and $200,000 was earned
as of December 31, 1995, 1996, 1997 and 1998 and paid in February 1996 and 1997,
March 1998 and February 1999, respectively. Such amounts have been treated as
cost in excess of fair value of net assets acquired. Lintek designs, develops
and manufactures radar cross section and antenna pattern measurement systems for
commercial and military applications, as well as surface penetrating radars.
The acquisitions have been accounted for as purchases and, accordingly, the
acquired assets and liabilities assumed have been recorded at their estimated
fair values at the respective dates of acquisition. The operating results of
UTMC, Europtest and Lintek are included in the consolidated statements of
earnings from the respective acquisition dates.
3. ACQUISITION OF ASSETS FROM LUCENT TECHNOLOGIES
Effective July 1, 1997, the Company's subsidiary, MIC Technology ("MIC"),
acquired certain equipment, inventory, licenses for technology and patents of
two of Lucent Technologies' microelectronics components units--multi-chip
modules and film integrated circuits--for $4.4 million in cash. These units
manufacture microelectronic modules and interconnect products. The Company has
also signed a multi-year supply agreement to provide Lucent with film integrated
circuits for use in telecommunications applications. The purchase price has been
allocated to the assets acquired, based on their fair values, and certain
obligations assumed relating to the agreements.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Raw materials........................................... $12,012 $18,441 $20,425
Work-in-process......................................... 12,737 11,148 11,814
Finished goods.......................................... 5,102 3,048 3,479
------- ------- -------
$29,851 $32,637 $35,718
======= ======= =======
</TABLE>
Inventories include contracts-in-process of $13.2 million and $9.6 million at
June 30, 1998 and 1999, respectively, which consist substantially of unbilled
material, labor and overhead costs that are or were expected to be billed during
the succeeding fiscal year.
F-11
<PAGE> 56
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, ESTIMATED
------------------ USEFUL LIFE
1998 1999 IN YEARS
------- ------- -----------
(In thousands)
<S> <C> <C> <C>
Land..................................................... $ 725 $ 4,725
Building and leasehold improvements...................... 17,479 32,353 2 to 40
Machinery, equipment, tools and dies..................... 29,400 37,727 3 to 10
Furniture and fixtures................................... 5,968 7,521 5 to 10
Assets recorded under capital leases..................... 2,334 2,334 5 to 10
------- -------
55,906 84,660
Less accumulated depreciation and amortization........... 28,912 33,858
------- -------
$26,994 $50,802
======= =======
</TABLE>
In July 1998, the Company purchased a previously leased operating facility in
Pearl River, New York for $2.5 million in cash.
Repairs and maintenance expense on property, plant and equipment was $1.1
million, $1.4 million and $2.3 million for the years ended June 30, 1997, 1998
and 1999, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include accrued salaries, wages
and other compensation of $4.3 million and $7.1 million at June 30, 1998 and
1999, respectively.
7. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Revolving credit, term loan and mortgage agreement(a)... $ 4,720 $21,853 $19,211
Building mortgage(b).................................... -- 4,165 4,165
Equipment loans(c)...................................... 5,624 4,877 4,481
Capitalized lease obligations........................... 1,019 124 14
Other................................................... 118 98 89
------- ------- -------
11,481 31,117 27,960
Less current maturities................................. 1,755 6,509 6,456
------- ------- -------
$ 9,726 $24,608 $21,504
======= ======= =======
</TABLE>
F-12
<PAGE> 57
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate long-term debt as of June 30, 1999 matures in each fiscal year as
follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000........................................................ $ 6,509
2001........................................................ 6,422
2002........................................................ 6,455
2003........................................................ 4,695
2004........................................................ 1,044
Thereafter.................................................. 5,992
-------
$31,117
=======
</TABLE>
Interest paid was $2.6 million, $2.1 million and $1.6 million during the years
ended June 30, 1997, 1998 and 1999, respectively.
