-----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, S1dDpE8nVRmuiVm3689BweHKxvjREXulWGc32SJmx3pF7nb/nzj9zPbi06nWDgR5 pOHlwxgnBWPb0qJGa59kKA== /in/edgar/work/0000047035-00-000010/0000047035-00-000010.txt : 20001026 0000047035-00-000010.hdr.sgml : 20001026 ACCESSION NUMBER: 0000047035-00-000010 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000730 FILED AS OF DATE: 20001025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERLEY INDUSTRIES INC /NEW CENTRAL INDEX KEY: 0000047035 STANDARD INDUSTRIAL CLASSIFICATION: [3812 ] IRS NUMBER: 232413500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-05411 FILM NUMBER: 745279 BUSINESS ADDRESS: STREET 1: 10 INDUSTRY DR CITY: LANCASTER STATE: PA ZIP: 17603 BUSINESS PHONE: 7173972777 MAIL ADDRESS: STREET 1: 10 INDUSTRY DRIVE CITY: LANCASTER STATE: PA ZIP: 17603 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY INDUSTRIES INC DATE OF NAME CHANGE: 19831103 10-K405 1 0001.txt ANNUAL REPORT FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 30, 2000 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ...............to ............... Commission File No. 0-5411 Herley Industries, Inc. ----------------------- (Exact name of registrant as specified in its charter) Delaware 23-2413500 -------- ------------------- State or other jurisdiction (I.R.S. Employer of incorporation or organization Identification No.) 10 Industry Drive, Lancaster, Pennsylvania 17603 ------------------------------------------ -------- (Address of Principal Executive Offices ) (Zip Code) Registrant's telephone number, including area code: (717) 397-2777 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Exchange on which registered ------------------- ------------------------------------ None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $ .10 par value ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] Based on the closing sale price of $20.50 as of October 11, 2000 the aggregate market value of the voting stock held by non-affiliates of the registrant was $106,351,335. The number of shares outstanding of registrant's common stock, $ .10 par value as of October 11, 2000 was 5,994,338. Documents incorporated by reference: - ----------------------------------- Registrant's definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934. HERLEY INDUSTRIES, INC. TABLE OF CONTENTS Page ---- PART I Item 1 Business 1 Item 2 Properties 10 Item 3 Legal Proceedings 10 Item 4 Submission of Matters to a Vote of Security Holders 10 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 11 Item 6 Selected Financial Data 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A Quantitative and Qualitative Disclosures About Market Risk 15 Item 8 Financial Statements and Supplementary Data 16 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III Item 10 Directors and Executive Officers of the Registrant 16 Item 11 Executive Compensation 16 Item 12 Security Ownership of Certain Beneficial Owners and Management 16 Item 13 Certain Relationships and Related Transactions 16 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8K 17 SIGNATURES 18 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES F-1 PART I Forward-Looking Statements All statements other than statements of historical fact included in this Annual Report, including without limitation statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," 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 Annual Report, 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 and trade difficulties 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. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph. Item 1. Business Herley Industries, Inc. ("Herley" or "Company") a Delaware corporation was incorporated in 1965. The Company's executive offices are located at 10 Industry Drive, Lancaster, PA 17603. The Company's common stock is listed on The Nasdaq National Market under the symbol "HRLY". Herley is a microwave technology company with five manufacturing facilities, over sixty microwave engineers and approximately 600 employees. The Company operates in a single business segment consisting of research, engineering, product development, and manufacturing of complex microwave radio frequency (RF) and millimeter wave components and subsystems for commercial wireless, defense and space customers worldwide. Herley has over 35 years of experience in the design and manufacture of sophisticated RF, microwave and millimeter wave electronic components for the defense industry. These products receive, transmit and process wireless data signals. During 1998 the Company began to explore the commercial wireless industry to determine the level of market potential for its technology. Herley believes a significant portion of its microwave technology is transferable to commercial wireless applications. As an example, the Interference Cancellation System ("ICS") was derived from technology developed during the creation of military systems that deliberately jam microwave signals. ICS generates an equal amplitude and opposite phase signal that effectively cancels the interfering signal. The Company's defense business is expected to continue its current rate of growth, generating consistent earnings that would be available, if needed, to invest in the commercial wireless opportunities to achieve top line growth. Herley's acquisition of General Microwave in January 1999 was the first step in this process. The acquisition added depth and breadth to the defense product line, strengthened an already strong team of engineers, and gave the Company an immediate entry into commercial wireless markets with General Microwave's commercial products catalog. Subsequent to the General Microwave acquisition, Herley began to coordinate the direction of its facilities, determine the viability of the existing line of commercial wireless products, and ascertain how best to apply existing microwave technology in the development of new products. Herley Wireless Technologies, Inc. was 1 formed in February 2000 to pursue commercial wireless opportunities through product development, teaming agreements, investments and acquisitions. Herley's technology range covers the entire wireless spectrum, from RF (at 900 MHz to 1800 MHz), microwave frequencies (2.4 GHz through 18.0 GHz), to millimeter wave frequencies (20 GHz through 40 GHz). This capability gives the Company the ability to select opportunities in both fixed wireless broadband and mobile wireless applications. Strategy The Company's strategy is to attempt to continue to leverage its proprietary technology, microwave development and manufacturing capabilities to further expand its penetration in the wireless communications and defense markets. Key components of the Company's strategy include the following: Increase Levels of Component Integration and Value Added Content Due to acquisitions, product development and growth of engineering expertise, the Company has increased its capability to provide more component integration. Component integration adds value and will enable Herley to increase content and revenue levels on wireless and defense systems. Further Expansion into Commercial Markets The Company has over 35 years experience in microwave technology used in designing and manufacturing complex microwave products for the defense industry. The Company recently successfully leveraged this experience into the wireless communications markets and will continue to expand its presence in select markets. Maintain Leadership in Microwave Technology The Company intends to pursue further technological advances through continued investment in research and development. The Company will seek to advance its leadership in microwave technology by continuing its participation in selected defense programs that involve highly sophisticated state-of-the-art microwave technology. Strengthen and Expand Customer Relationships The Company has developed mutually beneficial relationships with defense and commercial companies. The Company expects to continue to build and strengthen relationships with industry leaders by recognizing their needs and providing them with timely and cost effective solutions. Enhance High Volume Manufacturing Capability The Company intends to continue to implement process manufacturing automation and believes that its ability to develop a high level of automated production and test capability will help to further improve its cost effectiveness and time to market. Pursue Strategic Acquisitions The Company intends to continue to augment its existing technology base by acquiring specialized technology companies that complement its product offerings and market strategies. The Company believes that expansion of its core competencies through the acquisition of such specialized technology companies, when combined with its technological and manufacturing skills, will provide improved levels of integration, leading to subsystems and complete systems products. 2 Company Products Commercial Wireless Herley has selected the following applications to focus upon within the commercial wireless market: point-to- point access and point-to-multipoint access; handset, radio and infrastructure test equipment; power amplifiers, repeaters, and interference cancellation systems, and fiber optic communication. Test Equipment Test equipment is used in the manufacturing of cell phones, base stations and radio requiring components and assemblies with very high performance and quality. These systems operate over bandwidths much greater than the transmission bandwidth in order to check parameters outside of the operating band. Herley has pushed the state of the art in wideband components, such as attenuators, IQ modulators and up/down converters. The Company initially focused on this segment of the wireless market because of the wide range of catalog products it can offer and because the price pressures are significantly less than in the higher volume infrastructure equipment. The wireless equipment (handsets and infrastructure) market is likely to increase by approximately 30% in 2000, to $119 billion. Wireless telecom equipment should remain one of the fastest-growing segments of the $340 billion telecom equipment market. It is expected that the market will post a compound annual growth rate of 18% - 20% over the next five years, driven by new applications such as data as well as higher penetration rates. The key driver for wireless equipment spending is the conveniences of "anytime, anywhere" voice communications. Herley expects voice (both minutes of use and new subscribers) to remain a critical catalyst of telecom equipment spending over the next 12-18 months. However, in 2001, as the penetration rate begins to exceed 50% in the developed countries and 10%-15% in many developing countries, the growth rate for wireless voice products is likely to begin to level off. The overall worldwide penetration rate was estimated at 8% at the end of 1999 and should reach over 12% by the end of 2000. Point-to-Point and Point-to-Multipoint Radio Point-to-point radios have been used for some time in line of sight communications where land-based telecommunication was absent. The rapid growth of this market has resulted from the use of radios to connect base stations in the cellular infrastructure. Point-to-point fixed wireless connects a central building to the fiber backbone. It has multiple antennas; each targeted at a single antenna on a customer building, giving each customer the full bandwidth of the antenna, i.e. higher speeds. Maximum speed is 155 million bits per second as compared to a "high speed" line that provides 1.54 million bits per second. Point-to-multipoint fixed wireless connects multiple buildings to the fiber backbone through a central building. For example, the central building has four antennas. Each antenna covers 90 degrees so the central building can communicate with all surrounding buildings. In most cases, all customers share the four antennas. Costs of Point-to-multipoint are less, but this application offers lower speed services. Herley supplies subsystems (receiver/transmitter modules) to digital microwave radio original equipment manufacturers ("OEMs"). Power Amplifiers, Repeaters, and Interference Cancellation System Herley has recently broadened its technical and marketing capability in the area of power amplifiers, which opens opportunities in various power-based products. The cellular infrastructure uses power amplifiers in the base stations and in tower top amplifiers and repeaters to extend the range and capacity of the base stations. The Company's initial focus will be on supplying power amplifiers to service providers. 3 Herley has an additional advantage and opportunity in this market segment. The Company has signed a teaming agreement with Cyber Dynamics to introduce interference cancellation systems into repeaters, which would significantly enhance their performance. This product is unique in the market and is based on patented and proprietary technology from Cyber Dynamics and Herley. It is particularly useful in wideband multicarrier systems expected to dominate the next generation (3G) systems. The interference cancellation system is presently in production for a military communication system and field trials are planned with domestic and international cellular service providers. Fiberoptic Communications The fixed and mobile Internet infrastructure has boosted again the use of high-speed fiberoptics. The speed in fiberoptic communication has been increasing steadily and has now reached into the 10 to 40 Gbit range. This necessitates the use of microwave circuits to drive the optical components. Herley engineers have long predicted the merger of fiberoptics and microwave technologies. In 1993, one of the Company's leading engineers designed an optical device based on Lithium Niobate that can transmit signals at 40 Gbit for which the Company has received a patent. In simple terms, fiber optic technology uses a strand of glass as thin as hair that transmits both voice and data signals in the form of light pulses. Information is encoded in digital signals (binary code) and transmitted through a fiber by modulating a light source similar to a laser effect. At the signal's destination, the signal is decoded and reconstructed as the original information. The fiber optic cable has a core through which the signal travels and a cladding that surrounds and protects the core confining the light signal. These lightwave signals are guided through the core of the optical fiber similar to the way that radio frequency (RF) signals are guided through coaxial cable. Fiber optics are produced in single or multimode. Single mode has smaller cores resulting in higher transmission rates and lower signal losses. Single mode fiber optics have higher transmission and receiving costs but carry 50 to 100 times more capacity. On the other hand, multimode fiber optics are used for short distances or for slower transmission requirements. Fiber is designed to last approximately 20 years or more. Fiber optic cable offers much greater bandwidth than the older copper technologies, is more secure and robust, and has been developed to coexist with next generation networking technologies. The major trunk lines, those between one telephone company switch to another, are now primarily fiber optic cables. However, the cabling from the Telephone Company to residential and some business areas still consists primarily of older coaxial cable and copper pairs. The Company supplies microwave products to fiber optic manufacturers, including voltage controlled oscillators. Defense and Space Products The Company has focused its efforts on providing microwave products to defense programs, which have extended production cycles. Herley's subsystems and integrated components use specialized combinations of components that perform various microwave functions including filters, switches, oscillators, and amplifiers, among others. The Company is involved in the following applications: Carrier Landing Systems Electronic Countermeasure Systems Rear Warning Receivers Space Launch Fire Control Radar 4 Microwave Components Herley manufactures microwave devices at its facilities in Woburn, Massachusetts; in Nashua New Hampshire, in Farmingdale, New York; and in Jerusalem, Israel for existing long-term military programs, for new production units, as well as for spare parts and repair services. These microwave devices are used in a variety of radar, communications and missile applications, including airborne and shipboard navigation and missile guidance systems. The Company designs and manufactures complex microwave integrated circuits ("MICs"), which consist of sophisticated assemblies that perform many functions, primarily involving switching of microwave signals. MICs manufactured by the Company are employed in many defense electronics military systems as well as missile programs. The Company also manufactures magnetrons, which are the power source utilized in the production of the Company's transponders. Command and Control Systems (C2) The Company's command and control systems have been used to fly remotely a large variety of unmanned aerial vehicles ("UAVs"), typically aircraft used as target drones or Remotely Piloted Vehicles ("RPVs") and some surface targets. Operations have been conducted by users on the open ocean, remote landmasses, and instrumented test and training ranges. Telemetry Systems Missile, UAV, or target testing on domestic and international test ranges requires flight safety and performance data transmission to maximize flight safety during the test operation. Surveillance and intelligence gathering UAVs also require a data transmission downlink and a command and control systems uplink to accomplish their mission. The Company has developed a telemetry system capability that can be configured to meet individual customers' needs. Various components of the system include data encoders, transmitters and flight termination receivers. Each has a distinctive role and each is key to the success of the mission. Transponders The Company manufactures a variety of expendable transponders, including range safety, identification friend or foe ("IFF"), command and control, and scoring systems. Transponders are small, expendable, electronic systems consisting of a transmitter, sensitive receiver and internal signal processing equipment comprised of active and passive components, including microwave subassemblies such as amplifiers, oscillators and circulators. The transponder receives signals from radars, changes and amplifies the frequency of the signals, and sends back a reply on a different frequency and signal level. This reply will be a strong, noise free signal upon which the tracking radar can "lock", and one that is far superior to skin reflection tracking, particularly under adverse weather conditions after the launch. Flight Termination Receiver A flight termination receiver ("FTR") is installed in a test missile, a UAV, a target or a space launch vehicle as a safety device. The FTR has a built-in decoder that enables it to receive a complex series of audio tones which, when appropriate, will set off an explosive charge that will destroy the vehicle. A Range Safety Officer ("RSO") using the range safety transponder will track the vehicle in flight to determine if it is performing as required. If the RSO detects a malfunction in the test or launch vehicle that causes it to veer from a planned trajectory in a manner that may endanger personnel or facilities, the RSO will transmit a coded signal to the onboard FTR to explode the vehicle harmlessly. HF Communications and IFF Interrogators The Company also designs and manufactures high frequency radio and IFF interrogators. This high frequency communications equipment is used by the U.S. Navy and foreign navies that conduct joint military exercises 5 with the U.S. Navy. The IFF interrogators are used as part of shipboard equipment and are also placed on coastlines, where they are employed as silent sentries. The Company has been a significant supplier to the Republic of Korea ("ROK") for over twenty years and has a large, established installed base of equipment. The Company has been, and continues to be, a supplier to the ROK KDX destroyer program. Customers During the fiscal year ended July 30, 2000, approximately 26% of the Company's sales were attributable to contracts with offices and agencies of the U. S. Government. No other customers accounted for shipments in excess of 10% of consolidated net sales. During fiscal year 2000, sales to foreign customers accounted for approximately 23% of the Company's consolidated net sales and included shipments to 31 countries. All of the Company's contracts with foreign customers are payable in U. S. dollars. Sales to foreign customers for each of the last three fiscal years were $16,506,000, $17,680,000 and $11,943,000 in fiscal 2000, 1999, and 1998, respectively. Herley sells commercial wireless communications products primarily to OEMs, which in turn integrate its products into wireless infrastructure equipment solutions sold to network service providers. In addition, Herley sells certain niche products directly to network service providers. Some of Herley's customers for commercial wireless subsystems include: Alcatel Digital Microwave Teradyne P-Com Tadiran Matra BAe The Company also offers defense electronics equipment to major defense prime contractors for integration into larger systems. Some of its customers for defense electronics equipment include: Boeing British Aerospace Harris Lockheed Martin Litton Northrop Grumman Raytheon Business Acquisition The Company entered into an agreement, as of January 3, 2000 to acquire substantially all of the assets of Robinson Laboratories, Inc. ("Robinson" or "Robinson Labs"), a New Hampshire corporation, which is being operated as a division of Herley Industries, Inc. Robinson designs, develops and manufactures microwave components and subassemblies for the defense, space and telecommunications markets. The transaction, which closed on February 1, 2000, provided for the payment of $6,000,000 in cash, the issuance of 33,841 shares of Common Stock of the Company valued at $15.188 per share, and the assumption of approximately $3,140,000 in liabilities. In addition, the agreement provides for the issuance of additional shares of Common Stock at a future date, aggregating 97,841 shares, based on new orders booked through January 2001. The cash portion of the purchase price was financed by borrowing under the Company's existing line of credit with its bank. The transaction has been accounted for under the purchase method. Accordingly the consolidated statement of income includes the results of Robinson's operations from January 3, 2000. Excess cost over the fair value of net assets acquired of approximately $5,467,000 is being amortized over 20 years. 