0000950117-01-501307.txt : 20011009
0000950117-01-501307.hdr.sgml : 20011009
ACCESSION NUMBER: 0000950117-01-501307
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010928
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AEROFLEX INC
CENTRAL INDEX KEY: 0000002601
STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674]
IRS NUMBER: 111974412
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-08037
FILM NUMBER: 1748005
BUSINESS ADDRESS:
STREET 1: 35 S SERVICE RD
CITY: PLAINVIEW
STATE: NY
ZIP: 11803
BUSINESS PHONE: 5166946700
MAIL ADDRESS:
STREET 1: 35 S SERVICE ROAD
CITY: PLAINVIEW
STATE: NY
ZIP: 11803
FORMER COMPANY:
FORMER CONFORMED NAME: AEROFLEX LABORATORIES INC
DATE OF NAME CHANGE: 19851119
FORMER COMPANY:
FORMER CONFORMED NAME: ARX INC
DATE OF NAME CHANGE: 19920703
10-K
1
a31399.txt
AEROFLEX INCORPORATED 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ______
Commission File No. 000-02324
Aeroflex Incorporated
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-1974412
------------------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 South Service Road, Plainview, New York 11803
------------------------------------------ ----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-6700
----------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Class Which Registered
-------------- ------------------------
None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. (The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing). As of September 18, 2001 - approximately $520,157,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date (applicable only to
corporate registrants). Common Stock, par value $.10 per share; outstanding as
of September 18, 2001 - 59,669,985 (excluding 4,388 shares held in treasury).
Documents incorporated by reference: Part III - Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A of the Securities Act of
1934.
ITEM ONE - BUSINESS
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:
o Microelectronic Solutions
o Test Solutions
o Isolator Products
These segments, their products and the markets they serve are described below.
Microelectronic Solutions
The table below lists some of our products.
Market Substrates Assemblies/Modules Proprietary Modules
and Integrated
Circuits
------------------------------------------------------------------------------------------------------------------
Fiber Optics Laser Diodes Application Specific Clock and Data
(including PIN Pre-Amplifiers Carrier Assemblies Recovery
Cable) Transimpedance APD Receiver Bessel Filters
Amplifiers Sub-Assemblies Modulator Drivers
Pre-Amplifiers Clock Recovery Limiting Amplifiers
Post-Amplifiers Synthesizers Lithium Niobate
Lithium Niobate Laser Diode Assemblies Modulators
Terminations Transmitter Assemblies Optical Switches
Mach-Zender Modulators Modulator Assemblies
Clock Recovery
PIN Receivers
APD Receivers
1 Ghz Pre- and Post-
Amplifiers
Trunk Amplifiers
Line Extenders
Power Doublers
------------------------------------------------------------------------------------------------------------------
Wireless Receivers Memory Modules Application Specific
(including Handset Diplexers Multiplexers Integrated Circuits
Satellite) Handset Triplexers Data Communication Controllers
S, L, Ka, Ku Band Modules Memories
Transmit and Receive Micro Controllers LVDS Interconnects
Modules DC to DC Converters Programmable Logic
Amplifiers Voltage Regulators
Filters IF Switches
------------------------------------------------------------------------------------------------------------------
-2-
Thin Film Circuits and Interconnects
We design, develop, manufacture and market advanced integrated fiber optic and
wireless interconnect products based on thin film manufacturing technology.
Primary product requirements for this advanced technology include the following
attributes:
o miniaturization;
o ease of assembly;
o improved thermal management;
o reduced power consumption; and
o 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:
o fiber optic transmitters, receivers and amplifiers;
o cable trunk amplifiers, line extenders, pre-amplifiers and power
doublers; and
o 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, 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.
Microelectronic Modules
We design, develop and manufacture sub-assemblies and modules for fiber optic
networks. These products primarily support the 10 to 40 Gbit fiber optic
networks. Our manufacturing equipment, methods and processes are designed to
maintain the critical tolerances required for fiber optic components and high
Gigahertz RF and microwave signals. Our manufacturing methods are designed to
use automatic placement equipment and batch processing for maximum cost
efficiency and reliability.
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 that are highly
reliable, small and lightweight; attributes that are significant for space
components.
-3-
As a result of two acquisitions in 2001, we extended our core technologies in
microelectronics. Our acquisitions of TriLink Communications Corp. and
Amplicomm, Inc., and their products, complement our proprietary broadband module
products. TriLink's specialty is the application of Lithium Niobate technology
in broadband modulators and switches, while Amplicomm specializes in broadband
amplifiers optimized for driving modulators.
Silicon Integrated Circuits
We have been a designer and supplier of silicon integrated circuits for more
than 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.
Our subsidiary, UTMC has developed a Content Addressable Memory (CAM) Engine,
the UTCAM-Engine'TM', which is beneficial for network and internet address
processing, image processing, pattern recognition, artificial intelligence
learning systems and database applications. The UTCAM-Engine'TM' is based on
0.35'u'm technology, runs at 100 MHz and delivers association matches in as
little as 70ns when using fast SRAM.
The UTMC Circuit Card Assembly capability consists of full assembly, test and
coat in a high mix/low-to-medium volume operation. UTMC's processes and test
capabilities provide for state-of-the-art manufacturing. UTMC's SpaceCard'TM'
combines best commercial practices of the circuit card assembly with UTMC's
radiation-hardened integrated circuits to provide CCA solutions for the
commercial space industry. UTMC's CCA operation also assembles the UT131
Embedded Controller Card, a UTMC Standard Product Card. The UT131 ECC is ideal
for space applications.
Test Solutions
Instrumentation
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 FS1000/1200 family of synthesizers are microwave
frequency synthesizers that have 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.
-4-
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.
Our acquisitions of Altair Cybernetics Corp. and RDL Inc. extended our
capabilities in Test Solutions. Altair Cybernetics brought the power and
flexibility of a modern software development platform to provide control and
user interface solutions for complex test and control environments. RDL enlarged
and enhanced our product offerings in communication test equipment and allowed
us to extend our comprehensive solutions to high speed testing requirements.
Motion Control Systems
Motion control systems includes three divisions: stabilization and tracking
devices, magnetic motors and scanning devices. We design, develop and produce
stabilization tracking devices and systems. These products play an important
role in high altitude aircraft, as well as in other aircraft, ships and ground
vehicles which require precise, highly stable mounting for cameras, antennae and
lasers. Magnetic motors are utilized in our stabilization and tracking systems
and in other applications where precise movement is required, such as for
positioning antennae, optical systems, mechanical vanes and valves. We make
electro-optical scanning devices that are low cost, lightweight thermal imaging
devices that detect targets based on thermal radiation contrasts with the
background. These sights are intended for use on standard issue United States
Army assault rifles and crew served weapons.
Isolator Products
We design, develop, manufacture and sell shock and vibration isolation systems.
These devices include rubber, spring and steel wire rope shock and 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.
Customers
We have hundreds of customers in the communications, satellite,
aerospace/defense, transportation and construction industries. Except for Agere
(10.8%) in fiscal 2001; Teradyne (10.9%) and Lockheed Martin (10.3%) in fiscal
2000; and Lockheed Martin (12.0%) and Lucent Technologies (11.1%) in fiscal
1999, no one customer accounted for more than 10% of our net sales.
-5-
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:
o developing new products
o improving existing products
o adapting such products to new applications
o developing prototype components to bid on specific programs
Certain product development and similar costs are recoverable under contractual
arrangements and those that are not recoverable are expensed in the year
incurred. The costs of our self-funded research activities were approximately
$18.9 million for fiscal 2001, $11.6 million for fiscal 2000 and $10.1 million
for fiscal 1999. The increases are primarily attributable to the addition of the
expenses of our newly acquired companies and increased costs for the further
development of frequency synthesizers and high speed automatic test systems.
Also, in connection with our acquisitions of RDL, Inc. and TriLink
Communications Corp. in fiscal 2001, we allocated $1.5 million (for RDL) and
$1.0 million (for TriLink) of the purchase prices to incomplete research and
development projects. 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 at the time of the
acquisition, these amounts were charged to expense in the respective years in
addition to the self-funded research and development costs, 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 June 30, 2001, our order backlog was approximately
$105.8 million, approximately 83% of which was scheduled to be delivered on or
before June 30, 2002. Approximately 67% of this backlog represents commercial
contracts and approximately 33% of this backlog represents defense contracts.
Generally, government contracts are cancelable 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 cancelable.
At June 30, 2000, our backlog of orders was approximately $119.3 million.
Approximately 89% of this backlog was scheduled to be delivered before June 30,
2001. Approximately 24% of this backlog represented orders for military or
national defense purposes.
-6-
Competition
In all phases of our operations, we compete in both performance and price. In
the manufacture of microelectronics, we believe our primary competitors are NTK,
Texas Instruments, ILC/Data Devices Corp., Honeywell International and Kyocera
International. In the manufacture of test products, we believe our primary
competitors are Agilent Technologies and Rhode & Schwartz. In the manufacture of
isolators, we believe our primary competitor is Barry Controls, Inc. 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 competitive areas of:
o technology
o performance
o reliability
o quality
o customer service
o price
We believe that to remain competitive in the future, we will need to invest
significant financial resources in research and development.
To the extent that we are engaged in government contracts, our success or
failure, to a large measure, is based upon our ability to compete successfully
for contracts and to complete them at a profit. Government business is
necessarily affected by many factors such as variations in the military
requirements of the government and defense budget allocations.
Government Sales
Approximately 29% of our sales for fiscal 2001, 33% of our sales for fiscal 2000
and 42% of our sales for fiscal 1999 were to agencies of the United States
Government or to prime defense contractors or subcontractors of the United
States Government. Our overall dependence on the military has been declining due
to a focusing of resources towards developing standard products for commercial
markets. Our defense contracts have been awarded either on a bid basis or after
negotiation. The contracts are primarily fixed price contracts, though we also
have or had defense contracts providing for cost plus fixed fee. Our defense
contracts contain customary provisions for termination at the convenience of the
government without cause. In the event of such termination, we are generally
entitled to reimbursement for our costs and to receive a reasonable profit, if
any, on the work done prior to termination.
Manufacturing
We assemble, test, package and ship products at our manufacturing facilities
located in:
o Baldwin Park, California,
o Colorado Springs, Colorado,
o Boca Raton, Florida,
o Bloomingdale, New Jersey,
o Farmingdale, New York,
o Pearl River, New York,
-7-
o Plainview, New York,
o Powell, Ohio,
o Conshohocken, Pennsylvania,
o Richardson, Texas and
o 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,
many of our manufacturing plants are ISO-9001 or 9002 certified, our Plainview
and Farmingdale plants are also certified to the more stringent Boeing D1-9000
standard, and our Colorado Springs plant is also a QML (Qualified Manufacturers
List) supplier at V, Q and T 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. We believe that we
have the manufacturing capacity required to meet the growing demand for our
products.
The principal materials we use to manufacture and assemble our products are:
o ceramic,
o magnetic materials,
o gold,
o steel,
o aluminum,
o rubber,
o iron and
o copper.
Many of the component parts we use in our products are also purchased,
including:
o semiconductors,
o transformers and
o amplifiers.
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.
Patents and Trademarks
We own several patents, patent licenses and trademarks. In order to protect our
intellectual property rights, we rely on a combination of trade secret,
copyright, patent and trademark laws and employee and third-party nondisclosure
agreements. We also limit access to and distribution of our proprietary
information. While we believe that in the aggregate our patents and trademarks
are important to our operations, we do not believe that one or any group of them
is so important that its termination could materially affect us.
-8-
Employees
As of June 30, 2001, we had approximately 1,250 employees, of whom 620 were
employed in a manufacturing capacity, and 630 were employed in engineering,
sales, administrative or clerical positions. Approximately 220 of our employees
are covered by two collective bargaining agreements. We believe that our
employee relations are satisfactory.
Regulation
Our operations are subject to various environmental, health and employee safety
laws. We have spent money and management has spent time complying with
environmental, health and worker safety laws which apply to our operations and
facilities and we expect that we will continue to do so. Our principal products
or services do not require any governmental approval. Compliance with
environmental laws has not historically materially affected our capital
expenditures, earnings or competitive position. We do not expect compliance with
environmental laws to have a material effect on us in the future.
Because we participate in the defense industry, we are subject to audit from
time to time for our compliance with government regulations by various agencies,
including (1) the Defense Contract Audit Agency, (2) the Defense Investigative
Service and (3) the Defense Logistics Agency. These and other governmental
agencies may also, from time to time, conduct inquiries or investigations
regarding a broad range of our activities. Responding to any audits, inquiries
or investigations may involve significant expense and divert management
attention. Also, an adverse finding in any audit, inquiry or investigation could
involve penalties that may have a material adverse effect on our business,
results of operation or financial condition.
We believe that we generally comply with all applicable environmental, health
and worker safety laws and governmental regulations. Nevertheless, we cannot
guarantee that in the future we will not incur additional costs for compliance
or that those costs will not be material.
Financial Information About Industry Segments
The sales and operating profits of each industry segment and the identifiable
assets attributable to each industry segment for each of the three years in the
period ended June 30, 2001 are set forth in Note 14 of Notes to Consolidated
Financial Statements.
ITEM TWO - PROPERTIES
Our executive offices and the manufacturing facilities of Aeroflex Laboratories
Incorporated, one of our subsidiaries, are an aggregate of approximately 69,000
square feet and are located in premises which we own in Plainview, Long Island,
New York.
Aeroflex Laboratories Incorporated also leases manufacturing facilities in
Farmingdale, Long Island, New York of approximately 20,000 square feet and Boca
Raton, Florida of approximately 11,000 square feet. The annual rental of these
properties is approximately $166,000 for Farmingdale and $164,000 for Boca
Raton.
Our subsidiary, Aeroflex MIC Technology Corporation, owns its manufacturing
facility in Pearl River, New York consisting of approximately 66,000 square
feet. MIC leases a manufacturing facility of approximately 29,000 square feet in
Richardson, Texas with an annual rent of approximately $185,000.
-9-
Our subsidiary, Vibration Mountings and Controls, Inc., conducts manufacturing
operations at a plant located in Bloomingdale, New Jersey. The plant, which we
own, is approximately 72,000 square feet.
Our subsidiary, Aeroflex RDL, Inc., conducts manufacturing operations at a plant
located in Conshohocken, Pennsylvania. The plant, which we own, is approximately
50,000 square feet.
Our subsidiary, Aeroflex Lintek Corp., occupies approximately 20,000 square feet
of space in Powell, Ohio, with an annual rental of approximately $209,000.
Our subsidiary, Aeroflex UTMC Microelectronic Systems, Inc., conducts
manufacturing operations at a plant located in Colorado Springs, Colorado. The
plant, which we own, is approximately 102,000 square feet.
We believe that our facilities are adequate for our current and presently
foreseeable needs.
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 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.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-10-
PART II
ITEM FIVE -MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Our common stock trades 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. The prices have been adjusted to
reflect a five-for-four stock split that was paid on July 7, 2000 and a
two-for-one stock split that was paid on November 22, 2000.
Common Stock
-------------------
High Low
---- ---
1999
First Quarter............................... $ 7.35 $ 4.83
Second Quarter.............................. 7.90 5.20
Third Quarter............................... 8.63 4.88
Fourth Quarter.............................. 5.43 2.23
2000
First Quarter............................... 28.00 3.88
Second Quarter.............................. 19.88 10.40
Third Quarter............................... 24.31 12.84
Fourth Quarter.............................. 35.25 20.81
2001
First Quarter............................... 33.00 8.44
Second Quarter.............................. 15.60 7.53
Third Quarter (through September 18, 2001).. 12.09 7.00
(b) As of September 18, 2001, there were approximately 750 record holders
of our common stock.
(c) We have never declared or paid any cash dividends on our common stock.
There have been no stock dividends declared or paid on our common stock during
the past three years except for a five-for-four stock split, which was paid on
July 7, 2000 for record holders as of June 26, 2000 and a two-for-one stock
split, which was paid on November 22, 2000 for record holders as of November 16,
2000. We currently intend to retain any future earnings for use in the operation
and development of our business and for acquisitions and, therefore, do not
intend to declare or pay any cash dividends on our common stock in the
foreseeable future. In addition, our revolving credit, term loan and mortgage
agreement, as amended, prohibits us from paying cash dividends.
-11-
ITEM SIX - SELECTED FINANCIAL DATA (Unaudited)
(In thousands, except percentages, footnotes and per share data)
(Restated, Note 2 to Consolidated Financial Statements)
Years ended June 30,
-------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------------------
Earnings Statement Data
Net Sales...................... $232,808 $188,750 $160,382 $121,959 $ 96,003
Net Income Before Cumulative
Effect of a Change in
Accounting................... 21,222(1) 14,379 9,765(2) 8,430 4,497
Net Income Before Cumulative
Effect of a Change in
Accounting Per Common Share
Basic...................... $0.37(1) $0.30 $0.22(2) $0.22 $0.14
Diluted.................... 0.35(1) 0.28 0.20(2) 0.20 0.13
Weighted Average Number of
Common Shares Outstanding
Basic...................... 58,124 48,189 45,011 37,555 31,664
Diluted.................... 61,041 51,474 48,371 41,867 37,100
June 30,
-------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------------------
Balance Sheet Data
Working Capital................ $152,374 $133,586 $ 50,060 $ 53,660 $ 25,568
Total Assets................... 310,252 249,495 165,672 124,762 81,298
Long-term Debt
(including current portion).. 13,333 15,085 31,371 11,481 28,938
Stockholders' Equity........... 255,121 201,644 101,826 86,761 34,740
Other Statistics
After Tax Profit Margin......... 9.1%(1) 7.6% 6.1%(2) 6.9% 4.7%
Return on Average Stockholders'
Equity....................... 9.3%(1) 9.5% 10.4%(2) 13.9% 13.9%
Stockholders' Equity
Per Share (3) $ 4.28 $ 3.59 $ 2.18 $ 1.97 $ 1.09
(1) Includes $1.5 million, or $990,000, net of tax, for the write-off of
in-process research and development acquired in connection with the
purchase of RDL, Inc. in October 2000 and $1.0 million for the write-off of
in-process research and development acquired in connection with the
purchase of TriLink Communications, Corp. in March 2001 (combined $.03 per
basic and diluted share).
(2) Includes $3.5 million ($.07 per diluted share and $.08 basic) for the
write-off of in-process research and development acquired in connection
with the purchase of UTMC Microelectronic Systems, Inc. in February 1999.