(a) 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 the Company's 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 December 31, 1999, the outstanding term loan was
$15.0 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 30-day LIBOR
(approximately 6.5% at December 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 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 fair market value of the interest rate swap
agreement was $40,000 as of June 30, 1999 in favor of the Company.
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
December 31, 1999, the Company's available unused line of credit
was $21.0 million after consideration of the letter of credit.
(b) In December 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.
(c) During the year ended June 30, 1998, the Company entered into
equipment loans with two banks totaling $6.2 million. The loans are
repayable monthly through July 2004 and bear interest at a floating
rate 200 basis points above the 30-day LIBOR. The Company believes
F-13
<PAGE> 58
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that the carrying amount of this debt approximates fair value since
the interest rate is variable and the margins are consistent with
those available to the Company under similar terms.
8. SENIOR SUBORDINATED CONVERTIBLE DEBENTURES
During June 1994, the Company completed a sale of $10.0 million principal amount
of 7 1/2% Senior Subordinated Convertible Debentures to non-U.S. persons. The
net proceeds from the offering were used initially to retire certain bank
indebtedness and for general working capital with excess proceeds placed in
temporary short-term bank related investments until ultimately used for the
purchase of MIC in fiscal 1996. The debentures were convertible into the
Company's Common Stock at a price of $5.625 per share. On September 8, 1997, the
Company called for the redemption of all outstanding 7 1/2% Senior Subordinated
Convertible Debentures at 104.5% of the principal amount. All of the principal
amount of the Company's 7 1/2% Senior Subordinated Convertible Debentures was
converted. In connection with the conversions, $599,000 of deferred bond
issuance costs were charged to additional paid-in capital.
9. STOCKHOLDERS' EQUITY
(a) 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 purchase of UTMC.
(b) Stock Options and Warrants
Under the Company's stock option plans, options may be granted to purchase
shares of the Company's Common Stock exercisable at prices equal to the fair
market value on the date of grant. During 1990, the Company's shareholders
approved the Non-Qualified Stock Option Plan (the "NQSOP"). In December 1993,
the Board of Directors adopted the Outside Director Stock Option Plan (the
"Directors' Plan") which provides for options to non-employee directors, which
become exercisable in three installments and expire ten years from the date of
grant. The Directors' Plan, as amended, covers 500,000 shares of the Company's
Common Stock. In November 1994, the shareholders approved the Directors' Plan
and the 1994 Non-Qualified Stock Option Plan (the "1994 Plan"). In November
1996, the shareholders approved the 1996 Stock Option Plan (the "1996 Plan"). In
April 1998, the Board of Directors adopted the 1998 Stock Option Plan (the "1998
Plan"). In January 2000, the shareholders approved the 1999 Stock Option Plan
(the "1999 Plan"). The NQSOP, the 1994 Plan, the 1996 Plan, the 1998 Plan and
the 1999 Plan provide for options which become exercisable in one or more
installments and each covers 1.5 million shares of the Company's Common Stock
except for the 1999 Plan which covers 900,000 shares. Options under the NQSOP
and the 1994 Plan expire five years from the date of grant. Options under the
1996 Plan, the 1998 Plan and the 1999 Plan shall expire not later than ten years
from the date of grant.
The Company has also issued to employees, who are not executive officers,
options to purchase 548,000 shares of Common Stock exercisable between $4.00 and
$13.63 per share. Such grants were not covered by one of the above plans.
F-14
<PAGE> 59
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information with respect to the Company's stock options is as
follows:
<TABLE>
<CAPTION>
WEIGHTED SHARES
AVERAGE UNDER
EXERCISE OUTSTANDING
PRICES OPTIONS
-------- --------------
(In thousands)
<S> <C> <C>
Balance, July 1, 1996....................................... $ 3.38 3,293
Granted..................................................... 4.47 668
Forfeited................................................... 3.17 (71)
Exercised................................................... 2.04 (570)
------
Balance, June 30, 1997...................................... 3.83 3,320
Granted..................................................... 9.94 1,043
Forfeited................................................... 3.65 (35)
Exercised................................................... 3.17 (436)
------
Balance, June 30, 1998...................................... 5.54 3,892
Granted..................................................... 11.82 1,155
Forfeited................................................... 4.50 (3)
Exercised................................................... 3.74 (1,460)
------
Balance, June 30, 1999...................................... $ 8.30 3,584
======
</TABLE>
During fiscal years 1997, 1998 and 1999, payroll tax on stock option exercises
were withheld from employees in shares of the Company's Common Stock amounting
to $316,000, $10,000 and $2.6 million, respectively, as permitted by the option
plan provisions.