6 Sales and Marketing The Company markets its products worldwide to OEMs and service providers in commercial markets and prime contractors in defense markets primarily through a sales force generally organized by geographic territory and markets. In addition, the Company has contracts with manufacturers' representatives in the United States and international representatives who are located in Western Europe, the Middle East and Asia. As part of its marketing efforts, the Company advertises in major trade publications and attends major industrial shows in the commercial wireless communications and defense markets. After the Company has identified key potential customers, the Company makes sales calls with its own sales, management and engineering personnel and its manufacturers' representative. In order to promote widespread acceptance of its products and provide customers with support for their wireless communications needs, the Company's sales and engineering teams work closely with its customers to develop tailored solutions to their requirements. The Company believes that its customer engineering support provides it with a key competitive advantage. Manufacturing The Company manufactures its products from standard components, as well as from items that are manufactured by vendors to the company's specifications. A majority of the Company's commercial and defense electronics assemblies and subsystems products contain proprietary technology which is designed and tested by the Company's engineers and technicians and is manufactured at the Company's own facilities. The Company continues to invest in the advancement of its proprietary manufacturing processes and in automation of the manufacturing processes. Automation is critical in meeting its customers' demands for price competitiveness, world class quality and on-time delivery. The Company is also investing to enhance its responsiveness to production demands from its customers. Electronic components and other raw materials used in the Company's products are purchased by the Company from a large number of suppliers and all of such materials are readily available from alternate sources. The Company does not maintain any significant level of finished products inventory. Raw materials are generally purchased for specific contracts and common components are purchased for stock based on the Company's firm fixed backlog. There are no significant environmental control procedures required concerning the discharge of materials into the environment that would require the Company to invest in any significant capital equipment or that would have a material effect on the earnings of the Company or its competitive position. Quality assurance checks are performed on manufacturing processes, purchased items, work-in-process and finished products. Due to the complexity of the Company's products, final tests are performed on some products by highly skilled engineers and technicians. Herley's primary manufacturing facilities have earned the ISO 9001 Registration. The ISO 9000 series standards are internationally recognized quality management system requirements. ISO 9001, the most comprehensive Standard in the ISO 9000 Series covers design, manufacturing, installation, and servicing systems. Assembly, test, package and shipment of products are done at the Company's manufacturing facilities located in the following cities: Lancaster, Pennsylvania Farmingdale, New York Woburn, Massachusetts 7 Nashua, New Hampshire Jerusalem, Israel Backlog The Company's total backlog of orders was approximately $53,127,000 on July 31, 2000 as compared to $49,230,000 on August 1, 1999. Of the Company's total backlog of $53,127,000 at July 30, 2000, $31,178,000 is attributable to domestic orders and $21,949,000 is attributable to foreign orders. Management anticipates that approximately $41,835,000 of its backlog will be shipped during the fiscal year ending July 29, 2001. All of the orders included in backlog are covered by signed contracts or purchase orders. Backlog is not directly indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular date is representative of actual sales for any succeeding period. Substantially all of the Company's contracts are fixed price contracts, some of which require delivery over time periods in excess of one year. With this type of contract, the Company agrees to deliver products at a fixed price except for costs incurred because of change orders issued by the customer. In accordance with Department of Defense procedures, all contracts involving government programs may be terminated by the government, in whole or in part, at the government's discretion. In the event of such a termination, prime contractors on such contracts are required to terminate their subcontracts on the program and the government or the prime contractor is obligated to pay the costs incurred by the Company under the contract to the date of termination plus a fee based on the work completed. Research and Development The Company believes that its growth depends, in part, on its ability to renew and expand its technology, products, and design and manufacturing processes with an emphasis on cost effectiveness. The Company's primary efforts are focused on engineering design and product development activities rather than pure research. A substantial portion of the Company's development activities has been funded by the Company's customers. Certain of the Company's officers and engineers are involved at various times and in varying degrees in these activities. The Company's policy is to assign the required engineering and support people, on an ad hoc basis, to new product development as needs require and budgets permit. The cost of these development activities, including employees' time and prototype development, net of amounts paid by customers, were approximately $1,727,000, $1,685,000, and $1,562,000 in fiscal 2000, 1999, and 1998, respectively. Competition The microwave component and subsystems industry is highly competitive and the Company competes against many companies, both foreign and domestic, many of these are larger, have greater financial resources and are better known. As a supplier, the Company also experiences significant competition from the in-house capabilities of its actual prospective customers. Competition is generally based upon technology, design, price and past performance. The Company's ability to compete depends, in part, on its ability to offer better design and performance than its competitors and its readiness in facilities, equipment and personnel to undertake to complete the programs. Government Regulation The Company's wireless communications products are incorporated into wireless telecommunications systems that are subject to regulation domestically by the FCC and internationally by other government agencies. In addition, because of its participation in the defense industry, the Company is subject to audit from time to time for its compliance with government regulations by various government agencies. The Company is also subject to a variety of local, state and federal government regulations relating to, among other things, the storage, discharge, handling, omission, generation, manufacture and disposal of toxic or other hazardous substances 8 used to manufacture the Company's products. The Company believes that it operates its business in material compliance with applicable laws and regulations. However, any failure to comply with existing or future laws or regulations could have a material adverse impact on the Company's business, financial condition and result of operations. Intellectual Property While the Company holds several patents, the Company relies primarily on a combination of trade secret, employee and third-party nondisclosure agreements to protect its intellectual property, as well as limiting access to the distribution of proprietary information. There can be no assurance that the steps taken by the Company to protect its intellectual property rights will be adequate to prevent misappropriation of the Company's technology or to preclude competitors from independently developing such technology. Furthermore, there can be no assurance that, in the future, third parties will assert infringement claims against the Company or with respect to its products for which the Company has indemnified certain of its customers. Asserting the Company's rights or defending against third party claims could involve substantial costs and diversion of resources, thus materially and adversely affecting the Company's business, financial condition and results of operations. In the event a third party were successful in a claim that one of the Company's products infringed its proprietary rights, the Company may have to pay substantial royalties or damages, remove that product from the marketplace or expand substantial amounts in order to modify the product so that it no longer infringes such proprietary rights, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Employees As of October 1, 2000, the Company employed 583 persons full time. Of these employees, 61 comprise the engineering staff, 438 constitute manufacturing personnel, 30 occupy sales and marketing positions, and 35 are in management and support functions. None of the Company's employees are covered by collective bargaining agreements and the Company considers its employee relations to be satisfactory. The Company believes that its future success will depend, in part, on its continued ability to recruit and retain highly skilled technical, managerial and marketing personnel. To assist in recruiting and retaining such personnel, the Company has established competitive benefits programs, including a 401k employee savings plan and stock option plans. 9 Item 2. Properties The Company's properties are as follows:
Owned or Location Purpose of Property Area Leased - ------------------- ------------------------------------------ -------------- ------ Lancaster, PA (1) Production, engineering, administrative 71,200 sq. ft. Owned and executive offices Woburn, MA Production, engineering and administration 60,000 sq. ft. Owned Farmingdale, NY (2) Production, engineering and administration 46,000 sq. ft. Leased Jerusalem, Israel Production, engineering and administration 12,000 sq. ft.. Owned Nashua, NH (3) Production, and engineering 20,000 sq. ft. Leased Chicago, IL Engineering and administration 3,000 sq. ft. Leased Lancaster, PA Land held for expansion 20.4 Acres Owned - --------------
[FN] (1) The Company's executive offices occupy approximately 4,000 sq. ft. of space at this facility with engineering and administrative offices occupying 10,000 sq. ft. each. (2) On September 23, 1999 the Company closed on the sale of its prior owned facility in Amityville, NY and relocated the plant to this leased facility in Farmingdale, NY. The Company entered into a 10 year lease agreement with a partnership owned by the children of certain officers of the Company. The lease provides for initial minimum annual rent of $312,390, subject to escalation of approximately 4% annually throughout the 10 year term. (3) As of January 3, 2000 the Company acquired substantially all of the assets of Robinson Laboratories, Inc. which operates as a division at this location. In addition to the above operating facilities, the Company has an idle facility in Billerica, MA which is under lease. The Company is looking to sublease this facility. The Company believes that its facilities are adequate for its current and presently anticipated future needs. Item 3. Legal Proceedings The Company is not involved in any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholders Matters (a) The Company's Common Stock is traded in the NASDAQ National Market under the symbol HRLY. The following table sets forth the high and low sales price as reported by the NASDAQ National Market for the Company's Common Stock for the periods indicated. Common Stock -------------- High Low ----- ----- Fiscal Year 1999 First Quarter................................ 10.50 7.63 Second Quarter............................... 15.31 9.56 Third Quarter................................ 15.13 11.13 Fourth Quarter............................... 16.19 11.50 Fiscal Year 2000 First Quarter................................ 15.00 12.19 Second Quarter............................... 15.50 11.13 Third Quarter................................ 19.38 13.88 Fourth Quarter............................... 19.06 15.69 Fiscal Year 2001 First Quarter (through October 11, 2000)..... 22.75 17.44 The closing price on October 11, 2000 was $20.50. (b) As of October 11, 2000, there were approximately 1,000 record holders of the Company's Common Stock. (c) There have been no cash dividends declared or paid by the Company on its Common Stock during the past two fiscal years. Item 6. Selected Financial Data (in thousands except per share data)
52 Weeks ended ------------------------------------------------------------ July 30, August 1, August 2, August 3, July 28, 2000 (2) 1999 (3) 1998 (4) 1997 1996 -------- -------- -------- ---- ---- Net sales $ 70,537 61,036 40,798 32,195 29,001 ====== ====== ====== ====== ====== Net income $ 7,639 7,735 5,497 4,804 3,669 ====== ====== ======= ======= ======= Earnings per common share (1) Basic $ 1.57 1.48 1.11 1.18 .97 ==== ==== ==== ==== === Assuming Dilution $ 1.45 1.37 1.02 1.01 .86 ==== ==== ==== ==== === Total Assets $ 86,656 74,056 57,553 39,257 42,509 Total Current Liabilities $ 12,783 10,513 9,843 9,813 7,559 Long-Term Debt net of current portion $ 2,931 15,437 4,111 2,890 11,021
[FN] (1) As adjusted to give effect to a 4-for-3 stock split effective September 30, 1997. (2) On January 3, 2000, the Company acquired Robinson Laboratories, Inc. See Note B of the financial statements. (3) On January 4, 1999, the Company acquired General Microwave Corporation. See Note B of the financial statements. (4) On August 4, 1997, the Company acquired Metraplex Corporation. See Note B of the financial statements. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statements of income expressed as a percentage of net sales. There can be no assurance that trends in sales growth or operating results will continue in the future.
52 weeks ended ---------------------------------- July 30, August 1, August 2, 2000 1999 1998 ---- ---- ---- Net sales 100.0 % 100.0 % 100.0 % Cost of products sold 62.9 % 60.2 % 59.2 % ---- ---- ---- Gross profit 37.1 % 39.8 % 40.8 % Selling and administrative expenses 19.2 % 19.5 % 20.4 % ---- ---- ---- Operating income 17.9 % 20.3 % 20.4 % ---- ---- ---- Other income (expense), net: Investment income 0.3 % 0.5 % 1.4 % Interest expense (1.6)% (1.2)% (1.1)% ---- ---- ---- (1.3)% (0.7)% 0.3 % ---- ---- ---- Income before income taxes and extraordinary item 16.6 % 19.6 % 20.7 % Provision for income taxes 5.8 % 6.7 % 7.2 % ---- ---- ---- Income before extraordinary item 10.8 % 12.9 % 13.5 % Extraordinary item - (0.2)% - ---- ---- ---- Net income 10.8 % 12.7 % 13.5 % ---- ---- ----
