-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J27u6lulRRo8fXPfWyfWFRL8ksX8FnrNrQXi+FE+7yBOSVo8OvJFwjgVI+UYRM6L CXckNzcLq+yRf6uiU1Fa+w== 0000002601-99-000007.txt : 19990514 0000002601-99-000007.hdr.sgml : 19990514 ACCESSION NUMBER: 0000002601-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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-Q SEC ACT: SEC FILE NUMBER: 001-08037 FILM NUMBER: 99618993 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: ARX INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AEROFLEX LABORATORIES INC DATE OF NAME CHANGE: 19851119 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-Q --------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1999 ----------------------------- Commission File Number 1-8037 ---------------------- AEROFLEX INCORPORATED (Exact name of Registrant as specified in its Charter) DELAWARE 11-1974412 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 35 South Service Road Plainview, N.Y. 11803 (Address of principal executive offices) (Zip Code) (516) 694-6700 (Registrant's telephone number, including area code) --------------------- *Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. May 10, 1999 18,312,403 shares (excluding 15,993 shares held in treasury) - -------------------------------------------------------------------------------- (Date) (Number of Shares) AEROFLEX INCORPORATED AND SUBSIDIARIES INDEX ----- PAGE ---- PART I: FINANCIAL INFORMATION - ------ --------------------- CONSOLIDATED BALANCE SHEETS March 31, 1999 and June 30, 1998 3-4 CONSOLIDATED STATEMENTS OF EARNINGS Nine Months Ended March 31, 1999 and 1998 5 CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended March 31, 1999 and 1998 6 CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended March 31, 1999 and 1998 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine and Three Months Ended March 31, 1999 and 1998 13-19 PART II: OTHER INFORMATION - ------- ----------------- ITEM 6 Exhibits and Reports on Form 8-K 20 SIGNATURES 21 AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, June 30, 1999 1998 --------- -------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 3,515 $ 24,408 Accounts receivable, less allowance for doubtful accounts of $301,000 and $317,000 32,656 19,853 Inventories 34,719 29,851 Deferred income taxes 5,139 1,861 Prepaid expenses and other current assets 2,271 1,197 -------- -------- Total current assets 78,300 77,170 Property, plant and equipment, at cost, net 49,788 26,994 Intangible assets acquired in connection with the purchase of businesses, net 14,154 7,578 Cost in excess of fair value of net assets of businesses acquired, net 13,733 9,827 Other assets 4,013 2,532 -------- -------- Total assets $159,988 $124,101 ======== ======== See notes to consolidated financial statements.
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
March 31, June 30, 1999 1998 --------- -------- (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current portion of long-term debt $ 5,741 $ 1,755 Accounts payable 8,793 6,668 Accrued expenses and other current liabilities 15,353 12,932 Income taxes payable 2,588 1,850 -------- ------- Total current liabilities 32,475 23,205 Long-term debt 26,209 9,726 Deferred income taxes 3,363 1,156 Other long-term liabilities 2,447 2,978 -------- ------- Total liabilities 64,494 37,065 -------- ------- Stockholders' equity: Preferred Stock, par value $.10 per share; authorized 1,000,000 shares: Series A Junior Participating Preferred Stock, par value $.10 per share, authorized 40,000 shares, none issued - - Common Stock, par value $.10 per share; authorized 40,000,000 shares; issued 17,927,000 and 17,378,000 shares 1,793 1,738 Additional paid-in capital 103,900 100,481 Accumulated deficit (9,922) (15,178) -------- ------- 95,771 87,041 Less: Treasury stock, at cost (32,000 and 1,000 shares) 277 5 -------- ------- Total stockholders' equity 95,494 87,036 -------- ------- Total liabilities and stockholders' equity $159,988 $124,101 ======== ======== See notes to consolidated financial statements.
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended March 31, ----------------- 1999 1998 -------- -------- (In thousands, except per share data) Net sales $108,430 $ 84,431 Cost of sales 69,504 55,417 -------- -------- Gross profit 38,926 29,014 -------- -------- Selling, general and administrative costs 18,306 16,020 Research and development costs 6,874 3,510 Acquired in-process research and development (Note 2) 3,500 - -------- -------- 28,680 19,530 -------- -------- Operating income 10,246 9,484 -------- -------- Other expense (income) Interest expense 1,024 1,798 Other expense (income) (734) 41 -------- -------- Total other expense (income) 290 1,839 -------- -------- Income before income taxes 9,956 7,645 Provision for income taxes 4,700 2,750 -------- -------- Net income $ 5,256 $ 4,895 ======== ======== Net income per common share and common share equivalent: - Basic $ .30 $ .35 ===== ===== - Diluted $ .28 $ .32 ===== ===== Weighted average number of common shares and common share equivalents outstanding: - Basic 17,628 13,948 ======== ======== - Diluted 18,973 15,749 ======== ======== See notes to consolidated financial statements.
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, ------------------ 1999 1998 -------- ------- (In thousands, except per share data) Net sales $ 40,604 $ 31,221 Cost of sales 25,205 20,338 -------- -------- Gross profit 15,399 10,883 -------- -------- Selling, general and administrative costs 6,914 5,655 Research and development costs 2,580 1,481 Acquired in-process research and development (Note 2) 3,500 - -------- -------- 12,994 7,136 -------- -------- Operating income 2,405 3,747 -------- -------- Other expense (income) Interest expense 457 548 Other expense (income) (190) (33) -------- -------- Total other expense (income) 267 515 -------- -------- Income before income taxes 2,138 3,232 Provision for income taxes 1,950 1,175 -------- -------- Net income $ 188 $ 2,057 ======== ======== Net income per common share and common share equivalent: - Basic $ .01 $ .14 ===== ===== - Diluted $ .01 $ .13 ===== ===== Weighted average number of common shares and common share equivalents outstanding: - Basic 17,839 14,749 ======== ======== - Diluted 19,416 16,132 ======== ======== See notes to consolidated financial statements.
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, ----------------- 1999 1998 -------- ------- (In thousands) Cash Flows From Operating Activities: Net income $ 5,256 $ 4,895 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Acquired in-process research and development 3,500 - Depreciation and amortization 4,853 3,791 Amortization of deferred gain (441) (441) Deferred income taxes (531) (307) Other, net 55 184 Change in operating assets and liabilities, net of effects from purchase of businesses: Decrease (increase) in accounts receivable (8,946) 2,027 Decrease (increase) in inventories 2,386 (8,455) Decrease (increase) in prepaid expenses and other assets (2,663) (514) Increase (decrease) in accounts payable, accrued expenses and other long-term liabilities 617 4,644 Increase (decrease) in income taxes payable 3,129 1,584 -------- ------- Net Cash Provided By (Used In) Operating Activities 7,215 7,408 -------- ------- Cash Flows From Investing Activities: Payment for purchase of businesses, net of cash acquired (43,475) - Purchase of equipment, inventory and technology rights from Lucent Technologies - (4,435) Capital expenditures (6,902) (5,710) Proceeds from sale of equipment 967 184 Other, net (10) (149) -------- ------- Net Cash Provided By (Used In) Investing Activities (49,420) (10,110) -------- ------- Cash Flows From Financing Activities: Proceeds from issuance of common shares in public offering - 31,781 Costs in connection with public offering - (496) Borrowings under debt agreements 24,188 6,232 Debt repayments (3,910) (13,380) Proceeds from the exercise of stock options and warrants 1,377 1,106 Purchase of treasury stock (343) - -------- ------- Net Cash Provided By (Used In) Financing Activities 21,312 25,243 -------- ------- Net Increase (Decrease) In Cash And Cash Equivalents (20,893) 22,541 Cash And Cash Equivalents At Beginning Of Period 24,408 600 -------- ------- Cash And Cash Equivalents At End Of Period $ 3,515 $23,141 ======== ======= See notes to consolidated financial statements.
AEROFLEX INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation --------------------- The consolidated balance sheet of Aeroflex Incorporated and Subsidiaries ("the Company") as of March 31, 1999 and the related consolidated statements of earnings for the nine and three months ended March 31, 1999 and 1998 and the consolidated statements of cash flows for the nine months ended March 31, 1999 and 1998 have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments and the adjustments referred to in Note 2) necessary to present fairly the financial position, results of operations and cash flows at March 31, 1999 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 1998 annual report to shareholders. There have been no changes of significant accounting policies since June 30, 1998. Certain reclassifications have been made to previously reported financial statements to conform to current classifications. Results of operations for the nine and three month periods are not necessarily indicative of results of operations for the corresponding years. 2. Acquisition of Businesses ------------------------- UTMC ---- Effective February 25, 1999, the Company acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of cash. The purchase price was paid with available cash of $22.5 million and borrowings under the Company's bank loan agreement of $20.0 million. UTMC is a supplier of radiation-tolerant integrated circuits for satellite communications. The acquired company's net sales were approximately $33.4 million for the year ended December 31, 1998. The Company had commissioned an independent asset valuation study of acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. Based on this study, the Company allocated the purchase price and acquisition costs, of approximately $500,000, as follows:
(In thousands) Net tangible assets $29,220 Identifiable intangible assets 6,300 Excess costs over fair value of net assets 3,980 In-process research and development 3,500 ------- $43,000 =======
The identifiable intangible assets include existing technology, customer relationships and assembled work force. The intangibles are being amortized on a straight-line basis over 6 to 15 years based on the study described above. The acquired in-process research and development was not considered to have reached technological feasibility and, in accordance with generally accepted accounting principles, the value of such was expensed in the third quarter of fiscal 1999. Summarized below are the unaudited pro forma results of operations of the Company as if UTMC had been acquired at the beginning of the fiscal periods presented. The $3.5 million write-off has been included in the March 31, 1999 pro forma income but not the March 31, 1998 pro forma income in order to provide comparability to the respective historical periods.
Pro Forma Nine Months Ended March 31, ----------------------------------- 1999 1998 ---- ---- (In thousands, except per share data) Net Sales $ 128,475 $ 112,137 Net Income 4,968 7,347 Earnings Per Share Basic $ .28 $ .53 Diluted .26 .47
The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the periods presented or of future operating results of the combined companies. Europtest --------- Effective September 1, 1998, the Company acquired 90% of the stock of Europtest, S.A. (France) for approximately $1.1 million. The purchase agreement also requires that the Company purchase the remaining 10% of Europtest pro rata over a three-year period at prices determined based upon net sales of Europtest products. Europtest develops and sells specialized software-driven test equipment used primarily in cellular, satellite and other communications applications. The acquired company's net sales were approximately $1.9 million for the year ended March 31, 1998. On a pro forma basis, had the Europtest acquisition taken place as of the beginning of the periods presented, results of operations for those periods would not have been materially affected. The purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values. 3. Common Stock Offering --------------------- In March 1998, the Company sold 2.6 million shares of its Common Stock in a public offering for $31.3 million, net of an underwriting discount of $2.0 million and issuance costs of $496,000. Of these net proceeds, $9.6 million was used to repay bank indebtedness. The balance of the net proceeds was used primarily for the acquisition of UTMC. 4. Earnings Per Share ------------------ In accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share", earnings per common share ("Basic EPS") is computed by dividing net income by the weighted average common shares outstanding. Earnings per common share, assuming dilution ("Diluted EPS") is computed by dividing net income plus a pro forma addback of debenture interest by the weighted average common shares outstanding plus potential dilution from the conversion of debentures and the exercise of stock options and warrants. A reconciliation of the numerators and denominators of the Basic EPS and Diluted EPS calculations is as follows:
Nine Months Ended March 31, --------------- 1999 1998 ---- ---- (In thousands, except per share data) Computation of Adjusted Net Income: Net income for basic earnings per common share $ 5,256 $ 4,895 Add: Debenture interest and amortization expense, net of income taxes - 103 -------- -------- Adjusted net income for diluted earnings per common share $ 5,256 $ 4,998 ======== ======== Computation of Adjusted Weighted Average Shares Outstanding: Weighted average shares outstanding 17,628 13,948 Add: Shares assumed to be issued upon conversion of debentures - 522 Add: Effect of dilutive options and warrants outstanding 1,345 1,279 -------- -------- Weighted average shares and common share equivalents used for computation of diluted earnings per common share 18,973 15,749 ======== ======== Net Income Per Common Share: Basic $ .30 $ .35 ===== ===== Diluted $ .28 $ .32 ===== =====
Three Months Ended March 31, --------------- 1999 1998 ---- ---- (In thousands, except per share data) Net income for basic and diluted earnings per common share $ 188 $ 2,057 ======== ======== Computation of Adjusted Weighted Average Shares Outstanding: Weighted average shares outstanding 17,839 14,749 Add: Effect of dilutive options and warrants outstanding 1,577 1,383 -------- -------- Weighted average shares and common share equivalents used for computation of diluted earnings per common share 19,416 16,132 ======== ======== Net Income Per Common Share: Basic $ .01 $ .14 ===== ===== Diluted $ .01 $ .13 ===== =====
5. Bank Loan Agreements -------------------- As of February 25, 1999, the Company replaced a previous agreement with a revised revolving credit, term loan and mortgage agreement with two banks which is secured by substantially all of the Company's assets not otherwise encumbered. The agreement provides for a revolving credit line of $23.0 million, a term loan of $20.0 million and a mortgage on its Plainview property for $4.5 million. The revolving credit and term loans expire in December 2002. The term loan is payable in quarterly installments of $1.25 million beginning September 30, 1999 with final payment on December 31, 2002. As of March 31, 1999, the outstanding term loan was $17.5 million. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to LIBOR (approximately 5.0% at March 31, 1999) plus 1.50% on the revolving credit borrowings and LIBOR plus 1.75% on the term loan borrowings. The Company paid a facility fee of $100,000 and is required to pay a commitment fee of .25% per annum of the average unused portion of the credit line. The Company mortgaged its Plainview, NY property in the amount of $4.5 million. This mortgage is payable in monthly installments of approximately $26,000 through March, 2008 and a balloon payment of $1.6 million in April 2008. The interest rate under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to LIBOR plus 1.50%. The terms of the agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit facility of $2.0 million. At March 31, 1999, the Company's available unused line of credit was approximately $21.0 million after consideration of the letter of credit. On December 29, 1998, the Company financed the acquisition and renovation of the land and building of its Pearl River, NY facility and received proceeds amounting to $4.2 million. These borrowings are payable in annual installments of approximately $200,000 through 2019. 6. Inventories ----------- Inventories consist of the following:
March 31, June 30, 1999 1998 --------- -------- (In thousands) Raw Materials $ 19,705 $ 12,012 Work in Process 11,864 12,737 Finished Goods 3,150 5,102 -------- -------- $ 34,719 $ 29,851 ======== ========
7. Income Taxes ------------ The Company is undergoing routine audits by various taxing authorities of several of its state and local income tax returns covering periods from 1994 to 1996. Management believes that the probable outcome of these various audits should not materially affect the consolidated financial statements of the Company. 8. Contingencies ------------- A subsidiary of the Company whose operations were discontinued in 1991, is one of several defendants named in a personal injury action initiated in August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages which cumulatively exceed $500 million. The complaint alleges, among other things, that the plaintiffs suffered injuries from exposure to substances contained in products sold by the subsidiary to one of its customers. This action is in the discovery stage. Based upon available information and considering its various defenses, together with its product liability insurance, in the opinion of management of the Company, the outcome of the action against its subsidiary will not have a materially adverse effect on the Company's consolidated financial statements. 9. Conversion of 7-1/2% Debentures ------------------------------- On September 8, 1997, the Company called for the redemption of all of its outstanding 7-1/2% Senior Subordinated Convertible Debentures ($10.0 million) at 104-1/2% of the principal amount. As of October 1997, all of the principal amount outstanding was converted into Common Stock at $5-5/8 per share. In connection with the conversions, $599,000 of deferred bond issuance costs were charged to additional paid-in capital. AEROFLEX INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Aeroflex, founded in 1937, utilizes its advanced design, engineering and manufacturing capabilities to provide state-of-the-art microelectronic module, integrated circuit, interconnect and testing solutions used in communication applications for commercial and defense markets. Its products are used in satellite, personal wireless, cable television ("CATV") and defense communications markets. It also designs and manufactures motion control systems and shock and vibration isolation systems used for commercial, industrial and defense applications. The Company's operations are grouped into three segments: Microelectronics; Test, Measurement and Other Electronics; and Isolator Products. The Company's consolidated financial statements include the accounts of Aeroflex and its subsidiaries, all of which are wholly-owned, except for Europtest, as discussed below. Effective February 25, 1999, the Company acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of cash. Prior to the acquisition, UTMC distributed by dividend to its then-parent, United Technologies Corporation, the assets and United Technologies assumed the liabilities of the circuit card assembly portion of UTMC's business. The purchase price was paid with available cash of $22.5 million and borrowings under the Company's bank loan agreement of $20.0 million. UTMC is a leader in supplying radiation-tolerant integrated circuits for satellite communications. The acquired company's net sales, excluding the circuit card assembly business, were approximately $33.4 million for the year ended December 31, 1998. Effective September 1, 1998, the Company acquired 90% of the stock of Europtest, S.A. (France) for approximately $1.1 million. The purchase agreement also requires that the Company purchase the remaining 10% of Europtest pro rata over a three-year period at prices determined based upon net sales of Europtest products. Europtest develops and sells specialized software-driven test equipment used primarily in cellular, satellite and other communications applications. The acquired company's net sales were approximately $1.9 million for the year ended March 31, 1998. Approximately 42% and 50% of the Company's sales for fiscal years 1998 and 1997, respectively, were to agencies of the United States Government or to prime defense contractors or subcontractors of the United States Government. The Company's overall dependence on the defense market has been declining following its 1996 acquisition of MIC Technology and the resulting expansion of its Microelectronics business which is more commercially oriented, and a focusing of resources towards developing standard products for the commercial market. Management believes that potential reductions in defense spending will not materially affect its operations. In certain product areas, the Company has suffered reductions in sales volume due to cutbacks in the military budget. In other product areas, the Company has experienced increased sales volume due to a realignment of government spending towards upgrading existing systems instead of purchasing completely new systems. The overall effect of the cutbacks and realignment has not been material to the Company. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure About Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. The Company adopted this standard effective July 1, 1998, as required, and does not believe the adoption will result in a material change to its segment disclosures in its fiscal 1999 annual financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. This statement requires companies to record derivatives on the balance sheet as assets or liabilities at their fair value. In certain circumstances changes in the value of such derivatives may be required to be recorded as gains or losses. Management believes that the impact of this statement will not have a material effect on the Company's consolidated financial statements. Market Risk The Company is exposed to market risk related to changes in interest rates and, to an immaterial extent, foreign currency exchange rates. Some of the Company's debt is at fixed rates of interest or at a variable rate with an interest rate swap agreement to effectively make it a fixed rate of interest. That debt which is subject to a floating rate of interest (30-day LIBOR) and is not hedged by an interest rate swap amounts to approximately $26.7 million at March 31, 1999. If market interest rates increase by 10 percent from levels at March 31, 1999, the effect on the Company's results of operations would not be material. Year 2000 Compliance Management has initiated a company-wide program and has developed a formal plan of implementation to prepare the Company for the Year 2000. This includes taking actions designed to ensure that the Company's information technology ("IT") systems, products and infrastructure are Year 2000 compliant and that its customers, suppliers and service providers have taken similar action. The Company is in the process of evaluating its internal issues - all of its IT systems, products, equipment and other facilities systems - and modifying items that are not compliant. With respect to its external issues customers, suppliers and service providers - the Company is surveying them primarily through written correspondence. The Company expects to incur internal staff costs, as well as consulting and other expenses, and believes the total costs to be incurred for all internal Year 2000 compliance related projects will not have a material impact on the Company's business, results of operations or financial condition. The Company has completed substantially all of its investigation, remediation and contingency planning activities for all mission critical systems and areas. The Company has received written correspondence from substantially all mission critical third parties indicating their compliance but has also created contingency plans such as increasing inventory levels and identifying alternative sources. Despite its efforts to survey its customers, suppliers and service providers, management cannot be certain as to the actual Year 2000 readiness of these third parties or the impact that any non-compliance on their part may have on the Company's business, results of operations or financial condition, which impact may be material. Results of Operations Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998 Net Sales. Net sales increased 28.4% to $108.4 million for the nine months ended March 31, 1999 from $84.4 million for the nine months ended March 31, 1998. Net sales in the Microelectronics segment increased 29.3% to $68.1 million for the nine months ended March 31, 1999 from $52.7 million for the nine months ended March 31, 1998 due to increased sales volume in both microelectronic modules and thin film interconnects and due to the acquisition of UTMC at the end of February 1999. Net sales in the Test, Measurement and Other Electronics segment increased 49.4% to $26.9 million for the nine months ended March 31, 1999 from $18.0 million for the nine months ended March 31, 1998 primarily due to increased sales volume in both frequency synthesizers (including shipments on the new Navy CASS program) and high speed automatic test systems (primarily satellite payload test equipment for Hughes Space and Communications) and due to the acquisition of Europtest in September 1998 offset in part by decreased sales volume in stabilization and tracking devices. Net sales in the Isolator Products segment decreased 2.5% to $13.4 million for the nine months ended March 31, 1999 from $13.7 million for the nine months ended March 31, 1998. Gross Profit. Cost of sales includes materials, direct labor and overhead expenses such as engineering labor, fringe benefits, allocable occupancy costs, depreciation and manufacturing supplies. Gross profit increased 34.2% to $38.9 million for the nine months ended March 31, 1999 from $29.0 million for the nine months ended March 31, 1998. Gross margin increased to 35.9% for the nine months ended March 31, 1999 from 34.4% for the nine months ended March 31, 1998. The increase was primarily a result of increased margins in the Microelectronics segment reflecting the greater efficiencies of higher volume and a favorable sales mix in that segment. Selling, General and Administrative Costs. Selling, general and administrative costs include office and management salaries, fringe benefits, commissions and advertising costs. Selling, general and administrative costs increased 14.3% to $18.3 million (16.9% of net sales) for the nine months ended March 31, 1999 from $16.0 million (19.0% of net sales) for the nine months ended March 31, 1998. The increase was primarily due to labor related expenses, including salaries for additional hires. Research and Development Costs. Research and development costs consist of material, engineering labor and allocated overhead. Company sponsored research and development costs (exclusive of the charge for acquired in-process research and development) increased 95.8% to $6.9 million (6.3% of net sales) for the nine months ended March 31, 1999 from $3.5 million (4.2% of net sales) for the nine months ended March 31, 1998. The increase was primarily attributable to the costs for development of a new low-cost, high speed, high performance frequency synthesizer intended for commercial communication test systems. Acquired In-Process Research and Development. In connection with the acquisition of UTMC, the Company allocated $3.5 million of the purchase price to incomplete research and development projects. This allocation represents the estimated fair value based on future cash flows that have been adjusted by the projects' completion percentage. At the acquisition date, the development of these projects had not yet reached technological feasibility and the R&D in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. The Company used an independent third-party appraiser to assess and value the in- process research and development. The value assigned to this asset was determined by identifying significant research projects for which technological feasibility had not been established. In the case of UTMC, this included the design, development, and testing activities associated with its Commercial Products, Data Bus Products, Radiation Hardened ("RadHard") Products and ASIC Products. The research and development projects are associated with the introduction of several new products as well as specific significant enhancements to existing products. Valuation of development efforts in the future has been excluded from the R&D appraisal. The nature of the efforts to develop the acquired in-process technology into a commercially viable product relate to the completion of all planning, designing, and prototyping and testing activities that are necessary to establish that the proposed technologies meet their design specifications including functional, technical and economic performance requirements. The value assigned to purchased in-process technology was determined by estimating the contribution of the purchased in-process technology in developing a commercially viable product, estimating the resulting net cash flows from the expected sales of such a product, and discounting the net cash flows to their present value using an appropriate discount rate. Revenue growth rates for UTMC were estimated by the third party appraiser based on a detailed forecast prepared by management, as well as the appraiser's discussions with finance, marketing and engineering representatives of Aeroflex and UTMC. Allocation of total UTMC projected revenues to in-process R&D was based on the appraiser's discussions with Aeroflex and UTMC management. A significant portion of UTMC's future revenues is expected to originate from the sale of products that are not yet completed. However, UTMC's existing products and technologies are expected to generate sales through 2008. Management believes that sales of the new products, if successfully completed, would begin in the later half of 1999. Selling, general and administrative expenses and profitability estimates were determined based on management forecasts as well as an analysis of comparable companies' margin expectations. The projections utilized in the transaction pricing and purchase price allocation exclude the potential synergistic benefits related specifically to Aeroflex's ownership. Due to the relatively early stage of the development and reliance on future, unproven products and technologies, the cost of capital (discount rate) for UTMC was estimated using venture capital rates of return. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the development projects, a discount rate of 45 percent was used to discount cash flows from the in-process products. This discount rate is commensurate with UTMC's market position, the uncertainties in the economic estimates described above, the inherent uncertainty surrounding the successful development of the purchased in-process technology, the useful life of such technology, the profitability levels of such technology, and the uncertainty related to technological advances that could render even UTMC's development stage technologies obsolete. The Company believes that the foregoing assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate sales, development costs or profitability, or the events associated with such projects will transpire as estimated. For these reasons, actual results may vary from projected results. Remaining development efforts for UTMC's R&D include various phases of design, development, and testing. Anticipated completion dates for the projects in progress will occur in 1999 at which time the Company expects to begin generating the economic benefits from the technologies. Funding for such projects is expected to come from internally generated sources. As evidenced by the continued support of the development of its projects, management believes the Company has a reasonable chance of successfully completing the R&D programs. However, as with all of Aeroflex's technology development, there is risk associated with the completion of the UTMC R&D projects, and there is no assurance that technological or commercial success will be achieved. If the development of UTMC's in-process research and development project is unsuccessful, the sales and profitability of the Company may be adversely affected in future periods. Commercial results are also subject to certain market events, and risks, which are beyond the Company's control, such as trends in technology, changes in government regulation, market size and growth, and product introduction or other actions by competitors. Other Expense (Income). Interest expense decreased to $1.0 million for the nine months ended March 31, 1999 from $1.8 million for the nine months ended March 31, 1998, primarily due to reduced levels of borrowings throughout most of the current period. Other income of $734,000 for the nine months ended March 31, 1999 consisted primarily of interest income. Other expense was $41,000 for the nine months ended March 31, 1998 comprised primarily of $102,000 of debenture redemption costs net of $62,000 of interest income. Interest income increased due to increased levels of cash equivalents throughout most of the current period. The reduced levels of borrowings and the increased levels of cash equivalents resulted from the net proceeds of $31.3 million from stock issued in a public offering completed in March 1998. In connection with the acquisition of UTMC at the end of February 1999, the Company used most of its cash equivalents and increased its borrowings by $20.0 million. Provision for Income Taxes. Income taxes recorded by the Company increased 70.9% to $4.7 million (an effective income tax rate of 34.9%, exclusive of the special charge) for the nine months ended March 31, 1999 from $2.8 million (an effective income tax rate of 36.0%) for the nine months ended March 31, 1998. The income tax provisions for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to state and local income taxes and research and development credits. Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Net Sales. Net sales increased 30.1% to $40.6 million for the three months ended March 31, 1999 from $31.2 million for the three months ended March 31, 1998. Net sales in the Microelectronics segment increased 31.4% to $25.8 million for the three months ended March 31, 1999 from $19.6 million for the three months ended March 31, 1998 primarily due to increased sales volume of microelectronic modules and as a result of the acquisition of UTMC at the end of February 1999. Net sales in the Test, Measurement and Other Electronics segment increased 50.6% to $10.1 million for the three months ended March 31, 1999 from $6.7 million for the three months ended March 31, 1998 primarily as a result of increased sales volume of frequency synthesizers (including shipments on the new Navy CASS program). Net sales in the Isolator Products segment decreased 3.6% to $4.7 million for the three months ended March 31, 1999 from $4.9 million for the three months ended March 31, 1998. Gross Profit. Gross profit increased 41.5% to $15.4 million for the three months ended March 31, 1999 from $10.9 million for the three months ended March 31, 1998. Gross margin increased to 37.9% for the three months ended March 31, 1999 from 34.9% for the three months ended March 31, 1998. The increase was primarily a result of increased margins in the Microelectronics segment reflecting the greater efficiencies of higher volume and because UTMC generally has higher margins than the balance of the Company. Selling, General and Administrative Costs. Selling, general and administrative costs increased 22.3% to $6.9 million (17.0% of net sales) for the three months ended March 31, 1999 from $5.7 million (18.1% of net sales) for the three months ended March 31, 1998. The increase was primarily due to the addition of UTMC expenses. Research and Development Costs. Company sponsored research and development costs (exclusive of the charge for acquired in-process research and development) increased 74.2% to $2.6 million (6.4% of net sales) for the three months ended March 31, 1999 from $1.5 million (4.7% of net sales) for the three months ended March 31, 1998. The increase was primarily attributable to the acquisition of UTMC, since UTMC generally has a larger amount of research and development costs. Acquired In-Process Research and Development. In connection with the Company's purchase of UTMC, the Company allocated $3.5 million of the purchase price to in-process research and development. Since the research and development projects had not reached technological feasability, this $3.5 million was charged to expense in the third quarter of fiscal 1999 in accordance with generally accepted accounting principles. Other Expense (Income). Interest expense decreased to $457,000 for the three months ended March 31, 1999 from $548,000 for the three months ended March 31, 1998, primarily due to reduced levels of borrowings throughout most of the current quarter. Other income, net was $190,000 for the three months ended March 31, 1999 including interest income of $184,000. Other income was $33,000 for the three months ended March 31, 1998. Interest income increased due to increased levels of cash equivalents throughout most of the current quarter. The reduced levels of borrowings and the increased levels of cash equivalents resulted from the net proceeds of $31.3 million from stock issued in a public offering completed in March 1998. In connection with the acquisition of UTMC at the end of February 1999, the Company used most of its cash equivalents and increased its borrowings by $20.0 million. Provision for Income Taxes. Income taxes recorded by the Company increased 66.0% to $2.0 million (an effective income tax rate of 34.6% exclusive of the special charge) for the three months ended March 31, 1999 from $1.2 million (an effective income tax rate of 36.4%) for the three months ended March 31, 1998. The income tax provisions for the two quarters differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to state and local income taxes and research and development credits. Liquidity and Capital Resources As of February 25, 1999, the Company replaced a previous agreement with a revised revolving credit, term loan and mortgage agreement with two banks which is secured by substantially all of the Company's assets not otherwise encumbered. The agreement provides for a revolving credit line of $23.0 million, a term loan of $20.0 million and a mortgage on its Plainview property for $4.5 million. The revolving credit and term loans expire in December 2002. The term loan is payable in quarterly installments of $1.25 million beginning September 30, 1999 with final payment on December 31, 2002. As of March 31, 1999, the outstanding term loan was $17.5 million. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to LIBOR (approximately 5.0% at March 31, 1999) plus 1.50% on the revolving credit borrowings and LIBOR plus 1.75% on the term loan borrowings. The Company paid a facility fee of $100,000 and is required to pay a commitment fee of .25% per annum of the average unused portion of the credit line. The Company mortgaged its Plainview, NY property in the amount of $4.5 million. This mortgage is payable in monthly installments of approximately $26,000 through March, 2008 and a balloon payment of $1.6 million in April 2008. The interest rate under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to LIBOR plus 1.50%. The terms of the agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit facility of $2.0 million. At March 31, 1999, the Company's available unused line of credit was approximately $21.0 million after consideration of the letter of credit. On December 29, 1998, the Company financed the acquisition and renovation of the land and building of its Pearl River, NY facility and received proceeds amounting to $4.2 million. These borrowings are payable in annual installments of approximately $200,000 payable through 2019. In March 1998, the Company sold 2.6 million shares of its Common Stock in a public offering for $31.3 million, net of an underwriting discount of $2.0 million and issuance costs of $496,000. Of these net proceeds, $9.6 million was used to repay bank indebtedness. The balance of the net proceeds was used primarily for the acquisition of UTMC. During June 1994, the Company completed a sale of $10.0 million principal amount of 7- 1/2% Senior Subordinated Convertible Debentures ("Debentures"). On September 8, 1997, the Company called for redemption all of its outstanding Debentures at 104-1/2% of the principal amount. The Debentures were convertible into the Company's Common Stock at a price of $5-5/8 per share through October 6, 1997. As of October 1997, all of the principal amount outstanding was converted into Common Stock. The Company's order backlog at March 31, 1999 and 1998 was $92.1 million and $69.4 million, respectively. As of March 31, 1999, the Company had $45.8 million in working capital. The Company's net cash provided by operating activities was $7.2 million for the nine months ended March 31, 1999. Net cash used in investing activities was $49.4 million for the nine months ended March 31, 1999, consisting primarily of $43.5 million for the acquisition of both UTMC and Europtest and $6.9 million for capital expenditures (including $2.5 million for the acquisition of a previously leased operating facility in Pearl River, NY) offset by the proceeds from the sale of equipment of $1.0 million under a sale-leaseback arrangement. Net cash provided by financing activities was $21.3 million for the nine months ended March 31, 1999, consisting primarily of the proceeds of $20.0 million from the revised revolving credit and term loan facility and $4.2 million from the financing of the Pearl River, NY facility, offset, in part, by debt payments of $3.9 million. Management of the Company believes that internally generated funds and available lines of credit will be sufficient for its working capital requirements, capital expenditure needs and the servicing of its debt for at least the next twelve months. Forward-Looking Statements All statements other than statements of historical fact included in this Report on Form 10-Q, including without limitation statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations, are forward-looking statements. When used in this Report on Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward- looking statements. Such forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements, as a result of certain factors, including but not limited to competitive factors and pricing pressures, changes in legal and regulatory requirements, technological change or difficulties, product development risks, commercialization difficulties, the ability of the Company to integrate the production facilities of UTMC, and general economic conditions. Such statements reflect the current views of the Company with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. AEROFLEX INCORPORATED AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities On February 10, 1999, the Company amended its Certificate of Incorporation to increase its authorized capital stock to 41,000,000 shares, of which 40,000,000 shares are common stock, $0.10 par value and 1,000,000 are preferred stock, $0.10 par value from 26,000,000 shares, of which 25,000,000 were common stock, $0.10 par value and 1,000,000 were preferred stock, $0.10 par value. In connection with the amendment to the Company's Certificate of Incorporation, on February 10, 1999, the Company amended its Certificate of Designation for its Series A Junior Participating Preferred Stock to increase the number of shares designated to 40,000 from 25,000 Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Employment Agreement dated as of March 1, 1999 between the Company and Harvey R. Blau. 10.2 Employment Agreement dated as of March 1, 1999 between the Company and Michael Gorin. 10.3 Employment Agreement dated as of March 1, 1999 between the Company and Leonard Borow. 27 Financial Data Schedule (b) Reports on Form 8-K (1) Current Report on Form 8-K dated February 25, 1999 covering Item 2- Acquisition or Disposition of Assets, Item 5 - Other Events and Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits. (2) Report on Form 8-K/A dated May 5, 1999 covering Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AEROFLEX INCORPORATED (REGISTRANT) May 12, 1999 By: s/Michael Gorin -------------------------------- Michael Gorin President, Chief Financial Officer and Principal Accounting Officer EX-27 2