(3) Calculated by dividing stockholders' equity, at the end of the year, by the
number of shares outstanding at the end of the year.
Note: All share and per share amounts have been restated to reflect a
five-for-four stock split paid on July 7, 2000 and a two-for-one stock
split paid on November 22, 2000.
-12-
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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:
o microelectronic solutions
o test solutions
o isolator products
Our consolidated financial statements include the accounts of Aeroflex
Incorporated and all of our subsidiaries. In October 2000, we merged with Altair
Aerospace Corporation. This transaction was accounted for as a
pooling-of-interests and, accordingly, for all periods prior to the business
combination, our historical consolidated financial statements have been restated
to include the accounts and results of operations of Altair. All of our
subsidiaries are wholly-owned except for Europtest, S.A., of which we own 96.8%,
and Aeroflex Amplicomm, Inc., of which we own 75%.
Our microelectronic solutions segment has been designing, manufacturing and
selling state-of-the-art 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. In September 2000, we acquired all of the operating assets of
AmpliComm, Inc., which designs and develops fiber optic amplifiers and modulator
drivers used by manufacturers of advanced fiber optic systems. In March 2001, we
acquired TriLink Communications Corp. which designs, develops, manufactures and
markets fiber optic components for the communications industry, including
Lithium Niobate modulators and optical switches.
Our test solutions segment consists of two divisions: (1) instruments and
(2) motion control products, including the following product lines:
o 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.
o Lintek, a leader in high speed instrumentation antenna measurement
systems, radar systems and satellite test systems, which we acquired
in January 1995.
-13-
o 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 each of
March 2001 and 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.
o Altair, which we merged with in October 2000 in a pooling-of-interests
business combination. Altair designs and develops advanced
object-oriented control systems software based upon a proprietary
software engine.
o RDL, which we acquired in October 2000. RDL designs, develops and
manufactures advanced commercial communications test and measurement
products and defense subsystems.
o 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. Additionally, it is
engaged in the design, development and production of stabilization
tracking devices and systems and magnetic motors used in satellites
and other high reliability applications.
Our isolator products segment has been designing, developing, manufacturing
and selling severe service shock and vibration isolation systems since 1961.
These devices are primarily used in defense applications. 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 and industrial 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 generally recognized based upon shipments. Revenues
associated with certain long term contracts are recognized under the
units-of-delivery method which includes shipments and progress billings, in
accordance with Statement of Position 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." 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 29% of our sales for fiscal 2001, 33% of our sales for fiscal
2000 and 42% of our sales for fiscal 1999 were to agencies of the United States
government or to prime defense contractors or subcontractors of the United
States government. Our overall dependence on the military has been declining due
to a focusing of resources towards developing standard products for the
commercial markets. Our government contracts have been awarded either on a bid
basis or after negotiation. Our government contracts are primarily fixed price
contracts, although we also have or had government 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, if any, on the work done prior to termination.
-14-
Our product development efforts primarily involve engineering and design
relating to:
o developing new products
o improving existing products
o adapting existing products to new applications
o 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.
-15-
Statement of Operations
The following table sets forth our net sales and operating income by
business segment for the periods indicated. The special charges represent the
write-offs of in-process research and development acquired in connection with
the purchases of businesses.
Years Ended June 30,
---------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Net Sales:
Microelectronic Solutions $144,901 $110,253 $ 96,846
Test Solutions 68,394 58,744 44,793
Isolator Products 19,513 19,753 18,743
--------- --------- ---------
Net Sales $232,808 $188,750 $160,382
========= ========= =========
Operating Income:
Microelectronic Solutions $ 35,959 $ 22,734 $ 20,104
Test Solutions 1,971 2,438 3,181
Isolator Products 2,326 2,692 2,108
General Corporate
Expenses (7,293) (5,397) (4,262)
--------- --------- ---------
32,963 22,467 21,131
Special Charges (2,500) - (3,500)
--------- --------- ---------
Operating Income $ 30,463 $ 22,467 $ 17,631
========= ========= =========
The following table sets forth certain items from our statement of earnings
as a percentage of net sales for the periods indicated. The special charges
represent the write-offs of in-process research and development acquired in
connection with the purchases of businesses.
Years Ended June 30,
-------------------------------
2001 2000 1999
------ ------ ------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 58.7 63.7 62.9
------- ------- -------
Gross Profit 41.3 36.3 37.1
------- ------- -------
Operating Expenses:
Selling, General and
Administrative Costs 19.0 18.3 17.6
Research and Development Costs 8.1 6.1 6.3
Special Charges 1.1 - 2.2
------- ------- -------
Total Operating Expenses 28.2 24.4 26.1
------- ------- -------
Operating Income 13.1 11.9 11.0
Other Expense (Income), Net (0.9) 1.0 0.5
------- ------- -------
Income Before Income Taxes 14.0 10.9 10.5
Provision For Income Taxes 4.9 3.3 4.4
------- ------- -------
Income Before Cumulative
Effect of a Change in
Accounting 9.1 7.6 6.1
Cumulative Effect of a Change
in Accounting 0.1 - -
------- ------- -------
Net Income 9.2% 7.6% 6.1%
======= ======= =======
-16-
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
Net Sales. Net sales increased 23.3% to $232.8 million in fiscal 2001
from $188.8 million in fiscal 2000. Net sales in the microelectronic solutions
segment increased 31.4% to $144.9 million in fiscal 2001 from $110.3 million in
fiscal 2000 due primarily to increased sales volume in microelectronic modules
and thin film interconnects. Net sales in the test solutions segment increased
16.4% to $68.4 million in fiscal 2001 from $58.7 million in fiscal 2000
primarily due to the acquisition of RDL, Inc. in October 2000. Net sales in the
isolator products segment were $19.5 million in fiscal 2001 and $19.8 million in
fiscal 2000.
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
40.3% to $96.1 million in fiscal 2001 from $68.6 million in fiscal 2000. Gross
margin increased to 41.3% in fiscal 2001 from 36.3% in fiscal 2000. The
increases were primarily a result of the increased sales volume and improvements
in gross margins due to a favorable change in the product mix in both the
microelectronic solutions and test solutions segments.
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 28.4% to $44.3
million (19.0% of net sales) in fiscal 2001 from $34.5 million (18.3% of net
sales) in fiscal 2000. The increase was primarily due to higher corporate
expenses, increased expenses in the microelectronic solutions segment as a
result of this segment's increased growth, and the addition of the expenses of
RDL.
Research and Development Costs. Research and development costs include
material, engineering labor and allocated overhead. Our self-funded research and
development costs increased 63.1% to $18.9 million (8.1% of net sales) in fiscal
2001 from $11.6 million (6.1% of net sales) in fiscal 2000. The increase was
primarily due to the addition of the expenses of RDL and increased development
efforts in frequency synthesizers and high speed automatic test systems.
Acquired In-Process Research and Development. In connection with the
acquisition of RDL, Inc., we allocated $1.5 million of the purchase price to
incomplete research and development projects. In connection with the acquisition
of TriLink Communications Corp., we allocated $1.0 million of the purchase price
to incomplete research and development projects. These allocations represent the
estimated fair value based on future cash flows that have been adjusted by the
respective project's completion percentage. At the respective acquisition dates,
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 respective acquisition dates.
The values assigned to these assets were determined by identifying
significant research projects for which technological feasibility had not been
established. At the acquisition date, RDL was conducting design, development,
engineering and testing activities associated with the completion of its defense
and commercial product lines. The projects under development at the valuation
date represent next-generation technologies which are expected to address
emerging market demands in the equipment testing and measuring industry. At the
acquisition date, TriLink was conducting design, development, engineering and
testing activities associated with its completion of its 10 GB modulator for
fiber optic systems. We intend to continue with these development efforts and,
once complete, release the products to market.
At its acquisition date, RDL expected to spend approximately $1.3
million to complete all phases of the research and development, with anticipated
completion dates ranging from 13 to 17 months from that date. At its acquisition
date, TriLink expected to spend approximately $200,000 to complete the research
and development, with an anticipated completion date between 6 and 9 months from
that date.
-17-
We determined the value assigned to purchased in-process technology by
estimating the contribution of the purchased in-process technology in developing
a commercially viable product, estimating the resulting net cash flows from the
expected sales of such a product, and discounting the net cash flows to their
present value using an appropriate discount rate.
Revenue growth rates for the acquired companies were estimated based on
a detailed forecast, as well as discussions with the finance, marketing and
engineering personnel of the acquired companies. Allocation of total projected
revenues to in-process research and development was based on discussions with
the acquired companies' management. Selling, general and administrative expenses
and profitability estimates were determined based on 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 the acquired companies 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 25% for
RDL and 45% for TriLink was used to discount cash flows from the in-process
technology. Each discount rate was commensurate with the acquired company's
market position, the uncertainties in the economic estimates described above,
the inherent uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, and the uncertainty related to technological advances
that could render 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 the acquired companies' research and
development included 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 the
acquired companies' 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 research and development projects, and there is no assurance that
technological or commercial success will be achieved.
If the development of these in-process research and development
projects 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 $1.4 million in
fiscal 2001 from $2.4 million in fiscal 2000, primarily due to reduced levels of
borrowings. Other income of $3.6 million in fiscal 2001 consists primarily of
$3.9 million of interest income offset by a $229,000 decrease in the fair value
of our interest rate swap agreements. Other income of $554,000 in fiscal 2000
consisted primarily of $650,000 of interest income and a $193,000 gain on the
sale of securities offset, in part, by a $300,000 expense for the settlement of
a lawsuit. Interest income increased due to increased levels of cash equivalents
and marketable securities. The decreased levels of borrowings and the increased
levels of cash equivalents and marketable securities resulted from the net
proceeds of $68.5 million from stock issued in a public offering completed in
May 2000, as well as cash generated from operations during fiscal 2001.
-18-
Provision for Income Taxes. Income taxes increased 84.7% to $11.5
million (an effective income tax rate of 34.0%, exclusive of the non-deductible
$1.0 million charge for the acquired in-process R&D for TriLink) in fiscal 2001
from $7.2 million (an effective income tax rate of 35.0%), excluding a $1.0
million benefit from the utilization of a capital loss carryforward, in fiscal
2000. 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.
Cumulative Effect of a Change in Accounting. Effective July 1, 2000,
the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. 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. The impact of this statement did not
have a material effect on our consolidated financial statements. The cumulative
effect of the adoption of this accounting policy was a $132,000, net of tax,
credit in the quarter ended September 30, 2000 which represented the net of tax
fair value of certain interest rate swap agreements at July 1, 2000.
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Net Sales. Net sales increased 17.7% to $188.8 million in fiscal 2000
from $160.4 million in fiscal 1999. Net sales in our microelectronic solutions
segment increased 13.8% to $110.3 million in fiscal 2000 from $96.8 million in
fiscal 1999 due to the acquisition of UTMC Microelectronic Systems in 1999
partially offset by reductions in sales in microelectronic modules due to
temporary slowdowns in the satellite market. Net sales in our test solutions
segment increased 31.1% to $58.7 million in fiscal 2000 from $44.8 million in
fiscal 1999 primarily due to increased sales volume in frequency synthesizers
(primarily shipments of the FS-1000 for use in commercial communications test
systems). Net sales in our isolator products segment increased 5.4% to $19.8
million in fiscal 2000 from $18.7 million in fiscal 1999.
Gross Profit. Gross profit increased 15.2% to $68.6 million in fiscal
2000 from $59.5 million in fiscal 1999. Gross margin decreased to 36.3% in
fiscal 2000 from 37.1% in fiscal 1999. This increase in gross profit was
primarily a result of increased sales. The decrease in gross margin was due
primarily to low margins in both the satellite test system development program
and the start up of the FS-1000, a low-cost, high speed, high performance
frequency synthesizer.
Selling, General and Administrative Costs. Selling, general and
administrative costs increased 21.9% to $34.5 million (18.3% of net sales) in
fiscal 2000 from $28.3 million (17.6% of net sales) in fiscal 1999. 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 15.3% to $11.6 million (6.1% of net sales) in fiscal
2000 from $10.1 million (6.3% of net sales) in fiscal 1999. This increase was
primarily attributable to the additional costs of UTMC Microelectronic Systems,
partially offset by reduced costs, relative to the prior year, related to the
development of the FS-1000, a low-cost, high speed, high performance frequency
synthesizer intended for commercial communication test systems, which was
completed in early fiscal 2000.
Acquired In-Process Research and Development. In connection with the
acquisition of UTMC, we allocated $3.5 million of the purchase price to
incomplete research and development projects and expensed these costs in fiscal
1999.
-19-
Other Expense (Income). Interest expense increased to $2.4 million in
fiscal 2000 from $1.5 million in fiscal 1999, primarily due to higher average
levels of borrowings throughout most of fiscal 2000. Other income of $554,000
for the year ended June 30, 2000 consists primarily of $650,000 of interest
income, $193,000 gain on the sale of securities and a $300,000 expense for the
settlement of a lawsuit. Other income of $777,000 for the year ended June 30,
1999 consists primarily of interest income. Interest income decreased due to
lower average levels of cash and cash equivalents throughout most of fiscal
2000. The increased average levels of borrowings and the decreased average
levels of cash and cash equivalents resulted from the acquisition of UTMC
Microelectronic Systems in February 1999. In connection with this acquisition,
we used most of our cash and cash equivalents and increased our borrowings by
$20.0 million.
Provision for Income Taxes. Income taxes were $7.2 million (an
effective income tax rate of 35.0%), excluding a $1.0 million benefit from the
utilization of a capital loss carryforward, in fiscal 2000, and $7.2 million (an
effective income tax rate of 35.0%, exclusive of the non-deductible $3.5 million
charge for the acquired in-process R&D for UTMC) in fiscal 1999. The income tax
provisions in fiscal 2000 and 1999 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.
Liquidity and Capital Resources
As of June 30, 2001, we had $152.4 million in working capital. Our
current ratio was 5.1 to 1 at June 30, 2001. 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 provided 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 loan facility expires
in December 2002. The term loan was fully paid in May 2000 with the proceeds
from the sale of our common stock, described below. The interest rate on
borrowings under this agreement is at various rates depending upon certain
financial ratios, with the current rate substantially equivalent to prime
(approximately 6.75% at June 30, 2001) on the revolving credit borrowings. The
mortgage is payable in monthly installments of approximately $26,000 through
March 2008 and a balloon payment of $1.6 million in April 2008. We have entered
into an interest rate swap agreement for the outstanding amount under the
mortgage agreement at approximately 7.6% in order to reduce the interest rate
risk associated with these borrowings.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. In connection
with the purchase of certain materials for use in manufacturing, we have a
letter of credit of $2.0 million.
In December 1998, we financed the acquisition and renovation of the
land and building of our Pearl River, NY facility and received proceeds
amounting to $4.2 million. The debt requires a balloon payment of $3.8 million
in 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
-20-
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 May 2000, we sold 6.3 million shares (adjusted for a five-for-four
stock split and a two-for-one stock split) of our common stock in a public
offering for $68.5 million, net of an underwriting discount of $3.5 million and
issuance costs of $500,000. Of these net proceeds, $13.0 million was used to
repay the term loan. The balance of the net proceeds is invested in short-term
marketable securities and is intended to be used ultimately for additional
working capital, including research and development, for expansion of our
facilities, and for general corporate purposes, including possible acquisitions
of technologies, product lines or businesses.
In fiscal 2001, our operations provided cash of $47.2 million primarily
from our continued profitability and the tax benefit of stock option exercises.
In fiscal 2001, our investing activities used cash of $28.4 million including
$14.6 million for purchases of businesses (primarily $14.0 million for RDL),
$30.8 million for the purchase of available-for-sale securities and $13.3
million for capital expenditures offset, in part, by $30.1 million of proceeds
from the sale of available-for-sale marketable securities. In fiscal 2001, our
financing activities used cash of $3.7 million including $22.2 million for
amounts paid for withholding taxes on stock option exercises and $3.9 million
for debt payments partially offset by $18.0 million of withholding taxes
collected for stock option exercises and $3.8 million of proceeds from the
exercise of stock options and warrants.
We believe that existing cash, cash equivalents and marketable
securities coupled 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 the foreseeable future. Our cash, cash
equivalents and marketable securities are available to fund acquisitions and
other potential large cash needs that may arise. At June 30, 2001, our available
unused line of credit was $21.0 million after consideration of the letter of
credit.
Legal Proceedings
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.
We are undergoing routine audits by various taxing authorities of our
state and local income tax returns covering periods from 1997 to 1999. We
believe that the probable outcome of these various audits should not materially
affect our consolidated financial statements.
-21-
Backlog
Our backlog of orders was $105.8 million at June 30, 2001 and $120.0
million at June 30, 2000.
Market Risk
We are exposed to market risk related to changes in interest rates and,
to an immaterial extent, to foreign currency exchange rates. Most 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. Therefore, if market interest rates increase by 10 percent from levels at
June 30, 2001, the effect on our net income would not be material. Most of our
invested cash and marketable securities are at variable rates of interest. If
market interest rates decrease by 10 percent from levels at June 30, 2001, the
effect on our net income would be approximately $205,000.
Seasonality
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 is less than the previous year's fourth
quarter.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that the purchase method of accounting be used for all future business
combinations and specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
Amortization expense related to goodwill was $1.2 million, $640,000 and $437,000
for the years ended June 30, 2001, 2000 and 1999, respectively. SFAS No. 142
will also require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long- Lived Assets and for Long-Lived Assets to be Disposed Of." We will adopt
the provisions of SFAS 141 and SFAS 142 as of July 1, 2001.
We will evaluate our existing intangible assets and goodwill that were
acquired in prior purchase business combinations, and make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141 for
recognition apart from goodwill. We will be required to reassess the useful
lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by September 30, 2001. In addition, we
will be required to test goodwill and, to the extent an intangible asset is
identified as having an indefinite useful life, the intangible asset, for
impairment in accordance with the provisions of SFAS No. 142 by June 30, 2002
and September 30, 2001, respectively. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle as of July 1, 2001.
Because of the extensive effort needed to comply with adopting SFAS 141
and SFAS 142, it is not practicable to reasonably estimate the impact of
adopting these statements on our consolidated financial statements at the date
of this report, including whether we will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
-22-
Forward-Looking Statements
All statements other than statements of historical fact included in
this Annual Report, including without limitation statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding our financial position, business strategy and plans and objectives of
our management for future operations, are forward-looking statements. When used
in this Annual Report, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to us or our
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of our management, as well as assumptions made by and
information currently available to our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors, including but not limited to, competitive factors and
pricing pressures, changes in legal and regulatory requirements, technological
change or difficulties, product development risks, commercialization
difficulties and general economic conditions. Such statements reflect our
current views with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in the accompanying Index
to Financial Statements and Schedules are attached as part of this report.
ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III is incorporated by reference to our
definitive proxy statement in connection with our Annual Meeting of Stockholders
scheduled to be held in November 2001. The proxy statement is to be filed with
the Securities and Exchange Commission within 120 days following the end of our
fiscal year ended June 30, 2001.
-23-
PART IV
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements at beginning of attached
financial statements.
(b) Reports on Form 8-K:
None
(c) Exhibits
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1 to Form
10-Q for the quarter ended September 30, 2000).
3.2 By-Laws, as amended (Exhibit 3 to Form 10-Q for the quarter
ended March 31, 1998).
4.1 Fourth Amended and Restated Loan and Security Agreement dated
as of February 25, 1999 among the Registrant, certain of its
subsidiaries, The Chase Manhattan Bank (as successor to
Chemical Bank) and Fleet Bank, N.A. (as successor to NatWest
Bank, N.A.) (Exhibit 10.5 to Form 8-K dated February 25,
1999).
10.1 1989 Non-Qualified Stock Option Plan, as amended (Exhibit 10.8
to Form 10-K for the year ended June 30, 1990).
10.2 1994 Non-Qualified Stock Option Plan. (Exhibit 10.2 to Form
10-K for the year ended June 30, 1994).
10.3 1994 Outside Directors Stock Option Plan. (Exhibit 10.3 to
Form 10-K for the year ended June 30, 1994).
10.4 Employment Agreement between Aeroflex Incorporated and Harvey
R. Blau (Exhibit 10.1 to Form 10-Q for the quarter ended March
31, 1999).
10.5 Employment Agreement between Aeroflex Incorporated and Michael
Gorin (Exhibit 10.2 to Form 10-Q for the quarter ended March
31, 1999).
10.6 Employment Agreement between Aeroflex Incorporated and Leonard
Borow (Exhibit 10.3 to Form 10-Q for the quarter ended March
31, 1999).
10.7 Deferred Compensation Agreement between Aeroflex Incorporated
and Harvey R. Blau (Exhibit 10.4 to Form 8-K dated May 17,
1997).
10.8 Employment Agreement between Aeroflex Incorporated and Carl
Caruso (Exhibit 10.5 to Form 8-K dated May 17, 1997).
10.9 1996 Stock Option Plan (Exhibit A to Definitive Schedule 14A
filed September 30, 1996).
10.10 1998 Stock Option Plan (Exhibit 10 to Form 10-Q for the
quarter ended March 31, 1998).
-24-
10.11 1999 Stock Option Plan (Exhibit A to Definitive Schedule 14A
filed December 3, 1999).
10.12 2000 Stock Option Plan, as amended.
10.13 Amendment No. 1 to Employment Agreement between Aeroflex
Incorporated and Harvey R. Blau, effective September 1, 1999
(Exhibit 10.17 to Form 10-K for the year ended June 30, 2000).
10.14 Amendment No. 1 to Employment Agreement between Aeroflex
Incorporated and Michael Gorin, effective September 1, 1999
(Exhibit 10.18 to Form 10-K for the year ended June 30, 2000).
10.15 Amendment No. 1 to Employment Agreement between Aeroflex
Incorporated and Leonard Borow, effective September 1, 1999
(Exhibit 10.19 to Form 10-K for the year ended June 30, 2000).
10.16 Amendment No. 2 to Employment Agreement between Aeroflex
Incorporated and Harvey R. Blau, effective August 13, 2001.
10.17 Amendment No. 2 to Employment Agreement between Aeroflex
Incorporated and Michael Gorin, effective August 13, 2001.
10.18 Amendment No. 2 to Employment Agreement between Aeroflex
Incorporated and Leonard Borow, effective August 13, 2001.
10.19 Aeroflex Incorporated Key Employee Deferred Compensation Plan.
10.20 Trust Under Deferred Compensation Plan, dated August 22, 2001.
10.21 Key Employee Stock Option Plan (Exhibit A to Definitive
Schedule 14A filed October 2, 2000).
22 The following is a list of the Company's subsidiaries:
Jurisdiction of
Name Incorporation
------------ -------------
Aeroflex Altair Cybernetics Corp. Maryland
Aeroflex Amplicomm, Inc. Delaware
Aeroflex Laboratories Incorporated Delaware
Aeroflex Lintek Corp. Ohio
Aeroflex MIC Technology Corporation Texas
Aeroflex RDL, Inc. Delaware
Aeroflex Systems Corp. Delaware
Aeroflex TriLink Communications Corp. California
Aeroflex UTMC Microelectronic Systems, Inc. Delaware
Europtest, S.A. France
Vibration Mountings and Controls, Inc. New York
23 Consent of Independent Auditors
-25-
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
September 2001.
Aeroflex Incorporated
By: /s/ Harvey R. Blau
------------------------------
Harvey R. Blau, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on September 28th, 2001 by the following
persons in the capacities indicated:
/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
/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
-26-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
------------------
FINANCIAL STATEMENTS AND SCHEDULES
COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K
TO SECURITIES AND EXCHANGE COMMISSION
AS OF JUNE 30, 2001 AND 2000
AND FOR THE YEARS
ENDED JUNE 30, 2001, 2000 AND 1999
FINANCIAL STATEMENTS AND SCHEDULES
I N D E X PAGE
------------- ----
ITEM FOURTEEN (a)
1. FINANCIAL STATEMENTS:
Independent auditors' report S-1
Consolidated financial statements:
Balance sheets - June 30, 2001 and 2000 S-2-3
Statements of earnings - each of the three years
in the period ended June 30, 2001 S-4
Statements of stockholders' equity and comprehensive income -
each of the three years in the period ended June 30, 2001 S-5
Statements of cash flows - each of the three years
in the period ended June 30, 2001 S-6
Notes (1-14) S-7-25
Quarterly financial data (unaudited) S-26
2. FINANCIAL STATEMENT SCHEDULES:
II - Valuation and qualifying accounts S-27
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
Independent Auditors' Report
The Board of Directors and Stockholders of Aeroflex Incorporated
We have audited the accompanying consolidated balance sheets of Aeroflex
Incorporated and subsidiaries as of June 30, 2001 and 2000 and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended June
30, 2001. Our audits also included the financial statement schedule listed in
the Index at item 14(a)2. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001 and 2000 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Melville, New York
August 10, 2001
S-1
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
------------------------
ASSETS 2001 2000
---------- --------
(Restated, Note 2)
Current assets:
Cash and cash equivalents................... $ 69,896 $ 54,732
Marketable securities....................... 12,012 11,512
Accounts receivable, less allowance for
doubtful accounts of $459 and $509
at June 30, 2001 and 2000, respectively... 49,409 51,777
Inventories, net............................ 48,423 37,367
Deferred income taxes....................... 7,148 5,317
Prepaid expenses and other current assets... 2,583 2,859
-------- --------
Total current assets................... 189,471 163,564
Property, plant and equipment, net............ 62,137 52,251
Intangible assets acquired in connection with
the purchase of businesses, net of
accumulated amortization of $6,917 and $4,689
at June 30, 2001 and 2000, respectively..... 20,286 12,839
Cost in excess of fair value of net assets of
businesses acquired, net of accumulated
amortization of $4,957 and $3,800 at June 30,
2001 and 2000, respectively................. 21,006 13,380
Deferred income taxes......................... 8,538 3,093
Other assets.................................. 8,814 4,368
-------- --------
Total assets........................... $310,252 $249,495
======== ========
See notes to consolidated financial statements.
S-2
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(In thousands, except per share amounts)
June 30,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
--------- ---------
(Restated, Note 2)
Current liabilities:
Current portion of long-term debt.............. $ 1,905 $ 2,102
Accounts payable............................... 16,794 12,629
Accrued expenses and other current
liabilities.................................. 18,398 15,247
--------- ---------
Total current liabilities................. 37,097 29,978
Long-term debt................................... 11,428 12,983
Other long-term liabilities...................... 6,606 4,890
--------- ---------
Total liabilities......................... 55,131 47,851
--------- ---------
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
80 shares; none issued....................... - -
Common Stock, par value $.10 per share;
authorized 80,000 shares; issued 59,674 and
28,110 at June 30, 2001 and 2000,
respectively................................. 5,967 2,811
Additional paid-in capital..................... 219,278 190,141
Accumulated other comprehensive income (loss).. (154) 82
Retained earnings.............................. 30,044 8,690
--------- ---------
255,135 201,724
Less: Treasury stock, at cost (4 and 13
shares at June 30, 2001 and 2000,
respectively)................................. 14 80
--------- ---------
Total stockholders' equity................ 255,121 201,644
--------- ---------
Total liabilities and stockholders'
equity.................................. $310,252 $249,495
========= =========
See notes to consolidated financial statements.
S-3
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Years Ended June 30,
---------------------------------
2001 2000 1999
---- ---- ----
(Restated, Note 2)
Net sales............................. $232,808 $188,750 $160,382
Cost of sales......................... 136,659 120,200 100,892
--------- --------- ---------
Gross profit........................ 96,149 68,550 59,490
--------- --------- ---------
Operating costs:
Selling, general and
administrative costs.............. 44,277 34,491 28,306
Research and development
costs............................. 18,909 11,592 10,053
Acquired in-process research
and development costs (note 2).... 2,500 - 3,500
--------- --------- ---------
Total operating costs........... 65,686 46,083 41,859
--------- --------- ---------
Operating income ..................... 30,463 22,467 17,631
--------- --------- ---------
Other expense (income):
Interest expense.................... 1,397 2,442 1,493
Other income, net
(including interest income
and dividends of $3,854,
$650 and $781).................... (3,606) (554) (777)
--------- --------- ---------
Total other expense
(income)...................... (2,209) 1,888 716
--------- --------- ---------
Income before income taxes............ 32,672 20,579 16,915
Provision for income taxes............ 11,450 6,200 7,150
--------- --------- ---------
Income before cumulative effect
of a change in accounting............ 21,222 14,379 9,765
Cumulative effect of a change in
accounting, net of tax (Note 1)...... 132 - -
--------- --------- ---------
Net income ........................... $ 21,354 $ 14,379 $ 9,765
========= ========= =========
Net income per common share:
Basic
Income before cumulative effect.. $0.37 $0.30 $0.22
Cumulative effect of a change
in accounting.................. - - -
------ ------ ------
Net income....................... $0.37 $0.30 $0.22
====== ====== ======
Diluted
Income before cumulative effect.. $0.35 $0.28 $0.20
Cumulative effect of a change
in accounting.................. - - -
------ ------ ------
Net income....................... $0.35 $0.28 $0.20
====== ====== ======
Weighted average number of common
shares outstanding:
Basic.............................. 58,124 48,189 45,011
Diluted............................ 61,041 51,474 48,371
See notes to consolidated financial statements.
S-4
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years Ended June 30, 2001, 2000 and 1999
(In thousands)
(Restated, Note 2)
Accumulated
Other Comp- Retained
Common Stock Additional rehensive Earnings
---------------------- Paid-in Income (Accumulated
Total Shares Par Value Capital (Loss) Deficit)
---------- --------- ------------ ----------- ----------- -----------
Balance, July 1, 1998...... $ 86,761 17,598 $ 1,760 $100,460 $ - $ (15,454)
Stock issued upon
exercise of stock
options and warrants...... 4,967 1,051 105 4,563 - -
Purchase of treasury
stock..................... (343) - - - - -
Deferred compensation...... 676 - - 676 - -
Net income................. 9,765 - - - - 9,765
---------- --------- --------- ---------- ---------- -----------
Balance, June 30, 1999..... 101,826 18,649 1,865 105,699 - (5,689)
Stock issued in
public offering........... 68,500 2,500 250 68,250 - -
Stock issued upon
exercise of stock
options and warrants...... 18,457 1,339 133 16,365 - -
Purchase of treasury
stock..................... (1,990) - - - - -
Deferred compensation...... 401 - - 401 -
Five-for-four
stock split............... (11) 5,622 563 (574) - -
Other comprehensive
income.................... 82 - - 82 -
Net income................. 14,379 - - - - 14,379
---------- --------- --------- ---------- ---------- -----------
Balance, June 30, 2000..... 201,644 28,110 2,811 190,141 82 8,690
Stock and options issued for
acquisition of businesses. 11,766 1,153 115 11,651 - -
Stock issued upon
exercise of stock
options and warrants...... 20,390 1,450 145 20,179 - -
Deferred compensation...... 203 - - 203 - -
Two-for-one stock split.... - 28,961 2,896 (2,896) - -
Other comprehensive loss... (236) - - - (236) -
Net income................. 21,354 - - - - 21,354
---------- --------- --------- ---------- ---------- ----------
Balance, June 30, 2001..... $ 255,121 59,674 $ 5,967 $ 219,278 $ (154) $ 30,044
========== ========= ========= ========== ========== ==========
Treasury Stock
-------------------- Comprehensive
Shares Cost Income (Loss)
-------- --------- ---------------
Balance, July 1, 1998...... 1 $ (5)
Stock issued upon
exercise of stock
options and warrants...... (34) 299
Purchase of treasury
stock..................... 39 (343)
Deferred compensation...... - -
Net income................. - - $ 9,765
------- --------- ----------
Balance, June 30, 1999..... 6 (49) $ 9,765
==========
Stock issued in
public offering........... - -
Stock issued upon
exercise of stock
options and warrants...... (296) 1,959
Purchase of treasury
stock..................... 300 (1,990)
Deferred compensation...... - -
Five-for-four
stock split............... 3 -
Other comprehensive
income.................... - - $ 82
Net income................. - - 14,379
------- --------- ----------
Balance, June 30, 2000..... 13 (80) $ 14,461
==========
Stock and options issued for
acquisition of businesses. - -
Stock issued upon
exercise of stock
options and warrants...... (11) 66
Deferred compensation...... - -
Two-for-one stock split.... 2 -
Other comprehensive loss... - - $ (236)
Net income................. - - 21,354
------- --------- ----------
Balance, June 30, 2001..... 4 $ (14) $ 21,118
======= ========== ==========
See notes to consolidated financial statements.
S-5
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
---------------------------------
2001 2000 1999
---- ---- ----
(Restated, Note 2)
Cash flows from operating activities:
Net income .............................. $ 21,354 $ 14,379 $ 9,765
Adjustments to reconcile net income to
net cash provided by operating
activities:
Acquired in-process research
and development.................... 2,500 - 3,500
Depreciation and amortization........ 11,600 9,004 6,569
Amortization of deferred gain........ (823) (596) (588)
Tax benefit from stock option
exercises (Note 10)................ 8,962 5,114 3,203
Deferred income taxes................ 2,488 1,086 1,812
Other................................ 365 390 292
Change in operating assets and
liabilities, net of effects from
purchase of businesses:
Decrease (increase) in accounts
receivable.......................... 4,330 (11,481) (16,445)
Decrease (increase) in inventories.... (6,177) (4,232) 3,825
Decrease (increase) in prepaid
expenses and other assets........... (3,170) (1,069) (2,231)
Increase (decrease) in accounts
payable, accrued expenses and
other long-term liabilities......... 5,779 2,462 2,272
Increase (decrease) in income
taxes payable....................... - (698) (1,113)
--------- --------- ----------
Net cash provided by operating
activities................................ 47,208 14,359 10,861
--------- --------- ----------
Cash flows from investing activities:
Payment for purchase of businesses,
net of cash acquired.................... (14,580) (566) (43,656)
Capital expenditures...................... (13,292) (7,226) (9,127)
Proceeds from sale of property,
plant and equipment..................... 168 1,686 967
Purchase of marketable securities......... (30,767) (11,430) -
Proceeds from sale of marketable
securities.............................. 30,121 193 198
--------- --------- ----------
Net cash used in investing activities....... (28,350) (17,343) (51,618)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of
common shares in public
offering................................. - 69,000 -
Costs in connection with
public offering.......................... - (500) -
Borrowings under debt agreements........... 635 6,474 24,444
Debt repayments............................ (3,919) (23,182) (4,663)
Bank debt financing costs.................. - - (438)
Purchase of treasury stock................. - (1,990) (343)
Proceeds from the exercise of stock
options and warrants..................... 3,800 5,170 2,539
Amounts paid for withholding taxes on
stock option exercises................... (22,193) (11,169) (5,434)
Withholding taxes collected for stock
option exercises......................... 17,983 11,166 2,671
--------- --------- ---------
Net cash provided by (used in) financing
activities................................. (3,694) 54,969 18,776
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents........................... 15,164 51,985 (21,981)
Cash and cash equivalents at beginning of
year........................................ 54,732 2,747 24,728
--------- --------- ---------
Cash and cash equivalents at end of year..... $ 69,896 $ 54,732 $ 2,747
========= ========= =========
See notes to consolidated financial statements.
S-6
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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 96.8%
owned and Amplicomm which is 75% owned as of June 30, 2001 (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
consolidated 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 Recognition
The Company's revenue is generally recognized based upon shipments.
Revenues associated with certain long term contracts are recognized under
the units-of-delivery method which includes shipments and progress
billings, in accordance with Statement of Position 81-1 "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts."
The Company records costs on its 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.
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.
S-7
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 6
to 40 years except for certain costs allocated to identifiable intangible
assets including 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. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the
Company periodically, and whenever events or changes in circumstances
indicate that the carrying value of its intangible assets may be
impaired, evaluates the recoverability of such asset by estimating the
future cash flows. If the sum of the expected undiscounted cash flows
expected to result from the use of the asset, and its eventual
disposition, is less than the carrying amount of the asset, the Company
will recognize an impairment loss to the extent of this shortfall. The
Company assesses the recoverability of unamortized goodwill based on the
undiscounted projected future earnings of the related businesses.
Income Per Common Share
In accordance with SFAS No. 128 "Earnings Per Share," 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 by weighted
average common shares outstanding plus potential dilution from the
exercise of stock options and warrants.
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.
Foreign Currency Translations
The financial statements of the Company's subsidiary in France are
measured in the local currency and then translated into U.S. dollars
using the current rate method. Under the current rate method, assets and
liabilities are translated using the exchange rate at the balance sheet
date. Revenues and expenses are translated at average rates prevailing
throughout the year. Gains and losses resulting from the translation of
financial statements of the foreign susidiary are accumulated in other
comprehensive income (loss) and presented as part of stockholders'
equity. Exchange gains or losses from the settlement of foreign currency
transactions are reflected in the consolidated statement of earnings.