12 Fiscal 2000 Compared to Fiscal 1999 Net sales for the 52 weeks ended July 30, 2000 were approximately $70,537,000 compared to $61,036,000 for fiscal 1999. The sales increase of $9,501,000 (15.6%) is partially attributable to the acquisition of Robinson Labs as of January 3, 2000 which contributed $4,690,000 in revenues, and the acquisition of GMC as of January 4, 1999 which contributed $5,101,000 additional revenue over the volume generated in fiscal 1999, as well as an increase in net sales of approximately $2,478,000 in microwave component. Space and communications products experienced a drop in revenue of approximately $2,768,000. Gross profit of 37.1% for the 52 weeks ended July 30, 2000 is less than the prior year of 39.8%. The decline in margin of 2.7% is due primarily to lower margins on microwave components, which includes the revenues from Robinson Labs and GMC. Selling and administrative expenses for the 52 weeks ended July 30, 2000 were $13,497,000 compared to $11,877,000 for fiscal 1999, an increase of $1,620,000. The primary increase is due to the acquisition of Robinson Labs which added $1,069,000 in selling and administrative expenses in fiscal 2000. As a percentage of revenues, expenses declined from 19.5% in 1999 to 19.2% in 2000. Interest expense increased approximately $390,000 due to additional bank borrowings to fund the acquisitions of GMC and Robinson. The effective income tax rate increased to 35.0% in fiscal 2000 from 34.3% in 1999 due primarily to a decreased benefit received from the Company's foreign sales corporation in fiscal 2000. Fiscal 1999 Compared to Fiscal 1998 Net sales for the 52 weeks ended August 1, 1999 were approximately $61,036,000 compared to $40,798,000 for fiscal 1998. The sales increase of $20,238,000 (49.6%) is primarily attributable to the acquisition of GMC as of January 4, 1999 which contributed $14,374,000 in revenues in fiscal 1999,as well as an increase in net sales of approximately $3,508,000 in space and communications products, and approximately $2,356,000 in microwave components. Gross profit of 39.8% for the 52 weeks ended August 1, 1999 is less than the prior year of 40.8%. The decline in margin of 1% is due primarily to lower margins on microwave components, as well as the lower margins generated from the added GMC revenues. Selling and administrative expenses for the 52 weeks ended August 1, 1999 were $11,877,000 compared to $8,339,000 for fiscal 1998, an increase of $3,538,000. The acquisition of GMC added $3,222,000 in selling and administrative expenses in fiscal 1999. As a percentage of revenues, expenses declined from 20.4% in 1998 to 19.5% in 1999. Investment income declined $288,000 from the prior year due to a decrease in investments, the proceeds of which were used to partially fund the acquisition of GMC. In addition, bank borrowings of approximately $11,400,000 used to fund the balance of the acquisition price resulted in additional interest expense of approximately $302,000. The effective income tax rate decreased from 34.8% in fiscal 1998 to 34.3% in fiscal 1999. In February 1999, the Company refinanced the existing mortgage on its property located in Lancaster, Pa. The proceeds of the new mortgage loan were used to prepay the existing mortgage note having an outstanding principal balance of $2,890,000 plus a prepayment premium of $115,600. Unamortized debt expenses of $79,226 and the $115,600 prepayment premium related to the early extinguishment of the existing mortgage debt were charged to expense as an extraordinary loss, net of an income tax benefit of $68,000. 13 Liquidity and Capital Resources As of July 30, 2000 and August 1, 1999, working capital was approximately $35,476,000 and $25,703,000, respectively, and the ratio of current assets to current liabilities was 3.78 to 1 and 3.44 to 1, respectively. At July 30, 2000, the Company had cash and cash equivalents of approximately $7,665,000. As of January 3, 2000, the Company acquired substantially all of the assets of Robinson Laboratories, Inc. ("Robinson" or "Robinson Labs"), a New Hampshire corporation, which is being operated as a division of Herley Industries, Inc. The transaction provided for the payment of $6,000,000 in cash, the issuance of 33,841 shares of Common Stock of the Company valued at $15.188 per share, and the assumption of approximately $3,140,000 in liabilities. In addition, the agreement provides for the issuance of additional shares of Common Stock at a future date, aggregating 97,841shares, based on new orders booked through January 2001. As of January 4, 1999, the Company completed the acquisition of all of the issued and outstanding common stock of GMC, a New York corporation, including outstanding stock options, for $18.00 per share and 966,675 three-year warrants to purchase one share of the Company's common stock, at an aggregate purchase price of approximately $24,556,000. The purchase price includes shares of common stock of General Microwave purchased in the open market, acquisition of the remaining shares of common stock outstanding, an estimate of the fair market value of the warrants based on the trading price of similar warrants currently on the market, and transaction expenses. The warrants are exercisable at $15.60 per share of common stock of the Company and expire in January 2002. On August 4, 1997, the Company completed the acquisition of Metraplex Corporation, a Maryland corporation for 313,139 (as adjusted) shares of common stock of the Company, with a fair market value of $3,170,471, in exchange for all of the issued and outstanding common stock of Metraplex. As is customary in the defense industry, inventory is partially financed by advance payments. The unliquidated balance of these advance payments was approximately $1,006,000 in 2000, and $439,000 in 1999. Net cash provided by operations was approximately $9,854,000, and $12,723,000, in 2000 and 1999 respectively. Net cash used in investing activities in 2000 of approximately $4,571,000 relates to the acquisition of Robinson Labs, in part for cash of approximately $6,000,000 which was funded by borrowings under the bank line of credit, and capital expenditures of $2,618,000, including building and leasehold improvements of $1,676,000 to accommodate the move of GMC from Amityville, NY to a leased facility in Farmingdale, NY, and consolidation of the GMC leased facilities in Billerica, MA with the Company's Woburn, MA facility. Offsetting the cash outflows were the net proceeds from the sale of the facility in Amityville of $4,125,000. Net cash used in investing activities in 1999 of approximately $21,757,000 relates primarily to the acquisition of GMC, net of cash acquired, which was funded by available cash balances and borrowings under the bank line of credit. Net cash flows from financing activities in fiscal 2000 included: (1) net payments under the bank line of credit of $12,500,000; (2) proceeds from the exercise of stock options and warrants of $21,574,000, including the exercise of approximately 1,314,000 of the warrants issued in connection with the sale of common stock to the public in 1997 resulting in proceeds of approximately $20,492,000; and (3) the acquisition of treasury stock in the aggregate amount of $7,565,000. Net cash flows from financing activities in fiscal 1999 included: (1) net borrowings under the bank line of credit of $11,000,000 the proceeds of which were used to partially fund the acquisition of GMC; (2) refinancing of the existing mortgage on the property in Lancaster, Pa., which reduced the interest rate from 10.4% to 7.43% and extended the repayment schedule to 10 years; and (3) the acquisition of treasury stock in the aggregate amount of $7,688,000. 14 Net cash provided by financing activities in fiscal 1998 consists of net proceeds of $7,452,000 from the sale of 700,000 shares of common stock, and 1,265,000 Common Stock Purchase Warrants to the public. Net borrowings under a bank line of credit provided $1,500,000 in financing. Cash was used in financing activities for payments of long-term debt of $2,257,000 and the purchase of treasury stock of $1,084,000. The Company maintains a revolving credit facility with a bank for an aggregate of $30,000,000, as amended in January 2000, which expires January 31, 2002. As of August 1, 1999 the Company had borrowings outstanding under this facility of $12,500,000. No borrowings were outstanding as of July 30, 2000. During the fiscal years ended July 30, 2000 and August 1, 1999 the Company acquired 512,000 and 561,050 shares of its outstanding common stock for approximately $7,565,000 and $7,688,000, respectively through open market purchases, pursuant to a stock repurchase plan to acquire up to 1,250,000 shares of Common Stock. In January 1998, the Company purchased 89,888 shares of its outstanding common stock for $1,084,326 from certain officers of the Company based on the fair market value of the stock on the date acquired. The Company also acquired 8,982, 410,593 and 42,016 shares of common stock in fiscal 2000, 1999 and 1998, respectively, valued at $80,000, $5,989,000 and $538,000, respectively, in connection with certain "stock-for- stock" exercises of stock options by which certain employees elected to surrender "mature" shares owned in settlement of the option price. Such exercises are treated as an exercise of a stock option and the acquisition of treasury shares by the Company. See "Management - Stock Plans." The Company believes that presently anticipated future cash requirements will be provided by internally generated funds and existing credit facilities. Subsequent Events The Company entered into an agreement, as of August 28, 2000, to acquire substantially all of the assets of American Microwave Technology, Inc. ("AMT"), a California corporation. AMT designs, develops and manufactures radio frequency and microwave power amplifiers for the medical and scientific markets. The transaction, which closed on October 12, 2000, provided for the payment of $5,400,000 in cash, and the assumption of approximately $1,153,000 in liabilities. The transaction will be accounted for under the purchase method of accounting. The allocation of the aggregate estimated purchase price will be determined based on detailed reviews of the fair value of assets acquired and liabilities assumed. Any excess cost over the fair value of net assets acquired will be amortized over 20 years. The Company also entered into an exclusive license agreement with AMT related to certain application specific and wireless products under which the Company will pay a royalty of 10% of net sales of these products for a period of four years, after which no additional royalty will be due. On October 13, 2000 the Company notified the holders of the warrants issued in connection with the acquisition of GMC (see Note Q) of its intent to call the warrants at a price of $1.00 per warrant effective 30 days after notice. The holders of the warrants may elect to exercise the warrant for one share of common stock of the Company at $15.60 per share. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with changes in interest rates and stock prices. The Company has not entered into any derivative financial instruments to manage the above risks and the Company has not entered into any market risk sensitive instruments for trading purposes. The Company's debt consists of a working capital credit facility with a bank having an interest rate that is set at 1.65% over the FOMC Federal Funds Target Rate based on tangible net worth in excess of $25,000,000, or at an increment of 1.80% if tangible net worth is less than $25,000,001, and a mortgage on its facility in Lancaster, Pa. at a fixed rate of 7.43%. The FOMC Federal Funds Target Rate at July 30, 2000 was 6.50%. The credit line is reviewed on an annual basis. Since the acquisition of GMC, the Company is subject to movements in foreign currency rate changes related to GMC's Israel operations. The Company does not anticipate any other material changes in its primary market risk exposures in fiscal 2000. 15 As of July 30, 2000, the Company holds an investment in the common stock of a public company that is exposed to price risk with a cost basis and a fair market value basis of $143,330. The table below provides information about the Company's debt that is sensitive to changes in interest rates. The table presents principal cash flows by maturity date. Future principal payment cash flows by maturity date required under the mortgage and line of credit, and corresponding fair values are as follows: Fiscal year ending during: Mortgage ------------------------- -------- 2001 $ 69 2002 74 2003 80 2004 85 2005 93 2006 and later 2,439 ----- $2,840 Fair value $2,840 ===== Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data listed in the Index on Page F-1 are filed as a part of this report. Item 9. Changes in and Disagreements on Accounting and Financial Disclosure Not applicable PART III The information required by Part III is incorporated by reference to the Company's definitive proxy statement in connection with its Annual Meeting of Stockholders scheduled to be held in January 2001, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year ended July 30, 2000. 16 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Exhibits 3.1 Certificate of Incorporation, as amended (Exhibit 3(a) of Form S-1 Registration Statement No. 2- 87160). 3.2 By-Laws, as amended (Exhibit 3(b) of Form S-1 Registration Statement No. 2-87160). 10.1 1996 Stock Option Plan (Exhibit 10.1 of Annual Report on Form 10-K for the fiscal year ended July 28, 1996). 10.2 1997 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 10, 1997). 10.3 1998 Stock Option Plan (Exhibit 10.3 of Annual Report on Form 10-K for the fiscal year ended August 1, 1999). 10.4 Amendments dated January 26, 1999 and July 30, 1999 to Employment Agreement between Herley Industries, Inc. and Lee N. Blatt dated as of October 1, 1998 (Exhibit 10.4 of Annual Report on Form 10-K for the fiscal year ended August 1, 1999). 10.5 Amendments dated January 26, 1999 and July 30, 1999 to Employment Agreement between Herley Industries, Inc. and Myron Levy dated as of October 1, 1998 (Exhibit 10.5 of Annual Report on Form 10-K for the fiscal year ended August 1, 1999). 10.6 Agreement and Plan of Reorganization dated as of July 8, 1997 among the Company, Metraplex Acquisition Corporation and Metraplex Corporation (Exhibit 2.1 of Registration Statement Form S-3 dated September 4, 1997). 10.7 Agreement and Plan of Merger dated as of August 21, 1998 among General Microwave Corp., Eleven General Microwave Corp., Shareholders, GMC Acquisition Corporation and Registrant (Exhibit 1 of Schedule 13D dated August 28, 1998). 10.8 Lease Agreement dated September 1, 1999 between Registrant and RSK Realty LTD. (Exhibit 10.8 of Annual Report on Form 10-K for the fiscal year ended August 1, 1999). 10.9 Loan Agreement dated February 16, 1999 between Registrant and The First National Bank of Maryland, a division of FMB Bank. (Exhibit 10.9 of Annual Report on Form 10-K for the fiscal year ended August 1, 1999). 10.10 Asset Purchase Agreement dated as of February 1, 2000 between Registrant and Robinson Laboratories, Inc. (Exhibit 10.2 of Form 10-Q dated March 13, 2000). 10.11 Amendment to Loan Agreement dated January 11, 2000 between Registrant and Allfirst Bank, successor to The First National Bank of Maryland (Exhibit 10.1 of Form 10-Q dated March 13, 2000). 10.12 Asset Purchase Agreement dated as of October 12, 2000 between Registrant and American Microwave Technology Inc. 10.13 Lease Agreement dated March 1, 2000 between Registrant and RSK Realty LTD. 23.1 Consent of Arthur Andersen LLP. 27. Financial Data Schedule (for electronic submission only). (b) Financial Statements See Index to Consolidated Financial Statements at Page F-1. (c) Reports on Form 8-K None 17 SIGNATURES: Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 23th day of October, 2000. HERLEY INDUSTRIES, INC. By: /S/ Lee N. Blatt ----------------------------------- Lee N. Blatt, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on October 23, 2000 by the following persons in the capacities indicated: By: /S/ Lee N. Blatt Chairman of the Board ------------------------ (Principal Executive Officer) Lee N. Blatt By: /S/ Myron Levy President and Director ------------------------ Myron Levy By: /S/ Anello C. Garefino Vice President Finance, CFO, Treasurer --------------------------- (Principal Financial Officer) Anello C. Garefino By: /S/ David H. Lieberman Secretary and Director --------------------------- David H. Lieberman By: /S/ Thomas J. Allshouse Director ---------------------------- Thomas J. Allshouse By: /S/ John A. Thonet Director ----------------------- John A. Thonet By: /S/ Alvin M. Silver Director ----------------------- Alvin M. Silver By: /S/ Edward K. Walker, Jr. Director ----------------------------- Edward K. Walker, Jr. 18 Item 8. Financial Statements and Supplementary Data HERLEY INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................ F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets, July 30, 2000 and August 1, 1999...... F-3 Consolidated Statements of Income for the 52 weeks ended July 30, 2000, August 1, 1999, and August 2, 1998................ F-4 Consolidated Statements of Shareholders' Equity for the 52 weeks ended July 30, 2000, August 1, 1999, and August 2, 1998.......... F-5 Consolidated Statements of Cash Flows for the 52 weeks ended July 30, 2000, August 1, 1999, and August 2, 1998................ F-6 Notes to Consolidated Financial Statements.......................... F-7 Schedules have been omitted as not applicable. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Herley Industries, Inc. We have audited the accompanying consolidated balance sheets of Herley Industries, Inc and Subsidiaries as of July 30, 2000 and August 1, 1999, and the related consolidated statements of income, shareholders' equity and cash flows for the 52 weeks ended July 30, 2000, August 1, 1999 and August 2, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidted financial position of Herley Industries, Inc. and Subsidiaries as of July 30, 2000, August 1, 1999, and August 2, 1998, and the consolidated results of their operations and their cash flows for the 52 weeks ended July 30, 2000, August 1, 1999 and August 2, 1998 in conformity with accounting principles generally accepted in the United States. /S/ ARTHUR ANDERSEN LLP Lancaster, PA September 20, 2000 (except with respect to the matters discussed in Note Q, as to which the date is October 13, 2000) F-2 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data) July 30, August 1, 2000 1999 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 7,665 $ 2,741 Accounts receivable 14,315 10,679 Costs incurred and income recognized in excess of billings on uncompleted contracts 146 -- Other receivables 293 273 Inventories 23,045 19,880 Deferred taxes and other 2,795 2,643 ------ ------ Total Current Assets 48,259 36,216 Property, Plant and Equipment, net 18,004 21,888 Intangibles, net of amortization of $3,095 in 2000 and $2,137 in 1999 18,096 13,574 Available-For-Sale Securities 146 148 Other Investments 1,020 948 Other Assets 1,131 1,282 ------ ------ $86,656 $74,056 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 282 $ 258 Accounts payable and accrued expenses 9,602 8,035 Income taxes payable 1,426 276 Reserve for contract losses 467 1,505 Advance payments on contracts 1,006 439 ------ ------ Total Current Liabilities 12,783 10,513 Long-term Debt 2,931 15,437 Deferred Income Taxes 5,571 5,144 Minority Interest -- 62 ------ ------ 21,285 31,156 ------ ------ Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 5,993,870 in 2000 and 5,030,283 in 1999 599 503 Additional paid-in capital 29,808 15,072 Retained earnings 34,964 27,325 ------ ------ Total Shareholders' Equity 65,371 42,900 ------ ------ $86,656 $74,056 ====== ====== The accompanying notes are an integral part of these financial statements. F-3 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) 52 weeks ended July 30, August 1, August 2, 2000 1999 1998 ------- ------- ------- Net sales $ 70,537 $ 61,036 $ 40,798 ------- ------- ------- Cost and expenses: Cost of products sold 44,382 36,749 24,169 Selling and administrative expenses 13,497 11,877 8,339 ------- ------- ------- 57,879 48,626 32,508 ------- ------- ------- Operating income 12,658 12,410 8,290 ------- ------- ------- Other income (expense), net: Investment income 232 298 587 Interest expense (1,138) (748) (446) ------- ------- ------- (906) (450) 141 ------- ------- ------- Income before income taxes and extraordinary item 11,752 11,960 8,431 Provision for income taxes 4,113 4,098 2,934 ------- ------- ------- Income before extraordinary item 7,639 7,862 5,497 Extraordinary item - loss on extinguishment of debt (net of income tax benefit of $ 68) -- 127 -- ------- ------- ------- Net income $ 7,639 $ 7,735 $ 5,497 ======= ======= ======= Earnings per common share - Basic Earnings before extraordinary item 1.57 1.50 1.11 Extraordinary loss on extinguishment of debt - .02 - ---- ---- ---- Net earnings per common share - Basic $ 1.57 $ 1.48 $ 1.11 ==== ==== ==== Basic weighted average shares 4,872 5,233 4,969 ===== ===== ===== Earnings per common share - Diluted Earnings before extraordinary item 1.45 1.39 1.02 Extraordinary loss on extinguishment of debt - .02 - ---- ---- ---- Net earnings per common share - Diluted $ 1.45 $ 1.37 $ 1.02 ==== ==== ==== Diluted weighted average shares 5,285 5,660 5,407 ===== ===== ===== The accompanying notes are an integral part of these financial statements. F-4 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 52 weeks ended July 30, 2000, August 1, 1999 and August 2, 1998 (In thousands except share data)
Common Stock Additional -------------- Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total --------- -------- ---------- -------- ------- ------- Balance at August 3, 1997 4,209,365 $ 421 8,857 14,093 - $ 23,370 Net income 5,497 5,497 Net proceeds from public offering of 700,000 shares of common stock and 1,265,000 warrants 700,000 70 7,381 7,451 Issuance of common stock in connection with business acquired 313,139 31 3,139 3,170 Exercise of stock options and warrants 175,559 18 885 (538) 365 Tax benefit upon exercise of stock options 1,671 1,671 Purchase of 89,888 shares of treasury stock (1,084) (1,084) Retirement of treasury shares (131,904) (13) (1,609) 1,622 - --------- -------- ---------- -------- -------- -------- Balance at August 2, 1998 5,266,159 $ 527 20,324 19,590 - $ 40,440 Net income 7,735 7,735 Issuance of warrants in connection with business acquired 1,450 1,450 Exercise of stock options and warrants 735,767 73 4,752 (5,989) (1,164) Tax benefit upon exercise of stock options 2,127 2,127 Purchase of 561,050 shares of treasury stock (7,688) (7,688) Retirement of treasury shares (971,643) (97) (13,581) 13,678 - --------- -------- ---------- -------- -------- -------- Balance at August 1, 1999 5,030,283 $ 503 15,072 27,325 - $ 42,900 Net income 7,639 7,639 Issuance of common stock in connection with business acquired 33,841 3 511 514 Exercise of warrants issued in connection with public offering in 1998 1,313,613 131 20,361 20,492 Exercise of stock options and warrants 137,115 14 1,213 (140) 1,087 Tax benefit upon exercise of stock options 304 304 Purchase of 512,000 shares of treasury stock (7,565) (7,565) Retirement of treasury shares (520,982) (52) (7,653) 7,705 - --------- -------- ---------- -------- -------- -------- Balance at July 30, 2000 5,993,870 $ 599 29,808 34,964 - $ 65,371 ========= ======== ========== ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-5 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