5 The schedule contains summary financial information extracted from the consolidated financial statements for the nine months ended March 31, 1999 and is qualified in its entirety by reference to such statements. 9-MOS JUN-30-1999 MAR-31-1999 3,515 0 32,957 301 34,719 78,300 82,551 32,763 159,988 32,475 0 0 0 1,793 93,701 159,988 108,430 108,430 69,504 98,184 0 0 1,024 9,956 4,700 5,256 0 0 0 5,256 .30 .28
EX-10.1 3 April 15, 1999 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of March 1, 1999 (the "Effective Date"), by and between Aeroflex Incorporated, a Delaware corporation, with its principal office located at 35 South Service Road, Plainview, New York 11803 (together with its successors and assigns permitted under this Agreement, "Aeroflex") and Harvey R. Blau, who resides at 125 Wheatley Road, Old Westbury, New York 11568 ("Blau"), amends and restates in its entirety the original agreement made and entered into as of July 1, 1994 between Aeroflex and Blau, as subsequently amended through July 1, 1998 (the "Prior Agreement"). WITNESSETH: WHEREAS, Aeroflex has determined that it is in the best interests of Aeroflex and its stockholders to continue to employ Blau and to set forth in this Agreement the obligations and duties of both Aeroflex and Blau; and WHEREAS, Aeroflex wishes to assure itself of the services of Blau for the period hereinafter provided, and Blau is willing to be employed by Aeroflex for said period, upon the terms and conditions provided in this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, Aeroflex and Blau (individually a "Party" and together the "Parties") agree as follows: 1. DEFINITIONS. (a) "Beneficiary" shall mean the person or persons named by Blau pursuant to Section 17 below or, in the event that no such person is named who survives Blau, his estate. (b) "Board" shall mean the Board of Directors of Aeroflex. (c) "Cause" shall mean: (i) Blau's conviction of a felony involving an act or acts of dishonesty on his part and resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of Aeroflex; (ii) willful and continued failure of Blau to perform his obligations under this Agreement, resulting in demonstrable material economic harm to Aeroflex, or (iii) a material breach by Blau of the provisions of Sections 14 or 15 below to the demonstrable and material detriment of Aeroflex. Notwithstanding the foregoing, in no event shall Blau's failure to perform the duties associated with his position caused by his mental or physical disability constitute Cause for his termination. For purposes of this Section 1(c), no act or failure to act on the part of Blau shall be considered "willful" unless it is done, or omitted to be done, by him in bad faith or without reasonable belief that his action or omission was in the best interests of Aeroflex. Any act or failure to act based upon authority given pursuant to a resolution adopted by the Board or based upon the advice of counsel for Aeroflex shall be conclusively presumed to be done, or omitted to be done, by Blau in good faith and in the best interests of Aeroflex. (d) "Change in Control" shall mean the occurrence of any of the following events: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of Aeroflex when such acquisition causes such Person to own 20 percent or more of the combined voting power of the then outstanding voting securities of Aeroflex entitled to vote generally in the election of directors (the "Outstanding Aeroflex Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change in Control: (A) any acquisition directly from Aeroflex, (B) any acquisition by Aeroflex, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Aeroflex or any corporation controlled by Aeroflex or (D) any acquisition pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Aeroflex Voting Securities reaches or exceeds 20 percent as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of Aeroflex, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20 percent or more of the Outstanding Aeroflex Voting Securities; or (ii) individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by Aeroflex's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a reorganization, merger or consolidation or sale or other disposition of all or subsequently all of the assets of Aeroflex or the acquisition of assets of another entity ("Business Combination"); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Aeroflex Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60 percent of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns Aeroflex or all or substantially all of Aeroflex's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Aeroflex Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of Aeroflex or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20 percent or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the stockholders of Aeroflex of a complete liquidation or dissolution of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board. (g) "Consulting Period" shall mean the period specified in Section 13 below during which Blau serves as a consultant to Aeroflex. (h) "Disability" shall mean the illness or other mental or physical disability of Blau, as determined by a physician acceptable to Aeroflex and Blau, resulting in his failure during the Employment Term or the Consulting Period, as the case may be, (i) to perform substantially his applicable material duties under this Agreement for a period of nine consecutive months and (ii) to return to the performance of his duties within 30 days after receiving written notice of termination. (i) "Employment Term" shall mean the period specified in Section 2(b) below. (j) "Fiscal Year" shall mean the 12-month period beginning on July 1 and ending on the next subsequent June 30, or such other 12-month period as may constitute Aeroflex's fiscal year at any time hereafter. (k) "Good Reason" shall mean, at any time during the Employment Term, without Blau's prior written consent or his acquiescence: (i) reduction in his then current Salary; (ii) diminution, reduction or other adverse change in the bonus or incentive compensation opportunities available to Blau (with respect to the level of bonus or incentive compensation opportunities, the applicable performance criteria and otherwise the manner in which bonuses and incentive compensation are determined) in the aggregate from those available as of the Effective Date in accordance with Section 4(a) below; (iii) Aeroflex's failure to pay Blau any amounts otherwise vested and due him hereunder or under any plan or policy of Aeroflex; (iv) diminution of Blau's titles, position, authorities or responsibilities, including not serving on the Board; (v) assignment to Blau of duties incompatible with his position of Chief Executive Officer; (vi) termination by Blau of his employment within one year following a Change in Control other than (a) by mutual agreement, (b) for Cause or (c) by reason of Retirement, death or Disability; (vii) imposition of a requirement that Blau report other than directly to the full Board; (viii) a material breach of the Agreement by Aeroflex that is not cured within 10 business days after written notification by Blau of such breach; or (ix) relocation of Aeroflex's corporate headquarters to a location more than 35 miles from the location first above described. (l) "Retirement" shall mean termination of Blau's employment, other than due to death, with eligibility to receive a benefit under the terms of Aeroflex's Supplemental Executive Retirement Plan as then in effect. (m) "Salary" shall mean the annual salary provided for in Section 3 below, as adjusted from time to time. (n) "Spouse" shall mean, during the Employment Term and the Consulting Period, the woman who as of any relevant date is legally married to Blau. (o) "Subsidiary" shall mean any corporation of which Aeroflex owns, directly or indirectly, more than 50 percent of its voting stock. 2. EMPLOYMENT TERM, POSITIONS AND DUTIES. (a) Employment of Blau. Aeroflex hereby continues to employ Blau, and Blau hereby accepts continued employment with Aeroflex, in the positions and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. Blau shall render services to Aeroflex principally at Aeroflex's corporate headquarters, but he shall do such traveling on behalf of Aeroflex as shall be reasonably required in the course of the performance of his duties hereunder. (b) Employment Term. The Employment Term shall commence on the Effective Date and shall terminate on June 30, 2004. (c) Titles and Duties. (i) Until the date of termination of his employment hereunder, Blau shall be employed as Chief Executive Officer, reporting to the full Board. In his capacity as Chief Executive Officer, Blau shall have the customary powers, responsibilities and authorities of chief executive officers of corporations of the size, type and nature of Aeroflex including, without limitation, authority, in conjunction with the Board as appropriate, to hire and terminate other employees of Aeroflex. (ii) During the Employment Term, Aeroflex shall uses its best efforts to secure the election of Blau to the Board and to the chairmanship thereof. During the Employment Term, if the Board forms an executive or similar committee, Blau shall serve thereon. (d) Time and Effort. (i) Blau agrees to devote his best efforts and abilities, and such of his business time and attention as is reasonably necessary, to the affairs of Aeroflex in order to carry out his duties and responsibilities under this Agreement. The Parties hereby acknowledge that Blau is chairman of the board of Griffon Corporation and senior partner of the law firm, Blau, Kramer, Wactlar & Lieberman, P.C. and that during the Employment Term he will be devoting time and attention to those activities. (ii) Notwithstanding the foregoing, nothing shall preclude Blau from (A) serving on the boards of a reasonable number of trade associations, charitable organizations and/or businesses not in competition with Aeroflex, (B) engaging in charitable activities and community affairs and (C) managing his personal investments and affairs; provided, however, that, such activities do not materially interfere with the proper performance of his duties and responsibilities specified in Section 2 (c) above. 3. SALARY. (a)Initial Salary. Blau shall receive from Aeroflex a Salary, payable in accordance with the regular payroll practices of Aeroflex, in a minimum amount of $275,000. (b) Cost-of-Living Increase. During the Employment Term, Blau's Salary shall be increased semiannually by an amount equal to the increase in the cost of living for the immediately preceding calendar half-year, as reported in the "Consumer Price Index, New York and Northeastern New Jersey, All Items," published by the United States Department of Labor, Bureau of Labor Statistics (or, if such index is no longer published, a successor or comparable index that is published). Such amount shall be calculated and paid to Blau in a single sum on or before the first day of the second month following the applicable calendar half year, and thereafter his Salary shall be deemed to include the amount of any such increase. The first calculation and payment shall be made on or before August 1, 1999 with respect to the period July 1, 1998 through June 30, 1999. If Blau's employment shall terminate during any such six-month period, the cost-of-living increase provided in this Section 3(b) shall be prorated accordingly. (c) Salary Increase. Any amount to which Blau's Salary is increased, as provided in Section 3(b) above or otherwise, shall not thereafter be reduced without his consent, and the term "Salary" as used in this Agreement shall refer to his Salary as thus increased. 4. BONUSES. (a) Annual Bonus. For each Fiscal Year during the Employment Term Blau shall be eligible to receive an annual bonus equal to 3 percent of Aeroflex's consolidated pre-tax earnings for such Fiscal Year, computed without regard to any amount due under this Section 4(a). Any such bonus payable with respect to a portion of a Fiscal Year shall be prorated accordingly. Blau shall be entitled to elect to defer, under the terms of any deferred compensation agreement or annual incentive compensation plan applicable to him and then in effect, any portion of his annual bonus that is not already subject to deferral thereunder. (b) Special Bonus. Blau shall be eligible to receive additional bonuses during the Employment Term. The Committee shall determine, in its discretion, the occasion for payment, and the amount, of any such bonus. 5. LONG-TERM INCENTIVE. During the Employment Term, Blau shall be eligible for an award under any long-term incentive compensation plan established by Aeroflex for the benefit of Blau or, in the absence thereof, under any such plan established for the benefit of members of the senior management of Aeroflex. 6. EQUITY OPPORTUNITY. During the Employment Term, Blau shall be eligible to receive grants of options to purchase shares of Aeroflex's stock and awards of shares of Aeroflex's stock, either or both as determined by the Committee, under and in accordance with the terms of applicable plans of Aeroflex and related option and award agreements. It is the intention of Aeroflex to grant stock options to Blau during the Employment Term. Also, to the extent permitted by any such plan, Blau shall be eligible during any Consulting Period to receive grants of options and awards of shares of Aeroflex's stock in the same manner. 7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS. During the Employment Term and any Consulting Period, Blau shall be entitled to prompt reimbursement by Aeroflex for all reasonable out-of-pocket expenses incurred by him in performing services under this Agreement, upon his submission of such accounts and records as may be reasonably required by Aeroflex. In addition, Blau shall be entitled to payment by Aeroflex of all reasonable costs and expenses, including attorneys' and consultants' fees and disbursements, incurred by him in connection with adoption of this Agreement and any related compensatory arrangements that Aeroflex adopts solely for his benefit. 8. PERQUISITES. During the Employment Term and, and any Consulting Period, Aeroflex shall provide Blau with the following perquisites: (a) an office of a size and with furnishings and other appointments, and exclusive personal secretarial and other assistance, at least equal to that provided to other executive officers of Aeroflex as of the Effective Date; and (b) payment of club dues and the use of an automobile and payment of related expenses on the same terms as are in effect on the Effective Date or, if more favorable to Blau, as are made available generally to other executive officers of Aeroflex at any time thereafter. 9. EMPLOYEE BENEFIT PLANS. (a) General. During the Employment Term, Blau shall be entitled to participate in all employee benefit plans and programs that are made available to Aeroflex's senior executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, pension and other retirement plans, profit-sharing plans, savings and similar plans, group life insurance, accidental death and dismemberment insurance, travel accident insurance, hospitalization insurance, surgical insurance, major and excess major medical insurance, dental insurance, short-term and long-term disability insurance, sick leave (including salary continuation arrangements), holidays, vacation (not less than four weeks in any calendar year) and any other employee benefit plans or programs that may be sponsored by Aeroflex from time to time, including plans that supplement the above-listed types of plans, whether funded or unfunded. (b) Medical Care Reimbursement and Insurance. During the Employment Term and Consulting Period, Aeroflex shall reimburse Blau for 100 percent of any medical expenses incurred by him for himself and his Spouse that are not reimbursed by insurance or otherwise, offset by any amounts that are reimbursable by Medicare if Blau and his Spouse, when eligible, elect to be covered by Medicare. Aeroflex shall provide Blau and his Spouse during his lifetime with hospitalization insurance, surgical insurance, major and excess major medical insurance and dental insurance in accordance with the most favorable plans, policies, programs and practices of Aeroflex and its Subsidiaries made available generally to other senior executive officers of Aeroflex and its Subsidiaries as in effect from time to time. (c) Life Insurance Benefit. In addition to the group life insurance available to employees generally, Aeroflex shall provide Blau with an individual permanent life insurance benefit in an initial amount of not less than approximately $250,000, the terms and conditions of such benefit to be more fully described in an insurance ownership agreement between Blau and Aeroflex. (d) Disability Benefit. In consideration of the benefit payable to Blau in the event of termination of his employment due to Disability, as provided in Section 10(e) below, or, if applicable, in the event of termination of Blau's consulting services due to Disability during the Consulting Period, as provided in Section 13(d) below, Aeroflex shall not be obligated to provide Blau with long-term disability insurance. Notwithstanding the foregoing, if Aeroflex does provide Blau with such insurance, he shall be the owner of any individual policies obtained and shall pay the premiums thereon. (e) Retirement Benefit. Blau shall be entitled to the benefits provided under the Aeroflex Incorporated Supplemental Executive Retirement Plan (the "SERP"); provided, however, that if Aeroflex fails to maintain the SERP, Blau's retirement benefit shall be determined as if the SERP had remained in effect until termination of his employment with Aeroflex by retirement. These benefits are in addition to the benefits provided under this Agreement, and no modification, amendment or termination of this Agreement shall affect Blau's rights under the SERP as in effect on the Effective Date or, if more favorable to Blau, as in effect at any time thereafter. 