Comprehensive Income
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income consists of net income and
equity adjustments relating to foreign currency translation, fair value
of derivatives and available-for-sale securities and is presented in the
Consolidated Statements of Stockholders' Equity and Comprehensive Income.
The statement requires only additional disclosures in the consolidated
financial statements; it does not effect the Company's results of
operations.
S-8
Accounting for Derivative Instruments and Hedging Activities
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. 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. The impact of this statement did not have a material
effect on the Company's consolidated financial statements. The cumulative
effect of the adoption of this accounting policy was a $132,000, net of
tax, credit in the quarter ended September 30, 2000 which represented the
net of tax fair value of certain interest rate swap agreements at July 1,
2000.
Reclassifications
Reclassifications have been made to the 1999 and 2000 consolidated
financial statements to conform to the 2001 presentation.
Recent Accounting Pronouncements
Effective July 1, 2000, the Company adopted the SEC's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB
101") and the Emerging Issues Task Force Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs," ("EITF 00-10"). SAB 101 provides
guidance related to revenue recognition. EITF 00-10 requires companies to
recognize revenue for amounts billed to customers for shipping and
handling charges. The adoption of these two pronouncements did not have a
material impact on the Company's consolidated statements of earnings.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for all future
business combinations and specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and
reported apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized,
but instead tested for impairment at least annually in accordance with
the provisions of SFAS No. 142. Amortization expense related to goodwill
was $1.2 million, $640,000 and $437,000 for the years ended June 30,
2001, 2000 and 1999, respectively. SFAS No. 142 will also require that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives, and reviewed for impairment in
accordance with SFAS No. 121. The Company will adopt the provisions of
SFAS 141 and SFAS 142 as of July 1, 2001.
The Company will evaluate its existing intangible assets and goodwill
that were acquired in prior purchase business combinations, and make any
necessary reclassifications in order to conform with the new criteria in
SFAS No. 141 for recognition apart from goodwill. The Company will be
required to reassess the useful lives and residual values of all
intangible assets acquired, and make any necessary amortization period
adjustments by September 30, 2001. In addition, the Company will be
required to test goodwill and, to the extent an intangible asset is
identified as having an indefinite useful life, the intangible asset, for
impairment in accordance with the provisions of SFAS No. 142 by June 30,
2002 and September 30, 2001, respectively. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle as of July 1, 2001.
Because of the extensive effort needed to comply with adopting SFAS 141
and SFAS 142, it is not practicable to reasonably estimate the impact of
adopting these statements on the Company's consolidated financial
statements at the date of this report, including whether it will be
required to recognize any transitional impairment losses as the
cumulative effect of a change in accounting principle.
S-9
2. Acquisition of Businesses
TriLink
Effective March 23, 2001, the Company acquired all of the outstanding
stock of TriLink Communications Corp. ("TriLink") for 1.1 million shares
of Aeroflex common stock. TriLink designs, develops, manufactures and
markets fiber optic components for the communications industry, including
Lithium Niobate modulators and optical switches.
The Company evaluated the acquired tangible and identifiable intangible
assets to serve as a basis for allocation of the purchase price. The
Company allocated the purchase price, including acquisition costs of
approximately $300,000, as follows:
(In thousands)
Net tangible assets $ 1,171
Identifiable intangible assets - existing technology 6,000
- assembled workforce 430
Deferred income taxes on identifiable
intangible assets (2,572)
Excess costs over fair value of net assets
acquired 5,668
In-process research and development 1,000
-------
$11,697
=======
The existing technology, assembled workforce and costs in excess of fair
value of net assets acquired are being amortized on a straight-line basis
over 6 years. The acquired in-process research and development was not
considered to have reached technological feasibility and, in accordance
with accounting principles generally accepted in the United States of
America, the value of such has been expensed in the quarter ended March
31, 2001. At the acquisition date, TriLink was conducting design,
development, engineering and testing activities associated with the
completion of its 10 GB modulator.
Summarized below are the unaudited pro forma results of operations of the
Company as if TriLink had been acquired at the beginning of the fiscal
periods presented. The $1.0 million write-off has been included in the
June 30, 2001 pro forma income but not the June 30, 2000 pro forma income
in order to provide comparability to the respective historical periods.
Pro Forma
Years Ended
June 30,
--------------------------
2001 2000
---- ----
(In thousands, except per share data)
Net Sales $ 233,168 $ 188,790
Income before
cumulative effect
of a change in
accounting 19,870 12,721
Income before
cumulative effect
of a change in
accounting per share:
Basic $.34 $.26
Diluted .32 .24
S-10
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.
RDL
On October 23, 2000, the Company acquired all of the outstanding stock of
RDL, Inc. ("RDL") for $14.0 million of available cash. RDL designs,
develops and manufactures advanced commercial communications test and
measurement products and defense subsystems. The acquired company's net
sales were approximately $15.0 million for the year ended March 31, 2000.
The Company evaluated the acquired tangible and identifiable intangible
assets to serve as a basis for allocation of the purchase price. The
Company allocated the purchase price, including acquisition costs of
approximately $100,000, as follows:
(In thousands)
Net tangible assets $ 6,774
Existing technology 2,970
Excess costs over fair value of net assets
acquired 2,856
In-process research and development 1,500
-------
$14,100
=======
The existing technology and costs in excess of fair value of net assets
acquired are being amortized on a straight-line basis over 7 years. The
acquired in-process research and development was not considered to have
reached technological feasibility and, in accordance with accounting
principles generally accepted in the United States of America, the value
of such has been expensed in the quarter ended December 31, 2000. At the
acquisition date, RDL was conducting design, development, engineering and
testing activities associated with the completion of its defense and
commercial product lines representing next-generation technologies.
Summarized below are the unaudited pro forma results of operations of the
Company as if RDL had been acquired at the beginning of the fiscal periods
presented. The $1.5 million write-off has been included in the June 30,
2001 pro forma income but not the June 30, 2000 pro forma income in order
to provide comparability to the respective historical periods.
Pro Forma
Years Ended
June 30,
-------------------------
2001 2000
---- ----
(In thousands, except per share data)
Net sales $ 237,690 $ 204,586
Income before
cumulative effect
of a change in
accounting 20,799 13,163
Income before
cumulative effect
of a change in
accounting per share:
Basic $.36 $.27
Diluted .34 .26
S-11
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.
Altair
On October 16, 2000, the Company issued 550,000 shares(after adjustment
for the 2- for-1 stock split effective in November 2000) of its common
stock for all the outstanding common stock of Altair Aerospace Corporation
("Altair"). Altair designs and develops advanced object-oriented control
systems software based upon a proprietary software engine. This business
combination has been accounted for as a pooling-of-interests and,
accordingly, for all periods prior to the business combination, the
Company's historical consolidated financial statements have been restated
to include the accounts and results of operations of Altair. Altair's net
sales were approximately $2.8 million and $3.3 million for the years ended
June 30, 2000 and 1999, respectively, and its net income (loss) was
$(21,000) and $8,000, respectively. As of June 30, 2000, Altair's total
assets were $788,000 and its total liabilities were $1.1 million.
For periods preceding the combination, there were no intercompany
transactions which required elimination from the combined consolidated
results of operations and there were no adjustments necessary to conform
the accounting practices of the two companies.
Amplicomm
Effective September 7, 2000, Aeroflex Amplicomm, Inc. ("Amplicomm") was
formed as a wholly-owned subsidiary of the Company. On September 20, 2000,
Amplicomm acquired certain equipment and intellectual property from a
third party for approximately $300,000, entered into employment agreements
with this third party's former owners and issued 25% of the stock of
Amplicomm to them. Amplicomm designs and develops fiber optic amplifiers
and modulator drivers used by manufacturers of advanced fiber optic
systems. On a pro forma basis, had the Amplicomm acquisition taken place
as of the beginning of the periods presented, results of operations for
those periods would not have been materially affected.
UTMC
Effective February 25, 1999, the Company acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of
cash. The purchase price was paid with available cash of $22.5 million and
borrowings under the Company's bank loan agreement of $20.0 million. UTMC
is a supplier of radiation-tolerant integrated circuits for satellite
communications. The acquired company's net sales were approximately $33.4
million for the year ended December 31, 1998.
The Company evaluated the acquired tangible and identifiable intangible
assets to serve as a basis for allocation of the purchase price. The
Company allocated the purchase price, including acquisition costs of
approximately $500,000, as follows:
(In thousands)
Net tangible assets $28,771
Identifiable intangible assets - existing technology 4,700
- tradename 1,000
- assembled workforce 600
Costs in excess of fair value of
net assets acquired 4,429
In-process research and development 3,500
-------
$43,000
=======
S-12
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.
The acquired in-process research and development was not considered to
have reached technological feasibility and, in accordance with accounting
principles generally accepted in the United States of America, 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 as of July 1, 1998. The $3.5 million
write-off has been included in the June 30, 1999 pro forma income in order
to provide comparability to the actual results.
Pro Forma Year Ended
June 30,
--------------------
1999
----
(In thousands, except per share data)
Net sales $ 180,427
Net income 9,477
Net income per share
Basic $ .21
Diluted .20
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 period 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 each of March 2001 and October
1999, the Company purchased an additional 3.4% of Europtest's stock for
approximately $47,000 and $54,000, respectively. Europtest develops and
sells specialized software-driven test equipment used primarily in
cellular, satellite and other communications applications. The acquired
company's net sales were approximately $1.9 million for the year ended
March 31, 1998. On a pro forma basis, had the Europtest acquisition taken
place as of the beginning of the periods presented, results of operations
for those periods would not have been materially affected. The purchase
price has been allocated to the assets acquired and liabilities assumed
based on their fair values.
The acquisitions (except for Altair, as discussed above) 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 each
acquired company are included in the consolidated statements of earnings
from the respective acquisition dates. Further, with respect to Altair,
the Company's historical consolidated financial statements have been
restated for all periods prior to the business combination.
S-13
3. Marketable Securities
All of the Company's marketable securities are deemed by management to be
available-for-sale and are reported at fair value with net unrealized
gains or losses reported within stockholders' equity. Realized gains and
losses are recorded based on the specific identification method. For
fiscal years 2001, 2000 and 1999, gross realized gains and (losses) were
$0, $193,000 and $0, respectively. The carrying amount of the Company's
investments is shown in the table below:
June 30,
-------------------
2001 2000
-------- -------
(In thousands)
Amortized cost $12,075 $11,430
Gross unrealized gains 6 85
Gross unrealized losses (69) (3)
------- -------
Estimated fair value $12,012 $11,512
======= =======
The marketable securities at June 30, 2001 were virtually all U.S.
government agency debt securities with scheduled maturities within one
year.
4. Inventories
Inventories consist of the following:
June 30,
--------------------------
2001 2000
-------- --------
(In thousands)
Raw materials......... $28,999 20,392
Work-in-process....... 13,071 12,783
Finished goods........ 6,353 4,192
------- -------
$48,423 $37,367
======= =======
Inventories include contracts-in-process of $15.3 million and $9.3
million at June 30, 2001 and 2000, respectively, which consist
substantially of unbilled material, labor and overhead costs that are or
were expected to be billed during the succeeding fiscal year.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
-----------------------------
2001 2000 Estimated
------------- ------------- Useful Life
(In thousands) In Years
-----------
Land......................... $ 5,024 $ 4,725
Building and leasehold
improvements................ 37,266 33,061 2 to 40
Machinery, equipment, tools
and dies.................... 48,087 38,411 3 to 10
Furniture and fixtures....... 9,536 8,270 5 to 10
Assets recorded under
capital leases.............. 6,711 6,769 5 to 10
--------- ---------
106,624 91,236
Less accumulated depreciation
and amortization............ 44,487 38,985
--------- ---------
$ 62,137 $ 52,251
========= =========
Repairs and maintenance expense on property, plant and equipment was $2.6
million, $2.5 million and $2.3 million for the years ended June 30, 2001,
2000 and 1999, respectively.
S-14
6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities include accrued salaries,
wages and other compensation of $7.4 million and $6.9 million at June 30,
2001 and 2000, respectively.
7. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following:
June 30,
-----------------------
2001 2000
------ ------
(In thousands)
Revolving credit, term loan
and mortgage agreement (a)... $ 3,724 $ 4,038
Building mortgage (b)......... 3,765 3,965
Capitalized lease
obligations (c).............. 5,152 6,026
Other......................... 692 1,056
--------- ---------
13,333 15,085
Less current maturities....... 1,905 2,102
--------- ---------
$ 11,428 $ 12,983
========= =========
Aggregate long-term debt as of June 30, 2001 matures in each fiscal year
as follows:
(In thousands)
2002............... $ 1,905
2003............... 1,331
2004............... 1,433
2005............... 1,615
2006............... 1,063
Thereafter......... 5,986
-------
$13,333
=======
Interest paid was $1.4 million, $2.5 million and $1.6 million during the
years ended June 30, 2001, 2000 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 provided 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 loan
facility expires in December 2002. The outstanding balance of the term
loan was fully paid with the proceeds from the Company's sale of its
Common Stock in May 2000. The interest rate on borrowings under this
agreement is at various rates depending upon certain financial ratios,
with the current rate substantially equivalent to prime (approximately
6.75% at June 30, 2001) on the revolving credit 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 $66,000 as
of June 30, 2001 in favor of the banks.
S-15
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 of $2.0 million. At
June 30, 2001, 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. This debt requires a balloon payment
of $3.8 million in 2019.
(c) During the year ended June 30, 1998, the Company entered into
equipment loans with two banks totaling $6.2 million. In June 2000, the
remaining balance of these loans of $4.1 million was refinanced under two
sale and capital leaseback agreements for approximately $6.0 million. For
purposes of the Consolidated Statements of Cash Flows, the $4.1 million
refinancing was considered a non-cash transaction. These agreements
expire through June 2006 and bear interest at approximately 7.9%.
8. Stockholders' Equity
Common Stock Offering
In May 2000, the Company sold 6.3 million shares (adjusted for the stock
splits) of its Common Stock in a public offering for $68.5 million, net
of an underwriting discount of $3.5 million and issuance costs of
$500,000. Of these net proceeds, $13.0 million was used to repay the term
loan. The balance of the net proceeds is invested in short-term
marketable securities and is intended to ultimately be used for
additional working capital, including research and development, for
expansion of our facilities, and for general corporate purposes,
including possible acquisitions of technologies, product lines or
businesses.
Common Stock Splits
On June 12, 2000, the Company's Board of Directors authorized a
five-for-four stock split on its Common Stock, effective June 26, 2000.
On November 2, 2000, the Company's Board of Directors authorized a
two-for-one stock split of its Common Stock, effective November 16, 2000.
The share and per share amounts in the consolidated financial statements
give effect to the stock splits.
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 1.3 million 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"). In March 2000, the Board of
Directors adopted the 2000 Stock Option Plan ("the 2000 Plan"). In
November 2000, the shareholders approved the Key Employee Stock Option
Plan ("the Key Employee Plan"). The NQSOP, the 1994 Plan, the 1996 Plan,
the 1998 Plan, the 1999 Plan, the 2000 Plan and the Key Employee Plan
provide for options which become exercisable in one or more installments
and each covers 3.8 million shares of the Company's Common Stock except
for the 1999 Plan which covers 2.3 million
S-16
shares, the 2000 Plan which covers 4.6 million shares and the Key
Employee Plan which covers 4.0 million 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, the 1999 Plan, the 2000 Plan and the Key
Employee 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 1.4 million shares of Common Stock which were not
covered by one of the above plans.
Additional information with respect to the Company's stock options is as
follows:
Weighted Shares
Average Under
Exercise Outstanding
Prices Options
-------- ------------
(In thousands)
Balance, July 1,
1998......... $ 2.22 9,729
Granted....... 4.73 2,889
Forfeited..... 1.80 (8)
Exercised..... 1.50 (3,650)
---------
Balance, June 30,
1999......... 3.32 8,960
Granted....... 14.01 4,395
Forfeited..... 4.82 (56)
Exercised..... 2.23 (3,733)
---------
Balance, June 30,
2000......... 8.65 9,566
Granted....... 21.22 7,128
Forfeited..... 9.22 (148)
Exercised..... 4.02 (2,702)
---------
Balance, June 30,
2001......... 16.02 13,844
=========
The Company's stock option plans allow employees to use shares received
from the exercise of the option to satisfy the tax withholding
requirements. During fiscal years 2001, 2000 and 1999, payroll tax on
stock option exercises were withheld from employees in shares of the
Company's Common Stock amounting to $4.2 million, $0 and $2.6 million,
respectively.
Options to purchase 4.4 million, 3.3 million and 3.8 million shares were
exercisable at weighted average exercise prices of $10.21, $6.80 and
$2.03 as of June 30, 2001, 2000 and 1999, respectively.
S-17
The options outstanding as of June 30, 2001 are summarized in ranges as
follows:
Options Outstanding
----------------------------------------------
Weighted Weighted
Range of Average Average
Exercise Exercise Options Remaining
Prices Price Outstanding Life
----------- -------- ----------- ---------
(In thousands)
$ 1.67-$ 2.50 $ 1.89 328 5.6 years
$ 3.28-$ 4.65 4.13 1,697 6.9
$ 5.38-$ 7.03 6.36 2,231 7.7
$10.13-$13.56 12.93 1,775 9.2
$15.34-$22.53 17.88 4,685 9.2
$26.00-$34.41 29.82 3,128 7.4
---------
13,844
=========
Options Exercisable
----------------------------------
Weighted
Range of Average
Exercise Exercise Options
Prices Price Exercisable
----------- -------- -----------
(In thousands)
$ 1.67-$ 2.50 $ 1.89 328
$ 3.28-$ 4.65 4.15 1,218
$ 5.38-$ 7.03 6.18 1,021
$10.13-$13.56 13.56 474
$15.34-$22.53 19.22 1,400
--------
4,441
========
As of June 30, 2000, the Company had outstanding warrants to purchase
132,000 shares of its Common Stock exercisable between $2.70 and $3.00
per share. All of these warrants were exercised or expired during fiscal
year 2001.