52 weeks ended July 30, August 1, August 2, 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net Income $ 7,639 $ 7,735 $ 5,497 ------ ------ ------ Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 3,998 3,289 1,869 Gain on sale of fixed assets (21) -- -- Extraordinary loss on extinguishment of debt, net of income taxes -- 127 -- Equity in income of limited partnership (71) (99) (129) (Increase) decrease in deferred tax assets (148) 483 1,207 Increase (decrease) in deferred tax liabilities 342 (141) 173 Changes in operating assets and liabilities: (Increase) in accounts receivable (1,568) (361) (768) Decrease in notes receivable-officers -- -- 2,101 (Increase) decrease in costs incurred and income recognized in excess of billings on uncompleted contracts (146) 1,665 (1,665) (Increase) decrease in other receivables (20) 36 (23) Decrease (increase) in prepaid income taxes -- 377 (377) (Increase) decrease in inventories (1,625) 729 (3,758) Decrease (increase) in prepaid expenses and other 4 199 (55) Increase (decrease) in accounts payable and accrued expenses 685 (2,119) 773 Increase in income taxes payable 1,458 2,019 469 (Decrease) increase in reserve for contract losses (1,038) 360 667 Increase (decrease) in advance payments on contracts 195 (1,620) (1,364) Other, net 170 44 (46) ------ ------ ------ Total adjustments 2,215 4,988 (926) ------ ------ ------ Net cash provided by operations 9,854 12,723 4,571 ------ ------ ------ Cash flows from investing activities: Acquisition of business, net of cash acquired (6,095) (20,101) -- Proceeds from sale of fixed assets 4,142 6 1 Partial distribution from limited partnership -- -- 593 Capital expenditures (2,618) (1,662) (1,645) ------ ------ ------ Net cash used in investing activities (4,571) (21,757) (1,051) ------ ------ ------ Cash flows from financing activities: Net proceeds from public offering of common stock -- -- 7,452 Borrowings under bank line of credit 13,900 29,500 4,050 Proceeds from refinance of mortgage note -- 2,915 -- Proceeds from exercise of stock options and warrants, net 21,574 (1,164) 364 Payments under bank line of credit (26,400) (18,500) (2,550) Payments of long-term debt (1,868) (971) (2,257) Extinguishment of debt -- (3,006) -- Purchase of treasury stock (7,565) (7,688) (1,084) ------ ------ ------ Net cash (used in) provided by financing activities (359) 1,086 5,975 ------ ------ ------ Net increase (decrease) in cash and cash equivalents 4,924 (7,948) 9,495 Cash and cash equivalents at beginning of period 2,741 10,689 1,194 ------ ------ ------ Cash and cash equivalents at end of period $ 7,665 $ 2,741 $ 10,689 ====== ====== ====== Supplemental cash flow information: Cashless exercise of stock options $ 80 $ 5,989 $ 538 ====== ====== ====== Stock issued for business acquired $ 514 -- 3,170 ====== ====== ====== Warrants issued for business acquired $ -- 1,450 -- ====== ====== ====== Tax benefit related to stock options $ 304 2,127 1,671 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Nature of Operations The Company, a Delaware corporation, is engaged in research, engineering, product development, and manufacturing of complex microwave radio frequency (RF) and millimeter wave components and subsystems for commercial wireless, defense and space customers worldwide. 2. Fiscal Year The Company's fiscal year ends on the Sunday closest to July 31. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year will consist of 53 weeks. All fiscal years presented consisted of 52 weeks. 3. Basis of Financial Statement Presentation The consolidated financial statements include the accounts of Herley Industries, Inc. and its subsidiaries, all of which are wholly-owned. All significant inter-company accounts and transactions have been eliminated in consolidation. The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. 4. Cash and Cash Equivalents The Company considers all liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. Short-term investments are recorded at the amortized cost plus accrued interest which approximates market value. The Company limits its credit risk to an acceptable level by evaluating the financial strength of institutions at which significant investments are made and based upon credit ratings. 5. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of trade accounts receivable. Accounts receivable are principally from the U.S. Government, major U.S. Government contractors, several foreign governments, and domestic customers in the aerospace, communications, and defense industries. Credit is extended based on an evaluation of the customer's financial condition and generally collateral is not required. In many cases irrevocable letters of credit accompanied by advanced payments are received from foreign customers, and progress payments are received from domestic customers. The Company performs periodic credit evaluations of its customers and maintains reserves for potential credit losses. 6. Inventories Inventories, other than inventory costs relating to long-term contracts and programs, are stated at lower of cost (principally first-in, first-out) or market. Inventory costs relating to long-term contracts and programs are stated at the actual production costs, including factory overhead, reduced by amounts identified with revenue recognized on units delivered or progress completed. Inventory costs relating to long-term contracts and programs are reduced by any amounts in excess of estimated realizable value. The costs attributed to units delivered under long-term contracts and programs are based on the average costs of all units produced. F-7 7. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are provided principally by the straight-line method over the estimated useful lives of the related assets. Gains and losses arising from the sale or disposition of property, plant and equipment are recorded in income. 8. Intangibles Intangibles are comprised of customer lists, installed products base, drawings, patents, licenses, certain government qualifications and technology and goodwill in connection with the acquisitions of Robinson Laboratories, Inc. in 2000, General Microwave Corporation in 1999, Metraplex Corporation in 1997, and Vega Precision Laboratories, Inc. in 1993. Intangibles are being amortized over twenty years. Amortization charges totaled $1,109,000, $754,000, and ($71,000) in fiscal 2000, 1999, and 1998, respectively. The negative amortization in 1998 is attributable to the negative goodwill in connection with the acquisition of Stewart Warner Electronics in 1995. The carrying amount of intangibles is evaluated on a recurring basis. Current and future profitability as well as current and future undiscounted cash flows of the acquired businesses are primary indicators of recoverability. For the three fiscal years ended July 30, 2000, there were no adjustments to the carrying amount of the cost in excess of net assets acquired resulting from these evaluations. 9. Marketable Securities The Company accounts for its investments in marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to- maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value. Realized gains and losses and declines in value judged to be other-than-temporary are included in other income , net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities are included in other income, net. 10. Other Investments The Company is a limited partner in a nonmarketable limited partnership in which it owns approximately a 10% interest. This investment is accounted for under the equity method. 11. Revenue and Cost Recognition Under fixed-price contracts, revenue and related costs are recorded primarily as deliveries are made. Certain costs under long-term, fixed-price contracts (principally either directly or indirectly with the U.S. Government), which include non-recurring billable engineering, are deferred until these costs are contractually billable. Revenue under certain long-term, fixed price contracts is recognized using the percentage of completion method of accounting. Revenue recognized on these contracts is based on estimated completion to date (the total contract amount multiplied by percent of performance, based on total costs incurred in relation to total estimated cost at completion). Prospective losses on long-term contracts are based upon the anticipated excess of inventoriable manufacturing costs over the selling price of the remaining units to be delivered and are recorded when first reasonably determinable. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs and contract terms. F-8 Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. 12. Income Taxes Income taxes are accounted for by the asset/liability approach in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred taxes represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. They arise from temporary differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates when those changes are enacted. The provision for income taxes represents the total of income taxes paid or payable for the current year, plus the change in deferred taxes during the year. 13. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 14. Product Development The Company's primary efforts are focused on engineering design and product development activities rather than pure research. The cost of these development activities, including employees' time and prototype development, net of amounts paid by customers, was approximately $1,727,000, $1,685,000, and $1,562,000 in fiscal 2000, 1999, and 1998, respectively. NOTE B - ACQUISITIONS The Company entered into an agreement, as of January 3, 2000, to acquire substantially all of the assets of Robinson Laboratories, Inc. ("Robinson" or "Robinson Labs"), a New Hampshire corporation, which is being operated as a division of Herley Industries, Inc. The transaction provided for the payment of $6,000,000 in cash, the issuance of 33,841 shares of Common Stock of the Company valued at $15.188 per share, and the assumption of approximately $3,140,000 in liabilities. In addition, the agreement provides for the issuance of additional shares of Common Stock at a future date, aggregating 97,841shares, based on new orders booked through January 2001. The transaction has been accounted for under the purchase method. Accordingly, the consolidated balance sheet includes the assets and liabilities of Robinson at July 30, 2000, and the consolidated statement of income includes the results of Robinson's operations from January 3, 2000. Excess cost over the fair value of net assets acquired of approximately $5,467,000 is being amortized over 20 years. Pre-acquisition debt in the amount of $1,479,000 was paid during the quarter ended April 30, 2000. On the basis of a pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of fiscal 1999, unaudited consolidated net sales, net income, basic earnings per share, and diluted earnings per share for the fifty-two weeks ended August 1, 1999 would have been approximately $69,283,000, $7,272,000, $1.39, and $1.28, and approximately $73,246,000, $7,275,000, $1.49, and $1.38, respectively, for the fifty-two weeks ended July 30, 2000. The pro forma information includes adjustments for additional depreciation based on the estimated fair value of the property, plant, and equipment acquired, the amortization of intangibles, and additional interest on bank borrowings arising from the transaction. The pro forma financial information is not necessarily F-9 indicative of the results of operations as they would have been had the transaction been affected at the beginning of fiscal 1999. As of January 4, 1999, the Company completed the acquisition of all of the issued and outstanding common stock of General Microwave Corporation ("GMC"), a New York corporation, including outstanding stock options, for $18.00 per share and 966,675 three-year warrants to purchase one share of the Company's common stock, at an aggregate purchase price of approximately $24,556,000. This transaction was accounted for under the purchase method. The purchase price includes shares of common stock of GMC purchased in the open market, acquisition of the remaining shares of common stock outstanding, an estimate of the fair market value of the warrants based on the trading price of similar warrants currently on the market, and transaction expenses. The warrants are exercisable at $15.60 per share of common stock of the Company, subject to a call provision after October 11, 2000 at $1.00 per warrant if the average last reported sales price of the common stock of the Company has been not less than $17.60 per share for fifteen consecutive trading days immediately preceding the call date. The warrants expire in January 2002. The aggregate purchase price is calculated as follows (in thousands, except share and per share data): 365,600 shares previously acquired in the open market $ 6,273 848,675 shares at $18.00 per share 15,276 118,000 stock options at $18.00 per share, net of exercise price 1,279 966,675 warrants at $1.50 1,450 Transaction expenses 278 Purchase price $ 24,556 The cash portions of the acquisition were financed through available cash equivalents and borrowings under the Company's line of credit. GMC designs, manufactures and markets microwave components and subsystems, and related electronic test and measurement equipment. The company is headquartered in Farmingdale, New York, and operates another facility in Israel. The transaction has been accounted for under the purchase method. Accordingly, the consolidated statements of income include the results of GMC operations from January 4, 1999. The acquisition resulted in excess cost over fair value of net assets acquired of $7,538,501 which is being amortized over 20 years. As part of the Company's GMC acquisition plans, the Company closed GMC's Billerica, MA operations and moved it into the Company's existing Woburn, MA location. In connection with the closure of the Billerica facility, $180,000 of lease termination costs and $250,000 of severance was accrued as part of purchase accounting. Through July 30, 2000, $46,000 of lease termination costs were paid and $200,000 of severance was paid. On the basis of a pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of fiscal 1998, unaudited consolidated net sales, net income, basic earnings per share, and diluted earnings per share for the fifty-two weeks ended August 2, 1998 would have been approximately $63,477,000, $6,606,000, $1.33, and $1.22, and for the fifty-two weeks ended August 1, 1999 would have been approximately $70,349,000, $7,481,000, $1.43, and $1.32, respectively. The pro forma information includes adjustments for additional depreciation based on the estimated fair market value of the property, plant, and equipment acquired, and the amortization of intangibles arising from the transaction. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected at the beginning of fiscal 1998. On August 4, 1997, the Company completed the acquisition of Metraplex Corporation, a Delaware corporation, for 313,139 (as adjusted) shares of common stock of the Company, with a fair market value of $3,170,471, in exchange for all of the issued and outstanding common stock of Metraplex. Metraplex F-10 is a leading manufacturer of pulse code modulation and frequency modulation, telemetry and data acquisition systems for severe environment applications. The transaction has been accounted for by the purchase method. Accordingly, the consolidated statements of income include the results of Metraplex operations from August 4, 1997. The acquisition resulted in excess of cost over fair value of net assets acquired of $2,162,725 which is being amortized over twenty years. NOTE C - NOTES RECEIVABLE-OFFICERS In fiscal 1996 the Company loaned an aggregate of $2,000,000 to certain officers, as authorized by the Board of Directors, pursuant to the terms of nonnegotiable promissory notes. The loans were paid in full with accrued interest as of December 19, 1997. NOTE D - INVENTORIES The major components of inventories are as follows (in thousands): July 30, August 1, 2000 1999 ---- ---- Purchased parts and raw materials $ 12,804 $ 9,862 Work in process 9,358 8,781 Finished products 883 1,237 ------ ------ $ 23,045 $ 19,880 ====== ====== NOTE E - OTHER INVESTMENTS In July 1994, the Company invested $1,000,000 for a limited partnership interest in M.D. Sass Municipal Finance Partners-I, a Delaware limited partnership. The objectives of the partnership are the preservation and protection of its capital and the earning of income through the purchase of certificates or other documentation that evidence liens for unpaid local taxes on parcels of real property. At July 30, 2000 and August 1, 1999 the percentage of ownership was approximately 10%. The Company's interest in the partnership may be transferred to a substitute limited partner, upon written notice to the managing general partners, only with the unanimous consent of both general partners at their sole discretion. In July 1998, the Company received a partial distribution of $593,000 from the Partnership. As of July 30, 2000 the Company's limited partnership interest had an estimated fair value of $1,020,000. NOTE F - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are comprised of the following (in thousands): July 30, August 1, Estimated 2000 1999 Useful Life -------- --------- ----------- Land $ 1,161 $ 1,161 Building and building improvements 8,418 11,731 10-40 years Machinery and equipment 26,293 24,995 5- 8 years Furniture and fixtures 915 789 5-10 years Automobiles 108 131 3 years Tools 34 34 5 years Leasehold improvements 1,351 455 5-10 years ------ ------ 38,280 39,296 Less accumulated depreciation 20,276 17,408 ------ ------ $ 18,004 $ 21,888 ====== ====== Depreciation charges totaled $2,889,000, $2,535,000, and $1,940,000 in fiscal 2000, 1999, and 1998, respectively. F-11 NOTE G - COMMITMENTS AND CONTINGENCIES Leases The Company leases office, production and warehouse space as well as computer equipment and automobiles under noncancellable operating leases. Rent expense for the 52 weeks ended July 30, 2000, August 1, 1999, and August 2, 1998, was approximately $1,053,000, $519,000, and $546,000, respectively. Minimum annual rentals under noncancellable operating leases are as follows (in thousands): Amount ------ Year ending fiscal 2001 $ 848 2002 727 2003 701 2004 691 2005 624 Future 2,407 Employment Agreements The Company has employment agreements with various executives and employees of the Company, which, as amended, expire at various dates through December 31, 2002, subject to extension each January 1 for three years, commencing January 1, 2000. These agreements provide for aggregate annual salaries for fiscal 2000 of $1,022,000. Certain agreements provide for an annual cost of living adjustment based on the consumer price index, and also provide for incentive compensation based on pretax income of the Company in excess of $2,000,000. Incentive compensation in the amount of $971,000, $969,000, and $728,000 was expensed in fiscal years 2000, 1999, and 1998, respectively. Certain agreements also provide that, in the event there is a change in control of the Company, as defined, the executives have the option to terminate the agreements and receive a lump-sum payment of approximately three times their annual salary. As of July 30, 2000, the amount payable in the event of such termination would be approximately $3,154,000. One of the employment contracts provides for a consulting agreement commencing at the end of the employment period which became effective October 1, 1998, and terminating December 31, 2010 at the annual rate of $100,000. Another one of the employment contracts, as amended October 1, 1998, provides for a consulting period commencing at the end of the period of active employment and continuing for a period of five years at the annual rate of $100,000. Seven officers of the Company have severance agreements providing for a lump-sum payment of $2,020,000 through fiscal 2002 in the event of a change of control of the Company as defined in the agreements. Litigation The Company is involved in various legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. Stand-by Letters of Credit The Company maintains a letter of credit facility with a bank that provides for the issuance of stand-by letters of credit and requires the payment of a fee of 1.0% per annum of the amounts outstanding under the facility. The facility expires January 31, 2002. At July 30, 2000 stand-by letters of credit aggregating approximately $1,809,000 were F-12 outstanding under this facility. NOTE H - INCOME TAXES Income tax provision consisted of the following (in thousands): 52 Weeks ended --------------------------------------- July 30, August 1, August 2, 2000 1999 1998 ---- ---- ---- Current Federal $ 3,573 $ 3,328 (1) $ 1,469 State 192 399 85 Foreign 154 29 - 3,919 3,756 1,554 Deferred Federal 215 540 1,308 State (21) (198) 72 194 342 1,380 $ 4,113 $ 4,098 $ 2,934 (1) Excludes benefit of $68 from extraordinary loss incurred as a result of early extinguishment of long term debt (See Note I). The Company paid income taxes of approximately $2,241,000, $1,324,000, and $1,486,000 in fiscal 2000, 1999, and 1998, respectively. The following is a reconciliation of the U. S. statutory income tax rate and the effective tax rate on pretax income: 52 Weeks ended ---------------------------------- July 30, August 1, August 2, 2000 1999 1998 ---- ---- ---- U.S. Federal statutory rate 34.0 % 34.0 % 34.0 % State taxes, net of federal tax benefit 0.9 1.4 1.5 Benefit of foreign sales corporation (2.1) (3.2) (1.8) Non-deductible expenses 1.8 1.4 .8 Benefit of foreign and foreign-source income (1.8) (1.2) - Other, net 2.2 1.9 .3 Effective tax rate 35.0 % 34.3 % 34.8 % Income taxes have not been provided on undistributed earnings of foreign subsidiaries. If remitted as dividends, these earnings could become subject to additional tax. The Company's intention is to reinvest unremitted earnings of subsidiaries outside the United States permanently. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. F-13 Components of deferred tax assets and liabilities are as follows (in thousands):