Options to purchase 2.2 million, 2.3 million and 1.5 million shares were
exercisable at weighted average exercise prices of $3.61, $3.90 and $5.07 as of
June 30, 1997, 1998 and 1999, respectively.
The options outstanding as of June 30, 1999 are summarized in ranges as follows:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES EXERCISE PRICE OUTSTANDING REMAINING LIFE
--------------- ---------------- -------------- ----------------
(In thousands)
<S> <C> <C> <C>
$ 3.75 - $ 5.38 $ 4.17 1,402 4.5 years
$ 8.19 - $11.63 9.76 1,589 8.6
$13.44 - $17.56 14.15 593 9.2
-----
3,584
=====
</TABLE>
F-15
<PAGE> 60
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVERAGE OPTIONS
EXERCISE PRICES EXERCISE PRICE EXERCISABLE
--------------- ---------------- --------------
(In thousands)
<S> <C> <C>
$ 3.75 - $ 5.38 $ 4.12 1,225
$ 8.19 - $11.63 8.75 259
$13.44 - $17.56 13.99 23
-----
1,507
=====
</TABLE>
As of June 30, 1999, the Company has outstanding warrants to purchase 387,000
shares of its Common Stock exercisable between $6.75 and $7.50 per share through
June 2004. These warrants were issued primarily in connection with the
acquisition of MIC in fiscal 1996.
(c) Accounting for Stock-Based Compensation.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which the Company adopted in fiscal
1997. The Company has chosen not to implement the fair value based accounting
method for employee and director stock options, but has elected to disclose the
pro forma net income and net income per share as if such method had been used to
account for stock-based compensation cost as described in SFAS No. 123.
The per share weighted average fair value of stock options granted during fiscal
1997, 1998 and 1999 was $2.37, $7.39 and $7.50, respectively, on the date of
grant using the Black Scholes option-pricing model with the following weighted
average assumptions: 1997--expected dividend yield of 0%, risk free interest
rate of 6.3%, expected stock volatility of 40%, and an expected option life of
7.4 years; 1998--expected dividend yield of 0%, risk free interest rate of 5.8%,
expected stock volatility of 80%, and an expected option life of 7.4 years;
1999--expected dividend yield of 0%, risk free interest rate of 5.3%, expected
stock volatility of 77%, and an expected option life of 5.1 years. The pro forma
compensation cost before income taxes was $783,000, $2.0 million and $4.8
million for the years ended June 30, 1997, 1998 and 1999, respectively, based on
the aforementioned fair value at the grant date only for options granted after
fiscal year 1995. The Company's net income and net income per share using this
pro forma compensation cost would have been:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net income............ $4,420 $3,919 $8,406 $7,112 $9,757 $6,608
Net income per share
Basic............... $ 0.36 $ 0.31 $ 0.57 $ 0.48 $ 0.55 $ 0.37
Diluted............. 0.34 0.30 0.51 0.44 0.51 0.36
</TABLE>
Since the pro forma compensation cost reflects only options granted after fiscal
year 1995, the full impact of calculating stock-based compensation costs under
SFAS No. 123 is not reflected in the pro forma net income because compensation
cost is recognized over the respective vesting period and compensation cost for
options granted prior to fiscal year 1996 was not reflected.