Accounting for Stock-Based Compensation
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." 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 2001, 2000 and 1999 was $18.68, $10.60 and $3.00, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions: 2001 - expected dividend yield of
0%, risk free interest rate of 5.6%, expected stock volatility of 137%,
and an expected option life of 5.1 years; 2000 - expected dividend yield
of 0%, risk free interest rate of 6.0%, expected stock volatility of 94%,
and an expected option life of 5.3 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 $66.3 million, $14.0 million and $4.8 million for
the years ended June 30, 2001, 2000 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:
S-18
Years Ended June 30,
----------------------------
(In thousands, except per share data)
2001
----------------------------
As Reported Pro Forma
----------- ---------
Net income (loss) before
cumulative effect of
a change in
accounting................. $ 21,222 $(22,513)
Net income (loss) before
cumulative effect of
a change in
accounting per share
Basic................$ 0.37 $ (0.39)
Diluted.............. 0.35 *
* As a result of the loss, all options are anti-dilutive.
2000
----------------------------
As Reported Pro Forma
----------- ---------
Net income................... $ 14,379 $ 5,284
Net income per share
Basic................. $ 0.30 $ 0.11
Diluted............... 0.28 0.11
1999
----------------------------
As Reported Pro Forma
----------- ---------
Net income............... $ 9,765 $ 6,617
Net income per share
Basic............. $ 0.22 $ 0.15
Diluted........... 0.20 0.14
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.
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 1/2500 of a share of Series A Junior
Participating Preferred Stock, as amended, of the Company at a price of
$65. In addition, upon
S-19
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.
Net Income Per Share
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
Years Ended June 30,
------------------------------------
2001 2000 1999
------ ------ ------
(In thousands, except per share data)
Computation of Adjusted Net Income:
Income before cumulative
effect of a change in
accounting..................... $ 21,222 $ 14,379 $ 9,765
Cumulative effect of a
change in accounting, net
of tax......................... 132 - -
-------- -------- --------
Net income....................... $ 21,354 $ 14,379 $ 9,765
======== ======== ========
Computation of Adjusted
Weighted Average Shares
Outstanding:
Weighted average shares
outstanding.................... 58,124 48,189 45,011
Add: Effect of dilutive
options and warrants
outstanding.................... 2,917 3,285 3,360
-------- -------- --------
Weighted average shares and
common share equivalents used
for computation of diluted
earnings per common share...... 61,041 51,474 48,371
======== ======== ========
Income Per Share - Basic:
Income before cumulative
effect....................... $0.37 $0.30 $0.22
Cumulative effect of a change
in accounting................ - - -
----- ----- -----
Net income..................... $0.37 $0.30 $0.22
===== ===== =====
Income Per Share - Diluted:
Income before cumulative
effect....................... $0.35 $0.28 $0.20
Cumulative effect of a change
in accounting................ - - -
----- ----- -----
Net income..................... $0.35 $0.28 $0.20
===== ===== =====
Options to purchase 9.3 million shares at exercise prices ranging between
$13.56 and $34.41 per share were outstanding as of June 30, 2001 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.
S-20
9. Comprehensive Income
The components of comprehensive income are as follows:
Years Ended June 30,
---------------------------------
2001 2000 1999
------- ------- ------
(In thousands)
Net income $21,354 $14,379 $9,765
Unrealized gain (loss) on
interest rate swap
agreement, net of tax (43) - -
Unrealized investment
gain (loss), net of tax (124) 82 -
Foreign currency
translation adjustment (69) - -
------- ------- ------
Total comprehensive income $21,118 $14,461 $9,765
======= ======= ======
10. Income Taxes
The provision (benefit) for income taxes consists of the following:
Years Ended June 30,
----------------------------------
2001 2000 1999
------- ------ ------
(In thousands)
Current:
Federal............... $ 8,412 $4,656 $4,465
State and local....... 550 458 873
------- ------ ------
8,962 5,114 5,338
------- ------ ------
Deferred:
Federal............... 2,559 990 1,989
State and local....... (71) 96 (177)
------- ------ ------
2,488 1,086 1,812
------- ------ ------
$11,450 $6,200 $7,150
======= ====== ======
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:
Years Ended June 30,
----------------------------------
2001 2000 1999
------- ------ ------
(In thousands)
Tax at statutory rate.... $11,435 $ 7,203 $5,920
Utilization of capital
loss carryforward....... - (1,017) -
Non-deductible acquired
in-process research
and development charge.. 350 - 1,225
State and local
income tax.............. 311 360 452
Research and development
credit.................. (675) (300) (500)
Other, net............... 29 (46) 53
------- ------- ------
$11,450 $ 6,200 $7,150
======= ======= ======
S-21
Deferred tax assets and liabilities consist of:
June 30,
----------------------
2001 2000
-------- --------
(In thousands)
Accounts receivable....................... $ 206 $ 210
Inventories............................... 6,376 4,891
Accrued expenses and other current
liabilities............................. 566 216
-------- --------
Current assets.......................... 7,148 5,317
-------- --------
Capital lease obligation.................. 1,574 1,955
Other long-term liabilities............... 1,811 1,793
Capital loss carryforwards................ 684 1,262
Tax loss carryforwards.................... 11,268 6,189
Tax credit carryforwards.................. 5,016 4,164
Less: valuation allowance................. (1,088) (2,165)
-------- --------
Non-current assets...................... 19,265 13,198
-------- --------
Property, plant and equipment............. (4,688) (5,698)
Intangibles............................... (6,039) (4,407)
-------- --------
Long-term liabilities................... (10,727) (10,105)
-------- --------
Net non-current assets (liabilities).... 8,538 3,093
-------- --------
Total................................. $ 15,686 $ 8,410
======== ========
The Company recorded credits of $20.8 million, $13.3 million and $5.2
million to additional paid-in capital during the years ended June 30,
2001, 2000 and 1999, respectively, in connection with the tax benefit
related to compensation deductions on the exercise of stock options and
warrants. The deduction in fiscal 2001 and 2000, has created a net
operating loss carryforward for tax purposes which has resulted in an
increase in the Company's deferred tax assets. The tax loss carryforwards
and tax credit carryforwards expire through 2021.
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 assets will not be realized. The Company
has recorded a valuation allowance primarily against capital loss
carryforwards and certain other tax loss and credit carryforwards which
may expire before they can be utilized. The reduction of the valuation
allowance in fiscal 2001, was primarily due to the expiration of capital
loss carryforwards.
The Company is undergoing routine audits by various taxing authorities of
its state and local income tax returns covering periods from 1997 to
1999. 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 $227,000, $2.0 million and $3.3
million and received refunds of $2.3 million, $940,000 and $75,000 during
the years ended June 30, 2001, 2000 and 1999, respectively.
11. Employment Contracts
As of June 30, 2001, the Company has employment agreements with certain
of its officers for periods through June 30, 2004 with annual
remuneration ranging from $228,000 to $381,000, 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 $1.3 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 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.
S-22
12. Employee Benefit Plans
All employees of the Company and certain subsidiaries who are not members
of a collective bargaining agreement are eligible to participate in one
of three company sponsored 401(k) plans. Each participant has the option
to contribute a portion of his or her compensation and receive a
discretionary employer matching contribution. Furthermore, employees of
certain subsidiaries are eligible to participate in qualified profit
sharing plans and receive an allocation of a discretionary share of their
respective subsidiary's profits. For fiscal years ended June 30, 2001,
2000 and 1999, these 401(k) and profit sharing plans had an aggregate
expense of $2.3 million, $1.7 million and $1.0 million, 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, 2001, 2000 and 1999 was $625,000,
$454,000 and $384,000, respectively. The assets of the SERP are held in a
Rabbi Trust and amounted to $2.4 million and $1.8 million at June 30,
2001 and 2000, respectively. The accumulated benefit obligation was $3.0
million and $2.6 million at June 30, 2001 and 2000, respectively. The
projected benefit obligation was $4.8 million and $3.3 million at June
30, 2001 and 2000, respectively. The intangible asset related to the SERP
was $366,000 and $586,000 at June 30, 2001 and 2000, respectively. A
discount rate of 7.0% and 7.5% was assumed in the above calculations as
of June 30, 2001 and 2000, respectively, and a rate of compensation
increase of 3.0% was assumed for both years. 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 2007. 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, 2001 are as
follows for the fiscal years:
(In thousands)
--------------
2002................... $ 4,027
2003................... 3,442
2004................... 2,223
2005................... 1,384
2006................... 773
Thereafter............. 416
-------
$12,265
=======
Rental expense was $3.7 million, $3.0 million and $2.7 million during the
fiscal years 2001, 2000 and 1999, respectively.
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.
S-23
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:
Microelectronic Solutions:
a) Microelectronic Modules
b) Thin Film Interconnects
c) Integrated Circuits
Test Solutions:
a) Instrument Products
b) Motion Control Systems
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 29%, 33% and 42% of the Company's sales for the fiscal
years 2001, 2000 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 Agere which comprised 10.8% of sales in fiscal year 2001, Teradyne
and Lockheed Martin which comprised 10.9% and 10.3% of sales in fiscal
year 2000, respectively, and Lockheed Martin and Lucent Technologies
which comprised 12.0% and 11.1% of sales in fiscal year 1999,
respectively. The Company's customers are located primarily in the United
States, but export sales accounted for 14.7%, 11.6% and 7.6% of sales in
fiscal years 2001, 2000 and 1999, respectively.
S-24
Years Ended June 30,
------------------------------
2001 2000 1999
------ ------ ------
Business Segment Data:
(In thousands)
Net sales:
Microelectronic Solutions... $144,901 $110,253 $ 96,846
Test Solutions.............. 68,394 58,744 44,793
Isolator Products........... 19,513 19,753 18,743
--------- --------- ---------
Net sales................. $232,808 $188,750 $160,382
========= ========= =========
Operating income:
Microelectronic Solutions... $ 35,959 $ 22,734 $ 20,104
Test Solutions.............. 1,971 2,438 3,181
Isolator Products........... 2,326 2,692 2,108
General corporate expenses.. (7,293) (5,397) (4,262)
--------- --------- ---------
32,963 22,467 21,131
Acquired in-process research
and development(1)(2)..... (2,500) - (3,500)
Interest expense............ (1,397) (2,442) (1,493)
Other income (expense), net. 3,606 554 777
--------- --------- ---------
Income before income
taxes..................... $ 32,672 $ 20,579 $ 16,915
========= ========= =========
Total assets:
Microelectronic Solutions... $130,119 $112,183 $104,222
Test Solutions.............. 74,308 53,189 44,414
Isolator Products........... 9,445 9,567 10,020
Corporate................... 96,380 74,556 7,016
--------- --------- ---------
Total assets.............. $310,252 $249,495 $165,672
========= ========= =========
Capital expenditures:
Microelectronic Solutions... $ 8,057 $ 4,777 $ 6,955
Test Solutions.............. 4,878 2,297 1,582
Isolator Products........... 341 152 586
Corporate................... 16 - 4
--------- --------- ---------
Total capital
expenditures.............. $ 13,292 $ 7,226 $ 9,127
========= ========= =========
Depreciation and amortization
expense:
Microelectronic Solutions... $ 8,010 $ 6,657 $ 4,112
Test Solutions.............. 3,042 1,765 1,864
Isolator Products........... 522 554 563
Corporate................... 26 28 30
--------- --------- ---------
Total depreciation and
amortization expense..... $ 11,600 $ 9,004 $ 6,569
========= ========= =========
(1) The fiscal year 2001 special charges for the write-off of
in-process research and development acquired in the purchase of
RDL ($1.5 million) and TriLink ($1.0 million) are allocable fully
the Test Solutions and Microelectronic Solutions segments,
respectively.
(2) The fiscal year 1999 special charge for the write-off of
in-process research and development acquired in the purchase of
UTMC ($3.5 million) is allocable fully to the Microelectronic
Solutions segment.
S-25
Quarterly Financial Data (Unaudited):
(In thousands, except per share data and footnotes)
Quarter
------------------------------------------ Year Ended
2001 First Second Third Fourth June 30,
----------------------------------------------------------------------------------
Net Sales $ 51,127 $ 58,448 $ 64,026 $ 59,207 $232,808
Gross Profit 19,465 24,827 28,129 23,728 96,149
Income before cumulative
effect of a change in
accounting (1) $ 5,089 $ 5,625 $ 6,334 $ 4,174 $ 21,222
========= ========= ========= ========= =========
Net income before
cumulative effect of a
change in accounting
per share:
Basic (1) $ 0.09 $ 0.10 $ 0.11 $ 0.07 $ 0.37
======= ======= ======= ======= =======
Diluted (1) $ 0.09 $ 0.09 $ 0.10 $ 0.07 $ 0.35
======= ======= ======= ======= =======
Quarter
------------------------------------------ Year Ended
2000 (Restated, Note 2) First Second Third Fourth June 30,
----------------------------------------------------------------------------------
Net Sales $ 42,634 $ 41,912 $ 47,054 $ 57,150 $188,750
Gross Profit 15,247 13,535 17,213 22,555 68,550
Net Income $ 2,779 $ 1,025 $ 3,105 $ 7,470 $ 14,379
========= ========= ========= ========= =========
Net income per share:
Basic $ 0.06 $ 0.02 $ 0.07 $ 0.14 $ 0.30
======= ======= ======= ======= =======
Diluted $ 0.06 $ 0.02 $ 0.06 $ 0.13 $ 0.28
======= ======= ======= ======= =======
(1) Includes $1.5 million, or $990,000, net of tax, for the year ended June
30, 2001 and quarter ended December 31, 2000, for the write-off of the
in-process research and development acquired in connection with the
purchase of RDL, Inc. and $1.0 million for the year ended June 30, 2001
and the quarter ended March 31, 2001, for the write-off of the
in-process research and development acquired in connection with the
purchase of TriLink Communications Corp. (combined $.03 per basic and
diluted share).
Since per share information is computed independently for each quarter and the
full year, based on the respective average number of common and common
equivalent shares outstanding, the sum of the quarterly per share amounts does
not necessarily equal the per share amounts for each year.
All per share amounts have been restated to reflect a five-for-four stock split
that was paid on July 7, 2000 and a two-for-one stock split that was paid on
November 22, 2000.
S-26
AEROFLEX INCORPORATED
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
-----------------------------
Charged
Balance at Charged to to other Balance at
beginning costs and accounts Deductions end of
Description of period expenses - describe - describe period
----------- ---------- ---------- ---------- ---------- ----------
YEAR ENDED JUNE 30, 2001:
------------------------
Allowance for doubtful
accounts $ 509 $ 58 $ - $ 108 (A) $ 459
======= ======= ======== ======= =======
Reserve for inventory
obsolescence $2,830 $2,032 $ - $ 796 (B) $4,066
======= ======= ======== ======= =======
YEAR ENDED JUNE 30, 2000:
------------------------
Allowance for doubtful
accounts $ 381 $ 183 $ - $ 55 (A) $ 509
======= ======= ======== ======= =======
Reserve for inventory
obsolescence $2,764 $ 640 $ - $ 574 (B) $2,830
======= ======= ======== ======= =======
YEAR ENDED JUNE 30, 1999:
------------------------
Allowance for doubtful
accounts $ 317 $ 152 $ - $ 88 (A) $ 381
======= ======= ======== ======= =======
Reserve for inventory
obsolescence $2,357 $ 450 $ - $ 43 (B) $2,764
======= ======= ======== ======= =======
Note: (A) - Net write-offs of uncollectible amounts.
(B) - Write-off of inventory.
S-27
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as........................... 'TM'
The Greek letter mu shall be expressed as............................ 'u'
EX-10
3
ex10-12.txt
EXHIBIT 10.12
Exhibit 10.12
Aeroflex Incorporated
2000 Stock Option Plan, as amended
SECTION 1. GENERAL PROVISIONS
1.1 Name and General Purpose
The name of this plan is the Aeroflex Incorporated 2000 Stock Option Plan
(hereinafter called the "Plan"). The Plan is intended to be a broadly-based
incentive plan which enables Aeroflex Incorporated (the "Company") and its
subsidiaries and affiliates to foster and promote the interests of the Company
by attracting and retaining directors, officers and employees of, and
consultants to, the Company who contribute to the Company's success by their
ability, ingenuity and industry, to enable such directors, officers, employees
and consultants to participate in the long-term success and growth of the
Company by giving them a proprietary interest in the Company and to provide
incentive compensation opportunities competitive with those of competing
corporations.
1.2 Definitions
a. "Affiliate" means any person or entity controlled by or
under common control with the Company, by virtue of the
ownership of voting securities, by contract or otherwise.
b. "Board" means the Board of Directors of the Company.
c. "Change in Control" means a change of control of the Company,
or in any person directly or indirectly controlling the
Company, which shall mean:
(a) a change in control as such term is presently defined in
Regulation 240.12b-(2) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"); or
(b) if any "person" (as such term is used in Section 13(d) and
14(d) of the Exchange Act) other than the Company or any
"person" who on the date of this Agreement is a director or
officer of the Company, becomes the "beneficial owner" (as
defined in Rule 13(d)-3 under the Exchange Act) directly or
indirectly, of securities of the Company representing twenty
percent (20%) or more of the voting power of the Company's
then outstanding securities; or
(c) if during any period of two (2) consecutive years during
the term of this Plan, individuals who at the beginning of
such period constitute the Board of Directors, cease for any
reason to constitute at least a majority thereof.
d. "Committee" means the Committee referred to in Section 1.3 of
the Plan.
e. "Common Stock" means shares of the Common Stock, par value
$.10 per share, of the Company.
f. "Company" means Aeroflex Incorporated, a corporation organized
under the laws of the State of Delaware (or any successor
corporation).
g. "Fair Market Value" means the market price of the Common Stock
on the Nasdaq Stock Market on the date of the grant or on any
other date on which the Common Stock is to be valued
hereunder. If no sale shall have been reported on the Nasdaq
Stock Market on such date, Fair Market Value shall be
determined by the Committee.
h. "Non-Employee Director" shall have the meaning set forth in
Rule 16(b) promulgated by the Securities and Exchange
Commission ("Commission").
i. "Option" means any option to purchase Common Stock under
Section 2 of the Plan.
j. "Option Agreement" means the option agreement described in
Section 2.4 of the Plan.
k. "Participant" means any director, officer, employee or
consultant of the Company, a Subsidiary or an Affiliate who
is selected by the Committee to participate in the Plan.
l. "Subsidiary" means any corporation in which the Company
possesses directly or indirectly 50% or more of the combined
voting power of all classes of stock of such corporation.
m. "Total Disability" means accidental bodily injury or sickness
which wholly and continuously disabled an optionee. The
Committee, whose decisions shall be final, shall make a
determination of Total Disability.