10. TERMINATION OF EMPLOYMENT. (a) Termination by Mutual Agreement. The Parties may terminate this Agreement by mutual agreement at any time. If they do so, Blau's entitlements shall be as the Parties mutually agree. (b) General. Notwithstanding anything to the contrary herein, in the event of termination of Blau's employment under this Agreement, he or his Beneficiary, as the case may be, shall be entitled to receive (in addition to payments and benefits under, and except as specifically provided in, subsections (c) through (h) below, as applicable): (i) his Salary through the date of termination; (ii) any unused vacation from prior years; (iii) any annual bonus for the current Fiscal Year, prorated to the date of termination; (iv) any annual or special bonus previously awarded but not yet paid to him; (v) any deferred compensation under any incentive compensation plan of Aeroflex or any deferred compensation agreement then in effect; (vi) any other compensation or benefits, including without limitation long-term incentive compensation described in Section 5 above, benefits under equity grants and awards described in Section 6 above and employee benefits under plans described in Section 9 above, that have vested through the date of termination or to which he may then be entitled in accordance with the applicable terms and conditions of each grant, award or plan; and (vii) reimbursement in accordance with Sections 9(a) and (b) above of any business and medical expenses incurred by Blau or his Spouse, as applicable, through the date of termination but not yet paid to him. (c) Termination due to Retirement. In the event that Blau's employment terminates due to Retirement, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to the benefits provided under the SERP, as provided in Section 9(e) above. The Consulting Period shall begin on the day following termination of Blau's employment by Retirement. (d) Termination due to Death. In the event that Blau's employment terminates due to his death, his Beneficiary shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination. (e) Termination due to Disability. In the event of Disability, Aeroflex or Blau may terminate Blau's employment. If Blau's employment terminates due to Disability, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination, offset by any long-term disability insurance benefit that Aeroflex has provided for him and for which it has paid the applicable group or individual insurance premiums. (f) Termination by Aeroflex for Cause. Aeroflex may terminate Blau's employment hereunder for Cause only upon written notice to Blau not less than 30 days prior to any intended termination, which notice shall specify the grounds for such termination in reasonable detail. Cause shall in no event be deemed to exist except upon a finding reflected in a resolution approved by a majority (excluding Blau) of the members of the Board (whose findings shall not be binding upon or entitled to any deference by any court, arbitrator or other decision-maker ruling on this Agreement) at a meeting of which Blau shall have been given proper notice and at which Blau (and his counsel) shall have a reasonable opportunity to present his case. In the event that Blau's employment is terminated for Cause, he shall be entitled only to the compensation and benefits specified in Section 10(b). (g) Termination Without Cause or by Blau for Good Reason. (i) Termination without Cause shall mean termination of Blau's employment by Aeroflex and shall exclude termination (A) due to Retirement, death, Disability or Cause or (B) by mutual agreement of Blau and Aeroflex. Aeroflex shall provide Blau 15 days' prior written notice of termination by it without Cause, and Blau shall provide Aeroflex 15 days' prior written notice of his termination for Good Reason. (ii) In the event of termination by Aeroflex of Blau's employment without Cause or of termination by Blau of his employment for Good Reason, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to: (A) his Salary, payable for the remainder of the Employment Term at the rate in effect immediately before such termination; (B) annual bonuses for the remainder of the Employment Term (including a prorated bonus for any partial Fiscal Year) equal to the average of the three highest annual bonuses awarded to him during the ten Fiscal Years preceding the Fiscal Year of termination, such bonuses to be paid at the same time annual bonuses are regularly paid by Aeroflex to Blau; (C) continued medical reimbursement for the remainder of the Employment Term and thereafter the lifetime medical benefits described in Section 9(b) above; (D) a lump-sum payment equal to the then present value of the excess, if any, of (x) the retirement benefit to which Blau would have been entitled if he had remained employed under this Agreement until age 70 over (y) the early retirement benefit actually payable to him, both as calculated and payable under the SERP; and (E) continued participation in all employee benefit plans or programs available to Aeroflex employees generally in which Blau was participating on the date of termination of his employment until the end of the Employment Term; provided; however, that (x) if Blau is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (E), he shall be entitled to the after-tax economic equivalent of the benefits under the plan or program in which he is unable to participate until the end of the Employment Term, and (y) the economic equivalent of any benefit foregone shall be deemed to be the lowest cost that Blau would incur in obtaining such benefit on an individual basis; and (F) other benefits in accordance with applicable plans and programs of the Company. (iii) Prior written consent by Blau to any of the events described in Section 1(k) above shall be deemed a waiver by him of his right to terminate for Good Reason under this Section 10(g) solely by reason of the events set forth in such waiver. (h) Change in Control. Notwithstanding anything to the contrary in this Section 10, termination of Blau's employment within the one-year period following a Change in Control for any reason other than Cause, Retirement, death or Disability, shall be governed by Section 10(g). In the event of any such termination, Blau shall be entitled to compensation and benefits in accordance with the provisions of Section 10(g)(ii). 11. NO DUTY TO MITIGATE; NO OFFSET. Blau shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payment hereunder be subject to offset in the event Blau does receive compensation for services from any other source. 12. PARACHUTES. (a) Application. If all, or any portion, of the payments provided under this Agreement, and/or any other payments and benefits that Blau receives or is entitled to receive from Aeroflex or a Subsidiary, whether or not under an existing plan, arrangement or other agreement, constitutes an "excess parachute payment" within the meaning of Section 280G(b) of the Code (each such parachute payment, a "Parachute Payment") and will result in the imposition on Blau of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which Blau is entitled under this Agreement, Aeroflex shall pay him an amount in cash equal to the sum of the excise taxes payable by him by reason of receiving Parachute Payments, plus the amount necessary to put him in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including without limitation any payments under this Section 12) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). (b) Computation. The amount of any payment under this Section 12 shall be computed by a certified public accounting firm of national reputation selected by Aeroflex and acceptable to Blau. If Aeroflex or Blau disputes the computation rendered by such accounting firm, Aeroflex shall select an alternative certified public accounting firm of national reputation to perform the applicable computation. If the two accounting firms cannot agree upon the computations, Blau and Aeroflex shall jointly appoint a third certified public accounting firm of national reputation within 10 calendar days after the two conflicting computations have been rendered. Such third accounting firm shall be asked to determine within 30 calendar days the computation of the Parachute Gross-up to be paid to Blau, and payments shall be made accordingly. (c) Payment. In any event, Aeroflex shall pay to Blau or pay on his behalf the Parachute Gross-up as computed by the accounting firm initially selected by Blau by the time any taxes payable by him as a result of the Parachute Payments become due, with Blau agreeing to return the excess amount of such payment over the final computation rendered from the process described in Section 12(b). Blau and Aeroflex shall provide the accounting firms with all information that any of them reasonably deems necessary in order to compute the Parachute Gross-up. The cost and expenses of all the accounting firms retained to perform the computations described above shall be borne by Aeroflex. In the event that the Internal Revenue Service ("IRS") or the accounting firm computing the Parachute Gross-up finally determines that the amount of excise taxes thereon initially paid was insufficient to discharge Blau's excise tax liability, Aeroflex shall make additional payments to him as may be necessary to reimburse him for discharging the full liability. Blau shall apply to the IRS for a refund of any excise taxes paid and remit to Aeroflex the amount of any such refund that he receives. Aeroflex shall reimburse Blau for his expenses in seeking a refund of excise taxes and for any interest and penalties imposed on excise taxes that he is required to pay. 13. CONSULTING PERIOD. (a) General. Effective upon the end of the Employment Term (but only if the Employment Term ends by reason of its expiration or, if earlier, upon termination of Blau's employment (i) by mutual agreement or (ii) by Retirement), Blau shall become a consultant to Aeroflex, in recognition of the continued value to Aeroflex of his extensive knowledge and expertise. Unless earlier terminated, as provided in Section 13(e), the Consulting Period shall continue for three years. (b) Duties and Extent of Services. (i) During the Consulting Period, Blau shall consult with Aeroflex and its senior executive officers regarding its respective businesses and operations. Such consulting services shall not require more than 50 days in any calendar year, nor more than one day in any week, it being understood and agreed that during the Consulting Period Blau shall have the right, consistent with the prohibitions of Sections 14 and 15 below, to engage in full-time or part-time employment with any business enterprise that is not a competitor of Aeroflex. (ii) Blau's service as a consultant shall only be required at such times and such places as shall not result in unreasonable inconvenience to him, recognizing his other business commitments that he may have to accord priority over the performance of services for Aeroflex. In order to minimize interference with Blau's other commitments, his consulting services may be rendered by personal consultation at his residence or office wherever maintained, or by correspondence through mail, telephone, fax or other similar mode of communication at times, including weekends and evenings, most convenient to him. (iii) During the Consulting Period, Blau shall not be obligated to serve as a member of the Board or to occupy any office on behalf of Aeroflex or any of its Subsidiaries. (c) Compensation. During the Consulting Period, Blau shall receive from Aeroflex each year an amount equivalent to two-thirds of his Salary at the end of the Employment Term, payable and subject to annual increase as provided in Section 3 above. (d) Disability. In the event of Disability during the Consulting Period, Aeroflex or Blau may terminate Blau's consulting services. If Blau's consulting services are terminated due to Disability, he shall be entitled to compensation, in accordance with Section 13(c), for the remainder of the Consulting Period. (e) Termination. The Consulting Period shall terminate after three years or, if earlier, upon Blau's death or upon his failure to perform consulting services as provided in Section 13(b), pursuant to 30 days' written notice by Aeroflex to Blau of the grounds constituting such failure and reasonable opportunity afforded Blau to cure the alleged failure. Upon any such termination, payment of consulting fees and benefits (with the exception of lifetime medical benefits under Section 9(b) above) shall cease. (f) Other. During the Consulting Period, Blau shall be entitled to expense reimbursement (including secretarial, telephone and similar support services) and perquisites and medical benefits, pursuant to the terms of Sections 7, 8 and 9(b), respectively. 14. CONFIDENTIAL INFORMATION. (a) General. (i) Blau understands and hereby acknowledges that as a result of his employment with Aeroflex he will necessarily become informed of and have access to certain valuable and confidential information of Aeroflex and any of its Subsidiaries, joint ventures and affiliates, including, without limitation, inventions, trade secrets, technical information, computer software and programs, know-how and plans ("Confidential Information"), and that any such Confidential Information, even though it may be developed or otherwise acquired by Blau, is the exclusive property of Aeroflex to be held by him in trust solely for Aeroflex's benefit. (ii) Accordingly, Blau hereby agrees that, during the Employment Term and the Consulting Period and subsequent to both, he shall not, and shall not cause others to, use, reveal, report, publish, transfer or otherwise disclose to any person, corporation or other entity any Confidential Information without prior written consent of the Board, except to (A) responsible officers and employees of Aeroflex or (B) responsible persons who are in a contractual or fiduciary relationship with Aeroflex or who need such information for purposes in the interest of Aeroflex. Notwithstanding the foregoing, the prohibitions of this clause (ii) shall not apply to any Confidential Information that becomes of general public knowledge other than from Blau or is required to be divulged by court order or administrative process. (b) Return of Documents. Upon termination of his employment with Aeroflex for any reason or, if applicable, upon expiration of the Consulting Period, Blau shall promptly deliver to Aeroflex all plans, drawings, manuals, letters, notes, notebooks, reports, computer programs and copies thereof and all other materials, including without limitation those of a secret or confidential nature, relating to Aeroflex's business that are then in his possession or control. (c) Remedies and Sanctions. In the event that Blau is found to be in violation of Section 14(a) or (b) above, Aeroflex shall be entitled to relief as provided in Section 16 below. 15. NONCOMPETITION/NONSOLICITATION. (a) Prohibitions. During the Employment Term and, if applicable, the Consulting Period, Blau shall not, without prior written authorization of the Board, directly or indirectly, through any other individual or entity: (i) become on officer or employee of, or render any service to, any direct competitor of Aeroflex; (ii) solicit or induce any customer of Aeroflex to cease purchasing goods or services from Aeroflex or to become a customer of any competitor of Aeroflex; or (iii) solicit or induce any employee of Aeroflex to become employed by any competitor of Aeroflex. (b) Remedies and Sanctions. In the event that Blau is found to be in violation of Section 15(a) above, Aeroflex shall be entitled to relief as provided in Section 16 below. (c) Exceptions. Notwithstanding anything to the contrary in Section 15(a) above, its provisions shall not: (i) apply if Aeroflex terminates Blau's employment without Cause or Blau terminates his employment for Good Reason, each as provided in Section 10(g) above; (ii) be construed as preventing Blau from investing his assets in any business that is not a direct competitor of Aeroflex; or (iii) be construed as preventing Blau from maintaining the same level of involvement in the affairs of Griffon Corporation that he has as of the Effective Date. 16. REMEDIES/SANCTIONS. Blau acknowledges that the services he is to render under this Agreement are of a unique and special nature, the loss of which cannot reasonably or adequately be compensated for in monetary damages, and that irreparable injury and damage may result to Aeroflex in the event of any breach of this Agreement or default by Blau. Because of the unique nature of the Confidential Information and the importance of the prohibitions against competition and solicitation, Blau further acknowledges and agrees that Aeroflex will suffer irreparable harm if he fails to comply with his obligations under Section 14(a) or (b) above or Section 15(a) above and that monetary damages would be inadequate to compensate Aeroflex for any such breach. Accordingly, Blau agrees that, in addition to any other remedies available to either Party at law, in equity or otherwise, Aeroflex will be entitled to seek injunctive relief or specific performance to enforce the terms, or prevent or remedy the violation, of any provisions of this Agreement. 17. BENEFICIARIES/REFERENCES. Blau shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following his death by giving Aeroflex written notice thereof; provided, however, that absent any then effective contrary notice, his beneficiary shall be his surviving Spouse. In the event of Blau's death, or of a judicial determination of his incompetence, reference in this Agreement to Blau shall be deemed to refer, as appropriate, to his beneficiary, estate or other legal representative. 18. WITHHOLDING TAXES. All payments to Blau or his Beneficiary under this Agreement shall be subject to withholding on account of federal, state and local taxes as required by law. 19. INDEMNIFICATION AND LIABILITY INSURANCE. Nothing herein is intended to limit Aeroflex's indemnification of Blau, and Aeroflex shall indemnify him to the fullest extent permitted by applicable law consistent with Aeroflex's Certificate of Incorporation and By-Laws as in effect on the Effective Date, with respect to any action or failure to act on his part while he is an officer, director or employee of Aeroflex or any Subsidiary. Aeroflex shall cause Blau to be covered at all times by directors' and officers' liability insurance on terms no less favorable than the directors' and officers' liability insurance maintained by Aeroflex as in effect on the Effective Date in terms of coverage and amounts. Aeroflex shall continue to indemnify Blau as provided above and maintain such liability insurance coverage for him after the Employment Term and, if applicable, the Consulting Period for any claims that may be made against him with respect to his service as a director or officer of Aeroflex or a consultant to Aeroflex. 20. EFFECT OF AGREEMENT ON OTHER BENEFITS. The existence of this Agreement shall not prohibit or restrict Blau's entitlement to participate fully in compensation, employee benefit and other plans of Aeroflex in which senior executives are eligible to participate. 21. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Blau) and assigns. No rights or obligations of Aeroflex under this Agreement may be assigned or transferred by Aeroflex except pursuant to (a) a merger or consolidation in which Aeroflex is not the continuing entity or (b) sale or liquidation of all or substantially all of the assets of Aeroflex, provided that the surviving entity or assignee or transferee is the successor to all or substantially all of the assets of Aeroflex and such surviving entity or assignee or transferee assumes the liabilities, obligations and duties of Aeroflex under this Agreement, either contractually or as a matter of law. Aeroflex further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall use its best efforts to have such assignee or transferee expressly agree to assume the liabilities, obligations and duties of Aeroflex hereunder; provided, however, that notwithstanding such assumption, Aeroflex shall remain liable and responsible for fulfillment of the terms and conditions of this Agreement; and provided, further, that in no event shall such assignment and assumption of this Agreement adversely affect Blau's rights upon a Change in Control, as provided in Section 10(h) above. No rights or obligations of Blau under this Agreement may be assigned or transferred by him. 22. REPRESENTATIONS. The Parties respectively represent and warrant that each is fully authorized and empowered to enter into this Agreement and that the performance of its or his obligations, as the case may be, under this Agreement will not violate any agreement between such Party and any other person, firm or organization. Aeroflex represents and warrants that this Agreement has been duly authorized by all necessary corporate action and is valid, binding and enforceable in accordance with its terms. 23. ENTIRE AGREEMENT. Except to the extent otherwise provided herein, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes any prior agreements, whether written or oral, between the Parties concerning the subject matter hereof, including without limitation the Prior Agreement. Payments and benefits provided under this Agreement are in lieu of any payments or other benefits under any severance program or policy of Aeroflex to which Blau would otherwise be entitled. 24. AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by both Blau and an authorized officer of Aeroflex. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Party to be charged with the waiver. No delay by either Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 25. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 26. SURVIVAL. The respective rights and obligations of the Parties under this Agreement shall survive any termination of Blau's employment with Aeroflex. 27. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and construed and interpreted in accordance with the laws of New York, without reference to principles of conflict of laws. 28. COSTS OF DISPUTES. Aeroflex shall pay, at least monthly, all costs and expenses, including attorneys' fees and disbursements, of Blau in connection with any proceeding, whether or not instituted by Aeroflex or Blau, relating to any provision of this Agreement, including but not limited to the interpretation, enforcement or reasonableness thereof; provided, however, that, if Blau institutes the proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that his claims were frivolous or were made in bad faith, he shall pay his own costs and expenses and, if applicable, return any amounts theretofore paid to him or on his behalf under this Section 28. Pending the outcome of any proceeding, Aeroflex shall pay Blau all amounts due to him without regard to the dispute; provided, however, that if Aeroflex shall be the prevailing party in such a proceeding, Blau shall promptly repay all amounts that he received during pendency of the proceeding. 29. NOTICES. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered either personally, by fax, by overnight delivery service (such as Federal Express) or sent by certified or registered mail postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as the Party may subsequently give notice of. If to Aeroflex or the Board: Aeroflex Incorporated 35 South Service Road Plainview, NY 11803 Attention: ________________ FAX: (516) 694-4823 If to Blau: Harvey R. Blau, Esq. 125 Wheatley Road Old Westbury, NY 11568 30. HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 31. COUNTERPARTS. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. Aeroflex Incorporated Attest: /s/ Charles Badlato By: /s/ Michael Gorin -------------------------- -------------------------- Witness:/s/ Nancy D. Lieberman /s/ Harvey R. Blau -------------------------- -------------------------- Harvey R. Blau EX-10.2 4 April 15, 1999 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of March 1, 1999 (the "Effective Date"), by and between Aeroflex Incorporated, a Delaware corporation, with its principal office located at 35 South Service Road, Plainview, New York 11803 (together with its successors and assigns permitted under this Agreement, "Aeroflex") and Michael Gorin, who resides at 112B East Long Beach Road, Nissequogue, New York 11780 ("Gorin"), amends and restates in its entirety the original agreement made and entered into as of July 1, 1994 between Aeroflex and Gorin, as subsequently amended through July 1, 1998 (the "Prior Agreement"). WITNESSETH: WHEREAS, Aeroflex has determined that it is in the best interests of Aeroflex and its stockholders to continue to employ Gorin and to set forth in this Agreement the obligations and duties of both Aeroflex and Gorin; and WHEREAS, Aeroflex wishes to assure itself of the services of Gorin for the period hereinafter provided, and Gorin is willing to be employed by Aeroflex for said period, upon the terms and conditions provided in this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, Aeroflex and Gorin (individually a "Party" and together the "Parties") agree as follows: 1. DEFINITIONS. (a) "Beneficiary" shall mean the person or persons named by Gorin pursuant to Section 17 below or, in the event that no such person is named who survives Gorin, his estate. (b) "Board" shall mean the Board of Directors of Aeroflex. (c) "Cause" shall mean: (i) Gorin's conviction of a felony involving an act or acts of dishonesty on his part and resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of Aeroflex; (ii) willful and continued failure of Gorin to perform his obligations under this Agreement, resulting in demonstrable material economic harm to Aeroflex, or (iii) a material breach by Gorin of the provisions of Sections 14 or 15 below to the demonstrable and material detriment of Aeroflex. Notwithstanding the foregoing, in no event shall Gorin's failure to perform the duties associated with his position caused by his mental or physical disability constitute Cause for his termination. For purposes of this Section 1(c), no act or failure to act on the part of Gorin shall be considered "willful" unless it is done, or omitted to be done, by him in bad faith or without reasonable belief that his action or omission was in the best interests of Aeroflex. Any act or failure to act based upon authority given pursuant to a resolution adopted by the Board or based upon the advice of counsel for Aeroflex shall be conclusively presumed to be done, or omitted to be done, by Gorin in good faith and in the best interests of Aeroflex. (d) "Change in Control" shall mean the occurrence of any of the following events: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d- 3 promulgated under the Exchange Act) of voting securities of Aeroflex when such acquisition causes such Person to own 20 percent or more of the combined voting power of the then outstanding voting securities of Aeroflex entitled to vote generally in the election of directors (the "Outstanding Aeroflex Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change in Control: (A) any acquisition directly from Aeroflex, (B) any acquisition by Aeroflex, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Aeroflex or any corporation controlled by Aeroflex or (D) any acquisition pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Aeroflex Voting Securities reaches or exceeds 20 percent as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of Aeroflex, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20 percent or more of the Outstanding Aeroflex Voting Securities; or (ii) individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by Aeroflex's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a reorganization, merger or consolidation or sale or other disposition of all or subsequently all of the assets of Aeroflex or the acquisition of assets of another entity ("Business Combination"); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Aeroflex Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60 percent of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns Aeroflex or all or substantially all of Aeroflex's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Aeroflex Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of Aeroflex or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20 percent or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the stockholders of Aeroflex of a complete liquidation or dissolution of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board. (g) "Consulting Period" shall mean the period specified in Section 13 below during which Gorin serves as a consultant to Aeroflex. (h) "Disability" shall mean the illness or other mental or physical disability of Gorin, as determined by a physician acceptable to Aeroflex and Gorin, resulting in his failure during the Employment Term or the Consulting Period, as the case may be, (i) to perform substantially his applicable material duties under this Agreement for a period of nine consecutive months and (ii) to return to the performance of his duties within 30 days after receiving written notice of termination. (i) "Employment Term" shall mean the period specified in Section 2(b) below. (j) "Fiscal Year" shall mean the 12-month period beginning on July 1 and ending on the next subsequent June 30, or such other 12-month period as may constitute Aeroflex's fiscal year at any time hereafter. (k) "Good Reason" shall mean, at any time during the Employment Term, without Gorin's prior written consent or his acquiescence: (i) reduction in his then current Salary; (ii) diminution, reduction or other adverse change in the bonus or incentive compensation opportunities available to Gorin (with respect to the level of bonus or incentive compensation opportunities, the applicable performance criteria and otherwise the manner in which bonuses and incentive compensation are determined) in the aggregate from those available as of the Effective Date in accordance with Section 4(a) below; (iii) Aeroflex's failure to pay Gorin any amounts otherwise vested and due him hereunder or under any plan or policy of Aeroflex; (iv) diminution of Gorin's titles, position, authorities or responsibilities, including not serving on the Board; (v) assignment to Gorin of duties incompatible with his position as a senior executive officer; (vi) termination by Gorin of his employment within one year following a Change in Control other than (a) by mutual agreement, (b) for Cause or (c) by reason of Retirement, death or Disability; (vii) imposition of a requirement that Gorin report other than directly to Aeroflex's Chief Executive Officer or to the full Board; (viii) a material breach of the Agreement by Aeroflex that is not cured within 10 business days after written notification by Gorin of such breach; or (ix)relocation of Aeroflex's corporate headquarters to a location more than 35 miles from the location first above described. (l) "Retirement" shall mean termination of Gorin's employment, other than due to death, with eligibility to receive a benefit under the terms of Aeroflex's Supplemental Executive Retirement Plan as then in effect. (m) "Salary" shall mean the annual salary provided for in Section 3 below, as adjusted from time to time. (n) "Spouse" shall mean, during the Employment Term and the Consulting Period, the woman who as of any relevant date is legally married to Gorin. (o)"Subsidiary" shall mean any corporation of which Aeroflex owns, directly or indirectly, more than 50 percent of its voting stock. 2. EMPLOYMENT TERM, POSITIONS AND DUTIES. (a) Employment of Gorin. Aeroflex hereby continues to employ Gorin, and Gorin hereby accepts continued employment with Aeroflex, in the positions and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. Gorin shall render services to Aeroflex principally at Aeroflex's corporate headquarters, but he shall do such traveling on behalf of Aeroflex as shall be reasonably required in the course of the performance of his duties hereunder. (b) Employment Term. The Employment Term shall commence on the Effective Date and shall terminate on June 30, 2004. (c) Titles and Duties. (i) Until the date of termination of his employment hereunder, Gorin shall be employed as a senior executive officer of Aeroflex, reporting to the full Board. In his capacity as a senior executive officer, Gorin shall have the customary powers, responsibilities and authorities of senior executive officers of corporations of the size, type and nature of Aeroflex including, without limitation, authority, in conjunction with the Board as appropriate, to hire and terminate other employees of Aeroflex. (ii) During the Employment Term, Aeroflex shall uses its best efforts to secure the election of Gorin to the Board. During the Employment Term, if the Board forms an executive or similar committee, Gorin shall serve thereon. (d) Time and Effort. (i) Gorin agrees to devote his best efforts and abilities and his full business time and attention to the affairs of Aeroflex in order to carry out his duties and responsibilities under this Agreement. (ii) Notwithstanding the foregoing, nothing shall preclude Gorin from (A) serving on the boards of a reasonable number of trade associations, charitable organizations and/or businesses not in competition with Aeroflex, (B) engaging in charitable activities and community affairs and (C) managing his personal investments and affairs; provided, however, that, such activities do not materially interfere with the proper performance of his duties and responsibilities specified in Section 2 (c) above. 3. SALARY. (a) Initial Salary. Gorin shall receive from Aeroflex a Salary, payable in accordance with the regular payroll practices of Aeroflex, in a minimum amount of $350,000. (b) Cost-of-Living Increase. During the Employment Term, Gorin's Salary shall be increased semiannually by an amount equal to the increase in the cost of living for the immediately preceding calendar half-year, as reported in the "Consumer Price Index, New York and Northeastern New Jersey, All Items," published by the United States Department of Labor, Bureau of Labor Statistics (or, if such index is no longer published, a successor or comparable index that is published). Such amount shall be calculated and paid to Gorin in a single sum on or before the first day of the second month following the applicable calendar half year, and thereafter his Salary shall be deemed to include the amount of any such increase. The first calculation and payment shall be made on or before August 1, 1999 with respect to the period July 1, 1998 through June 30, 1999. If Gorin's employment shall terminate during any such six-month period, the cost-of-living increase provided in this Section 3(b) shall be prorated accordingly. (c) Salary Increase. Any amount to which Gorin's Salary is increased, as provided in Section 3(b) above or otherwise, shall not thereafter be reduced without his consent, and the term "Salary" as used in this Agreement shall refer to his Salary as thus increased. 4. BONUSES. (a) Annual Bonus. For each Fiscal Year during the Employment Term Gorin shall be eligible to receive an annual bonus equal to 3 percent of Aeroflex's consolidated pre-tax earnings for such Fiscal Year, computed without regard to any amount due under this Section 4(a). Any such bonus payable with respect to a portion of a Fiscal Year shall be prorated accordingly. Gorin shall be entitled to elect to defer, under the terms of any deferred compensation agreement or annual incentive compensation plan applicable to him and then in effect, any portion of his annual bonus that is not already subject to deferral thereunder. (b) Special Bonus. Gorin shall be eligible to receive additional bonuses during the Employment Term. The Committee shall determine, in its discretion, the occasion for payment, and the amount, of any such bonus. 5. LONG-TERM INCENTIVE. During the Employment Term, Gorin shall be eligible for an award under any long-term incentive compensation plan established by Aeroflex for the benefit of Gorin or, in the absence thereof, under any such plan established for the benefit of members of the senior management of Aeroflex. 6. EQUITY OPPORTUNITY. During the Employment Term, Gorin shall be eligible to receive grants of options to purchase shares of Aeroflex's stock and awards of shares of Aeroflex's stock, either or both as determined by the Committee, under and in accordance with the terms of applicable plans of Aeroflex and related option and award agreements. It is the intention of Aeroflex to grant stock options to Gorin during the Employment Term. Also, to the extent permitted by any such plan, Gorin shall be eligible during any Consulting Period to receive grants of options and awards of shares of Aeroflex's stock in the same manner. 7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS. During the Employment Term and any Consulting Period, Gorin shall be entitled to prompt reimbursement by Aeroflex for all reasonable out-of-pocket expenses incurred by him in performing services under this Agreement, upon his submission of such accounts and records as may be reasonably required by Aeroflex. In addition, Gorin shall be entitled to payment by Aeroflex of all reasonable costs and expenses, including attorneys' and consultants' fees and disbursements, incurred by him in connection with adoption of this Agreement and any related compensatory arrangements that Aeroflex adopts solely for his benefit. 8. PERQUISITES. During the Employment Term and, and any Consulting Period, Aeroflex shall provide Gorin with the following perquisites: (a) an office of a size and with furnishings and other appointments, and exclusive personal secretarial and other assistance, at least equal to that provided to Gorin by Aeroflex as of the Effective Date; and (b) the use of an automobile and payment of related expenses on the same terms as are in effect on the Effective Date or, if more favorable to Gorin, as are made available generally to other executive officers of Aeroflex at any time thereafter. 9. EMPLOYEE BENEFIT PLANS. (a) General. During the Employment Term, Gorin shall be entitled to participate in all employee benefit plans and programs that are made available to Aeroflex's senior executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, pension and other retirement plans, profit-sharing plans, savings and similar plans, group life insurance, accidental death and dismemberment insurance, travel accident insurance, hospitalization insurance, surgical insurance, major and excess major medical insurance, dental insurance, short-term and long-term disability insurance, sick leave (including salary continuation arrangements), holidays, vacation (not less than four weeks in any calendar year) and any other employee benefit plans or programs that may be sponsored by Aeroflex from time to time, including plans that supplement the above-listed types of plans, whether funded or unfunded. (b) Medical Care Reimbursement and Insurance. During the Employment Term and Consulting Period, Aeroflex shall reimburse Gorin for 100 percent of any medical expenses incurred by him for himself and his Spouse that are not reimbursed by insurance or otherwise, offset by any amounts that are reimbursable by Medicare if Gorin and his Spouse, when eligible, elect to be covered by Medicare. Aeroflex shall provide Gorin and his Spouse during his lifetime with hospitalization insurance, surgical insurance, major and excess major medical insurance and dental insurance in accordance with the most favorable plans, policies, programs and practices of Aeroflex and its Subsidiaries made available generally to other senior executive officers of Aeroflex and its Subsidiaries as in effect from time to time. (c) Life Insurance Benefit. In addition to the group life insurance available to employees generally, Aeroflex shall provide Gorin with an individual permanent life insurance benefit in an initial amount of not less than approximately $1,000,000, the terms and conditions of such benefit to be more fully described in an insurance ownership agreement between Gorin and Aeroflex. (d) Disability Benefit. In consideration of the benefit payable to Gorin in the event of termination of his employment due to Disability, as provided in Section 10(e) below, or, if applicable, in the event of termination of Gorin's consulting services due to Disability during the Consulting Period, as provided in Section 13(d) below, Aeroflex shall not be obligated to provide Gorin with long-term disability insurance. Notwithstanding the foregoing, if Aeroflex does provide Gorin with such insurance, he shall be the owner of any individual policies obtained and shall pay the premiums thereon. (e) Retirement Benefit. Gorin shall be entitled to the benefits provided under the Aeroflex Incorporated Supplemental Executive Retirement Plan (the "SERP"); provided, however, that if Aeroflex fails to maintain the SERP, Gorin's retirement benefit shall be determined as if the SERP had remained in effect until termination of his employment with Aeroflex by retirement. These benefits are in addition to the benefits provided under this Agreement, and no modification, amendment or termination of this Agreement shall affect Gorin's rights under the SERP as in effect on the Effective Date or, if more favorable to Gorin, as in effect at any time thereafter. 