F-16
<PAGE> 61
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Shareholders' Rights Plan
On August 13, 1998, the Company's Board of Directors approved a Shareholders'
Rights Plan which provides for a dividend distribution of one right for each
share to holders of record of the Company's Common Stock on August 31, 1998 and
the issuance of one right for each share of Common Stock that shall be
subsequently issued. The rights become exercisable only in the event a person or
group ("Acquiring Person") accumulates 15% or more of the Company's Common
Stock, or if an Acquiring Person announces an offer which would result in it
owning 15% or more of the Common Stock. The rights expire on August 31, 2008.
Each right will entitle the holder to buy one-thousandth of a share of Series A
Junior Participating Preferred Stock, as amended, of the Company at a price of
$65. In addition, upon the occurrence of a merger or other business combination,
or the acquisition by an Acquiring Person of 50% or more of the Common Stock,
holders of the rights, other than the Acquiring Person, will be entitled to
purchase either Common Stock of the Company or common stock of the Acquiring
Person at half their respective market values.
The Company will be entitled to redeem the rights for $.01 per right at any time
prior to a person becoming an Acquiring Person.
(e) Net Income Per Share
A reconciliation of the numerators and denominators of the Basic EPS and Diluted
EPS calculations is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------- -----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
COMPUTATION OF ADJUSTED NET INCOME:
Net income for basic earnings per common
share....................................... $ 4,420 $ 8,406 $ 9,757 $ 5,068 $ 4,271
Add: Debenture interest and amortization
expense, net of income taxes................ 504 103 -- -- --
------- ------- ------- ------- -------
Adjusted net income for diluted earnings per
common share................................ $ 4,924 $ 8,509 $ 9,757 $ 5,068 $ 4,271
======= ======= ======= ======= =======
Computation of Adjusted Weighted Average
Shares Outstanding.......................... 12,446 14,802 17,784 17,523 18,528
Add: Shares assumed to be issued upon
conversion of debentures.................... 1,774 392 -- -- --
Add: Effect of dilutive options and warrants
outstanding................................. 400 1,333 1,344 1,228 913
------- ------- ------- ------- -------
Weighted average shares used for computation
of diluted earnings per common share........ 14,620 16,527 19,128 18,751 19,441
======= ======= ======= ======= =======
Net Income Per Common Share:
Basic....................................... $ 0.36 $ 0.57 $ 0.55 $ 0.29 $ 0.23
======= ======= ======= ======= =======
Diluted..................................... $ 0.34 $ 0.51 $ 0.51 $ 0.27 $ 0.22
======= ======= ======= ======= =======
</TABLE>
F-17
<PAGE> 62
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options to purchase 2.2 million shares at exercise prices ranging between $10.38
and $17.56 per share were outstanding as of December 31, 1999 but were not
included in the computation of Diluted EPS because the exercise prices of these
options were greater than the average market price of the common shares.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1997 1998 1999
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Current:
Federal................................................... $1,752 $3,178 $4,465
State and local........................................... 693 568 873
------ ------ ------
2,445 3,746 5,338
------ ------ ------
Deferred:
Federal................................................... 404 932 1,989
State and local........................................... (414) 72 (177)
------ ------ ------
(10) 1,004 1,812
------ ------ ------
$2,435 $4,750 $7,150
====== ====== ======
</TABLE>
The provision for income taxes varies from the amount computed by applying the
U.S. Federal income tax rate to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1997 1998 1999
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Tax at statutory rate....................................... $2,331 $4,505 $5,917
Non-deductible acquired in-process research and development
charge.................................................... -- -- 1,225
State and local income tax.................................. 184 416 452
Research and development credit............................. -- (250) (500)
Other, net.................................................. (80) 79 56
------ ------ ------
$2,435 $4,750 $7,150
====== ====== ======
</TABLE>
F-18
<PAGE> 63
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Accounts receivable......................................... $ 106 $ 160
Inventories................................................. 1,671 5,025
Accrued expenses............................................ 84 106
------- -------
Current assets............................................ 1,861 5,291
------- -------
Other long-term liabilities................................. 781 801
Capital loss carryforwards.................................. 2,493 2,543
Tax loss carryforwards...................................... 238 1,434
Tax credit carryforwards.................................... 3,737 3,864
Less: valuation allowance................................... (3,379) (3,426)
------- -------
Non-current assets........................................ 3,870 5,216
------- -------
Property, plant and equipment............................... (1,848) (3,572)
Intangibles................................................. (3,125) (5,205)
Other....................................................... (53) (21)
------- -------
Long-term liabilities..................................... (5,026) (8,798)
------- -------
Net non-current liabilities............................... (1,156) (3,582)
------- -------
Total.................................................. $ 705 $ 1,709
======= =======
</TABLE>
In accordance with SFAS No. 109, the Company records a valuation allowance
against deferred tax assets if it is more likely than not that some or all of
the deferred tax asset will not be realized.