1.3 Administration of the Plan
The Plan shall be administered by the Board or by the Committee appointed
by the Board consisting of two or more members of the Board all of whom shall be
Non-Employee Directors. The Committee shall serve at the pleasure of the Board
and shall have such powers as the Board may, from time to time, confer upon it.
Subject to this Section 1.3, the Committee shall have sole and complete
authority to adopt, alter, amend or revoke such administrative rules, guidelines
and practices governing the operation of the Plan as it shall, from time to
time, deem advisable, and to interpret the terms and provisions of the Plan.
The Committee shall keep minutes of its meetings and of action taken by it
without a meeting. A majority of the Committee shall constitute a quorum, and
the acts of a majority of the members present at any meeting at which a quorum
is present, or acts approved in writing by all of the members of the Committee
without a meeting, shall constitute the acts of the Committee.
1.4 Eligibility
Stock Options may be granted only to directors, officers, employees or
consultants of the Company or a Subsidiary or Affiliate. All employees are
eligible to receive Stock Options under the Plan. Any person who has been
granted any Option may, if he is otherwise eligible, be granted an additional
Option or Options.
1.5 Shares
The aggregate number of shares reserved for issuance pursuant to the Plan
shall be 4,625,000(1) shares of Common Stock, or the number and kind of shares
of stock or other securities which shall be substituted for such shares or to
which such shares shall be adjusted as provided in Section 1.6.
Such number of shares may be set aside out of the authorized but unissued
shares of Common Stock or out of issued shares of Common Stock acquired for and
held in the Treasury of the Company, not reserved for any other purpose. Shares
subject to, but not sold or issued under, any Option terminating or expiring for
any reason prior to its exercise in full will again be available for Options
thereafter granted during the balance of the term of the Plan.
1.6 Adjustments Due to Stock Splits, Mergers, Consolidation, Etc.
If, at any time, the Company shall take any action, whether by stock
dividend, stock split, combination of shares or otherwise, which results in a
proportionate increase or decrease in the number of shares of Common Stock
theretofore issued and outstanding, the number of shares which are reserved for
issuance under the Plan and the number of shares which, at such time, are
subject to Options shall, to the extent deemed appropriate by the Committee, be
increased or decreased in the same proportion, provided, however, that the
Company shall not be obligated to issue fractional shares.
Likewise, in the event of any change in the outstanding shares of Common
Stock by reason of any recapitalization, merger, consolidation, reorganization,
combination or exchange of shares or other corporate change, the Committee shall
make such substitution or adjustments, if any, as it deems to be appropriate, as
to the number or kind of shares of Common Stock or other securities which are
reserved for issuance under the Plan and the number of shares or other
securities which, at such time are subject to Options.
In the event of a Change in Control, at the option of the Board or
Committee, (a) all Options outstanding on the date of such Change in Control
shall become immediately and fully exercisable, and (b) an optionee will be
permitted to surrender for cancellation within sixty (60) days after such Change
in Control any Option or portion of an Option which was granted more than six
(6) months prior to the date of such surrender, to the extent not yet exercised,
and to receive a cash payment in an amount equal to the excess, if any, of the
Fair Market Value (on the
---------------
(1) after giving effect to the Company's 5-for-4 stock split in July 2000,
the amendment of the Plan on October 12, 2000, the 2-for-1 stock split in
November 2000 and the amendment of the Plan on May 3, 2001.
date of surrender) of the shares of Common Stock subject to the Option or
portion thereof surrendered, over the aggregate purchase price for such Shares
under the Option.
1.7 Non-Alienation of Benefits
Except as herein specifically provided, no right or unpaid benefit under
the Plan shall be subject to alienation, assignment, pledge or charge and any
attempt to alienate, assign, pledge or charge the same shall be void. If any
Participant or other person entitled to benefits hereunder should attempt to
alienate, assign, pledge or charge any benefit hereunder, then such benefit
shall, in the discretion of the Committee, cease.
1.8 Withholding or Deduction for Taxes
If, at any time, the Company or any Subsidiary or Affiliate is required,
under applicable laws and regulations, to withhold, or to make any deduction for
any taxes, or take any other action in connection with any Option exercise, the
Participant shall be required to pay to the Company or such Subsidiary or
Affiliate, the amount of any taxes required to be withheld, or, in lieu thereof,
at the option of the Company, the Company or such Subsidiary or Affiliate may
accept a sufficient number of shares of Common Stock to cover the amount
required to be withheld.
1.9 Administrative Expenses
The entire expense of administering the Plan shall be borne by the Company.
1.10 General Conditions
a. The Board or the Committee may, from time to time, amend, suspend or
terminate any or all of the provisions of the Plan, provided that,
without the Participant's approval, no change may be made which would
alter or impair any right theretofore granted to any Participant.
b. With the consent of the Participant affected thereby, the Committee
may amend or modify any outstanding Option in any manner not
inconsistent with the terms of the Plan, including, without
limitation, and irrespective of the provisions of Section 2.3 below,
to accelerate the date or dates as of which an installment of an
Option becomes exercisable; provided, that the Committee shall not
have the right to reprice any outstanding Options.
c. Nothing contained in the Plan shall prohibit the Company or any
Subsidiary or Affiliate from establishing other additional incentive
compensation arrangements for employees of the Company or such
Subsidiary or Affiliate.
d. Nothing in the Plan shall be deemed to limit, in any way, the right of
the Company or any Subsidiary or Affiliate to terminate a
Participant's employment or service with the Company (or such
Subsidiary or Affiliate) at any time.
e. Any decision or action taken by the Board or the Committee arising out
of or in connection with the construction, administration,
interpretation and effect of the
Plan shall be conclusive and binding upon all Participants and
any person claiming under or through any Participant.
f. No member of the Board or of the Committee shall be liable for any act
or action, whether of commission or omission, (i) by such member
except in circumstances involving actual bad faith, nor (ii) by any
other member or by any officer, agent or employee.
1.11 Compliance with Applicable Law
Notwithstanding any other provision of the Plan, the Company shall not be
obligated to issue any shares of Common Stock, or grant any Option with respect
thereto, unless it is advised by counsel of its selection that it may do so
without violation of the applicable Federal and State laws pertaining to the
issuance of securities and the Company may require any stock certificate so
issued to bear a legend, may give its transfer agent instructions limiting the
transfer thereof, and may take such other steps, as in its judgment are
reasonably required to prevent any such violation.
1.12 Effective Dates
The Plan was adopted by the Board on March 22, 2000 and amended on October
12, 2000, March 21,2001 and May 3, 2001. The Plan shall terminate on March 21,
2010.
Section 2. OPTION GRANTS
2.1 Authority of Committee
Subject to the provisions of the Plan, the Committee shall have the sole
and complete authority to determine (i) the Participants to whom Options shall
be granted; (ii) the number of shares to be covered by each Option; and (iii)
the conditions and limitations, if any, in addition to those set forth in
Sections 2 and 3 hereof, applicable to the exercise of an Option, including
without limitation, the nature and duration of the restrictions, if any, to be
imposed upon the sale or other disposition of shares acquired upon exercise of
an Option.
Stock Options granted under the Plan shall be non-qualified stock options.
The Committee shall have the authority to grant Options.
2.2 Option Exercise Price
The exercise price set forth in the Option Agreement at the time of grant
shall not be less than the Fair Market Value of the Common Stock at the time
that the Option is granted; provided, that in the case of any Option granted in
connection with a business acquisition, the Board may grant such Option with an
exercise price that is less than the Fair Market Value at the time of such
grant.
The purchase price is to be paid in full in cash, certified or bank
cashier's check or, at the option of the Company, Common Stock valued at its
Fair Market Value on the date of exercise, or
a combination thereof, when the Option is exercised and stock certificates
will be delivered only against such payment.
2.3 Option Grants
Each Option will be subject to the following provisions:
a. Term of Option
An Option will be for a term of not more than ten years from the date
of grant.
b. Exercise
(i) By an Employee:
Unless otherwise provided by the Committee and except in the
manner described below upon the death of the optionee, an Option
may be exercised only in installments as follows: up to one-half
of the subject shares on and after the first anniversary of the
date of grant, up to all of the subject shares on and after the
second such anniversary of the date of the grant of such Option
but in no event later than the expiration of the term of the
Option.
An Option shall be exercisable during the optionee's lifetime
only by the optionee and shall not be exercisable by the optionee
unless, at all times since the date of grant and at the time of
exercise, such optionee is an employee of or providing services
to the Company, any parent corporation of the Company or any
Subsidiary or Affiliate, except that, upon termination of all
such employment or provision of services (other than by death,
Total Disability, or by Total Disability followed by death in the
circumstances provided below), the optionee may exercise an
Option at any time within three months thereafter but only to the
extent such Option is exercisable on the date of such
termination.
Upon termination of all such employment by Total Disability, the
optionee may exercise such Options at any time within one year
thereafter, but only to the extent such Option is exercisable on
the date of such termination.
In the event of the death of an optionee (i) while an employee of
or providing services to the Company, any parent corporation of
the Company or any Subsidiary or Affiliate, or (ii) within three
months after termination of all such employment or provision of
services (other than for Total Disability) or (iii) within one
year after termination on account of Total Disability of all such
employment or provision of services, such optionee's estate or
any person who acquires the right to exercise such option by
bequest or inheritance or by reason of the death of the optionee
may exercise such optionee's Option at any time within the period
of three years from the date of death. In the case of clauses (i)
and (iii) above, such
Option shall be exercisable in full for all the remaining shares
covered thereby, but in the case of clause (ii) such Option shall
be exercisable only to the extent it was exercisable on the date
of such termination of employment or service.
(ii) By Persons other than Employees:
If the optionee is not an employee of the Company or the parent
corporation of the Company or any Subsidiary or Affiliate, the
vesting of such optionee's right to exercise his Options shall be
established and determined by the Committee in the Option
Agreement covering the Options granted to such optionee.
Notwithstanding the foregoing provisions regarding the exercise
of an Option in the event of death, Total Disability, other
termination of employment or provision of services or otherwise,
in no event shall an Option be exercisable in whole or in part
after the termination date provided in the Option Agreement.
c. Transferability
An Option granted under the Plan shall not be transferable
otherwise than by will or by the laws of descent and
distribution, except as may be permitted by the Board or the
Committee.
2.4 Agreements
In consideration of any Options granted to a Participant under the Plan,
each such Participant shall enter into an Option Agreement with the Company
providing, consistent with the Plan, such terms as the Committee may deem
advisable.
EX-10
4
ex10-16.txt
EXHIBIT 10.16
Exhibit 10.16
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This Amendment No. 2 (this "Amendment") to Amendment No.1 ("Amendment No. 1") to
the Employment Agreement (the "Employment Agreement") dated as of March 1, 1999
by and between Harvey R. Blau (the "Executive") and Aeroflex Incorporated (the
"Company"), hereby amends Amendment No. 1, effective as of August 13, 2001, as
set forth below.
1. Paragraph 2 of Amendment No. 1 is hereby amended to read in
its entirety as follows:
"The Company shall credit each Deferred Amount to a
bookkeeping account in the name of the Executive (the
"Account") on the date the Deferred Amount would (absent
this Amendment) have been paid to the Executive. The Company
shall permit the Executive to file an Investment
Designation, as defined in Section 1.2 of the Company's Key
Employee Deferred Compensation Plan (the "Plan"), and shall
credit to the Account earnings in accordance with such
Investment Designation and in accordance with and subject to
the terms and conditions of Section 2.2 of the Plan. The
Account shall be reduced as and to the extent distributions
are made from the Account pursuant to Sections 4, 6 and 7 of
Amendment No. 1."
2. Paragraph 7 of Amendment No. 1 is hereby amended to read in
its entirety as follows:
"Notwithstanding any other provision of Amendment No. 1, if
the Committee determines that it is possible for the Company
to pay the Executive all or any portion of the amounts
credited to his Account at a time when he is still employed
with the Company or any of its affiliates, without the
amount so paid being nondeductible by reason of Section
162(m), then subject to the approval of the Committee in its
sole and complete discretion, such amount may be paid to the
Executive."
3. Except as specifically provided in this Amendment, the
Employment Agreement and Amendment No. 1 are in all other respects ratified and
confirmed without amendment.
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands as of the date first above written.
AEROFLEX INCORPORATED
By: /s/ Michael Gorin
-----------------
Name: Michael Gorin
Title: President
/s/ Harvey Blau
--------------------
Harvey R. Blau
2
EX-10
5
ex10-17.txt
EXHIBIT 10.17
Exhibit 10.17
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This Amendment No. 2 (this "Amendment") to Amendment No.1 ("Amendment No. 1") to
the Employment Agreement (the "Employment Agreement") dated as of March 1, 1999
by and between Michael Gorin (the "Executive") and Aeroflex Incorporated (the
"Company"), hereby amends Amendment No. 1, effective as of August 13, 2001, as
set forth below.
1. Paragraph 2 of Amendment No. 1 is hereby amended to read in
its entirety as follows:
"The Company shall credit each Deferred Amount to a
bookkeeping account in the name of the Executive (the
"Account") on the date the Deferred Amount would (absent
this Amendment) have been paid to the Executive. The Company
shall permit the Executive to file an Investment
Designation, as defined in Section 1.2 of the Company's Key
Employee Deferred Compensation Plan (the "Plan"), and shall
credit to the Account earnings in accordance with such
Investment Designation and in accordance with and subject to
the terms and conditions of Section 2.2 of the Plan. The
Account shall be reduced as and to the extent distributions
are made from the Account pursuant to Sections 4, 6 and 7 of
Amendment No. 1."
2. Paragraph 7 of Amendment No. 1 is hereby amended to read in
its entirety as follows:
"Notwithstanding any other provision of Amendment No. 1, if
the Committee determines that it is possible for the Company
to pay the Executive all or any portion of the amounts
credited to his Account at a time when he is still employed
with the Company or any of its affiliates, without the
amount so paid being nondeductible by reason of Section
162(m), then subject to the approval of the Committee in its
sole and complete discretion, such amount may be paid to the
Executive."
3. Except as specifically provided in this Amendment, the
Employment Agreement and Amendment No. 1 are in all other respects ratified and
confirmed without amendment.
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands as of the date first above written.
AEROFLEX INCORPORATED
By: /s/ Leonard Borow
----------------------------
Name: Leonard Borow
Title: Executive Vice-President
/s/ Michael Gorin
-------------------------------
Michael Gorin
2
EX-10
6
ex10-18.txt
EXHIBIT 10.18
Exhibit 10.18
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This Amendment No. 2 (this "Amendment") to Amendment No.1 ("Amendment No. 1") to
the Employment Agreement (the "Employment Agreement") dated as of March 1, 1999
by and between Leonard Borow (the "Executive") and Aeroflex Incorporated (the
"Company"), hereby amends Amendment No. 1, effective as of August 13, 2001, as
set forth below.
1. Paragraph 2 of Amendment No. 1 is hereby amended to read in its
entirety as follows:
"The Company shall credit each Deferred Amount to a bookkeeping
account in the name of the Executive (the "Account") on the date
the Deferred Amount would (absent this Amendment) have been paid
to the Executive. The Company shall permit the Executive to file
an Investment Designation, as defined in Section 1.2 of the
Company's Key Employee De ferred Compensation Plan (the "Plan"),
and shall credit to the Account earnings in accordance with such
Investment Designation and in accordance with and subject to the
terms and conditions of Section 2.2 of the Plan. The Account
shall be reduced as and to the extent distributions are made from
the Account pursuant to Sections 4, 6 and 7 of Amendment No. 1."
2. Paragraph 7 of Amendment No. 1 is hereby amended to read in its
entirety as follows:
"Notwithstanding any other provision of Amendment No. 1, if the
Committee determines that it is possible for the Company to pay
the Executive all or any portion of the amounts credited to his
Account at a time when he is still employed with the Company or
any of its affiliates, without the amount so paid being
nondeductible by reason of Section 162(m), then subject to the
approval of the Committee in its sole and complete discretion,
such amount may be paid to the Executive."
3. Except as specifically provided in this Amendment, the Employment
Agreement and Amendment No. 1 are in all other respects ratified and confirmed
without amendment.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as
of the date first above written.
AEROFLEX INCORPORATED
By: /s/ Michael Gorin
------------------
Name: Michael Gorin
Title: President
/s/ Leonard Borow
----------------------
Leonard Borow
2
EX-10
7
ex10-19.txt
EXHIBIT 10.19
Exhibit 10.19
July 30, 2001
AEROFLEX INCORPORATED
KEY EMPLOYEE DEFERRED COMPENSATION PLAN
Section 1. General Provisions
1.1 Name, General Purpose and Effective Date
The name of this plan is the Aeroflex Incorporated Key Employee Deferred
Compensation Plan (the "Plan"). The Plan is intended to enable Aeroflex
Incorporated and its subsidiaries (collectively the "Company") to defer payment
of a portion of the compensation of key employees of the Company who are
designated to participate in the Plan. As of its effective date, which is July
1, 2001, the Plan will serve as the vehicle (a) for making deferrals under
deferral plans or arrangements for key employees of the Company then or
thereafter in effect and (b) for continuing deferral of amounts theretofore
deferred under any deferral plans or arrangements in effect on or before said
date.