10. TERMINATION OF EMPLOYMENT. (a) Termination by Mutual Agreement. The Parties may terminate this Agreement by mutual agreement at any time. If they do so, Gorin's entitlements shall be as the Parties mutually agree. (b) General. Notwithstanding anything to the contrary herein, in the event of termination of Gorin's employment under this Agreement, he or his Beneficiary, as the case may be, shall be entitled to receive (in addition to payments and benefits under, and except as specifically provided in, subsections (c) through (h) below, as applicable): (i) his Salary through the date of termination; (ii) any unused vacation from prior years; (iii) any annual bonus for the current Fiscal Year, prorated to the date of termination; (iv) any annual or special bonus previously awarded but not yet paid to him; (v) any deferred compensation under any incentive compensation plan of Aeroflex or any deferred compensation agreement then in effect; (vi) any other compensation or benefits, including without limitation long-term incentive compensation described in Section 5 above, benefits under equity grants and awards described in Section 6 above and employee benefits under plans described in Section 9 above, that have vested through the date of termination or to which he may then be entitled in accordance with the applicable terms and conditions of each grant, award or plan; and (vii) reimbursement in accordance with Sections 9(a) and (b) above of any business and medical expenses incurred by Gorin or his Spouse, as applicable, through the date of termination but not yet paid to him. (c) Termination due to Retirement. In the event that Gorin's employment terminates due to Retirement, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to the benefits provided under the SERP, as provided in Section 9(e) above. The Consulting Period shall begin on the day following termination of Gorin's employment by Retirement. (d) Termination due to Death. In the event that Gorin's employment terminates due to his death, his Beneficiary shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination. (e) Termination due to Disability. In the event of Disability, Aeroflex or Gorin may terminate Gorin's employment. If Gorin's employment terminates due to Disability, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination, offset by any long-term disability insurance benefit that Aeroflex has provided for him and for which it has paid the applicable group or individual insurance premiums. (f) Termination by Aeroflex for Cause. Aeroflex may terminate Gorin's employment hereunder for Cause only upon written notice to Gorin not less than 30 days prior to any intended termination, which notice shall specify the grounds for such termination in reasonable detail. Cause shall in no event be deemed to exist except upon a finding reflected in a resolution approved by a majority (excluding Gorin) of the members of the Board (whose findings shall not be binding upon or entitled to any deference by any court, arbitrator or other decision-maker ruling on this Agreement) at a meeting of which Gorin shall have been given proper notice and at which Gorin (and his counsel) shall have a reasonable opportunity to present his case. In the event that Gorin's employment is terminated for Cause, he shall be entitled only to the compensation and benefits specified in Section 10(b). (g) Termination Without Cause or by Gorin for Good Reason. (i) Termination without Cause shall mean termination of Gorin's employment by Aeroflex and shall exclude termination (A) due to Retirement, death, Disability or Cause or (B) by mutual agreement of Gorin and Aeroflex. Aeroflex shall provide Gorin 15 days' prior written notice of termination by it without Cause, and Gorin shall provide Aeroflex 15 days' prior written notice of his termination for Good Reason. (ii) In the event of termination by Aeroflex of Gorin's employment without Cause or of termination by Gorin of his employment for Good Reason, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to: (A) his Salary, payable for the remainder of the Employment Term at the rate in effect immediately before such termination; (B) annual bonuses for the remainder of the Employment Term (including a prorated bonus for any partial Fiscal Year) equal to the average of the three highest annual bonuses awarded to him during the ten Fiscal Years preceding the Fiscal Year of termination, such bonuses to be paid at the same time annual bonuses are regularly paid by Aeroflex to Gorin; (C) continued medical reimbursement for the remainder of the Employment Term and thereafter the lifetime medical benefits described in Section 9(b) above; (D) a lump-sum payment equal to the then present value of the excess, if any, of (x) the retirement benefit to which Gorin would have been entitled if he had remained employed under this Agreement until age 70 over (y) the early retirement benefit actually payable to him, both as calculated and payable under the SERP; and (E) continued participation in all employee benefit plans or programs available to Aeroflex employees generally in which Gorin was participating on the date of termination of his employment until the end of the Employment Term; provided; however, that (x) if Gorin is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (E), he shall be entitled to the after-tax economic equivalent of the benefits under the plan or program in which he is unable to participate until the end of the Employment Term, and (y) the economic equivalent of any benefit foregone shall be deemed to be the lowest cost that Gorin would incur in obtaining such benefit on an individual basis; and (F) other benefits in accordance with applicable plans and programs of the Company. (iii) Prior written consent by Gorin to any of the events described in Section 1(k) above shall be deemed a waiver by him of his right to terminate for Good Reason under this Section 10(g) solely by reason of the events set forth in such waiver. (h) Change in Control. Notwithstanding anything to the contrary in this Section 10, termination of Gorin's employment within the one-year period following a Change in Control for any reason other than Cause, Retirement, death or Disability, shall be governed by Section 10(g). In the event of any such termination, Gorin shall be entitled to compensation and benefits in accordance with the provisions of Section 10(g)(ii). 11. NO DUTY TO MITIGATE; NO OFFSET. Gorin shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payment hereunder be subject to offset in the event Gorin does receive compensation for services from any other source. 12. PARACHUTES. (a) Application. If all, or any portion, of the payments provided under this Agreement, and/or any other payments and benefits that Gorin receives or is entitled to receive from Aeroflex or a Subsidiary, whether or not under an existing plan, arrangement or other agreement, constitutes an "excess parachute payment" within the meaning of Section 280G(b) of the Code (each such parachute payment, a "Parachute Payment") and will result in the imposition on Gorin of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which Gorin is entitled under this Agreement, Aeroflex shall pay him an amount in cash equal to the sum of the excise taxes payable by him by reason of receiving Parachute Payments, plus the amount necessary to put him in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including without limitation any payments under this Section 12) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). (b) Computation. The amount of any payment under this Section 12 shall be computed by a certified public accounting firm of national reputation selected by Aeroflex and acceptable to Gorin. If Aeroflex or Gorin disputes the computation rendered by such accounting firm, Aeroflex shall select an alternative certified public accounting firm of national reputation to perform the applicable computation. If the two accounting firms cannot agree upon the computations, Gorin and Aeroflex shall jointly appoint a third certified public accounting firm of national reputation within 10 calendar days after the two conflicting computations have been rendered. Such third accounting firm shall be asked to determine within 30 calendar days the computation of the Parachute Gross-up to be paid to Gorin, and payments shall be made accordingly. (c) Payment. In any event, Aeroflex shall pay to Gorin or pay on his behalf the Parachute Gross-up as computed by the accounting firm initially selected by Gorin by the time any taxes payable by him as a result of the Parachute Payments become due, with Gorin agreeing to return the excess amount of such payment over the final computation rendered from the process described in Section 12(b). Gorin and Aeroflex shall provide the accounting firms with all information that any of them reasonably deems necessary in order to compute the Parachute Gross-up. The cost and expenses of all the accounting firms retained to perform the computations described above shall be borne by Aeroflex. In the event that the Internal Revenue Service ("IRS") or the accounting firm computing the Parachute Gross-up finally determines that the amount of excise taxes thereon initially paid was insufficient to discharge Gorin's excise tax liability, Aeroflex shall make additional payments to him as may be necessary to reimburse him for discharging the full liability. Gorin shall apply to the IRS for a refund of any excise taxes paid and remit to Aeroflex the amount of any such refund that he receives. Aeroflex shall reimburse Gorin for his expenses in seeking a refund of excise taxes and for any interest and penalties imposed on excise taxes that he is required to pay. 13. CONSULTING PERIOD. (a) General. Effective upon the end of the Employment Term (but only if the Employment Term ends by reason of its expiration or, if earlier, upon termination of Gorin's employment (i) by mutual agreement or (ii) by Retirement), Gorin shall become a consultant to Aeroflex, in recognition of the continued value to Aeroflex of his extensive knowledge and expertise. Unless earlier terminated, as provided in Section 13(e), the Consulting Period shall continue for three years. (b) Duties and Extent of Services. (i) During the Consulting Period, Gorin shall consult with Aeroflex and its senior executive officers regarding its respective businesses and operations. Such consulting services shall not require more than 50 days in any calendar year, nor more than one day in any week, it being understood and agreed that during the Consulting Period Gorin shall have the right, consistent with the prohibitions of Sections 14 and 15 below, to engage in full-time or part-time employment with any business enterprise that is not a competitor of Aeroflex. (ii) Gorin's service as a consultant shall only be required at such times and such places as shall not result in unreasonable inconvenience to him, recognizing his other business commitments that he may have to accord priority over the performance of services for Aeroflex. In order to minimize interference with Gorin's other commitments, his consulting services may be rendered by personal consultation at his residence or office wherever maintained, or by correspondence through mail, telephone, fax or other similar mode of communication at times, including weekends and evenings, most convenient to him. (iii) During the Consulting Period, Gorin shall not be obligated to serve as a member of the Board or to occupy any office on behalf of Aeroflex or any of its Subsidiaries. (c) Compensation. During the Consulting Period, Gorin shall receive from Aeroflex each year an amount equivalent to two-thirds of his Salary at the end of the Employment Term, payable and subject to annual increase as provided in Section 3 above. (d) Disability. In the event of Disability during the Consulting Period, Aeroflex or Gorin may terminate Gorin's consulting services. If Gorin's consulting services are terminated due to Disability, he shall be entitled to compensation, in accordance with Section 13(c), for the remainder of the Consulting Period. (e) Termination. The Consulting Period shall terminate after three years or, if earlier, upon Gorin's death or upon his failure to perform consulting services as provided in Section 13(b), pursuant to 30 days' written notice by Aeroflex to Gorin of the grounds constituting such failure and reasonable opportunity afforded Gorin to cure the alleged failure. Upon any such termination, payment of consulting fees and benefits (with the exception of lifetime medical benefits under Section 9(b) above) shall cease. (f) Other. During the Consulting Period, Gorin shall be entitled to expense reimbursement (including secretarial, telephone and similar support services) and perquisites and medical benefits, pursuant to the terms of Sections 7, 8 and 9(b), respectively. 14. CONFIDENTIAL INFORMATION. (a) General. (i) Gorin understands and hereby acknowledges that as a result of his employment with Aeroflex he will necessarily become informed of and have access to certain valuable and confidential information of Aeroflex and any of its Subsidiaries, joint ventures and affiliates, including, without limitation, inventions, trade secrets, technical information, computer software and programs, know-how and plans ("Confidential Information"), and that any such Confidential Information, even though it may be developed or otherwise acquired by Gorin, is the exclusive property of Aeroflex to be held by him in trust solely for Aeroflex's benefit. (ii) Accordingly, Gorin hereby agrees that, during the Employment Term and the Consulting Period and subsequent to both, he shall not, and shall not cause others to, use, reveal, report, publish, transfer or otherwise disclose to any person, corporation or other entity any Confidential Information without prior written consent of the Board, except to (A) responsible officers and employees of Aeroflex or (B)_responsible persons who are in a contractual or fiduciary relationship with Aeroflex or who need such information for purposes in the interest of Aeroflex. Notwithstanding the foregoing, the prohibitions of this clause (ii) shall not apply to any Confidential Information that becomes of general public knowledge other than from Gorin or is required to be divulged by court order or administrative process. (b) Return of Documents. Upon termination of his employment with Aeroflex for any reason or, if applicable, upon expiration of the Consulting Period, Gorin shall promptly deliver to Aeroflex all plans, drawings, manuals, letters, notes, notebooks, reports, computer programs and copies thereof and all other materials, including without limitation those of a secret or confidential nature, relating to Aeroflex's business that are then in his possession or control. (c) Remedies and Sanctions. In the event that Gorin is found to be in violation of Section 14(a) or (b) above, Aeroflex shall be entitled to relief as provided in Section 16 below. 15. NONCOMPETITION/NONSOLICITATION. (a) Prohibitions. During the Employment Term and, if applicable, the Consulting Period, Gorin shall not, without prior written authorization of the Board, directly or indirectly, through any other individual or entity: (i) become on officer or employee of, or render any service to, any direct competitor of Aeroflex; (ii) solicit or induce any customer of Aeroflex to cease purchasing goods or services from Aeroflex or to become a customer of any competitor of Aeroflex; or (iii) solicit or induce any employee of Aeroflex to become employed by any competitor of Aeroflex. (b) Remedies and Sanctions. In the event that Gorin is found to be in violation of Section 15(a) above, Aeroflex shall be entitled to relief as provided in Section 16 below. (c) Exceptions. Notwithstanding anything to the contrary in Section 15(a) above, its provisions shall not: (i) apply if Aeroflex terminates Gorin's employment without Cause or Gorin terminates his employment for Good Reason, each as provided in Section 10(g) above; or (ii) be construed as preventing Gorin from investing his assets in any business that is not a direct competitor of Aeroflex. 16. REMEDIES/SANCTIONS. Gorin acknowledges that the services he is to render under this Agreement are of a unique and special nature, the loss of which cannot reasonably or adequately be compensated for in monetary damages, and that irreparable injury and damage may result to Aeroflex in the event of any breach of this Agreement or default by Gorin. Because of the unique nature of the Confidential Information and the importance of the prohibitions against competition and solicitation, Gorin further acknowledges and agrees that Aeroflex will suffer irreparable harm if he fails to comply with his obligations under Section 14(a) or (b) above or Section 15(a) above and that monetary damages would be inadequate to compensate Aeroflex for any such breach. Accordingly, Gorin agrees that, in addition to any other remedies available to either Party at law, in equity or otherwise, Aeroflex will be entitled to seek injunctive relief or specific performance to enforce the terms, or prevent or remedy the violation, of any provisions of this Agreement. 17. BENEFICIARIES/REFERENCES. Gorin shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following his death by giving Aeroflex written notice thereof; provided, however, that absent any then effective contrary notice, his beneficiary shall be his surviving Spouse. In the event of Gorin's death, or of a judicial determination of his incompetence, reference in this Agreement to Gorin shall be deemed to refer, as appropriate, to his beneficiary, estate or other legal representative. 18. WITHHOLDING TAXES. All payments to Gorin or his Beneficiary under this Agreement shall be subject to withholding on account of federal, state and local taxes as required by law. 19. INDEMNIFICATION AND LIABILITY INSURANCE. Nothing herein is intended to limit Aeroflex's indemnification of Gorin, and Aeroflex shall indemnify him to the fullest extent permitted by applicable law consistent with Aeroflex's Certificate of Incorporation and By-Laws as in effect on the Effective Date, with respect to any action or failure to act on his part while he is an officer, director or employee of Aeroflex or any Subsidiary. Aeroflex shall cause Gorin to be covered at all times by directors' and officers' liability insurance on terms no less favorable than the directors' and officers' liability insurance maintained by Aeroflex as in effect on the Effective Date in terms of coverage and amounts. Aeroflex shall continue to indemnify Gorin as provided above and maintain such liability insurance coverage for him after the Employment Term and, if applicable, the Consulting Period for any claims that may be made against him with respect to his service as a director or officer of Aeroflex or a consultant to Aeroflex. 20. EFFECT OF AGREEMENT ON OTHER BENEFITS. The existence of this Agreement shall not prohibit or restrict Gorin's entitlement to participate fully in compensation, employee benefit and other plans of Aeroflex in which senior executives are eligible to participate. 21. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Gorin) and assigns. No rights or obligations of Aeroflex under this Agreement may be assigned or transferred by Aeroflex except pursuant to (a) a merger or consolidation in which Aeroflex is not the continuing entity or (b) sale or liquidation of all or substantially all of the assets of Aeroflex, provided that the surviving entity or assignee or transferee is the successor to all or substantially all of the assets of Aeroflex and such surviving entity or assignee or transferee assumes the liabilities, obligations and duties of Aeroflex under this Agreement, either contractually or as a matter of law. Aeroflex further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall use its best efforts to have such assignee or transferee expressly agree to assume the liabilities, obligations and duties of Aeroflex hereunder; provided, however, that notwithstanding such assumption, Aeroflex shall remain liable and responsible for fulfillment of the terms and conditions of this Agreement; and provided, further, that in no event shall such assignment and assumption of this Agreement adversely affect Gorin's right upon a Change in Control, as provided in Section 10(h) above. No rights or obligations of Gorin under this Agreement may be assigned or transferred by him. 22. REPRESENTATIONS. The Parties respectively represent and warrant that each is fully authorized and empowered to enter into this Agreement and that the performance of its or his obligations, as the case may be, under this Agreement will not violate any agreement between such Party and any other person, firm or organization. Aeroflex represents and warrants that this Agreement has been duly authorized by all necessary corporate action and is valid, binding and enforceable in accordance with its terms. 23. ENTIRE AGREEMENT. Except to the extent otherwise provided herein, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes any prior agreements, whether written or oral, between the Parties concerning the subject matter hereof, including without limitation the Prior Agreement. Payments and benefits provided under this Agreement are in lieu of any payments or other benefits under any severance program or policy of Aeroflex to which Gorin would otherwise be entitled. 24. AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by both Gorin and an authorized officer of Aeroflex. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Party to be charged with the waiver. No delay by either Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 25. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 26. SURVIVAL. The respective rights and obligations of the Parties under this Agreement shall survive any termination of Gorin's employment with Aeroflex. 27. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and construed and interpreted in accordance with the laws of New York, without reference to principles of conflict of laws. 28. COSTS OF DISPUTES. Aeroflex shall pay, at least monthly, all costs and expenses, including attorneys' fees and disbursements, of Gorin in connection with any proceeding, whether or not instituted by Aeroflex or Gorin, relating to any provision of this Agreement, including but not limited to the interpretation, enforcement or reasonableness thereof; provided, however, that, if Gorin institutes the proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that his claims were frivolous or were made in bad faith, he shall pay his own costs and expenses and, if applicable, return any amounts theretofore paid to him or on his behalf under this Section 28. Pending the outcome of any proceeding, Aeroflex shall pay Gorin all amounts due to him without regard to the dispute; provided, however, that if Aeroflex shall be the prevailing party in such a proceeding, Gorin shall promptly repay all amounts that he received during pendency of the proceeding. 