July 30, 2000 August 1, 1999 ---------------------- ----------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Intangibles $ - $ 1,766$ $ - $ 1,790 Alternative minimum tax - - 643 - Accrued vacation pay 323 - 242 - Accrued bonus 578 - 415 - Accrued pension - - 199 - Warranty costs 95 - 123 - Inventory 1,011 - 1,176 - Depreciation - 3,770 - 4,415 Contract losses 345 - 390 - Net operating loss carryforwards 96 - 219 - Other 201 195 266 210 ----- ----- ----- ----- $ 2,649 $ 5,731 $ 3,673 $ 6,415 ===== ===== ===== =====
As of July 30, 2000 the Company has available net operating loss carryforwards for state income tax purposes of approximately $96,000 which expire from fiscal 2001 through 2009. NOTE I- LONG-TERM DEBT Long-term debt is summarized as follows (in thousands): July 30, August 1, Rate 2000 1999 --------------- ---- ---- Revolving loan facility (a) 8.15% and 6.65% $ - $ 12,500 Mortgage note (b) 7.43% 2,840 2,902 Other - 373 293 ----- ------ 3,213 15,695 Less current portion 282 258 ----- ------ $ 2,931 $ 15,437 ===== ====== (a) In January 2000, the Company entered into an amendment to its revolving loan agreement with a bank that provides for a revolving unsecured loan in the aggregate principal amount of $30,000,000 which may be used for general corporate purposes, including business acquisitions. The revolving credit facility requires the payment of interest only on a monthly basis and payment of the outstanding principal balance on January 31, 2002. Interest is set at 1.65% over the FOMC Federal Funds Target Rate based on tangible net worth in excess of $25,000,000, or at an increment of 1.80% if tangible net worth is less than $25,000,001. The FOMC Federal Funds Target Rate was 6.50% at July 30, 2000. There is a fee of 15 basis points per annum on the unused portion of the credit line in excess of $20,000,000 payable quarterly. There are no borrowings under the line at July 30, 2000. The agreement contains various financial covenants, including, among other matters, minimum tangible net worth, debt to tangible net worth, debt service coverage, and restrictions on other borrowings. (b) The mortgage loan is for a term of ten years with fixed monthly principal and interest installments of $23,359, including interest at a fixed rate of 7.43%, and is based upon a twenty year amortization. The loan is secured by a mortgage on the Company's land and building in Lancaster, Pennsylvania having a net book value of approximately $1,946,000. The proceeds of the mortgage loan were used F-14 to prepay the existing mortgage note having an outstanding balance of $2,890,000 plus a prepayment premium of $115,600. The mortgage note agreement contains various financial covenants, including, among other matters, the maintenance of specific amounts of tangible net worth, debt to tangible net worth, debt service coverage, and restrictions on other borrowings. In connection with this loan, the Company paid approximately $45,000 in financing costs. Such costs are included in Other Assets in the accompanying consolidated balance sheet at July 30, 2000 and are being amortized over the term of the loan (10 years). Unamortized debt expenses of $79,226 related to the prior mortgage and the $115,600 prepayment premium were charged to expense in 1999 as an extraordinary loss in connection with the prepayment of this mortgage note. The Company paid interest of approximately $1,200,000 in 2000, $730,000 in 1999, and $441,000 in 1998. Future payments required on long-term debt are as follows (in thousands): Fiscal year ending during: Amount ------------------------- ------ 2001 $ 282 2002 186 2003 108 2004 106 2005 92 Future 2,439 ----- $ 3,213 ===== NOTE J - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses include the following (in thousands): July 30, August 1, 2000 1999 ---- ---- Accounts payable $ 3,812 $ 2,668 Accrued payroll and bonuses 3,430 2,636 Accrued commissions 710 488 Accrued interest 19 84 Accrued legal expenses 129 123 Accrued warranty costs 220 284 Accrued pension cost - 499 Accrued severance 594 538 Lease termination cost 134 180 Accrued expenses 554 535 ----- ----- $ 9,602 $ 8,035 ===== ===== NOTE K - EMPLOYEE BENEFIT PLANS In August 1985, the Board of Directors approved an Employee Savings Plan which qualified as a thrift plan under Section 401(k) of the Internal Revenue Code. This Plan, as amended and restated, allows employees to contribute between 2% and 15% of their salaries to the Plan. The Company, at its discretion can contribute 100% of the first 2% of the employees' contribution and 25% of the next 4%. Additional Company contributions can be made depending on profits. The aggregate benefit payable to an employee is dependent upon his rate of contribution, the earnings of the fund, and the length of time such employee continues as a participant. Employees of GMC became eligible to participate in the Plan as of May 1, 1999. The existing savings and investing plan of GMC did not provide for F-15 company matching contributions and has been frozen. The Company has recognized expenses of approximately $415,000, $266,000 and $197,000 for the 52 weeks ended July 30, 2000, August 1, 1999 and August 2, 1998, respectively. At the time of the acquisition, GMC also had a noncontributory defined benefit pension plan covering all eligible employees of the company. As part of the acquisition plan, the Company froze all benefits under the plan effective April 30, 1999 and elected to terminate the plan. As part of the allocation of the purchase price, the Company recorded a liability at the date of acquisition of $464,000. Net pension (income) expense recorded by the Company in fiscal 2000 and 1999 includes the following components (in thousands): July 30, August 1, 2000 1999 ---- ---- Service cost - benefits earned during the period $ - $ 21 Interest cost 237 137 Return on assets (736) (123) --- --- Net pension (income) expense $ (499) $ 35 === === The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheets at July 30, 2000 and August 1, 1999 (in thousands): July 30, August 1, 2000 1999 ---- ---- Projected benefit obligation, beginning of period $ 4,841 $ 4,793 Service costs - 21 Interest cost 237 137 Actuarial gain (348) - Benefit payments (214) (110) Projected benefit obligation, end of year $ 4,516 $ 4,841 Change in fair value of plan assets: Fair value at beginning of period $ 4,342 $ 4,329 Return on assets 823 123 Benefit payments (214) (110) Fair value at end of year 4,951 4,342 Funded status (435) 499 Unrecognized net gain 435 - Accrued pension costs $ - $ 499 Assumptions used were: Discount rate 5.00% 5.00% Expected return on plan assets 10.00% 5.00% Assets held by the trust are comprised primarily of U.S. Treasury securities. NOTE L - RELATED PARTY TRANSACTIONS In connection with the move of the Amityville facilities of GMC in fiscal 1999, the Company entered into a 10 year lease agreement with a partnership owned by the children of certain officers of the Company. The lease provides for initial minimum annual rent of $312,000 subject to escalation of approximately 4% annually throughout the 10 year term. Additionally, in March 2000, The Company F-16 entered into another 10 year lease with the same partnership for additional space. The initial minimum annual rent of $92,000 is subject to escalation of approximately 4% annually. NOTE M - COMPUTATION OF PER SHARE EARNINGS The following table shows the calculation of basic earnings per share and earnings per share assuming dilution (in thousands except per share data):
52 Weeks ended --------------------------------- July 30, August 1, August 2, 2000 1999 1998 ---- ---- ---- Numerator: Income before extraordinary item $ 7,639 $ 7,862 $ 5,497 Extraordinary loss - 127 - ----- ----- ----- Net Income $ 7,639 $ 7,735 $ 5,497 ===== ===== ===== Denominator: Basic weighted-average shares 4,872 5,233 4,969 Effect of dilutive securities: Employee stock options and warrants 413 427 438 ----- ----- ----- Diluted weighted-average shares 5,285 5,660 5,407 ===== ===== ===== Stock options and warrants not included in computation 1,648 3,047 1,424 ===== ===== =====
The number of stock options and warrants not included in the computation of diluted EPS relates to stock options and warrants having exercise prices that are greater than the average market price of the common shares during the period, and therefore, are antidilutive. The options and warrants with exercise prices ranging from $15.60 to $17.88, which expire at various dates through May 26, 2010 were outstanding as of July 30, 2000. NOTE N - SHAREHOLDERS' EQUITY At the annual meeting of stockholders held on February 18, 1998, the stockholders of the Company approved a proposal to amend the Certificate of Incorporation to increase the authorized shares of Common Stock from 10,000,000 to 20,000,000 shares. In December 1997, the Company completed the sale of 1,100,000 shares of common stock to the public, of which 700,000 shares were sold by the Company and 400,000 shares were sold by certain selling stockholders. In addition, the Company also sold 1,265,000 Common Stock Purchase Warrants ("Warrant(s)"). The Company received net proceeds of $7,451,579 after underwriting discounts and commissions and other expenses of the offering. Each Warrant entitles the holder to purchase one share of common stock at $15.60 per share (subject to adjustment under certain conditions) through May 2000, as extended. The Company also issued to the underwriters, for their own accounts, Managing Underwriters' Warrants which entitle the holder to purchase 110,000 shares of common stock of the Company (subject to adjustment under certain circumstances), at a price of $14.40 per share through December 2002, and the right to purchase 110,000 Warrants (as described above) at a price of $.12 per Warrant through May 2000, as extended. Approximately 1,314,000 of the warrants which were due to expire May 18, 2000 were exercised at $15.60 per share of common stock resulting in proceeds of approximately $20,492,000. The proceeds were used to pay off the bank debt under the revolving credit facility. On September 4, 1997 the Board of Directors declared a 4-for-3 stock split effected as a stock dividend payable September 30, 1997 to holders of record on September 15, 1997. The amount of $105,234 was transferred from additional paid-in capital to the common stock account to record this distribution. All share and per share data, including stock options and warrants, included in the financial statements have been restated to reflect the stock split. F-17 The Company has various fixed option plans which reserve shares of common stock for issuance to executives, key employees and directors. The Company applies APB Opinion No. 25 and related Interpretations in accounting for these plans. Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and , if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has been recognized for the stock option plans. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for options granted is estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management' s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of computing pro-forma (unaudited) consolidated net earnings, the following assumptions were used to calculate the fair value of each option granted: 52 Weeks ended ---------------------------- July 30, 2000 August 1, 1999 August 2, 1998 ------------- -------------- -------------- Expected life of options .71 years .65 years .40 years Volatility .72 .58 .59 Risk-free interest rate 6.1% 5.1% 4.9% Dividend yield zero zero zero Had compensation cost for stock options granted in fiscal years 2000, 1999, and 1998 been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below using the statutory income tax rate of 34% (in thousands except per share data): 2000 1999 1998 ---- ---- ---- Net income - as reported $7,639 $7,735 $5,497 Net income - pro forma 5,952 5,940 4,925 Earnings per share - as reported Basic $1.57 $1.48 $1.11 Diluted 1.45 1.37 1.02 Earnings per share - pro forma Basic $1.22 $1.14 $.99 Diluted 1.13 1.05 .91 The effects of applying the pro forma disclosures of SFAS 123 are not likely to be representative of the effects on reported net income for future years due to the various vesting schedules. In April 1998, the Board of Directors approved the 1998 Stock Option Plan which covers 1,500,000 shares of the Company's common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986 or non-qualified stock options. Under the terms of the Plan, the exercise price for options granted under the plan will be the fair market value at the date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. The nature and terms of the options to be granted is determined at the time of grant by the Board of Directors. The options expire ten years from the date of grant, subject to certain restrictions. Options for 646,500 and 375,000 shares F-18 were granted during the fiscal years ended July 30, 2000 and August 1, 1999, respectively. In May 1997, the Board of Directors approved the 1997 Stock Option Plan which covers 1,666,666 shares of the Company's common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986 or non-qualified stock options. Under the terms of the Plan, the exercise price for options granted under the plan will be the fair market value at the date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. The nature and terms of the options to be granted is determined at the time of grant by the Board of Directors. The options expire ten years from the date of grant, subject to certain restrictions. Options for 86,000, 875,500 and 88,333 shares were granted during the fiscal years ended July 30, 2000, August 1, 1999 and August 2, 1998, respectively. In October 1995, the Board of Directors approved the 1996 Stock Option Plan which covers 666,666 shares of the Company's common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986 or non-qualified stock options. Under the terms of the Plan, the exercise price for options granted under the plan will be the fair market value at the date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. The nature and terms of the options to be granted is determined at the time of grant by the Board of Directors. If not specified, 100% of the shares can be exercised one year after the date of grant. The options expire ten years from the date of grant. Options for 663,989 shares were granted during the fiscal year ended August 3, 1997. A summary of stock option activity under all plans for the 52 weeks ended July 30, 2000, August 1, 1999 and August 2, 1998 follows:
Non-Qualified Stock Options ----------------------------------------- Weighted Warrant Agreements Average ------------------------ Number Price Range Exercise Number Price Range of shares per share Price of shares per share --------- -------------- -------- --------- ------------- Outstanding August 3, 1997........... 916,327 $ 2.54 -10.41 $ 5.87 320,000 $ 4.64 - 5.35 Granted .......................... 88,333 10.31 -13.88 12.04 Exercised......................... (135,594) 2.54 - 6.94 5.08 (40,000) 5.35 Canceled.......................... (8,222) 2.54 - 6.47 5.31 --------- ------------- ----- ------- ----------- Outstanding August 2, 1998........... 860,844 $ 2.54 -13.88 $ 6.65 280,000 $ 4.64 Granted .......................... 1,250,500 9.25 -16.46 11.44 Exercised......................... (669,100) 2.54 - 9.94 6.56 (66,667) 4.64 Canceled.......................... (47,631) 6.47 -16.46 11.16 --------- ------------- ----- ------- ----------- Outstanding August 1, 1999........... 1,394,613 $ 2.54 -16.46 $10.74 213,333 $ 4.64 Granted .......................... 732,500 13.88 -17.88 15.51 Exercised......................... (103,990) 2.54 -14.75 7.03 4.64 Canceled.......................... (13,700) 11.13 -15.69 12.72 --------- ------------- ----- ------- ----------- Outstanding July 30, 2000............ 2,009,423 $ 6.09 -17.88 $12.65 213,333 $ 4.64 ========= =======
F-19 Options Outstanding and Exercisable by Price Range as of July 30, 2000:
Options Outstanding Options Exercisable ---------------------------------------------- -------------------------- Weighted Average Weighted Weighted Range of Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ----------------- ----------- ---------------- -------------- ----------- -------------- $ 6.09 - $ 9.25 517,323 7.5 $ 8.27 312,133 $ 7.96 10.41 - 13.88 577,100 8.7 12.46 331,300 12.16 13.94 - 15.00 280,500 8.9 14.01 257,600 13.96 15.69 - 17.88 634,500 8.0 15.80 372,000 15.70 $6.09 - $17.88 2,009,423 8.2 $12.65 1,273,033 $12.53