The Company is undergoing routine audits by various taxing authorities 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.
The Company made income tax payments of $1.5 million, $2.1 million and $3.3
million and received refunds of $1.1 million, $26,000 and $75,000 during the
years ended June 30, 1997, 1998 and 1999, respectively.
A tax benefit of $598,000, $1.6 million and $5.2 million was credited to
additional paid-in capital during the years ended June 30, 1997, 1998 and 1999,
respectively in connection with the exercise of stock options and warrants.
11. EMPLOYMENT CONTRACTS
As of June 30, 1999, the Company has employment agreements with certain of its
officers for periods through June 30, 2004 with annual remuneration ranging from
$180,000 to $350,000, plus cost of living adjustments and, in some cases,
additional compensation based upon earnings of the Company. Future aggregate
minimum payments under these contracts are $1.2 million per year. Certain of the
contracts provide for a three-year consulting period at the expiration of the
employment term at two-thirds of salary. In addition, these officers have the
option to terminate their employment agreements upon change in
F-19
<PAGE> 64
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
control of the Company, as defined, and receive lump sum payments equal to the
salary and bonus, if any, for the remainder of the term.
12. EMPLOYEE BENEFIT PLANS
The Aeroflex Incorporated Employees' 401(k) Plan (the "ARX 401(k)") was
established pursuant to Section 401(k) of the Internal Revenue Code. All
employees of the Company and certain subsidiaries who are not members of a
collective bargaining agreement may participate in the ARX 401(k). Each
participant has the option to contribute a portion of his or her compensation.
For each of the 1997, 1998 and 1999 calendar years, the Board of Directors has
elected to provide an employer contribution, which vests immediately, equal to
30%, 30% and 40%, respectively of employee contributions subject to certain
limitations. The ARX 401(k) expense for the fiscal years ended June 30, 1997,
1998 and 1999 was $263,000, $298,000 and $507,000, respectively.
Employees of MIC, who are excluded from the ARX 401(k), are eligible to
participate in the MIC 401(k) and Profit Sharing Plan (the "MIC Plan"). In
addition to contributing a portion of his or her compensation and receiving an
employer contribution, eligible employees also receive an allocation of a
discretionary share of the MIC profits. The MIC Plan expense was $450,000,
$512,000 and $500,000 for the fiscal years ended June 30, 1997, 1998 and 1999,
respectively.
Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan (the "SERP") which provides retirement, death and disability
benefits to certain of its officers. The SERP expense for the fiscal years ended
June 30, 1997, 1998 and 1999 was $300,000, $324,000 and $384,000, respectively.
The assets of the SERP are held in a Rabbi Trust and amounted to $744,000 and
$1.2 million at June 30, 1998 and 1999, respectively. The accumulated benefit
obligation was $1.7 million and $2.0 million at June 30, 1998 and 1999,
respectively. No participants are currently receiving benefits.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
Several of the Company's operating facilities and certain machinery and
equipment are leased under agreements expiring through 2005. The leases for
machinery and equipment generally contain options to purchase at the then fair
market value of the related leased assets.
Future minimum payments under operating leases as of June 30, 1999 are as
follows for the fiscal years:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000........................................................ $2,191
2001........................................................ 1,990
2002........................................................ 1,677
2003........................................................ 1,598
2004........................................................ 783
Thereafter.................................................. 361
------
$8,600
======
</TABLE>
Rental expense was $1.6 million, $1.9 million and $2.3 million during the fiscal
years 1997, 1998 and 1999, respectively.