1.2 Definitions
a. "Beneficiary" means any person or entity, or any combination thereof,
designated by a Participant in a form acceptable to the Committee, to
receive benefits under the Plan in the event of the Participant's
death or, in the absence of any such designation, his or her estate.
b. "Board" means the Board of Directors of the Company.
c. "Change in Control" means the occurrence of any of the following
events:
i. the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934 as amended (the "Exchange Act") (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of voting securities of Aeroflex when such
acquisition causes such Person to own 20 percent or more of the
combined voting power of the then outstanding voting securities of
Aeroflex entitled to vote generally in the election of directors (the
"Outstanding Aeroflex Voting Securities"); provided, however, that
for purposes of this subsection (i), the following acquisitions shall
not be deemed to result in a Change in Control: (A) any acquisition
directly from Aeroflex, (B) any acquisition by Aeroflex, (C) any
acquisition by any employee benefit plan (or related trust) sponsored
or maintained by Aeroflex or any corporation controlled by Aeroflex
or (D) any acquisition pursuant to a transaction that complies with
clauses (A), (B) and (C) of subsection (iii) below; and provided,
further, that if any Person's beneficial ownership of the Oustanding
Aeroflex Voting Securities reaches or exceeds 20 percent as a result
of a transaction described in clause (A) or (B) above, and such
Person subsequently acquires beneficial ownership of additional
voting securities of Aeroflex, such subsequent acquisition shall be
treated as an acquisition that causes such Person to own 20 percent
or more of the Oustanding Aeroflex Voting Securities; or
ii. individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual
becoming a director subsequent to the
-2-
Effective Date whose election, or nomination for election by
Aeroflex's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the
Incumbent Board, but excluding for this purpose any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal
of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
iii. consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of
Aeroflex or the acquisition of assets of another entity ("Business
Combination"); excluding, however, such a Business Combination
pursuant to which (A) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Aeroflex
Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 60 percent of,
respectively, the then outstanding shares of common stock or the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation that as a result of
such transaction owns Aeroflex or all or substantially all of
Aeroflex's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination, of the
Outstanding Aeroflex Voting Securities, (B) no Person (excluding any
employee
-3-
benefit plan (or related trust) of Aeroflex or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 20 percent or more of, respectively,
the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power
of the then outstanding voting securities of such corporation except
to the extent that such ownership existed prior to the Business
Combination and (C) at least a majority of the members of the board
of directors or the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
iv. approval by the stockholders of Aeroflex of a complete liquidation
or dissolution of the Company.
d. "Code" means the Internal Revenue Code of 1986, as in effect at any
applicable time.
e. "Committee" means the Committee referred to in Section 1.3 of the
Plan.
f. "Common Stock" means shares of the Common Stock, par value $.10 per
share, of the Company.
g. "Company" means Aeroflex Incorporated, a corporation organized under
the laws of the State of Delaware or any successor corporation.
h. "Compensation" means, for any applicable Year, salary and bonus
earned by a Participant for such Year for services rendered to the
Company.
i. "Deferral Election Form" means the form provided by the Company
pursuant to which a Participant elects deferral of a portion of his
or her Compensation for any Year.
-4-
j. "Deferred Compensation Account" means the account established in the
name of a Participant, as provided in Section 2.2 below.
k. "Early Distribution" means withdrawal by a Participant of amounts
from his or her Deferred Compensation Account before he or she would
otherwise be entitled to such amounts, as provided in Section 3.8
below.
l. "Earnings" means the amount credited to a Participant's Deferred
Compensation Account, as provided in Section 2.3 below.
m. "ERISA" means the Employee Retirement Income Security Act of 1974, as
in effect at any applicable time.
n. "Fair Market Value" means the closing market price of the Common
Stock on the Nasdaq Stock Market on the trading day prior to any date
on which the Common Stock is to be valued hereunder. If no sale shall
have been reported on the Nasdaq Stock Market on such date, Fair
Market Value shall be determined by the Committee.
o. "Hardship" means a severe financial stringency to a Participant
resulting from a sudden and unexpected illness or accident of the
Participant or his or her dependent (as defined in Code Section
154(a)), loss of his or her property due to casualty, or other
similar or extraordinary and unforeseeable circumstance arising as a
result of events beyond the control of the Participant.
p. "Investment Designation" means the designation made by a Participant,
pursuant to a Deferral Election Form, for the actual or putative
investment of the Compensation that he or she has elected to defer
under the Plan.
q. "Participant" means any key employee of the Company who is designated
by the Committee to participate in the Plan.
-5-
r. "Retirement" means termination of a Participant's employment with the
Company other than by reason of death or Total Disability.
s. "Total Disability" means bodily injury or sickness that wholly and
continuously disables a Participant. The Committee shall make any
determination of Total Disability, which shall be final, based on the
finding of an independent physician selected by the Board.
t. "Trust" means the Aeroflex Incorporated Key Employee Deferred
Compensation Plan Trust.
u. "Trustee" means the Trustee of the Trust.
v. "Year" means the fiscal year of the Company, which is the 12-month
period beginning on July 1 of any year and ending on June 30 of the
next subsequent year.
1.3 Administration of the Plan
The Plan shall be administered by the Committee, which shall be
appointed by the Board and consist of two or more members of the Board. The
Committee shall serve at the pleasure of the Board and shall have such powers as
the Board may, from time to time, confer upon it.
Subject to this Section 1.3, the Committee shall have sole and complete
authority to adopt, alter, amend or revoke such administrative rules, guidelines
and practices governing the operation of the Plan as it may from time to time
deem advisable, and to interpret the terms and provisions of the Plan.
The Committee shall keep minutes of its meetings and of action taken by
it without a meeting. A majority of the Committee shall constitute a quorum, and
the acts of a majority of the
-6-
members present at any meeting at which a quorum is present, or acts approved in
writing by all of the members of the Committee without a meeting, shall
constitute the acts of the Committee.
1.4 Participation
For any Year, the Committee shall designate those key employees of the
Company who may elect to defer a portion of their Compensation for such Year.
1.5 Non-Alienation of Benefits
Except as herein specifically provided, no right or unpaid benefit under
the Plan shall be subject to alienation, assignment, pledge or charge and any
attempt to alienate, assign, pledge or charge the same shall be void. If any
Participant or other person entitled to benefits hereunder should attempt to
alienate, assign, pledge or charge any benefit hereunder, then such benefit
shall, in the discretion of the Committee, cease.
1.6 Withholding or Deduction for Taxes
If at any time the Company is required, under applicable laws and
regulations, to withhold, or make any deduction for, any taxes, or take any
other action in connection with payment of benefits from a Participant's
Deferred Compensation Account, the Participant, or his or her Beneficiary as
applicable, shall pay to the Company the amount of any taxes required to be
withheld. Alternatively, when shares of Common Stock are being distributed from
a Participant's Deferred Compensation Account, the Company at its option may
accept a sufficient number of shares of Common Stock to cover the amount of any
taxes required to be withheld.
-7-
1.7 Administrative Expenses
The entire expense of administering the Plan shall be borne by the
Company.
1.8 General Conditions
a. The Board may, from time to time, amend, suspend or terminate any
or all of the provisions of the Plan, provided that no change may
be made that would alter or impair any right theretofore granted to
any Participant without such Participant's approval.
b. Nothing in the Plan shall be deemed to limit, in any way, the right
of the Company to terminate a Participant's employment at any time.
c. Any decision or action taken by the Board or the Committee arising
out of or in connection with the construction, administration,
interpretation and effect of the Plan shall be conclusive and
binding upon all Participants and any person claiming under or
through any Participant.
d. No member of the Board or of the Committee shall be liable for any
act or action, whether of commission or omission, (i) by such
member except in circumstances involving actual bad faith, or (ii)
by any other member or by any officer, agent or employee.
Section 2. Deferral of Compensation
2.1 Deferral Election Form
As a condition of participation in the Plan, each Year a Participant
shall execute and file with the Company one or more Deferral Election
Forms, designating the portion of his or
-8-
her Compensation for such Year, and any other amounts or entitlements
that will vest in such Year, the payment of which is to be deferred
hereunder. Any such Deferral Election Form shall be filed in advance of
(a) the Participant's entitlement to the element of Compensation to
which it relates or (b) the amount of such Compensation becoming
definitely determinable.
a. Salary. A Participant may not defer more of his or her salary to be
earned for any Year than the percentage specified by the Company
and in effect at the time of execution and filing of the applicable
Deferral Election Form.
b. Bonus. A Participant may defer up to 100 percent of his or her
bonus to be earned for any Year, pursuant to execution and timely
filing of the applicable Deferral Election Form.
c. Deferral Increments. Deferrals of salary or bonus shall be in
increments of 1 percent, but may be stated as the dollar amount to
which a specified percentage translates; provided, however, that a
Participant may elect to receive currently a specified dollar
amount of his or her bonus and defer the balance.
d. Deferral of Other Amounts or Items. Pursuant to a Deferral Election
Form executed by a Participant and filed with the Company, a
Participant may defer any other amount or item that the Company
authorizes to be deferred (as, for example, the gain on exercise of
nonstatutory stock options and settlement of rights to restricted
shares of Common Stock).
e. Annual Deferral Election Required. A Deferral Election Form
executed by a Participant and filed with the Company for any Year
shall apply only to the elements of Compensation or other amounts
or items added to his or her Deferred
-9-
Compensation Account for such Year, and the Company shall require
execution and filing of a Deferral Election Form for new deferrals
for each subsequent Year. Once filed with the Company for any Year,
a Participant's Deferral Election Form shall be irrevocable for
such Year.
f. New Participants During Any Year. If an individual becomes a
Participant other than at the beginning of a Year, he or she shall
execute and file with the Company one or more Deferral Election
Forms with respect to elements of Compensation not yet earned for
such Year, or not yet determinable, that are to be deferred and
other amounts or items, if any, that will vest in such Year and are
to be deferred.
2.2 Deferred Compensation Account
a. Bookkeeping Account. Any Compensation or other amounts or items
deferred by a Participant shall be credited to a deferred
compensation bookkeeping account in the Participant's name (the
"Deferred Compensation Account"), and such Account shall be
maintained by the Company or by an organization appointed by the
Company. The Company or its appointee shall update the
Participant's Deferred Compensation Account on a quarterly basis.
b. Earnings. Earnings on amounts in a Participant's Deferred
Compensation Account shall be credited to the Account in accordance
with the Participant's Investment Designation as approved by the
Committee. The available choices for Investment Designation, to be
made in increments of not less than 10 percent of any deferral,
shall be:
i. Common Stock, at Fair Market Value, and
-10-
ii. One or more of the following funds run by a qualified
investment manager:
1. A broad-based common stock fund,
2. A fixed-income fund,
3. A short-term securities fund,
4. An interest-based fund, with interest credited at an
annual rate equal to a designated federal long-term rate,
and
5. A diversified investment fund.
Earnings credited to a Participant's Deferred Compensation Account
shall be equal to the amount that is, or would have been, earned if
the Account is, or had been, invested in accordance with his or her
Investment Designation, as it may be amended from time to time. In
the event of any losses based on an Investment Designation, the
Account shall be reduced accordingly, and the Company shall have no
obligation or responsibility with respect to any such losses.
c. Change in Investment Designation. By filing of notice with the
Company on a form provided by it, a Participant may change the
Investment Designation with respect to his or her Deferred
Compensation Account balance once during any Year, to take effect
on the first day of the next succeeding calendar quarter.
2.3 Trust Fund
a. Funding. The Company has created a Trust with the Trustee, which it
intends to fund from time to time.
b. No Rights in Specific Assets. Although the principal of the Trust
and any earnings thereon shall be held separate and apart from
other funds of the Company for the uses
-11-
and purposes of Participants and Beneficiaries, neither
Participants nor Beneficiaries shall have any preferred claim to,
or any beneficial interest in, any assets of the Trust prior to the
time such assets are paid to them as benefits. All rights to
receive benefits under this Plan and the Trust shall be unsecured
contractual rights of Participants and Beneficiaries against the
Company and shall be no greater than the rights of any unsecured
creditor of the Company.
c. Change in Control. In the event of (i) a Change in Control or,
(ii) if earlier, upon the failure of management, as the result of a
proxy contest, to elect any of its candidates for membership on the
Board at a meeting of shareholders of the Company, the Company
shall make contributions to the Trust in an amount sufficient to
enable the Trust to pay all benefits earned or accrued as of the
date of such Change in Control and all benefits reasonably expected
to be earned or accrued thereafter, as calculated by the Company
based on reasonable assumptions.
Section 3. Payment of Benefits
3.1 Benefit Commencement Date
a. Participant Election. A Participant shall designate the benefit
commencement date, for payment of the portion of his or her
Deferred Compensation Account attributable to any Year's deferral,
on the Deferral Election From executed and filed with the Company
with respect to such deferral. If a Participant fails to designate
a benefit commencement date, he or she will be deemed to have
elected the first day of the calendar quarter following the date of
his or her Retirement.
-12-
b. Revision of Date. A Participant may extend the benefit commencement
date for payment of the portion of his or her Deferred Compensation
Account attributable to any Year's deferral, provided such change
occurs at least one year before the scheduled benefit commencement
date.
3.2 Retirement
If a Participant's employment with the Company terminates by reason of
Retirement, he or she shall receive benefit payments in the form specified in
his or her Deferral Election Forms as applicable.
If the Participant failed thus to specify any form of benefit payments,
he or she may request payment of any amounts payable in cash (a) in a lump sum
or (b) in substantially equal quarterly installments over five or ten years,
subject in either case to Committee approval. If payment in installments is
elected, each installment shall be an amount equal to the quotient determined by
dividing (i) the remaining balance of the Participant's Deferred Compensation
Account at the time of payment by (ii) the number of remaining installments
(including the current installment).
Notwithstanding the foregoing, to the extent that payment is to be made
in shares of Common Stock, such shares shall be distributed in kind to the
Participant or his or her Beneficiary, as the case may be, in accordance with
the terms of the applicable Deferral Election Form.
-13-
3.3 Death
If a Participant dies while employed by the Company or while receiving
benefit payments, the amount remaining in his or her Deferred Compensation
Account, apart from any shares of Common stock, shall be paid to his or her
Beneficiary in a cash lump sum during the calendar quarter next following the
Company's receipt of notice of the Participant's death, valued as of the last
business day of the calendar quarter in which such notice is received.
3.4 Total Disability
If a Participant's employment with the Company terminates by reason of
Total Disability, his or her previously designated benefit commencement date
shall remain in effect, unless the Parcipant elects to treat such termination as
Retirement, in which case his or her benefit commencement date shall be the
first day of the calendar quarter following the date of termination, as provided
in Section 3.1 above.
3.5 Other Termination of Employment
If a Participant's employment with the Company terminates other than by
reason of Retirement, death or Total Disability, his or her benefit commencement
date shall be the first day of the calendar quarter next following such
termination of employment.
3.6 Change in Control
Notwithstanding the provisions of Section 3.1, in the event of a Change
in Control or, if earlier, management's loss of a proxy contest, as described in
Section 2.3.c., each Participant's benefit commencement date shall be the date
of occurrence of either such event.
-14-
3.7 Hardship
While employed by the Company, a Participant may request a Hardship
distribution on a form provided by and filed with the Company. The Committee
shall make a determination that the requested distribution is due to Hardship.
The amount determined by the Committee as a Hardship distribution shall be paid
to the Participant as soon as practicable thereafter. A Participant receiving a
Hardship distribution will be ineligible to participate in the Plan for the
balance of the Year of such distribution.
3.8 Early Distribution
A Participant may elect an Early Distribution from his or her Deferred
Compensation Account, of an amount up to 50 percent of the Account balance, by
filing an election form with the Committee. Any such election shall be subject
to the approval of the Committee, and the Committee's determination whether or
not to allow such election shall be final.
To the extent that the Committee allows any such election, the amount of
the Participant's Deferred Compensation Account balance to which the approved
Early Distribution percentage translates shall be determined as of the end of
the calendar quarter coincident with or next following the Committee's approval,
and such amount shall be paid to the Participant in a lump sum as soon as
practicable thereafter; provided, however, that, any such Early Distribution
shall be made pro rata from the Participant's Account and, to the extent that
shares of Common Stock are part thereof, the cash payment shall be adjusted to
reflect the value, as of the same determination date, of the shares distributed.
When an Early Distribution is made, the Participant shall forfeit 10
percent of (a) such Early Distribution or (b) the remaining balance of his or
her Deferred Compensation Account,
-15-
whichever is less, and the Company shall have no obligation to the Participant
or his or her Beneficiary, as the case may be, with respect to such forfeited
amount.
A Participant who receives an Early Distribution while employed by the
Company will be ineligible to participate in the Plan for the balance of the
Year in which such Early Distribution is made.
3.9 Certain Withdrawals with Committee Approval
Subject to approval of the Committee, in its sole and complete
discretion, a Participant may withdraw from his or her Deferred Compensation
Account any amount (or portion thereof) deferred for any Year (plus the earnings
thereon) that need not have been deferred to preserve the deductibility of
Compensation paid to the Participant for such Year under Section 162(m) of the
Code.
Section 4. Miscellaneous
4.1 Claims Procedure
Subject to and in compliance with the applicable regulations promulgated
under ERISA, (i) any decision by the Company denying a claim for benefits under
this Plan by a Participant or any other claimant shall be stated in writing by
the Company and delivered or mailed to the claimant; (ii) each such notice shall
set forth the specific reasons for the denial, written to the best of the
Company's ability in a manner that may be understood without legal or actuarial
counsel; and (iii) the Company shall afford a reasonable opportunity to the
claimant whose claim for benefits has been denied for a review of the decision
denying such claim.
-16-
4.2 Nonassignability of Benefits
No Participant or Beneficiary shall have any power or right to transfer,
assign, anticipate, hypothecate or otherwise encumber any part or all of the
amounts payable hereunder. Such amounts shall not be subject to seizure by any
creditor of a Participant or any Beneficiary, by a proceeding at law or in
equity, nor transferable by operation of law in the event of the bankruptcy or
insolvency of any Participant or Beneficiary. Any such attempted assignment or
transfer shall be void and shall terminate the Participant's participation in
the Plan, and the Employer shall thereupon have no further liability hereunder
with respect to such Participant and his or her Beneficiary.
4.3 Impact on Other Benefits
Except as otherwise required by the Code or any other applicable law,
this Plan and the benefits provided herein are in addition to all other benefits
that may be provided by the Company to the Participants from time to time, and
shall not reduce or replace, in any manner, any of such other benefits.
4.4 Notices
Any notice, consent or demand required or permitted to be given under
the provisions of this Plan by the Company or any Participant or Beneficiary
shall be in writing, and shall be signed by the person or entity giving or
making the same. If such notice, consent or demand is mailed, it shall be sent
by United States certified mail, postage prepaid, addressed to the principal
office of the Company, or if to a Participant or Beneficiary to such individual
or entity's last
-17-
known address as shown on the records of the Company. The date of such mailing
shall be deemed the date of notice, consent or demand.
-18-
EX-10
8
ex10-20.txt
EXHIBIT 10.20
Exhibit 10.20
TRUST UNDER DEFERRED COMPENSATION PLAN
This Trust Agreement (the "Trust Agreement") is made this 22nd
day of August, 2001, by and between Aeroflex Incorporated, a Delaware
corporation (the "Company") and American Stock Transfer & Trust Co.(the
"Trustee").