In April 1993, common stock warrants were issued to certain officers and directors for the right to acquire 573,333 shares of common stock of the Company at the fair market value of $5.35 per share at date of issue. In December 1995 warrants for 533,333 shares were canceled, and the remaining 40,000 warrants were exercised in fiscal 1998. In December 1995, common stock warrants were issued to certain officers for the right to acquire 293,333 shares of common stock of the Company at the fair market value of $4.64 per share at date of issue. The warrants vest immediately and expire December 13, 2005. NOTE O - SIGNIFICANT SEGMENTS, MAJOR CUSTOMERS, AND EXPORT SALES The Company's chief operating decision maker is considered to be the Chairman and Chief Executive Officer (CEO). The Company's CEO evaluates both consolidated and disaggregated financial information consisting of revenue information in deciding how to allocate resources and assess performance. The CEO uses certain disaggregated financial information for the Company's two product groups: Space and Communications and Microwave Components. The Company does not determine a measure of operating income or loss by product group. The Company's two product groups have similar long-term economic characteristics, such as application, and are similar in regards to (a) nature of products and production processes, (b) type of customers, and (c) method used to distribute products. Accordingly, the Company is in a single reportable segment as a provider of complex microwave radio frequency (RF) and millimeter wave components and subsystems for commercial wireless, defense and space customers worldwide. All of the Company's revenues result from sales of its products. Revenues by product group (as defined by the Company) for fiscal years 2000, 1999 and 1998 were as follows: Space and Communications, $27,590,000, $33,846,000 and $30,338,000, respectively; Microwave Components, $42,947,000, $27,190,000, and $10,460,000, respectively. Net sales to the U.S. Government in 2000, 1999, and 1998 accounted for approximately 26%, 17%, and 26% of net sales, respectively. No other customer accounted for shipments in excess of 10% of consolidated net sales in fiscal 2000. One customer accounted for 12% of net sales in 1999. Foreign sales amounted to approximately $16,506,000, $17,680,000, and $11,943,000 in fiscal 2000, 1999 and 1998, respectively. Included in accounts receivable as of July 30, 2000 and August 1, 1999 are amounts due from the U.S. Government of approximately $2,269,000 and $2,470,000 respectively. NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximated its fair value. F-20 Available-for-sale securities: The fair value of available-for-sale securities was based on quoted market prices. Long-term debt: The fair value of the mortgage note was estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts and fair values of the Company's financial instruments are presented below (in thousands): July 30, 2000 ---------------- Carrying Fair Amount Value -------- ----- Cash and cash equivalents $7,665 $7,665 Long-term debt 2,931 2,931 NOTE Q - SUBSEQUENT EVENTS The Company entered into an agreement, as of August 28, 2000, to acquire substantially all of the assets of American Microwave Technology, Inc. ("AMT"), a California corporation, which is being operated as Herley- AMT, a division of Herley Industries, Inc. The transaction, which closed on October 12, 2000, provided for the payment of $5,400,000 in cash, and the assumption of approximately $1,153,000 in liabilities. The transaction will be accounted for under the purchase method of accounting. The allocation of the aggregate estimated purchase price will be determined based on detailed reviews of the fair value of assets acquired and liabilities assumed. Any excess cost over the fair value of net assets acquired will be amortized over 20 years. The Company also entered into an exclusive license agreement with AMT related to certain application specific and wireless products under which the Company will pay a royalty of 10% of net sales of these products for a period of four years, after which no additional royalty will be due. On October 13, 2000 the Company notified the holders of the warrants issued in connection with the acquisition of GMC (see Note B) of its intent to call the warrants at a price of $1.00 per warrant effective 30 days after notice. The holders of the warrants may elect to exercise the warrant for one share of common stock of the Company at $15.60 per share. F-21 EX-10.12 2 0002.txt ASSET PURCHASE AGREEMENT DATED OCTOBER 12, 2000 Exhibit 10.12 ------------- ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT ("Agreement") made as of the 12th day of October, 2000, by and between AMERICAN MICROWAVE TECHNOLOGY, INC., a California corporation (hereinafter called "Seller") and HERLEY INDUSTRIES, INC., a Delaware corporation (hereinafter called "Buyer"). W I T N E S S E T H: WHEREAS, Seller is engaged in the business of manufacturing and selling radio frequency power amplifiers and desires to sell to Buyer its business unit commonly referred to as medical /scientific unit ("Business Unit") and substantially all of the Business Unit assets, as herein provided, and Buyer desires to purchase the Business Unit and assets, all at the price and on the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the mutual representations, covenants and warranties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1. 1.1 Purchase and Sale of Assets. Subject to the terms and conditions hereof and based upon the representations, warranties, covenants and agreements of the parties hereafter set forth, Buyer hereby agrees to purchase and accept from Seller, and Seller agrees to sell, assign, transfer and convey to Buyer on the Closing Date (as hereinafter defined) except as otherwise set forth in Section 1.2 below and the Exhibits attached hereto, all of the assets used in or related to the Business Unit, including without limitation, all of the Business Unit related tangible and intangible assets, rights, interests and properties of every kind and nature, wherever located and by whomever possessed, owned by Seller as of the date hereof (together with any proceeds thereof or any payment thereon which may be received by Seller subsequent to the date hereof), except as otherwise specifically stated herein, free and clear of all security interests, liens and encumbrances, including, without limitation, the following: (a) All Business Unit related real property, machinery and other equipment, telephone systems, vehicles, furniture, fixtures, computers and computer software and fixed assets of Seller of any kind whatsoever, including without limitation those Business Unit related assets reflected on the pro forma Balance Sheet of Seller ("Balance Sheet") which reflects only Business Unit related assets as described on Exhibit "A" attached hereto. (b) All catalogues, shipping and office supplies, books of account and other financial records necessary to or useful in the continued operation of the Business Unit, customer lists and vendor lists, Business Unit customer backlogs, telephone numbers and telephone directory listings, the name AMT and any variation thereof, Business Unit patents, copyrights, licenses and rights listed in Exhibit "B" attached hereto, all rights under any Business Unit contracts subject to consents required for assignment of government contracts, licenses and permits, the Business Unit of Seller as an operating business, and all Business Unit related intangible assets of Seller of any kind whatsoever. (c) All other Business Unit related assets, property and rights of Seller of any kind whatsoever, including, but not limited to, tax refunds, accounts receivable and prepaid expenses. (d) All Business Unit related inventories of supplies, merchandise, packaging and promotional materials including raw material, works in process and finished goods as attached in Exhibit H. (e) All Business Unit related intellectual property rights. The assets, property and rights to be transferred to Buyer by Seller hereunder on the Closing Date are hereafter sometimes called the "Assets". Notwithstanding the foregoing, it is expressly agreed that Seller shall be entitled to use the name American Microwave Technology but not the name AMT in connection with the assets and liabilities it retains. 1.2 Excluded Assets. The assets listed on Exhibit "E" are not Assets and are excluded from the purchase contemplated by this Agreement. ARTICLE 2. 2.1 Payment of Purchase Price and Assumption of Liabilities. Subject to the terms and conditions set forth in this Agreement, Buyer shall, in full consideration of the Assets to be sold and assigned to Buyer: (a) Pay to Seller or as otherwise directed by Seller the sum of Five Million, Four Hundred Thousand Dollars ($5,400,000) by cashier's check, bank check or wire transfer on the Closing Date. (b) On the Closing Date, assume the following liabilities of Seller and no others: (i) Accounts payable as set forth in the attached Exhibit "C", the aggregate of which shall not exceed $800,000. (ii) Equipment lease obligations as set forth in the attached Exhibit "D", the aggregate of which shall not exceed $200,000. (iii) All liabilities set forth in Exhibit "A" in an amount not to exceed $1,153,191. The liabilities and obligations to be assumed and referred to in (i) through (iii) above are hereinafter termed the "Assumed Liabilities". Except as expressly set forth in this Agreement, no liabilities or obligations of Seller shall be assumed by Buyer. (c) Any provision of this Agreement to the contrary notwithstanding, Buyer will not and does not assume the following liabilities and obligations of Seller even if, to any extent, they were reflected in the Financials set forth at Exhibit "F" and arose in connection with, were incurred by or were related to the operation of the Business Unit: (i) liabilities or obligations of Seller to any officer, director or stockholder of the Seller, whether or not owed to such person in his capacity as such, any person affiliated with any of the foregoing or any person related to or sharing a household with any of the foregoing except liabilities for accrued wages and salaries reflected in the Balance Sheet. (ii) expenses incurred by the Seller in connection with the transactions contemplated herein, including, without limitation, fees and expenses of Seller's finder's fees to Decisionpoint, counsel and accountants. (iii) any obligation or liability of the Seller to the Buyer. (iv) any foreign, federal, state or local tax based on income or revenues or interest or penalties relating thereto, whether arising by reason of the sale of the Assets as herein provided or by reason of the existence or operations of the Seller prior to or after the date hereof and any sales or use taxes incurred by Seller on or prior to the Closing. (v) to the extent not paid for under existing insurance policies assigned to Buyer hereunder, workman's compensation claims against Seller based on occurrences prior to the Closing Date. (vi) to the extent not paid for under existing insurance policies assigned to Buyer hereunder, liabilities to third parties for tort and product liability claims made against Seller prior to the Closing Date based upon occurrences prior to the Closing Date. (vii) all obligations of Seller incurred after the date hereof other than those incurred in the ordinary course of business. (viii) all other liabilities or obligations of Seller to the extent any of such liabilities or obligations constitute a breach of the representations or warranties of Seller set forth in Article 3 hereof. (ix) obligations or liabilities of Seller with respect to any employee option or benefit plan including, without limitation, any underfunding or termination liability. (x) liabilities or obligations of Seller in connection with its failure to obtain, its failure to maintain in full force and effect or its default under any approval, authorization, consent, certificate of occupancy (or local equivalent), license, franchise, order or other permit of any governmental or regulatory agency, whether federal, state, local or foreign necessary to the operation of Seller's business as presently conducted including, without limitation, the construction, alteration, operation, use or occupancy of the premises occupied by Seller, or any improvements thereon. (xi) except to the extent provided in Section 2.1(c)(i) above or as otherwise expressly provided herein or in any other document executed in connection herewith, any liabilities to employees or former employees of the Seller, and their beneficiaries, whether pursuant to agreement or otherwise, including those for salaries, bonus and employment benefits, fringe benefits, insurance, welfare, post retirement medical, medical reimbursement, deferred compensation, sick pay, termination, severance, stock option, stock purchase, accident, disability, vacation, health, medical and worker's compensation insurance or benefits. (xii) any and all environmental liabilities arising out of or resulting from any or all of the following conditions, which hereinafter are collectively referred to as the "pre-closing liability conditions": (A) the existence prior to the Closing Date of hazardous materials upon, within or beneath any of the real property, or migrating from such real property; (B) any violations of environmental requirements premised upon, or arising out of any of the conditions described in (A) above; (C) any violations of environmental requirements pertaining to the use or operation of the real property or any other of the Assets prior to the Closing Date, or the conduct of operation of the business of the Seller prior to the Closing Date; and (D) the existence of any underground storage tank (USTs) at the real property. (xiii) any other liabilities or obligations of Seller which are not expressly assumed hereunder. Notwithstanding the foregoing, Seller shall not have any liability or responsibility whatsoever arising in any way from actions or inactions of Buyer relative to the Assumed Liabilities, Assets or the Business Unit purchased by Buyer hereunder after the Closing to the extent Buyer's actions impair the Assets or Business Unit. ARTICLE 3. 3.1 Representations and Warranties of Seller. Seller represents, warrants and covenants as follows: (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Seller is not required by reason of its present ownership of property or present operations to be qualified to do business in any other state. Seller does not have any subsidiaries. (b) Seller has corporate power to enter into and carry out this Agreement and related documents, has no contractual or other restriction upon its so doing and has properly secured the approval of this Agreement by its Board of Directors and stockholders; and Seller's executing officers are authorized thereby to execute this Agreement, and such other documents as may be necessary to consummate the transaction contemplated herein. The Agreement and related documents to which Seller is a party executed on the Closing Date will be valid and binding agreements of Seller, enforceable against Seller in accordance with their terms. (c) Attached hereto as Exhibit "F" are copies of the unaudited financial statements of Seller for the year ended December 31, 1999 and unaudited financial statements for the period ended August 26, 2000, including the balance sheet of the Seller as at August 26, 2000, and statement of operations and retained earnings, and. changes of cash flows of the Seller, with appended notes to all such financial statements, which are an integral part of such statements (collectively the "Financials"). The Financials have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and present fairly the financial position and results of operations of Seller at the dates and for the periods specified. (d) There has been no material change in the financial condition, assets or liabilities of Seller as they relate to the Business Unit and the Assets from August 26, 2000 to the date hereof, except for changes which have occurred in the ordinary course of business, none of which have been materially adverse. (e) The only real property owned by Seller are real estate leases as described in Exhibit "G" attached hereto. Aside from Exhibit "G", the Seller neither owns nor has interest in or rights to any real estate. (f) Exhibit "A", attached hereto, includes a true and correct list of all fixed assets owned by Seller used in the Business Unit and a schedule of all leases of fixed assets used in the Business Unit and personal property used in the Business Unit under which Seller is lessee, all of which leases are valid and binding and not in default, by either lessor or lessee thereunder. (g) Seller has not received any notice from any governmental authority that its real estate, or personal property within the Assets violate the provisions of any building or similar code, nor does Seller have knowledge of any basis for such a claim. Seller is conveying to Buyer all the equipment and property previously required by Seller for the proper operation of its Business Unit. Except with respect to government contracts and governmental licenses and permits, no consent (except those which have already been obtained) are necessary to transfer to the Buyer any of the Assets, property or rights of the Business Unit, including any leases or licenses of personal property or other rights. (h) The Assets are and will be on the Closing Date owned by Seller free and clear of any liens, encumbrances or restrictions, except as specifically reflected in the Exhibit "J". (i) From and after the date of this Agreement and until the Closing Date, the Business Unit has been and will be operated in the ordinary course consistent with past practices and there has not or will not have been: (i) any damage, destruction or loss, whether or not covered by insurance, which has had, or will have, a material adverse effect on the Business Unit; (ii) any strike, picketing or similar labor trouble which has had, or will have, a material adverse effect on the Business Unit; (iii) any license, sale, transfer, mortgage or other disposition of any Assets except in the ordinary course of business, or any license, sale, assignment, transfer or other disposition of any patent, copyright, trademark, license, franchise, know-how, proprietary process, formula or other intangible asset used in the Business Unit; (iv) any change in the benefits or compensation payable or to become payable to officers or employees in any form, including bonuses, pension, severance, etc.; (v) any loans, advances or capital contribution to or investment in any person or entity; (vi) any issuances or sale of any stock, bond or other corporate security; (vii) any material adverse change in the condition (financial or otherwise) of the Business Unit. (j) Seller has not received any notice from any governmental agency with respect to any "alleged material violation" (i.e., an alleged violation which would have a material adverse effect on the Business Unit) by it of any applicable federal, state or local environmental or health and safety statutes and regulations in connection with the Business Unit, nor does Seller know of any basis for any investigation or proceeding against it by any federal, state or local environmental or health and safety enforcement agency regarding such a violation in connection with the operation of the Business Unit. To the best knowledge of Seller, neither Seller nor any predecessor of Seller has been alleged to be in material violation of, or has been subject to any administrative or judicial proceeding pursuant to such environmental laws and regulations with respect to the Business Unit, either now or at any time during the past three years, and so far as Seller is aware, there are no such threatened or proposed violations with respect to the Business Unit. (k) The equipment and other personal property included within the Assets taken as a whole, is in good operating condition in all material respects, subject to normal wear and tear. (l) Except as set forth in Exhibit "I ", there are no material agreements or contracts to which the Business Unit of Seller is a party or by which it is bound. (m) With respect to government contracts or OEM subcontracts included within the Assets, there are (i) no outstanding written cure notices or show causes, (ii) any written notices of contract termination or stop work orders, (iii) any written final decision assessing a penalty or damages, (iv) any written assertion of a formal claim based on violation of government cost accounting standards or government pricing, or (v) any formal notice of proposed disallowance of indirect cost claims, any subpoena or written notice signifying government investigation. (n) Seller is not aware of any fact or circumstance which would have an adverse effect on the efforts of Seller and Buyer to obtain novation agreements and to otherwise obtain all required consents. (o) Seller is not in default or breach with respect to any material obligation under any of its vendor, supplier or customer contracts, including the government contracts relative to the Assets. (p) All inventory within the Assets reflected on the balance sheet at August 26, 2000 is, and on the Closing Date will be, of usable quality, except as may be otherwise reserved for and reflected on the Seller's financial statements. (q) Seller has never had any labor trouble, by which is meant employee strikes, work stoppages, slow downs or lock outs, or any threats thereof. None of Seller's employees has ever been covered by a collective bargaining agreement between Seller and any labor union. (r) Exhibit "B", attached hereto contains a complete listing of all patents, licenses, trademarks, trade names, brand names, copyrights, logos, inventions, trade secrets, and other proprietary information used or required by Seller in connection with the carrying on and conduct of its Business Unit, none of which, to the best knowledge of Seller, infringes the rights of others. Seller is the sole owner of or has the exclusive right to use, for the life of the proprietary rights, all patents, trademarks, service marks, tradenames, copyrights, inventions, logos, trade secrets, etc. used in the Business