F-20
<PAGE> 65
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Legal Matters
A subsidiary of the Company whose operations were discontinued in 1991, is one
of several defendants named in a personal injury action initiated in August
1994, by a group of plaintiffs. The plaintiffs are seeking damages which
cumulatively exceed $500 million. The complaint alleges, among other things,
that the plaintiffs suffered injuries from exposure to substances contained in
products sold by the subsidiary to one of its customers. This action is in the
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.
The Company is involved in various other routine legal matters. Management
believes the outcome of these matters will not have a materially adverse effect
on the Company's consolidated financial statements.
14. BUSINESS SEGMENTS
The Company's business segments and major products included in each segment, are
as follows:
MICROELECTRONICS:
a) Microelectronic Modules
b) Thin Film Interconnects
c) Integrated Circuits
TEST, MEASUREMENT AND OTHER ELECTRONICS:
a) Instrument Products
b) Motion Control Systems
-- Scanning devices
-- Stabilization and tracking devices
-- Magnetic devices
ISOLATOR PRODUCTS:
a) Commercial spring and rubber isolators
b) Industrial spring and rubber isolators
c) Military wire-rope isolators
The Company is a manufacturer of advanced technology systems and components for
commercial industry, government and defense contractors. Approximately 50%, 42%
and 41% of the Company's sales for the fiscal years 1997, 1998 and 1999,
respectively, were to agencies of the United States government or to prime
defense contractors or subcontractors of the United States government. The only
customers which constituted more than 10% of the Company's sales during any year
in the period presented were Lockheed Martin and Hughes which comprised 13.3%
and 11.7% of sales in fiscal year 1997, respectively, Lucent Technologies which
comprised 15.5% of sales in fiscal year 1998 and Lockheed Martin and Lucent
Technologies which comprised 12.2% and 11.4% of sales in fiscal year 1999,
respectively. The Company's customers are located primarily in the United
States, but export sales accounted for 8.8%, 5.5% and 7.7% in fiscal years 1997,
1998 and 1999, respectively.
F-21
<PAGE> 66
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------- -----------------
1997 1998 1999 1998 1999
------- -------- -------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
BUSINESS SEGMENT DATA:
Net sales:
Microelectronics......................... $48,462 $ 74,263 $ 96,846 $42,317 $49,872
Test, Measurement and Other
Electronics........................... 28,144 25,685 41,515 16,827 24,697
Isolator Products........................ 17,693 18,913 18,743 8,682 9,034
------- -------- -------- ------- -------
Net sales............................. $94,299 $118,861 $157,104 $67,826 $83,603
======= ======== ======== ======= =======
Operating income:
Microelectronics......................... $ 6,644 $ 14,147 $ 20,104 $ 7,658 $ 8,368
Test, Measurement and Other
Electronics........................... 2,762 996 3,134 971 682
Isolator Products........................ 2,844 3,063 2,108 1,013 992
General corporate expenses............... (2,514) (3,348) (4,262) (1,801) (1,987)
------- -------- -------- ------- -------
9,736 14,858 21,084 7,841 8,055
Acquired in-process research and
development(1)........................... -- -- (3,500) -- --
Interest expense......................... (2,974) (2,011) (1,454) (567) (1,249)
Other income (expense), net.............. 93 309 777 544 (235)
------- -------- -------- ------- -------
Income before income taxes............... $ 6,855 $ 13,156 $ 16,907 $ 7,818 $ 6,571
======= ======== ======== ======= =======
Total assets:
Microelectronics......................... $37,741 $ 58,053 $104,222
Test, Measurement and Other
Electronics........................... 28,603 27,522 43,958
Isolator Products........................ 9,700 10,163 10,020
Corporate................................ 5,003 28,363 7,016
------- -------- --------
Total assets.......................... $81,047 $124,101 $165,216
======= ======== ========
Capital expenditures:
Microelectronics......................... $ 1,637 $ 8,792 $ 6,955
Test, Measurement and Other
Electronics........................... 996 848 1,559
Isolator Products........................ 293 970 586
Corporate................................ 5 3 4
------- -------- --------
Total capital expenditures............ $ 2,931 $ 10,613 $ 9,104
======= ======== ========
Depreciation and amortization expense:
Microelectronics......................... $ 2,230 $ 2,802 $ 4,112
Test, Measurement and Other
Electronics........................... 1,528 1,553 1,849
Isolator Products........................ 532 500 563
Corporate................................ 32 29 30
------- -------- --------
Total depreciation and amortization
expense............................. $ 4,322 $ 4,884 $ 6,554
======= ======== ========
</TABLE>
- ---------------------------
(1) The special charge for the write-off of in-process research and development
acquired in the purchase of UTMC is allocable fully to the Microelectronics
segment.