WHEREAS, the Company has adopted the Aeroflex Incorporated Key
Employee Deferred Compensation Plan (the "Plan") and amendments to the employ-
ment agreements listed on Appendix A (such amendments, the "Amendments"); and
WHEREAS, the Company has incurred or expects to incur
liability under the terms of the Plan and the Amendments; and
WHEREAS, the Company wishes to establish a trust (hereinafter
called the "Trust") and to contribute to the Trust assets that shall be held
therein, subject to the claims of the Company's creditors in the event of the
Company's Insolvency, as herein defined, until paid to Plan participants and
their beneficiaries in such manner and at such times as specified in the Plan;
and
WHEREAS, it is the intention of the parties that this Trust
Agreement shall constitute an unfunded arrangement and shall not affect the
status of the Plan as an unfunded plan maintained for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees for purposes of Title I of the Employee Retirement Income Security Act
of 1974; and
WHEREAS, it is the intention of the Company to make
contributions to the Trust to provide itself with a source of funds to assist it
in the meeting of its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and
agree that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment Of Trust
(a) The Company hereby deposits with the Trustee in trust
$100, which shall become the principal of the Trust to be held, administered and
disposed of by the Trustee as provided in this Trust Agreement.
(b) The Trust hereby established is revocable by the Company;
it shall become irrevocable upon a Change in Control, as defined herein.
(c) The Trust is intended to be a grantor trust, of which the
Company is the grantor, within the meaning of subpart E, part I, subchapter J,
chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and
shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon,
shall be held separate and apart from other funds of the Company and shall be
used exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their beneficiaries shall
have no preferred claim on, or any beneficial ownership interest in, any assets
of the Trust. Any rights created under the Plan and this Trust Agreement shall
be mere unsecured contractual rights of Plan participants and their
beneficiaries against the Company. Any assets held by the Trust will be subject
to the claims of the Company's general creditors under federal and state law in
the event of Insolvency, as defined in Section 3(a) herein.
(e) The Company, in its sole discretion, may at any time, or
from time to time, make additional deposits, with respect to some or all Plan
participants, of cash or other property in trust with the Trustee to augment the
principal to be held, administered and disposed of by the Trustee as provided in
this Trust Agreement. Neither the Trustee nor any Plan participant or
beneficiary shall have any right to compel such additional deposits. Upon a
Change in Control, the Company shall, as soon as practicable, but in no event
longer than 30 days following the Change in Control, make an irrevocable
contribution to the Trust in an amount that is sufficient to pay each Plan
participant or beneficiary the benefits to which Plan participants or their
beneficiaries would be entitled pursuant to the terms of the Plan and the
Amendments as of the date on which the Change in Control occurred.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) The Company shall deliver to the Trustee a schedule (the
"Payment Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), that provides a formula or other
instructions acceptable to the Trustee for determining the amounts so payable,
the form in which such amount is to be paid (as provided for or available under
the Plan), and the time of commencement for payment of such amounts. Except as
otherwise provided herein, the Trustee shall make payments to the Plan
participants and their beneficiaries in accordance with such Payment Schedule.
The Trustee shall make provision for the reporting and withholding of any
federal, state or local taxes that may be required to be withheld with respect
to the payment of benefits pursuant to the terms
2
of the Plan and the Amendments and shall pay amounts withheld to the appropriate
taxing authorities or determine that such amounts have been reported, withheld
and paid by the Company.
(b) The entitlement of a Plan participant or his or her
beneficiaries to benefits under the Plan shall be determined by the Company or
such party as it shall designate under the Plan, and any claim for such benefits
shall be considered and reviewed under the procedures set out in the Plan and
the Amendments.
(c) The Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plan and the Amendments. The Company shall notify the Trustee of its decision to
make payment of benefits directly prior to the time amounts are payable to
participants or their beneficiaries. In addition, if the principal of the Trust,
and any earnings thereon, are not sufficient to make payments of benefits in
accordance with the terms of the Plan and the Amendments, the Company shall make
the balance of each such payment as it falls due. The Trustee shall notify the
Company where principal and earnings are not sufficient.
Section 3. Trustee Responsibility Regarding Payments to Trust Benefi-
ciary When the Company Is Insolvent.
(a) The Trustee shall cease payment of benefits to Plan
participants and their beneficiaries if the Company is Insolvent. The Company
shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the
Company is unable to pay its debts as they become due, or (ii) the Company is
subject to a pending proceeding as a debtor under the United States Bankruptcy
Code.
(b) At all times during the continuance of this Trust
Agreement, as provided in Section 1(d) hereof, the principal and income of the
Trust shall be subject to claims of general creditors of the Company under
federal and state law as set forth below.
(c) The Board of Directors and the Chief Executive Officer of
the Company shall have the duty to inform the Trustee in writing of the
Company's Insolvency. If a person claiming to be a creditor of the Company
alleges in writing to the Trustee that the Company has become Insolvent, the
Trustee shall determine whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of benefits to Plan
participants or their beneficiaries.
3
(d) Unless the Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a person claiming to be a
creditor alleging that the Company is Insolvent, the Trustee shall have no duty
to inquire whether the Company is Insolvent. The Trustee may in all events rely
on such evidence concerning the Company's solvency as may be furnished to the
Trustee and that provides the Trustee with a reasonable basis for making a
determination concerning the Company's solvency.
(e) If at any time the Trustee has determined that the Company
is Insolvent, the Trustee shall discontinue payments to Plan participants or
their beneficiaries and shall hold the assets of the Trust for the benefit of
the Company's general creditors. Nothing in this Trust Agreement shall in any
way diminish any rights of Plan participants or their beneficiaries to pursue
their rights as general creditors of the Company with respect to benefits due
under the Plan or otherwise.
(f) The Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after the Trustee has determined that the Company is not
Insolvent (or is no longer Insolvent).
(g) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan and the
Amendments for the period of such discontinuance, less the aggregate amount of
any payments made to Plan participants or their beneficiaries by the Company in
lieu of the payments provided for hereunder during any such period of
discontinuance.
Section 4. Payments to the Company.
Except as provided in Section 3 hereof, after the Trust has
become irrevocable, the Company shall have no right or power to direct the
Trustee to return to the Company or to divert to others any of the Trust assets
before all payments of benefits have been made to Plan participants and their
beneficiaries pursuant to the terms of the Plan and the Amendments.
4
Section 5. Investment Authority.
(a) All rights associated with assets of the Trust shall be
exercised by the Trustee or the person designated by the Trustee, and shall in
no event be exercisable by or rest with Plan participants, provided that the
Company shall be entitled to direct the Trustee with respect to the exercise of
any powers otherwise reserved to the Trustee hereunder. The Company shall have
the right, at any time, and from to time in its sole discretion, to substitute
assets of equal fair market value for any asset held by the Trust. This right is
exercisable by the Company in a nonfiduciary capacity without the approval or
consent of any person in a fiduciary capacity.
(b) Subject to Section 5(a) above, the Trustee shall have the
following powers and authority with respect to all property constituting part of
the Trust:
(i) To retain, sell, exchange, manage, lend, improve, or
transfer or otherwise dispose of any such property at
public or private sale for cash or on credit.
(ii) To invest and reinvest any money held in the Trust
hereunder in any common, collective or commingled
Trust fund established and maintained by a bank.
(iii) To participate in any agreement of reorganization,
consolidation, merger, combination, liquidation or
other similar agreement relating to any such
property, and to consent to or oppose any such
agreement or an action thereunder, or any contract,
lease, mortgage, purchase, sale or other action by
any corporation or other entity.
(iv) To deposit any such property with any protective,
reorganization or similar committee; to delegate
discretionary power to any such committee; and to pay
part of the expenses and compensation of any such
committee and any assessments levied with respect to
any property so deposited.
(v) To exercise any conversion privilege or subscription
right available in connection with any such property;
to oppose or to consent to the reorganization,
consolidation, merger or read-
5
justment of the finances of any corporation, company
or association, or to the sale, mortgage, pledge or
lease of the property of any corporation, company or
association any of the securities of which may at any
time be held in the Trust and to do any act with
reference thereto, including the exercise of options,
the making of agreements or subscriptions and the
payment of expenses, assessments or subscriptions,
which may be deemed necessary or advisable in
connection therewith, and to hold and retain any
securities or other property which it may so acquire.
(vi) To commence or defend suits or legal proceedings and
to represent the Trust in all suits or legal
proceedings; to settle, compromise or submit to
arbitration any claims, debts or damages, due or
owing to or from the Trust; provided, however, that
the Trustee shall notify the Company of all such
suits, legal proceedings and claims and shall obtain
the written consent of the Company before settling,
compromising or submitting to binding arbitration any
claim, suit or legal proceeding of any nature
whatsoever, which consent shall not unreasonably be
withheld.
(vii) To exercise, personally or by general or limited
power of attorney, any right, including the right to
vote, appurtenant to any securities or other such
property.
(viii) To borrow money from any lender in such amounts and
upon such terms and conditions as shall be deemed
advisable or proper to carry out the purposes of the
Trust and to pledge any securities or other property
for the repayment of any such loan.
(ix) To hold mortgages (including deeds of trust) in its
own name or in the name of a nominee of the Trustee,
with or without the addition of words indicating that
any such mortgage is held in a fiduciary capacity,
and to cause to be formed a corporation, partnership,
trust or other entity to hold title to any mortgage
with the aforesaid powers, all upon such terms and
conditions as may be deemed advisable; to review or
extend or participate in the renewal or extension of
any mortgage, and to agree to a reduction in the rate
of interest on any mortgage or to any
6
other modification or change in the terms of any
mortgage or of any guarantee pertaining thereto, in
any manner and to any extent that may be deemed
advisable for the protection of assets of the Trust
or the preservation of any covenant or condition of
any mortgage or in the performance of any guarantee
or to enforce any default in such manner and to such
extent as may be deemed advisable; and to exercise
and enforce any and all rights of foreclosure, to bid
on any property on foreclosure, to take a deed in
lieu of foreclosure with or without paying a
consideration therefor and in connection therewith to
release the obligation on the note or bond secured by
such mortgage, and to exercise and enforce in any
action, suit or proceeding at law or in equity any
rights or remedies in respect of any such mortgage or
guarantee.
(x) To register any securities held by the Trustee in its
own name or in the name of a nominee of the Trustee
or any custodian of such property, including the
nominee of any system for the central handling of
securities, with or without the addition of words
indicating that such securities are held in a
fiduciary capacity; to deposit or arrange for the
deposit of any such securities with such a system and
to hold any securities in bearer form, provided that
the Trustee shall at all times remain responsible for
the safe custody and disposition of the assets of the
Trust.
(xi) To make, execute and deliver, as Trustee, any and all
deeds, leases, notes, bonds, guarantees, mortgages,
conveyances, contracts, waivers, releases or other
instruments in writing necessary or proper for the
accomplishment of any of the foregoing powers.
(xii) To hold cash (including, without limitation, in
non-interest bearing accounts) in time or demand
deposits including deposits with the Trustee, such
deposits to pay a reasonable amount of interest.
(xiii) To select one or more broker-dealers to effect
securities trans actions on behalf of the Trust,
which broker-dealers may be an affiliate of the
Trustee.
7
(xiv) To exercise, generally, any of the powers which an
individual owner might exercise in connection with
property either real, personal or mixed held by the
Trust, and to do all other acts that the Trustee may
deem necessary or proper to carry out any of the
powers set forth in this Section 5 or otherwise in
the best interests of the Trust.
Section 6. Disposition of Income.
(a) During the term of this Trust Agreement, all income
received by the Trust, net of expenses and taxes, shall be accumulated and
reinvested.
Section 7. Accounting by the Trustee.
The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
made, including such specific records as shall be agreed upon in writing between
the Company and the Trustee. Within 30 days following the close of each calendar
year and within 30 days after the removal or resignation of the Trustee, the
Trustee shall deliver to the Company a written account of its administration of
the Trust during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting forth all
investments, receipts, disbursements and other transactions effected by it,
including a description of all securities and investments purchased and sold
with the cost or net proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately), and showing all cash, securities and
other property held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be.
Section 8. Responsibility of the Trustee.
(a) The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. In the event of a dispute
between the Company and a party, the Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) In the execution of its powers hereunder, the Trustee
shall not be liable for any loss to the Trust assets arising (i) in consequence
of the failure, depreciation or loss of any investments made in good faith or
(ii) by reason of any act
8
or omission made in good faith or of any other matter or thing except, in each
case, liability for breach of trust arising from the fraud, wilful misconduct or
gross negligence of the Trustee, and the Company agrees to indemnify the Trustee
against, and to be primarily liable for, any such loss and an cost and expenses
incurred by the Trustee in defending against any such loss. If the Company does
not pay such costs, expenses and losses in a reasonably timely manner, the
Trustee may obtain payment from the Trust.
(c) The Trustee may consult with legal counsel (who may also
be counsel for the Company generally) with respect to any of its duties or
obligations hereunder and the Company agrees to indemnify the Trustee against,
and to be primarily liable for, any loss (and costs and expenses incurred by the
Trustee in defending against any such loss) arising out of any actions or
omissions of the Trustee taken or omitted in good faith reliance on any such
advice.
(d) The Trustee may hire agents, accountants, actuaries,
investment advisors, financial consultants or other professionals to assist it
in performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers
conferred on trustees by applicable law, unless expressly provided otherwise
herein, provided, however, that if an insurance policy is held as an asset of
the Trust, the Trustee shall have no power to name a beneficiary of the policy
other than the Trust, to assign the policy (as distinct from conversion of the
policy to a different form) other than to a successor the Trustee, or to loan to
any person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee pursuant
to this Trust Agreement or to applicable law, the Trustee shall not have any
power that could give this Trust Agreement the objective of carrying on a
business and dividing the gains therefrom, within the meaning of section
301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant
to the Internal Revenue Code.
9
Section 9. Compensation and Expenses of the Trustee.
The Company shall pay the Trustee's fees and expenses. If not
so paid, the fees and expenses shall be paid from the Trust.
Section 10. Resignation and Removal of the Trustee.
(a) The Trustee may resign at any time by written notice to
the Company, which shall be effective 60 days after receipt of such notice
unless the Company and the Trustee agree otherwise.
(b) The Trustee may be removed by the Company on 60 days
notice or upon shorter notice accepted by the Trustee; provided however that the
Trustee may not be removed by the Company for one (1) following a Change in
Control.
(c) If the Trustee resigns or is removed within one (1) year
following a Change in Control, the Trustee shall select a successor Trustee in
accordance with the provisions of Section 11(b) hereof prior to the effective
date of the Trustee's resignation or removal.
(d) Upon resignation or removal of the Trustee and appointment
of a successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within 60 days after receipt
of notice of resignation, removal or transfer, unless the Company extends the
time limit.
(e) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraph(s) (a) or (b) of this section. If no such
appointment has been made, the Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses
of the Trustee in connection with the proceeding shall be allowed as
administrative expenses of the Trust.
Section 11. Appointment of Successor.
(a) If the Trustee resigns or is removed in accordance with
Section 10(a) or (b) hereof, the Company may appoint any third party, such as a
bank trust department or other party that may be granted corporate trustee
powers under state law, as a successor to replace the Trustee upon resignation
or removal. The appointment shall be effective when accepted in writing by the
new Trustee, who shall have all of the rights and powers of the former Trustee,
including ownership rights in the
10
Trust assets. The former Trustee shall execute any instrument necessary or
reasonably requested by the Company or the successor Trustee to evidence the
transfer.
(b) If the Trustee resigns pursuant to the provisions of
Section 10(c) hereof and selects a successor Trustee, the Trustee may appoint
any third party such as a bank trust department or other party that may be
granted corporate trustee powers under state law. The appointment of a successor
Trustee shall be effective when accepted in writing by the new Trustee. The new
Trustee shall have all the rights and powers of the former Trustee, including
ownership rights in Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by the successor Trustee to
evidence the transfer.
(c) The successor Trustee need not examine the records and
acts of any prior Trustee and may retain or dispose of existing Trust assets,
subject to Sections 7 and 8 hereof. The successor Trustee shall not be
responsible for and the Company shall indemnify and defend the successor Trustee
from any claim or liability resulting from any action or inaction of any prior
Trustee or from any other past event, or any condition existing at the time it
becomes successor Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written
instrument executed by the Trustee and the Company. Notwithstanding the
foregoing, no such amendment shall conflict with the terms of the Plan or the
Amendments or shall make the Trust revocable after it has become irrevocable in
accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan or the Amendments, unless sooner revoked in accordance
with Section 1(b) hereof. Upon termination of the Trust any assets remaining in
the Trust shall be returned to the Company.
(c) Upon written approval of participants or beneficiaries
entitled to payment of benefits pursuant to the terms of the Plan or the
Amendments, the Company may terminate this Trust Agreement prior to the time all
benefit payments under the Plan have been made. All assets in the Trust at
termination shall be returned to the Company.
11
Section 13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law
shall be ineffective to the extent of any such prohibition, without invalidating
the remaining provisions hereof.
(b) Benefits payable to Plan participants and their
beneficiaries under this Trust Agreement may not be anticipated, assigned
(either at law or in equity), alienated, pledged, encumbered or subjected to
attachment, garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of New York, without regard to its principles of
conflicts of laws.
(d) For purposes of this Agreement, Change in Control shall
have the meaning assigned thereto in the Employment Agreement entered into as of
March 1, 1999 between the Company and its Chief Executive Officer, as such
Employment Agreement is in effect on the date hereof.
Section 14. Effective Date.
The effective date of this Trust Agreement shall be August 22,
2001.
12
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands as of the date first above written.
AEROFLEX INCORPORATED
By: /s/ Michael Gorin
--------------------------------------
Name: Michael Gorin
Title: President
AMERICAN STOCK TRANSFER
& TRUST CO.
By: /s/ Herbert Lemmer
-------------------------------------
Name: Herbert Lemmer
Title: Vice President
13
EX-23
9
ex-23.txt
EXHIBIT 23
Exhibit 23
Independent Auditors' Consent
Board of Directors
Aeroflex Incorporated:
We consent to incorporation by reference in the registration statements (Nos.
33-75496, 33-88868, 33-88878, 333-42399, 333-42405, 333-64611, 333-90173,
333-31654, 333-53626, 333-53622 and 333-61094) on Form S-8 and (No. 333-53618)
on Form S-3 of Aeroflex Incorporated of our report dated August 10, 2001,
relating to the consolidated balance sheets of Aeroflex Incorporated and
subsidiaries as of June 30, 2001 and 2000, and the related consolidated
statements of earnings, stockholders' equity and comprehensive income, and cash
flows and related schedule for each of the years in the three-year period ended
June 30, 2001, which report appears in the June 30, 2001 annual report on Form
10-K of Aeroflex Incorporated.
KPMG LLP
Melville, New York
September 28, 2001