29. NOTICES. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered either personally, by fax, by overnight delivery service (such as Federal Express) or sent by certified or registered mail postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as the Party may subsequently give notice of. If to Aeroflex or the Board: Aeroflex Incorporated 35 South Service Road Plainview, NY 11803 Attention: Harvey Blau FAX: (516) 694-4823 If to Gorin: Michael Gorin 112B East Long Beach Road Nissequogue, New York 11780 30. HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 31. COUNTERPARTS. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. Aeroflex Incorporated Attest: /s/ Charles Badlato By: /s/ Harvey R. Blau ------------------- ---------------------- Chairman of The Board Witness:/s/ Nancy D. Lieberman /s/ Michael Gorin ---------------------- ---------------------- Michael Gorin EX-10.3 5 April 15, 1999 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of March 1, 1999 (the "Effective Date"), by and between Aeroflex Incorporated, a Delaware corporation, with its principal office located at 35 South Service Road, Plainview, New York 11803 (together with its successors and assigns permitted under this Agreement, "Aeroflex") and Leonard Borow, who resides at 125 Rodeo Drive, Oyster Bay Cove, New York 11791 ("Borow"), amends and restates in its entirety the original agreement made and entered into as of July 1, 1994 between Aeroflex and Borow, as subsequently amended through July 1, 1998 (the "Prior Agreement"). WITNESSETH: WHEREAS, Aeroflex has determined that it is in the best interests of Aeroflex and its stockholders to continue to employ Borow and to set forth in this Agreement the obligations and duties of both Aeroflex and Borow; and WHEREAS, Aeroflex wishes to assure itself of the services of Borow for the period hereinafter provided, and Borow is willing to be employed by Aeroflex for said period, upon the terms and conditions provided in this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, Aeroflex and Borow (individually a "Party" and together the "Parties") agree as follows: 1. DEFINITIONS. (a) "Beneficiary" shall mean the person or persons named by Borow pursuant to Section 17 below or, in the event that no such person is named who survives Borow, his estate. (b) "Board" shall mean the Board of Directors of Aeroflex. (c) "Cause" shall mean: (i) Borow's conviction of a felony involving an act or acts of dishonesty on his part and resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of Aeroflex; (ii) willful and continued failure of Borow to perform his obligations under this Agreement, resulting in demonstrable material economic harm to Aeroflex, or (iii) a material breach by Borow of the provisions of Sections 14 or 15 below to the demonstrable and material detriment of Aeroflex. Notwithstanding the foregoing, in no event shall Borow's failure to perform the duties associated with his position caused by his mental or physical disability constitute Cause for his termination. For purposes of this Section 1(c), no act or failure to act on the part of Borow shall be considered "willful" unless it is done, or omitted to be done, by him in bad faith or without reasonable belief that his action or omission was in the best interests of Aeroflex. Any act or failure to act based upon authority given pursuant to a resolution adopted by the Board or based upon the advice of counsel for Aeroflex shall be conclusively presumed to be done, or omitted to be done, by Borow in good faith and in the best interests of Aeroflex. (d) "Change in Control" shall mean the occurrence of any of the following events: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d- 3 promulgated under the Exchange Act) of voting securities of Aeroflex when such acquisition causes such Person to own 20 percent or more of the combined voting power of the then outstanding voting securities of Aeroflex entitled to vote generally in the election of directors (the "Outstanding Aeroflex Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change in Control: (A) any acquisition directly from Aeroflex, (B) any acquisition by Aeroflex, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Aeroflex or any corporation controlled by Aeroflex or (D) any acquisition pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Aeroflex Voting Securities reaches or exceeds 20 percent as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of Aeroflex, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20 percent or more of the Outstanding Aeroflex Voting Securities; or (ii) individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by Aeroflex's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a reorganization, merger or consolidation or sale or other disposition of all or subsequently all of the assets of Aeroflex or the acquisition of assets of another entity ("Business Combination"); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Aeroflex Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60 percent of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns Aeroflex or all or substantially all of Aeroflex's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Aeroflex Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of Aeroflex or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20 percent or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the stockholders of Aeroflex of a complete liquidation or dissolution of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board. (g) "Consulting Period" shall mean the period specified in Section 13 below during which Borow serves as a consultant to Aeroflex. (h) "Disability" shall mean the illness or other mental or physical disability of Borow, as determined by a physician acceptable to Aeroflex and Borow, resulting in his failure during the Employment Term or the Consulting Period, as the case may be, (i) to perform substantially his applicable material duties under this Agreement for a period of nine consecutive months and (ii) to return to the performance of his duties within 30 days after receiving written notice of termination. (i) "Employment Term" shall mean the period specified in Section 2(b) below. (j) "Fiscal Year" shall mean the 12-month period beginning on July 1 and ending on the next subsequent June 30, or such other 12-month period as may constitute Aeroflex's fiscal year at any time hereafter. (k) "Good Reason" shall mean, at any time during the Employment Term, without Borow's prior written consent or his acquiescence: (i) reduction in his then current Salary; (ii) diminution, reduction or other adverse change in the bonus or incentive compensation opportunities available to Borow (with respect to the level of bonus or incentive compensation opportunities, the applicable performance criteria and otherwise the manner in which bonuses and incentive compensation are determined) in the aggregate from those available as of the Effective Date in accordance with Section 4(a) below; (iii) Aeroflex's failure to pay Borow any amounts otherwise vested and due him hereunder or under any plan or policy of Aeroflex; (iv) diminution of Borow's titles, position, authorities or responsibilities, including not serving on the Board; (v) assignment to Borow of duties incompatible with his position as a senior executive officer; (vi) termination by Borow of his employment within one year following a Change in Control other than (a) by mutual agreement, (b) for Cause or (c) by reason of Retirement, death or Disability; (vii) imposition of a requirement that Borow report other than directly to Aeroflex's Chief Executive Officer or to the full Board; (viii) a material breach of the Agreement by Aeroflex that is not cured within 10 business days after written notification by Borow of such breach; or (ix) relocation of Aeroflex's corporate headquarters to a location more than 35 miles from the location first above described. (l) "Retirement" shall mean termination of Borow's employment, other than due to death, with eligibility to receive a benefit under the terms of Aeroflex's Supplemental Executive Retirement Plan as then in effect. (m) "Salary" shall mean the annual salary provided for in Section 3 below, as adjusted from time to time. (n) "Spouse" shall mean, during the Employment Term and the Consulting Period, the woman who as of any relevant date is legally married to Borow. (o)"Subsidiary" shall mean any corporation of which Aeroflex owns, directly or indirectly, more than 50 percent of its voting stock. 2. EMPLOYMENT TERM, POSITIONS AND DUTIES. (a) Employment of Borow. Aeroflex hereby continues to employ Borow, and Borow hereby accepts continued employment with Aeroflex, in the positions and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. Borow shall render services to Aeroflex principally at Aeroflex's corporate headquarters, but he shall do such traveling on behalf of Aeroflex as shall be reasonably required in the course of the performance of his duties hereunder. (b) Employment Term. The Employment Term shall commence on the Effective Date and shall terminate on June 30, 2004. (c) Titles and Duties. (i) Until the date of termination of his employment hereunder, Borow shall be employed as a senior executive officer of Aeroflex, reporting to the full Board. In his capacity as a senior executive officer, Borow shall have the customary powers, responsibilities and authorities of senior executive officers of corporations of the size, type and nature of Aeroflex including, without limitation, authority, in conjunction with the Board as appropriate, to hire and terminate other employees of Aeroflex. (ii) During the Employment Term, Aeroflex shall uses its best efforts to secure the election of Borow to the Board. During the Employment Term, if the Board forms an executive or similar committee, Borow shall serve thereon. (d) (d)Time and Effort. (i) Borow agrees to devote his best efforts and abilities and his full business time and attention to the affairs of Aeroflex in order to carry out his duties and responsibilities under this Agreement. (ii) Notwithstanding the foregoing, nothing shall preclude Borow from (A) serving on the boards of a reasonable number of trade associations, charitable organizations and/or businesses not in competition with Aeroflex, (B) engaging in charitable activities and community affairs and (C) managing his personal investments and affairs; provided, however, that, such activities do not materially interfere with the proper performance of his duties and responsibilities specified in Section 2 (c) above. 3. SALARY. (a) Initial Salary. Borow shall receive from Aeroflex a Salary, payable in accordance with the regular payroll practices of Aeroflex, in a minimum amount of $350,000. (b) Cost-of-Living Increase. During the Employment Term, Borow's Salary shall be increased semiannually by an amount equal to the increase in the cost of living for the immediately preceding calendar half-year, as reported in the "Consumer Price Index, New York and Northeastern New Jersey, All Items," published by the United States Department of Labor, Bureau of Labor Statistics (or, if such index is no longer published, a successor or comparable index that is published). Such amount shall be calculated and paid to Borow in a single sum on or before the first day of the second month following the applicable calendar half year, and thereafter his Salary shall be deemed to include the amount of any such increase. The first calculation and payment shall be made on or before August 1, 1999 with respect to the period July 1, 1998 through June 30, 1999. If Borow's employment shall terminate during any such six-month period, the cost-of-living increase provided in this Section 3(b) shall be prorated accordingly. (c) Salary Increase. Any amount to which Borow's Salary is increased, as provided in Section 3(b) above or otherwise, shall not thereafter be reduced without his consent, and the term "Salary" as used in this Agreement shall refer to his Salary as thus increased. 4. BONUSES. (a) Annual Bonus. For each Fiscal Year during the Employment Term Borow shall be eligible to receive an annual bonus equal to 3 percent of Aeroflex's consolidated pre-tax earnings for such Fiscal Year, computed without regard to any amount due under this Section 4(a). Any such bonus payable with respect to a portion of a Fiscal Year shall be prorated accordingly. Borow shall be entitled to elect to defer, under the terms of any deferred compensation agreement or annual incentive compensation plan applicable to him and then in effect, any portion of his annual bonus that is not already subject to deferral thereunder. (b) Special Bonus. Borow shall be eligible to receive additional bonuses during the Employment Term. The Committee shall determine, in its discretion, the occasion for payment, and the amount, of any such bonus. 5. LONG-TERM INCENTIVE. During the Employment Term, Borow shall be eligible for an award under any long-term incentive compensation plan established by Aeroflex for the benefit of Borow or, in the absence thereof, under any such plan established for the benefit of members of the senior management of Aeroflex. 6. EQUITY OPPORTUNITY. During the Employment Term, Borow shall be eligible to receive grants of options to purchase shares of Aeroflex's stock and awards of shares of Aeroflex's stock, either or both as determined by the Committee, under and in accordance with the terms of applicable plans of Aeroflex and related option and award agreements. It is the intention of Aeroflex to grant stock options to Borow during the Employment Term. Also, to the extent permitted by any such plan, Borow shall be eligible during any Consulting Period to receive grants of options and awards of shares of Aeroflex's stock in the same manner. 7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS. During the Employment Term and any Consulting Period, Borow shall be entitled to prompt reimbursement by Aeroflex for all reasonable out-of-pocket expenses incurred by him in performing services under this Agreement, upon his submission of such accounts and records as may be reasonably required by Aeroflex. In addition, Borow shall be entitled to payment by Aeroflex of all reasonable costs and expenses, including attorneys' and consultants' fees and disbursements, incurred by him in connection with adoption of this Agreement and any related compensatory arrangements that Aeroflex adopts solely for his benefit. 8. PERQUISITES. During the Employment Term and, and any Consulting Period, Aeroflex shall provide Borow with the following perquisites: (a) an office of a size and with furnishings and other appointments, and exclusive personal secretarial and other assistance, at least equal to that provided to Borow by Aeroflex as of the Effective Date; and (b) the use of an automobile and payment of related expenses on the same terms as are in effect on the Effective Date or, if more favorable to Borow, as are made available generally to other executive officers of Aeroflex at any time thereafter. 9. EMPLOYEE BENEFIT PLANS. (a) General. During the Employment Term, Borow shall be entitled to participate in all employee benefit plans and programs that are made available to Aeroflex's senior executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, pension and other retirement plans, profit-sharing plans, savings and similar plans, group life insurance, accidental death and dismemberment insurance, travel accident insurance, hospitalization insurance, surgical insurance, major and excess major medical insurance, dental insurance, short-term and long-term disability insurance, sick leave (including salary continuation arrangements), holidays, vacation (not less than four weeks in any calendar year) and any other employee benefit plans or programs that may be sponsored by Aeroflex from time to time, including plans that supplement the above-listed types of plans, whether funded or unfunded. (b) Medical Care Reimbursement and Insurance. During the Employment Term and Consulting Period, Aeroflex shall reimburse Borow for 100 percent of any medical expenses incurred by him for himself and his Spouse that are not reimbursed by insurance or otherwise, offset by any amounts that are reimbursable by Medicare if Borow and his Spouse, when eligible, elect to be covered by Medicare. Aeroflex shall provide Borow and his Spouse during his lifetime with hospitalization insurance, surgical insurance, major and excess major medical insurance and dental insurance in accordance with the most favorable plans, policies, programs and practices of Aeroflex and its Subsidiaries made available generally to other senior executive officers of Aeroflex and its Subsidiaries as in effect from time to time. (c) Life Insurance Benefit. In addition to the group life insurance available to employees generally, Aeroflex shall provide Borow with an individual permanent life insurance benefit in an initial amount of not less than approximately $1,000,000, the terms and conditions of such benefit to be more fully described in an insurance ownership agreement between Borow and Aeroflex. (d) Disability Benefit. In consideration of the benefit payable to Borow in the event of termination of his employment due to Disability, as provided in Section 10(e) below, or, if applicable, in the event of termination of Borow's consulting services due to Disability during the Consulting Period, as provided in Section 13(d) below, Aeroflex shall not be obligated to provide Borow with long-term disability insurance. Notwithstanding the foregoing, if Aeroflex does provide Borow with such insurance, he shall be the owner of any individual policies obtained and shall pay the premiums thereon. (e) Retirement Benefit. Borow shall be entitled to the benefits provided under the Aeroflex Incorporated Supplemental Executive Retirement Plan (the "SERP"); provided, however, that if Aeroflex fails to maintain the SERP, Borow's retirement benefit shall be determined as if the SERP had remained in effect until termination of his employment with Aeroflex by retirement. These benefits are in addition to the benefits provided under this Agreement, and no modification, amendment or termination of this Agreement shall affect Borow's rights under the SERP as in effect on the Effective Date or, if more favorable to Borow, as in effect at any time thereafter. 