F-22
<PAGE> 67
- --------------------------------------------------------------------------------
[AEROFLEX LOGO]
3,250,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
, 2000
CIBC WORLD MARKETS
A.G. EDWARDS & SONS, INC.
WIT SOUNDVIEW
WASSERSTEIN PERELLA SECURITIES, INC.
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 45,940
Nasdaq Filing Fee........................................... 17,500
NASD Filing Fee............................................. 17,902
Blue Sky Fees and Expenses*................................. 5,000
Transfer Agent Fees*........................................ 3,500
Accounting Fees and Expenses................................ 85,000
Legal Fees and Expenses*.................................... 150,000
Printing and Engraving...................................... 85,000
Miscellaneous*.............................................. 15,158
--------
Total............................................. $425,000
========
</TABLE>
- ---------------
* Estimated
The Company will pay all of these expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under provisions of the By-Laws of the Company, each person who is or was a
director or officer of the Company may be indemnified by the Company to the full
extent permitted or authorized by the General Corporation Law of Delaware.
Under such law, to the extent that such person is successful on the merits of
defense of a suit or proceeding brought against him by reason of the fact that
he is a director or officer of the Company, he shall be indemnified against
expenses (including attorneys' fees) reasonably incurred in connection with such
action.
If unsuccessful in defense of a third-party civil suit or if a criminal suit is
settled, such a person may be indemnified under such law against both (1)
expenses (including attorneys' fees) and (2) judgements, fines and amounts paid
in settlement if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Company, and with respect
to any criminal action, had no reasonable cause to believe his conduct was
unlawful.
If unsuccessful in defense of a suit brought by or in the right of the Company,
or if such suit is settled, such a person may be indemnified under such law only
against expenses (including attorneys' fees) incurred in the defense or
settlement of such suit if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the Company except
that if such a person is adjudged to be liable in such suit for negligence or
misconduct in the performance of his duty to the Company, he cannot be made
whole even for expenses unless the court determines that he is fairly and
reasonably entitled to indemnity for such expenses.
The Company and its officers and directors are covered by officers and directors
liability insurance. The policy coverage is $50,000,000, which includes
reimbursement for costs and fees. There is a maximum deductible under the policy
of $250,000 for each claim. The Company has entered into Indemnification
Agreements with certain of its officers and directors. The Agreements provide
for reimbursement for all direct and indirect costs of any type or nature
whatsoever (including attorneys' fees and related disbursements) actually and
reasonably incurred in connection with either the investigation, defense or
appeal of a Proceeding, as defined, including amounts paid in settlement by or
on behalf of an Indemnitee.
II-1
<PAGE> 69
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.*
4.1 Specimen Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-3, File No. 333-46689)
5 Opinion of Blau, Kramer, Wactlar & Lieberman, P.C.
23.1 Consent of KPMG LLP
23.2 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included
in Exhibit 5 hereof)
24 Powers of Attorney (included in the signature pages hereof)
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Act"), each filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part
of the registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE> 70
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Plainview, New York on the 5th day of April, 2000.