Unit. (s) Seller has timely and properly filed all federal, state and other tax returns and reports, statements and other documents which it is or has been required to file, and has paid all taxes, including interest and penalties, if any, which have become due pursuant to tax returns and reports filed and pursuant to assessments received by it. Seller has, to the date hereof, properly accrued, and will pay when due, all federal, state and other tax liabilities of Seller. (t) To the best of its knowledge, Seller has complied in all material respects with all laws, rules, regulations, ordinances, judgments, decrees and orders of federal, state and local authorities and agencies applicable to its Business Unit, the violation of which could result in liability to Seller of $2,000 or more. Seller has substantially complied with all requirements under necessary permits, authorizations, or licenses and has, as of the date hereof, secured such permits, authorizations and licenses in connection with the Assets. Notwithstanding the foregoing, Seller has fully disclosed to Buyer the circumstances surrounding its ESOP, including the fact that the Department of Labor has requested information about the ESOP. (u) Except as set forth on Exhibit "K," there are no actions at law or in equity pending or, to the best knowledge of Seller, threatened against or adversely affecting Seller or any of the Assets, and except as set forth on Exhibit "K," there are no proceedings pending or, to the best knowledge of Seller, threatened against Seller by or before any governmental board, department, commission or agency involving the Assets. (v) None of the real property nor to the best knowledge of the Seller any real property previously owned or leased by Seller or any of its predecessors have been used at any time in connection with the Business Unit: (i) as a site for the storage or disposal of waste (including, without limitation, as that term is used in the Resource Conservation Recovery Act (the "Conservation Act") (42 U.S.C. 901 et seq); (ii) so as to cause a violation of or to give rise to a removal or restoration obligation or liability for the costs of removal or restoration by others, or liability for damages to others, under any statute, ordinance, order, decree, or under the common law of any state, federal, municipal or other governmental entity, body or agency having jurisdiction over any of the real property or any such previously owned or leased property, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA") (42 U.S.C. 9601 et seq.), or any similar Environmental Requirement, nor has any such violation, obligation or liability been created by the removal by or at the request of the Seller or, to the best knowledge of the Seller, any of its predecessors of any waste from the real property or such leased or previously owned or leased properties, the disposition of such removed waste or by reason of the discontinuance of operations of any business conducted at the real property or the previously owned or leased properties or (iii) to the best knowledge of the Seller, for storage of hazardous materials in USTs. Seller has delivered to Buyer true, complete and correct copies or results of any reports, studies or tests in the possession of or initiated by Sellers pertaining to the existence of hazardous materials and other environmental concerns at any part of the real property or any properties previously owned or leased by Seller or any of its predecessors or concerning compliance with or liability under laws relating to toxic waste and other environmental matters in the operation of the business and properties of the Seller or any of its predecessors. (w) Seller has no reason to believe that the accounts receivable being conveyed to Buyer hereunder are uncollectible. (x) Seller is not in default, or alleged to be in default, under any agreement, instrument or obligation, which singly or in the aggregate might have an adverse effect on the Seller's Business Unit. There is no default by any party with whom the Seller has an agreement which is of material importance to the Seller's Business Unit. (y) Except with respect to government contracts, licenses and permits for which consent is required, there is no material asset, property or right used or required by the Buyer in the conduct of the Business Unit which is not being conveyed, transferred, or assigned to Buyer under this Agreement. (z) Except as set forth on Exhibit "L", neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, violates any provision of the articles of incorporation or by-laws of Seller; violates or is in conflict with or constitutes a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or results in the termination of, or accelerates the performance required by, or excuses performance by any person of any of its or their obligations under, or causes the acceleration of the maturity of any debt or obligation pursuant to, or results in, the creation or imposition of any lien or encumbrance upon any of the Assets under any agreement or commitment to which Seller is a party or by which any of its Assets is bound, or to which any of the Assets of the Seller is subject; or violates any statute, law, regulation, rule, judgment or order of any court or other governmental body. (aa) The insurance coverage of Seller is within industry standards for the Assets and Business Unit. (bb) Seller has not employed any broker, finder, investment banker or financial advisor as to whom the Seller may have an obligation to pay monies, or incurred any liability for any brokerage fees or commissions or for any finders' investment banking or financial advisory fees for which the Seller may be responsible in connection with the transactions contemplated hereby except finder's fees to Decisionpoint in the amount of $432,000. (cc) No representation or warranty made in this Agreement by the Seller, nor any statement, schedule or certificate furnished or to be furnished to the Buyer pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. ARTICLE 4. 4.1 Representations and Warranties of Buyer. Buyer represents and warrants to Seller that: (a) Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with corporate power to carry on its business as now conducted. Buyer has corporate power to enter into and carry out this Agreement, has no contractual or other restriction upon its so doing, and has properly secured the approval of its Board of Directors to do so, no other approval being required. Buyer's executing officers are authorized thereby to execute this Agreement, and such other documents as may be necessary to consummate the transactions contemplated herein. (b) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, violates any provision of the certificate of incorporation or by-laws of Buyer; violates or is in conflict with or constitutes a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or results in the termination of, or accelerates the performance required by, or excuses performance by any person of any of its or their obligations under, or causes the acceleration of the maturity of any debt or obligation pursuant to, or results in the creation or imposition of any lien or encumbrance upon any property or assets of Buyer under any agreement or commitment to which Buyer is a party or by which any of its property or assets is bound, or to which any of the property or assets of the Buyer is subject; or violates any statute, law, regulation, rule, judgment or order of any court or other governmental body. (c) Buyer will use all reasonable efforts to release Seller from those liabilities which Buyer has expressly agreed to assume under this Agreement. (d) No representation or warranty made in this Agreement by the Buyer, nor any statement, schedule or certificate furnished or to be furnished to the Seller pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. ARTICLE 5. 5.1 Operations of Business Unit Since August 26, 2000 . Since August 26, 2000, the Seller has adhered to the following restrictions: (a) Seller has conducted the Business Unit in the ordinary and usual course and has used its best efforts to maintain the Business Unit and the goodwill thereof in accordance with its prior practice. (b) Seller has maintained the Assets owned or leased by Seller in the same condition as the same were on August 26, 2000, reasonable wear and tear excepted and dispositions in the ordinary course of business, which dispositions have not been material in the aggregate. (c) Seller has not mortgaged, pledged or subjected to any lien or encumbrance any of the Assets or suffered or permitted, any of the Assets to become encumbered or subject to any lien. (d) Seller has not made or declared any distribution, transfer or dividend to its shareholders, or sold or disposed of, or made any offer, agreement or contract relating to the sale or disposition of, any of the Assets acquired by Seller since August 26 2000 (with the further exception of those which have been disposed of in the ordinary course of business consistent with historical practice). (e) Except as otherwise disclosed to Buyer, Seller has not incurred or become liable for any obligation or liability except current liabilities incurred in the ordinary course of business consistent with historical business practices. (f) Seller has not made increases in employees' salaries or benefits subsequent to August 26, 2000 except for a $150,000 termination payment to Hans Gregory Wood which is not being paid from the Business Unit Assets. (g) Seller has paid or accrued all operating costs since August 26, 2000, including but not limited to all wages and salaries as the same shall have become due and payable, any premiums due on employee health insurance and other insurance policies, utility bills, rents, all payments required for merchandise and services received during such period, and all other expenses of the type ordinarily and reasonably incurred by Seller's business since August 26, 2000. ARTICLE 6. 6.1 Conditions to Obligation of Buyer to Close. The obligation of Buyer to purchase the Assets and otherwise to consummate the transactions that are to be consummated at the Closing is subject to the satisfaction, on or before the Closing Date, of the following conditions (any of which may be waived by Buyer in whole or in part): (a) All required consents shall have been duly obtained or obviated, except where (i) the failure to obtain any such required consents would not reasonably be expected to subject Buyer to any material penalty or loss, including loss of partial revenue, or (ii) such required consent relates to an assigned contract or a related assumed liability, as to which the parties will proceed pursuant to Article 8. (b) The representations and warranties of Seller set forth in Article 3 shall be true and correct in all material respects on the Closing Date. (c) Seller shall have complied with and performed, in all material respects, all obligations required by this Agreement to be complied with or performed by Seller on or before the Closing Date. (d) Seller shall have delivered to Buyer a certificate, dated as of the Closing Date, to the effect that the conditions set forth in Sections (b) and (c) pursuant to this Article 6 have been satisfied. (e) Buyer shall have entered into an employment agreement with Hans Gregory Wood, in conformity with the form of agreement annexed hereto as Exhibit "M". (f) Seller shall have fully complied with the provisions of any so-called Bulk Sales Laws applicable to the conveyance to Buyer of the Assets. ARTICLE 7. 7.1 Conditions to Obligation of Seller to Close. The obligation of Seller to sell the Assets to Buyer and otherwise to consummate the transactions that are to be consummated at the Closing is subject to the satisfaction, on or before the Closing Date, of the following conditions (any of which may be waived by Seller in whole or in part): (a) All required consents shall have been duly obtained or obviated, except where (i) the failure to obtain any such required consents would not reasonably be expected to subject Seller to a material penalty or loss or (ii) such required consent relates to an assigned contract or a related assumed liability, as to which the party will proceed pursuant to Article 8. (b) The representations and warranties of Buyer set forth in Article 4 and the representations and warranties of Buyer set forth in the other instruments shall be true and correct in all material respects on the Closing Date. (c) Buyer shall have complied with and performed, in all material respects, all obligations required by this Agreement to be complied with or performed by Buyer on or before the Closing Date. (d) Buyer shall have delivered to Seller a certificate dated as of the Closing Date, to the effect that the conditions set forth in Sections (b) and (c) of this Article 7 above have been satisfied. (e) Buyer shall have entered into an Employment Agreement with Hans Gregory Wood, in conformity with the form of agreement annexed hereto as Exhibit "M". ARTICLE 8. 8.1 Best Efforts to Obtain Consents. (a) Where required, Seller and Buyer shall notify Seller's customers and suppliers that Seller's obligations under its contracts, including government contracts, will, after the closing, be performed by Buyer. Prior to the Closing, Seller will use its best efforts to obtain the consents of any parties to the contracts which require such consent to be obtained prior to transfer of the contracts to Buyer ("Pre-closing Consents"). Seller and Buyer will cooperate and use their best reasonable efforts to obtain (i) novation agreements to the extent required by law to each government contract ("Novation Contracts ") as soon as reasonably possible, (ii) any security clearances, licenses or similar permits required to operate any facility or conduct any portion of the Business Unit, and (iii) all other consents, approvals, novations, and waivers necessary to convey to Buyer any of the Assets which are not required by law or by contract to be obtained prior to the Closing Date. (All Novation Contracts and other consents, security clearances, permits, approvals and waivers described in (i), (ii) and (iii) above are hereinafter referred to as "Post-closing Consents ".). (b) To the extent that the assignment by Seller and the assumption by Buyer of any contracts included within the Assets shall require the consent or approval of any third party, this Agreement shall not constitute an assignment and/or assumption thereof if such attempted assignment or assumption would constitute a breach thereof. (c) Until (i) any Novation Contract legally required with respect to any government contract has been executed and delivered and (ii) Seller and Buyer have obtained any Post-closing Consents necessary to convey to Buyer any contract not requiring a Novation Contract pursuant to Section 1 of this Article 8 above, Buyer on behalf of Seller, from and after the Closing Date, shall assume and perform (as a subcontractor to Seller in the case of government contracts) and Buyer shall assume and perform, for the benefit of the issuer thereof or other party or parties thereto, the liabilities, responsibilities and obligations of Seller thereunder (other than the liabilities, responsibilities and obligations of Seller under Section (d) of this Article 8. (d) Until Seller and Buyer have obtained any Novation Contracts or Post-closing Consents necessary to convey to Buyer any contracts, including government contracts pursuant to Section (a) of this Article 8, Seller from and after the Closing Date will (i) promptly transmit to Seller's government contract customers, Seller's invoices based upon the invoices submitted by Buyer to Seller pursuant to Section (e) of this Article 8, (ii) receive payments tendered to Seller by such government contract customers and promptly remit such payments to Buyer, (iii) enforce for the benefit of Buyer all rights of Seller under any government contract, and (iv) take any other reasonable actions necessary to allow Buyer to perform its obligations and derive its benefits as a subcontractor under the government contracts. (e) From and after the Closing Date and until the applicable Post-closing Consents are obtained, Buyer shall take all reasonable action necessary to allow Seller to perform its obligations under the government contracts, including but not limited to promptly submitting invoices to Seller for such payments or reimbursements as are appropriate in accordance with the respective terms of such government contracts. ARTICLE 9. 9.1 The Closing. (a) The Closing hereunder shall take place at the offices of McAndrews, Allen & Matson on October 12, 2000 at 9:00 a.m, (the "Closing Date"). (b) On the Closing Date, (a) Seller shall transfer the Assets to Buyer by good and sufficient deeds, bills of sale, assignments and other documents and instruments of conveyance reasonably satisfactory to counsel for Buyer; and (b) Buyer shall deliver to Seller the cash payment payable on the Closing Date (by cashier's check or wire transfer) and duly executed instrument or instruments reasonably satisfactory to counsel for Seller evidencing the assumption by Buyer of the Assumed Liabilities. (c) Seller shall furnish to Buyer, on the Closing Date, the Exhibits. (d) Except as otherwise provided in Article 8, Seller shall have received on or prior to the Closing Date, all required consents of third parties to the consummation of the transactions provided for herein, including consents to the assignment of the material contracts, leases and agreements addressed above in Section 6.1. (e) Seller shall furnish to Buyer on the Closing Date resolutions duly adopted and carried by its directors authorizing the execution, delivery and performance of this Agreement and evidence of shareholder approval of the sale of the Business Unit certified by its secretary. (f) Seller shall furnish to Buyer, on the Closing Date, an opinion of counsel for Seller in form and substance reasonably satisfactory to counsel for Buyer to the effect that: (i) Seller is a corporation duly organized, existing and in good standing under the laws of the State of California, with corporate power to enter into and perform this Agreement and transfer the Assets as provided for herein. (ii) This Agreement has been duly authorized, executed and delivered by Seller and constitutes its legal, valid and enforceable obligation in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (iii) The carrying out of the transactions provided for herein will not violate any charter or by law of Seller nor, to counsel's knowledge, any corporate restriction, agreement, or arrangement to which Seller is a party or to which it is subject. (iv) The bills of sale and other documents of conveyance and transfer delivered to Buyer by Seller on the Closing Date have been duly authorized, executed and delivered by Seller and are adequate under the laws of California to effect such conveyance and transfer. (g) Buyer shall furnish to Seller, on the Closing Date, an opinion of counsel for Buyer in form and substance reasonably satisfactory to counsel for Seller to the effect that: (i) Buyer is a corporation duly organized, existing and in good standing under the laws of the State of Delaware with corporate power to enter into and perform this Agreement. (ii) This Agreement has been duly authorized, executed and delivered by Buyer and constitutes the legal, valid and enforceable obligation in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (iii) This Agreement and the carrying out of the transactions herein provided for will not violate any charter or to our knowledge other corporate restrictions, agreements or arrangements to which Buyer is subject. ARTICLE 10. 