10. TERMINATION OF EMPLOYMENT. (a) Termination by Mutual Agreement. The Parties may terminate this Agreement by mutual agreement at any time. If they do so, Borow's entitlements shall be as the Parties mutually agree. (b) General. Notwithstanding anything to the contrary herein, in the event of termination of Borow's employment under this Agreement, he or his Beneficiary, as the case may be, shall be entitled to receive (in addition to payments and benefits under, and except as specifically provided in, subsections (c) through (h) below, as applicable): (i) his Salary through the date of termination; (ii) any unused vacation from prior years; (iii) any annual bonus for the current Fiscal Year, prorated to the date of termination; (iv) any annual or special bonus previously awarded but not yet paid to him; (v) any deferred compensation under any incentive compensation plan of Aeroflex or any deferred compensation agreement then in effect; (vi) any other compensation or benefits, including without limitation long-term incentive compensation described in Section 5 above, benefits under equity grants and awards described in Section 6 above and employee benefits under plans described in Section 9 above, that have vested through the date of termination or to which he may then be entitled in accordance with the applicable terms and conditions of each grant, award or plan; and (vii) reimbursement in accordance with Sections 9(a) and (b) above of any business and medical expenses incurred by Borow or his Spouse, as applicable, through the date of termination but not yet paid to him. (c) Termination due to Retirement. In the event that Borow's employment terminates due to Retirement, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to the benefits provided under the SERP, as provided in Section 9(e) above. The Consulting Period shall begin on the day following termination of Borow's employment by Retirement. (d) Termination due to Death. In the event that Borow's employment terminates due to his death, his Beneficiary shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination. (e) Termination due to Disability. In the event of Disability, Aeroflex or Borow may terminate Borow's employment. If Borow's employment terminates due to Disability, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination, offset by any long-term disability insurance benefit that Aeroflex has provided for him and for which it has paid the applicable group or individual insurance premiums. (f) Termination by Aeroflex for Cause. Aeroflex may terminate Borow's employment hereunder for Cause only upon written notice to Borow not less than 30 days prior to any intended termination, which notice shall specify the grounds for such termination in reasonable detail. Cause shall in no event be deemed to exist except upon a finding reflected in a resolution approved by a majority (excluding Borow) of the members of the Board (whose findings shall not be binding upon or entitled to any deference by any court, arbitrator or other decision-maker ruling on this Agreement) at a meeting of which Borow shall have been given proper notice and at which Borow (and his counsel) shall have a reasonable opportunity to present his case. In the event that Borow's employment is terminated for Cause, he shall be entitled only to the compensation and benefits specified in Section 10(b). (g) Termination Without Cause or by Borow for Good Reason. (i) Termination without Cause shall mean termination of Borow's employment by Aeroflex and shall exclude termination (A) due to Retirement, death, Disability or Cause or (B) by mutual agreement of Borow and Aeroflex. Aeroflex shall provide Borow 15 days' prior written notice of termination by it without Cause, and Borow shall provide Aeroflex 15 days' prior written notice of his termination for Good Reason. (ii) In the event of termination by Aeroflex of Borow's employment without Cause or of termination by Borow of his employment for Good Reason, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to: (A) his Salary, payable for the remainder of the Employment Term at the rate in effect immediately before such termination; (B) annual bonuses for the remainder of the Employment Term (including a prorated bonus for any partial Fiscal Year) equal to the average of the three highest annual bonuses awarded to him during the ten Fiscal Years preceding the Fiscal Year of termination, such bonuses to be paid at the same time annual bonuses are regularly paid by Aeroflex to Borow; (C) continued medical reimbursement for the remainder of the Employment Term and thereafter the lifetime medical benefits described in Section 9(b) above; (D) a lump-sum payment equal to the then present value of the excess, if any, of (x) the retirement benefit to which Borow would have been entitled if he had remained employed under this Agreement until age 70 over (y) the early retirement benefit actually payable to him, both as calculated and payable under the SERP; and (E) continued participation in all employee benefit plans or programs available to Aeroflex employees generally in which Borow was participating on the date of termination of his employment until the end of the Employment Term; provided; however, that (x) if Borow is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (E), he shall be entitled to the after-tax economic equivalent of the benefits under the plan or program in which he is unable to participate until the end of the Employment Term, and (y) the economic equivalent of any benefit foregone shall be deemed to be the lowest cost that Borow would incur in obtaining such benefit on an individual basis; and (F) other benefits in accordance with applicable plans and programs of the Company. (iii) Prior written consent by Borow to any of the events described in Section 1(k) above shall be deemed a waiver by him of his right to terminate for Good Reason under this Section 10(g) solely by reason of the events set forth in such waiver. (h) Change in Control. Notwithstanding anything to the contrary in this Section 10, termination of Borow's employment within the one-year period following a Change in Control for any reason other than Cause, Retirement, death or Disability, shall be governed by Section 10(g). In the event of any such termination, Borow shall be entitled to compensation and benefits in accordance with the provisions of Section 10(g)(ii). 11. NO DUTY TO MITIGATE; NO OFFSET. Borow shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payment hereunder be subject to offset in the event Borow does receive compensation for services from any other source. 12. PARACHUTES. (a) Application. If all, or any portion, of the payments provided under this Agreement, and/or any other payments and benefits that Borow receives or is entitled to receive from Aeroflex or a Subsidiary, whether or not under an existing plan, arrangement or other agreement, constitutes an "excess parachute payment" within the meaning of Section 280G(b) of the Code (each such parachute payment, a "Parachute Payment") and will result in the imposition on Borow of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which Borow is entitled under this Agreement, Aeroflex shall pay him an amount in cash equal to the sum of the excise taxes payable by him by reason of receiving Parachute Payments, plus the amount necessary to put him in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including without limitation any payments under this Section 12) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). (b) Computation. The amount of any payment under this Section 12 shall be computed by a certified public accounting firm of national reputation selected by Aeroflex and acceptable to Borow. If Aeroflex or Borow disputes the computation rendered by such accounting firm, Aeroflex shall select an alternative certified public accounting firm of national reputation to perform the applicable computation. If the two accounting firms cannot agree upon the computations, Borow and Aeroflex shall jointly appoint a third certified public accounting firm of national reputation within 10 calendar days after the two conflicting computations have been rendered. Such third accounting firm shall be asked to determine within 30 calendar days the computation of the Parachute Gross-up to be paid to Borow, and payments shall be made accordingly. (c) Payment. In any event, Aeroflex shall pay to Borow or pay on his behalf the Parachute Gross-up as computed by the accounting firm initially selected by Borow by the time any taxes payable by him as a result of the Parachute Payments become due, with Borow agreeing to return the excess amount of such payment over the final computation rendered from the process described in Section 12(b). Borow and Aeroflex shall provide the accounting firms with all information that any of them reasonably deems necessary in order to compute the Parachute Gross-up. The cost and expenses of all the accounting firms retained to perform the computations described above shall be borne by Aeroflex. In the event that the Internal Revenue Service ("IRS") or the accounting firm computing the Parachute Gross-up finally determines that the amount of excise taxes thereon initially paid was insufficient to discharge Borow's excise tax liability, Aeroflex shall make additional payments to him as may be necessary to reimburse him for discharging the full liability. Borow shall apply to the IRS for a refund of any excise taxes paid and remit to Aeroflex the amount of any such refund that he receives. Aeroflex shall reimburse Borow for his expenses in seeking a refund of excise taxes and for any interest and penalties imposed on excise taxes that he is required to pay. 13. CONSULTING PERIOD. (a) General. Effective upon the end of the Employment Term (but only if the Employment Term ends by reason of its expiration or, if earlier, upon termination of Borow's employment (i) by mutual agreement or (ii) by Retirement), Borow shall become a consultant to Aeroflex, in recognition of the continued value to Aeroflex of his extensive knowledge and expertise. Unless earlier terminated, as provided in Section 13(e), the Consulting Period shall continue for three years. (b) Duties and Extent of Services. (i) During the Consulting Period, Borow shall consult with Aeroflex and its senior executive officers regarding its respective businesses and operations. Such consulting services shall not require more than 50 days in any calendar year, nor more than one day in any week, it being understood and agreed that during the Consulting Period Borow shall have the right, consistent with the prohibitions of Sections 14 and 15 below, to engage in full-time or part-time employment with any business enterprise that is not a competitor of Aeroflex. (ii) Borow's service as a consultant shall only be required at such times and such places as shall not result in unreasonable inconvenience to him, recognizing his other business commitments that he may have to accord priority over the performance of services for Aeroflex. In order to minimize interference with Borow's other commitments, his consulting services may be rendered by personal consultation at his residence or office wherever maintained, or by correspondence through mail, telephone, fax or other similar mode of communication at times, including weekends and evenings, most convenient to him. (iii) During the Consulting Period, Borow shall not be obligated to serve as a member of the Board or to occupy any office on behalf of Aeroflex or any of its Subsidiaries. (c) Compensation. During the Consulting Period, Borow shall receive from Aeroflex each year an amount equivalent to two-thirds of his Salary at the end of the Employment Term, payable and subject to annual increase as provided in Section 3 above. (d) Disability. In the event of Disability during the Consulting Period, Aeroflex or Borow may terminate Borow's consulting services. If Borow's consulting services are terminated due to Disability, he shall be entitled to compensation, in accordance with Section 13(c), for the remainder of the Consulting Period. (e) Termination. The Consulting Period shall terminate after three years or, if earlier, upon Borow's death or upon his failure to perform consulting services as provided in Section 13(b), pursuant to 30 days' written notice by Aeroflex to Borow of the grounds constituting such failure and reasonable opportunity afforded Borow to cure the alleged failure. Upon any such termination, payment of consulting fees and benefits (with the exception of lifetime medical benefits under Section 9(b) above) shall cease. (f) Other. During the Consulting Period, Borow shall be entitled to expense reimbursement (including secretarial, telephone and similar support services) and perquisites and medical benefits, pursuant to the terms of Sections 7, 8 and 9(b), respectively. 14. CONFIDENTIAL INFORMATION. (a) General. (i) Borow understands and hereby acknowledges that as a result of his employment with Aeroflex he will necessarily become informed of and have access to certain valuable and confidential information of Aeroflex and any of its Subsidiaries, joint ventures and affiliates, including, without limitation, inventions, trade secrets, technical information, computer software and programs, know-how and plans ("Confidential Information"), and that any such Confidential Information, even though it may be developed or otherwise acquired by Borow, is the exclusive property of Aeroflex to be held by him in trust solely for Aeroflex's benefit. (ii) Accordingly, Borow hereby agrees that, during the Employment Term and the Consulting Period and subsequent to both, he shall not, and shall not cause others to, use, reveal, report, publish, transfer or otherwise disclose to any person, corporation or other entity any Confidential Information without prior written consent of the Board, except to (A) responsible officers and employees of Aeroflex or (B)_responsible persons who are in a contractual or fiduciary relationship with Aeroflex or who need such information for purposes in the interest of Aeroflex. Notwithstanding the foregoing, the prohibitions of this clause (ii) shall not apply to any Confidential Information that becomes of general public knowledge other than from Borow or is required to be divulged by court order or administrative process. (b) Return of Documents. Upon termination of his employment with Aeroflex for any reason or, if applicable, upon expiration of the Consulting Period, Borow shall promptly deliver to Aeroflex all plans, drawings, manuals, letters, notes, notebooks, reports, computer programs and copies thereof and all other materials, including without limitation those of a secret or confidential nature, relating to Aeroflex's business that are then in his possession or control. (c) Remedies and Sanctions. In the event that Borow is found to be in violation of Section 14(a) or (b) above, Aeroflex shall be entitled to relief as provided in Section 16 below. 15. NONCOMPETITION/NONSOLICITATION. (a) Prohibitions. During the Employment Term and, if applicable, the Consulting Period, Borow shall not, without prior written authorization of the Board, directly or indirectly, through any other individual or entity: (i) become on officer or employee of, or render any service to, any direct competitor of Aeroflex; (ii) solicit or induce any customer of Aeroflex to cease purchasing goods or services from Aeroflex or to become a customer of any competitor of Aeroflex; or (iii) solicit or induce any employee of Aeroflex to become employed by any competitor of Aeroflex. (b) Remedies and Sanctions. In the event that Borow is found to be in violation of Section 15(a) above, Aeroflex shall be entitled to relief as provided in Section 16 below. (c) Exceptions. Notwithstanding anything to the contrary in Section 15(a) above, its provisions shall not: (i) apply if Aeroflex terminates Borow's employment without Cause or Borow terminates his employment for Good Reason, each as provided in Section 10(g) above; or (ii) be construed as preventing Borow from investing his assets in any business that is not a direct competitor of Aeroflex. 16. REMEDIES/SANCTIONS. Borow acknowledges that the services he is to render under this Agreement are of a unique and special nature, the loss of which cannot reasonably or adequately be compensated for in monetary damages, and that irreparable injury and damage may result to Aeroflex in the event of any breach of this Agreement or default by Borow. Because of the unique nature of the Confidential Information and the importance of the prohibitions against competition and solicitation, Borow further acknowledges and agrees that Aeroflex will suffer irreparable harm if he fails to comply with his obligations under Section 14(a) or (b) above or Section 15(a) above and that monetary damages would be inadequate to compensate Aeroflex for any such breach. Accordingly, Borow agrees that, in addition to any other remedies available to either Party at law, in equity or otherwise, Aeroflex will be entitled to seek injunctive relief or specific performance to enforce the terms, or prevent or remedy the violation, of any provisions of this Agreement. 17. BENEFICIARIES/REFERENCES. Borow shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following his death by giving Aeroflex written notice thereof; provided, however, that absent any then effective contrary notice, his beneficiary shall be his surviving Spouse. In the event of Borow's death, or of a judicial determination of his incompetence, reference in this Agreement to Borow shall be deemed to refer, as appropriate, to his beneficiary, estate or other legal representative. 18. WITHHOLDING TAXES. All payments to Borow or his Beneficiary under this Agreement shall be subject to withholding on account of federal, state and local taxes as required by law. 19. INDEMNIFICATION AND LIABILITY INSURANCE. Nothing herein is intended to limit Aeroflex's indemnification of Borow, and Aeroflex shall indemnify him to the fullest extent permitted by applicable law consistent with Aeroflex's Certificate of Incorporation and By-Laws as in effect on the Effective Date, with respect to any action or failure to act on his part while he is an officer, director or employee of Aeroflex or any Subsidiary. Aeroflex shall cause Borow to be covered at all times by directors' and officers' liability insurance on terms no less favorable than the directors' and officers' liability insurance maintained by Aeroflex as in effect on the Effective Date in terms of coverage and amounts. Aeroflex shall continue to indemnify Borow as provided above and maintain such liability insurance coverage for him after the Employment Term and, if applicable, the Consulting Period for any claims that may be made against him with respect to his service as a director or officer of Aeroflex or a consultant to Aeroflex. 20. EFFECT OF AGREEMENT ON OTHER BENEFITS. The existence of this Agreement shall not prohibit or restrict Borow's entitlement to participate fully in compensation, employee benefit and other plans of Aeroflex in which senior executives are eligible to participate. 21. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Borow) and assigns. No rights or obligations of Aeroflex under this Agreement may be assigned or transferred by Aeroflex except pursuant to (a) a merger or consolidation in which Aeroflex is not the continuing entity or (b) sale or liquidation of all or substantially all of the assets of Aeroflex, provided that the surviving entity or assignee or transferee is the successor to all or substantially all of the assets of Aeroflex and such surviving entity or assignee or transferee assumes the liabilities, obligations and duties of Aeroflex under this Agreement, either contractually or as a matter of law. Aeroflex further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall use its best efforts to have such assignee or transferee expressly agree to assume the liabilities, obligations and duties of Aeroflex hereunder; provided, however, that notwithstanding such assumption, Aeroflex shall remain liable and responsible for fulfillment of the terms and conditions of this Agreement; and provided, further, that in no event shall such assignment and assumption of this Agreement adversely affect Borow's right upon a Change in Control, as provided in Section 10(h) above. No rights or obligations of Borow under this Agreement may be assigned or transferred by him. 22. REPRESENTATIONS. The Parties respectively represent and warrant that each is fully authorized and empowered to enter into this Agreement and that the performance of its or his obligations, as the case may be, under this Agreement will not violate any agreement between such Party and any other person, firm or organization. Aeroflex represents and warrants that this Agreement has been duly authorized by all necessary corporate action and is valid, binding and enforceable in accordance with its terms. 23. ENTIRE AGREEMENT. Except to the extent otherwise provided herein, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes any prior agreements, whether written or oral, between the Parties concerning the subject matter hereof, including without limitation the Prior Agreement. Payments and benefits provided under this Agreement are in lieu of any payments or other benefits under any severance program or policy of Aeroflex to which Borow would otherwise be entitled. 24. AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by both Borow and an authorized officer of Aeroflex. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Party to be charged with the waiver. No delay by either Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 25. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 26. SURVIVAL. The respective rights and obligations of the Parties under this Agreement shall survive any termination of Borow's employment with Aeroflex. 27. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and construed and interpreted in accordance with the laws of New York, without reference to principles of conflict of laws. 28. COSTS OF DISPUTES. Aeroflex shall pay, at least monthly, all costs and expenses, including attorneys' fees and disbursements, of Borow in connection with any proceeding, whether or not instituted by Aeroflex or Borow, relating to any provision of this Agreement, including but not limited to the interpretation, enforcement or reasonableness thereof; provided, however, that, if Borow institutes the proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that his claims were frivolous or were made in bad faith, he shall pay his own costs and expenses and, if applicable, return any amounts theretofore paid to him or on his behalf under this Section 28. Pending the outcome of any proceeding, Aeroflex shall pay Borow all amounts due to him without regard to the dispute; provided, however, that if Aeroflex shall be the prevailing party in such a proceeding, Borow shall promptly repay all amounts that he received during pendency of the proceeding. 29. NOTICES. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered either personally, by fax, by overnight delivery service (such as Federal Express) or sent by certified or registered mail postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as the Party may subsequently give notice of. If to Aeroflex or the Board: Aeroflex Incorporated 35 South Service Road Plainview, NY 11803 Attention: Harvey Blau FAX: (516) 694-4823 If to Borow: Leonard Borow at 125 Rodeo Drive Oyster Bay Cove, New York 11791 30. HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 31. COUNTERPARTS. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. Aeroflex Incorporated Attest: /s/ Charles Badlato By: /s/ Michael Gorin ------------------- ------------------- Witness:/s/ Nancy D. Lieberman /s/ Leonard Borow ---------------------- ------------------- Leonard Borow -----END PRIVACY-ENHANCED MESSAGE-----