Aeroflex Incorporated
By: /s/ HARVEY R. BLAU
------------------------------------
Harvey R. Blau
Chairman of the Board
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below on April 5, 2000 by the following persons in the
capacities indicated. Each person whose signature appears below also constitutes
and appoints Harvey R. Blau and Michael Gorin, and each of them, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ HARVEY R. BLAU Chairman of the Board (Chief Executive
- ----------------------------------------------------- Officer)
Harvey R. Blau
/s/ MICHAEL GORIN President and Director (Chief Financial
- ----------------------------------------------------- Officer and Principal Accounting Officer)
Michael Gorin
/s/ LEONARD BOROW Executive Vice President, Secretary and
- ----------------------------------------------------- Director (Chief Operating Officer)
Leonard Borow
/s/ PAUL ABECASSIS Director
- -----------------------------------------------------
Paul Abecassis
/s/ MILTON BRENNER Director
- -----------------------------------------------------
Milton Brenner
</TABLE>
II-3
<PAGE> 71
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ ERNEST E. COURCHENE, JR. Director
- -----------------------------------------------------
Ernest E. Courchene, Jr.
/s/ DONALD S. JONES Director
- -----------------------------------------------------
Donald S. Jones
/s/ EUGENE NOVIKOFF Director
- -----------------------------------------------------
Eugene Novikoff
/s/ JOHN S. PATTON Director
- -----------------------------------------------------
John S. Patton
</TABLE>
II-4
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<S> <C>
EXHIBITS
---- DESCRIPTION
------------------------------------------------------------
1.1 Form of Underwriting Agreement.*
4.1 Specimen Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-3, File No. 333-46689)
5 Opinion of Blau, Kramer, Wactlar & Lieberman, P.C.
23.1 Consent of KPMG LLP
23.2 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included
in Exhibit 5 hereof)
24 Powers of Attorney (included in the signature pages hereof)
</TABLE>
- ---------------
* To be filed by amendment.
II-5
<PAGE> 1
Exhibit 5
April 5, 2000
Securities and Exchange Commission
450 Fifth Avenue
Washington, D.C. 20549
RE: AEROFLEX INCORPORATED
REGISTRATION STATEMENT ON FORM S-3
Gentlemen:
Reference is made to the filing by Aeroflex Incorporated (the "Company") of a
Registration Statement on Form S-3 (the "Registration Statement") with the
Securities and Exchange Commission pursuant to the provisions of the Securities
Act of 1933, as amended, covering the registration of 3,737,500 shares of Common
Stock of the Company, par value $.10 per share (the "Common Stock").
As counsel for the Company, we have examined its corporate records, including
its Certificate of Incorporation, By-Laws, its corporate minutes, the form of
its Common Stock certificate and such other documents as we have deemed
necessary or relevant under the circumstances.
Based upon our examination, we are of the opinion that:
1. The Company is duly organized and validly existing under the laws of
the State of Delaware.
2. The shares of Common Stock subject to the Registration Statement
have been duly authorized and, when issued will be legally issued,
fully paid and non-assessable.
3. The 1,237,500 previously issued shares of Common Stock covered by
the Registration Statement to be sold by the Selling Stockholders
have been, or upon the exercise of options will be, legally issued,
fully paid and non-assessable.
We hereby consent to be named in the Registration Statement and in the
prospectus which constitutes a part thereof as counsel to the Company, and we
hereby consent to the filing of this opinion as Exhibit 5 to the Registration
Statement.
Very truly yours,
/s/ BLAU, KRAMER, WACTLAR &
LIEBERMAN, P.C.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Aeroflex Incorporated:
We consent to the inclusion in and the incorporation by reference in the
registration statement on Form S-3 of Aeroflex Incorporated and subsidiaries of
our report dated August 10, 1999, relating to the consolidated balance sheets of
Aeroflex Incorporated and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the years in the three-year period ended June 30, 1999, which report
appears in the June 30, 1999, annual report on Form 10-K of Aeroflex
Incorporated and subsidiaries. We consent to the reference to our firm under the
heading "Experts" in the prospectus.
/s/ KPMG LLP
--------------------------------------
KPMG LLP
Melville, New York
April 4, 2000