10.1 Survival of Representations and Warranties of Seller, and Indemnification. (a) The representations, covenants and warranties of Seller contained in this Agreement or any Exhibit attached hereto or any certificate delivered pursuant hereto shall survive the Closing Date for two years. (b) Notwithstanding any investigation of Seller or the Assets or Business Unit which is made by or on behalf of Buyer prior to the Closing Date, Seller shall indemnify, defend, and hold harmless Buyer against any loss, expense (including reasonable cost of investigation and legal fees), or other damage resulting from (i) any material breach by Seller of any of their warranties, representations or agreements contained herein, (ii) any action or claim which is brought or asserted by third parties against Buyer or any successor arising out of the conduct of Seller (except the Assumed Liabilities expressly assumed by Buyer pursuant to Article 2 hereof) or on account of the non-compliance by Buyer with the provisions of any so-called Bulk Sales Law applicable to the conveyance to Buyer of the Assets, (iii) any failure by Seller to perform any covenant, undertaking or obligation hereunder, or (iv) any liability arising as a result of any of the proceedings listed on Exhibit "K"; to the extent any such claim or claims exceed in the aggregate $50,000. (c) If any action or claim shall be brought or asserted against Buyer or any successor in respect of which indemnity may be sought from Seller pursuant to paragraph 10.1 (b) of this Article 10, Buyer shall timely notify Seller and Seller shall assume the defense thereof, including the employment of counsel reasonably satisfactory to Buyer, and the payment of all expenses. Buyer shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fee and expenses of such counsel shall be at the expense of Buyer unless (i) the employment thereof shall have been specifically directed by Seller, or (ii) Seller shall have elected not to assume the defense and employ counsel. For the purpose of this section, notice given within thirty (30) days after the occurrence giving rise to the right of indemnification shall be "timely" but notice given later than such thirty (30) days shall not terminate a party's right to indemnification unless the party receiving such notice can demonstrate that its rights have been adversely affected in a material fashion by such allegedly untimely notice. (d) The indemnity liability of the Seller herein shall not exceed the amount of the purchase price to be paid by Buyer under Article 2 hereof. 10.2 Survival of Representations and Warranties of Buyer, and Indemnification. (a) The representations and warranties of Buyer contained in this Agreement or any Exhibit attached hereto or any certificate delivered pursuant hereto shall survive the Closing Date for two years. (b) Notwithstanding any investigation of Buyer which is made by or on behalf of Seller prior to the Closing Date, Buyer shall indemnify, defend, and hold harmless Seller against any loss, expense (including reasonable cost of investigation and legal fees), or other damage resulting from (i) any breach by Buyer of any of its warranties, representations or agreements contained herein, (ii) any failure by Buyer to perform any covenant, undertaking or obligation hereunder, or (iii) any action or claim brought or asserted, by third parties against Seller which relates to the Assets or the conduct of the Business Unit by Buyer after the Closing Date; to the extent any such claim or claims exceed in the aggregate $50,000. (c) If any action or claim shall be brought or asserted against Seller or any successor in respect of which indemnity may be sought from Buyer pursuant to paragraph 10.2(b) of this Article 10. Seller shall timely notify Buyer and Buyer shall assume the defense thereof, including the employment of counsel reasonably satisfactory to Seller, and the payment of all expenses. Seller shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fee and expenses of such counsel shall be at the expense of Seller unless (i) the employment thereof shall have been specifically directed by Buyer, or (ii) Buyer shall have elected not to assume the defense and employ counsel. For the purpose of this section, notice given within thirty (30) days after the occurrence giving rise to the right of indemnification shall be "timely" but notice given later than such thirty (30) days shall not terminate a party's right to indemnification unless the party receiving such notice can demonstrate that its rights have been adversely affected in a material fashion by such allegedly untimely notice. ARTICLE 11 11.1 Covenants and Agreements Pertaining to the Period Subsequent to Closing. (a) After the Closing: (i) Seller shall indemnify Buyer from, and use its best efforts to promptly discharge or cause to be discharged as they become due, all debts, obligations and liabilities of Seller other than the Assumed Liabilities (ii) Buyer shall indemnify Seller from, and promptly discharge, or cause to be discharged as they become due, the Assumed Liabilities and those liabilities arising out of the conduct of the Business Unit by Buyer after the Closing Date. (b) Upon the request of either Buyer or Seller, the other party will execute and deliver to the requesting party all such instruments and documents of further assurance or otherwise, and will do any and all such acts and things as may reasonably be required to carry out the obligations of such party hereunder and to consummate the transactions contemplated hereby. (c) Seller and its representatives shall, upon reasonable notice and at reasonable times, have access to Seller's records which have been left in the possession of Buyer for the purpose of winding up its affairs and filing and paying its tax obligations. (d) From and after the date hereof, the Seller and its officers and directors will, and Seller will cause its officers and directors to, hold in a fiduciary capacity for the benefit of Buyer all confidential information, knowledge, and data relating to or concerned with the Business Unit and shall not divulge, and shall cause such officers and directors not to divulge, any such confidential information, knowledge, or data to any person, firm or corporation other than Buyer. (e) Buyer will not assign, transfer or convey the Business Unit to any third party without requiring such third party to assume the obligations of Buyer hereunder. Such assignment, transfer or conveyance will not release or modify any of the obligations of Buyer under this Agreement. (f) Buyer will be entitled, for a period of five (5) months after the Closing, to use Seller's leased premises in Anaheim, California without additional cost to Buyer. Should Buyer continue to use or otherwise occupy such premises after the five (5) month period, Buyer shall pay to Seller $12,500 per month, and pro rated for any portion of a month. ARTICLE 12. 12.1 Miscellaneous. (a) Any notices, approvals or other communications provided for herein to be given hereunder by any party to another shall be deemed validly and properly given or made if in writing and delivered personally or sent by overnight or certified mail, return receipt requested, postage prepaid, as follows: If to Seller: American Microwave Technology, Inc. c/o Edgewater Private Equity Fund II, LP 2 Corporate Plaza Newport Beach, CA 92660 Attention: Robert G. Allison With a copy to: McAndrews Allen & Matson 1301 Dove Street, Ste. 1020 Newport Beach, CA 92660 Attention: Stephanie E. Allen, Esq. If to Buyer: Herley Industries, Inc. 10 Industry Drive Lancaster, Pennsylvania 17603 Attention: Mr. Lee N. Blatt, Chairman of the Board With a copy to: Blau, Kramer, Wactlar, & Lieberman, P.C. 100 Jericho Quadrangle Jericho, New York 11753 Attention: David H. Lieberman, Esq. Either of the parties hereto may give notice to the other at any time by the methods specified above of a change in the address at which, or the persons to whom, notices addressed to it are to be delivered in the future, and such notice shall be deemed to amend this paragraph until superseded by a later notice of the same type. Any notice given by mail as aforesaid shall be conclusively deemed to have been received by a party hereto and be effective on the third business day after the day on which mailed to the address set forth above. (a) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. (b) This Agreement may be executed in one or more counterparts, each of which shall constitute an original hereof. (c) This Agreement may be modified, amended or supplemented only by mutual written agreement of the Seller and the Buyer. Each amendment, modification or supplement shall be in writing signed by the party or parties to be charged. (d) This Agreement, the Exhibits hereto and the other documents delivered hereto constitute the entire agreement of the parties in respect of the subject matter hereof and supersedes all prior statements or agreements among the parties in respect of such subject matter. (e) Article headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement. (f) Whenever in this Agreement it is provided that a party hereto shall deliver an agreement or other instrument to the other of them, such agreement or instrument shall be in form reasonably satisfactory to counsel for the party to which-the same is to be delivered. (g) In the event of litigation to enforce this Agreement, the prevailing party shall receive an award of reasonable attorney's fees and costs. (h) This Agreement shall be construed and interpreted according to the laws of the State of Delaware without regard to its conflicts of laws provisions. [SIGNATURES ON FOLLOWING PAGE] IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be executed by their duly authorized officers and their corporate seals to be affixed and attested by their respective Secretaries as of the day, month and year first above written. AMERICAN MICROWAVE TECHNOLOGY, INC. By: /s/ James P. Burra ------------------------------------ James P. Burra Interim Chairman of the Board HERLEY INDUSTRIES, INC. By: /s/ Myron Levy ------------------------------------ Myron Levy President EX-10.13 3 0003.txt LEASE AGREEMENT DATED MARCH 1, 2000 Exhibit 10.13 ------------- AGREEMENT OF LEASE BETWEEN RSK REALTY LTD AND Herley Wireless Technologies, Inc. TABLE OF CONTENTS SPACE ...........................................................1 TERM.............................................................1 RENT.............................................................3 USE OF PREMISES..................................................6 TAXES............................................................7 CONDITION OF PREMISES AND DELIVERY OF POSSESSION.................8 INITIAL CONSTRUCTION.............................................8 REPAIRS, MAINTENANCE, FLOOR LOADS AND PARKING RESTRICTION........9 TENANT'S ALTERATION.............................................12 UTILITIES.......................................................14 REQUIREMENTS OF LAW, SPRINKLERS.................................14 INSURANCE.......................................................17 DAMAGE OR DESTRUCTION...........................................19 SUBORDINATION...................................................21 INDEMNIFICATION.................................................23 EMINENT DOMAIN..................................................23 RIGHT TO SUBLET OR ASSIGN.......................................25 RIGHT TO INSPECT; POSTING SIGNS.................................28 DEFAULT.........................................................30 i REMEDIES OF LANDLORD............................................31 ATTORNEY'S FEES.................................................33 WAIVER OF REDEMPTION, COUNTERCLAIM, TRIAL BY JURY...............33 NO WAIVER.......................................................34 END OF TERM.....................................................35 BROKER..........................................................36 QUIET ENJOYMENT.................................................37 NONLIABIITY OF LANDLORD.........................................37 NO ABATEMENT....................................................38 APPLICABLE LAW AND CONSTRUCTION.................................38 CONSTRUCTION ON ADJACENT PREMISES OR BUILDINGS..................39 UTILITY EASEMENT................................................40 NOTICES.........................................................40 BINDING EFFECT OF LEASE.........................................40 UNAVOIDABLE DELAYS..............................................41 SANITARY SYSTEMS................................................41 COMMON AREA MAINTENANCE CHARGE..................................41 PARKING.........................................................42 CLEANING, RUBBISH REMOVAL.......................................42 EXHIBIT "A".....................................................45 ii AGREEMENT OF LEASE AGREEMENT OF LEASE made as of the 1st day of March, 2000 between RSK Realty LTD a limited partnership having its principal office at 44 Midwood Road, Rockville Centre, New York 11570 (hereinafter referred to as "Landlord"), and Herley Wireless Technologies, Inc., a corporation having its principal office at 425 Smith Street, Farmingdale, NY (hereinafter referred to as "Tenant"). SPACE 1. Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the real property and the building and other improvements thereon known as and located at 425 Smith Street, Farmingdale, New York 11735 as shown on Exhibit "A" annexed hereto (such real property, building and improvements being hereinafter referred to as the "Premises" and such building being hereinafter referred to as the "Building"). The parties stipulate and agree that the Premises contains 13,602 square feet in a Building containing 68,282 square feet which constitutes 20.00 percent of the areas of the Building ("Tenant's Proportionate Share"). The Premises are let subject to covenants, restrictions and easements of record, governmental laws, rules, regulations and orders, and the reservation by Landlord of all air rights above, around and about the Premises and all rights to increase the sizes of surrounding buildings based on the air rights appurtenant to the Premises, and, if and when permitted by any present or future zoning laws, ordinances, orders or regulations. TERM 2. (a) The term ("Term" or "Demised Term" or "term") of this lease shall commence on the date of this lease (the "Term Commencement Date"). Tenant's obligation to pay Rent (as defined in Article 3) shall commence on March. 1, 2000. The Term of this lease shall expire on the day (hereinafter referred to as the "Expiration Date") which is ten (10) years after (i) the Rent Commencement Date, if such date is the first day of a calendar month, or (ii) the first day of the first full calendar month following the Rent Commencement Date, if such date is not the first day of a calendar month. (b) Tenant waives any right to rescind this lease under Section 223-a of the New York Real Property Law or any successor statute of similar import then in force and further waives the right to recover any damages which may result from Landlord's failure to deliver possession of the Premises by the Rent Commencement Date. (c) Upon the request of Landlord, Tenant agrees to execute a writing, prepared and executed by Landlord, setting forth the actual date on which the Term Commencement Date, the Rent Commencement Date and the Expiration Date took place or will take place. Notwithstanding anything to the contrary contained herein, such writing shall be deemed a part of this lease and conclusive evidence of such dates. (d) A "Lease Year" shall comprise a period of twelve (12) consecutive calendar months. The first Lease Year shall commence on the Rent Commencement Date but, notwithstanding the first sentence of this paragraph, if the Rent Commencement Date is not the first day of a month, then the first Lease Year shall include the additional period from the Rent Commencement Date to the end of the month in which the Rent Commencement Date shall take place. Each succeeding Lease Year shall end on the anniversary date of the last day of the preceding Lease Year. For example, if the Rent Commencement Date is January 1, 1999, the first Lease Year would begin on January 1, 1999 and end on December 31,1999 and each succeeding Lease Year would end on December 31st. If, however, the Rent Commencement Date is January 2, 1999, the first Lease Year would begin on January 2, 1999 and end on January 31, 2000, the second Lease Year would begin on February 1, 2000, and each succeeding Lease Year would end on January 31st. RENT 3. (a) Tenant covenants to pay to Landlord at its principal office, or at such place as Landlord shall from time to time direct in writing, the minimum annual rent set forth below, and the additional rent required to be paid pursuant to the terms of this lease. Minimum annual rent and such other additional rent and charges which Tenant shall be required to pay are hereinafter sometimes referred to as "Rent". Minimum annual rent shall be as follows: During the first Lease Year, the minimum annual rent shall be $91,813.50 payable in equal monthly installments of $7,651.13. During the second Lease Year, the minimum annual rent shall be $95,486.16 payable in equal monthly installments of $7,957.18 During the third Lease Year, the minimum annual rend shall be $99,305.50 payable in equal monthly installments of $8,275.46. During the fourth Lease Year, the minimum annual rent shall be $103,277.74 payable in equal monthly installments of $8,606.48. During the fifth Lease Year, the minimum annual rent shall be $107,408.84 payable in equal monthly installments of $8,950.74. During the sixth Lease Year, the minimum annual rent shall be $110,631.08 payable in equal monthly installments of $9,219.26. During the seventh Lease Year, the minimum annual rent shall be $113,950.05 payable in equal monthly installments of $9,495.84. During the eighth Lease Year, the minimum annual rent shall be $117,938.31 payable in equal monthly installments of $9,828.19. During the ninth Lease Year, the minimum annual rent shall be $122,066.14 payable in equal monthly installments of $10,172.18 During the tenth Lease Year, the minimum annual rent shall be $126,338.40 payable in equal monthly installments of $10,528.20. (b) Tenant shall pay the minimum annual rent in equal monthly installments in advance on the first day of each calendar month included in the term, except that Tenant shall pay the first month's rent upon execution of this lease. (c) All Rent shall be paid in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, at the address of Landlord set forth in this lease or at such other place as Landlord in writing may designate without any set-off or deduction whatsoever and without any prior demand therefor. (d) Unless another time shall be herein expressly provided, any additional rent shall be due and payable on demand or together with the next succeeding installment of minimum annual rent, whichever shall first occur; and Landlord shall have the same remedies for failure to pay the additional rent as for a non-payment of minimum annual rent. (e) For any portion of a calendar month included at the beginning or end of the term, Tenant shall pay 1/30th of the closest applicable monthly installment of minimum annual rent (specifically excluding month one of the first Lease Year and months eleven and twelve of the tenth Lease Year) for each day of such portion, payable in advance at the beginning of such portion. (f) In any case in which the minimum annual rent of additional rent is not paid within five (5) days of the day when same is due, Tenant shall pay a late charge equal to 8-1/2 cents for each dollar so due; and, in addition thereto, the sum of $100.00 for the purpose of defraying expenses incident to the handling of such delinquent account. Tenant further agrees that the late charge imposed herein is fair and reasonable, complies with all laws, regulations and statutes, and constitutes an agreement between Landlord and Tenant as to the estimated compensation for costs and administrative expenses incurred by Landlord due to the late payment of rent to Landlord by Tenant. Tenant further agrees that the late charge assessed pursuant to this lease is not interest, and the late charge assessed does not constitute a lender or borrower/creditor relationship between Landlord and Tenant. (g) If Tenant shall default in making any payment required to be made by Tenant or in performing any obligation of Tenant under this lease which shall require the expenditure of money, Landlord may, but shall not be obligated to, make such payment on behalf of Tenant or expend such sum as may be necessary to perform or fulfill such obligation. Any sums so paid by Landlord shall be deemed Rent and shall be due and payable to Landlord at the time of payment of the next installment of minimum annual rent. USE OF PREMISES 4. (a) Tenant shall use and occupy the Premises solely for light manufacturing of microwave components and products, and executive and administrative offices related thereto and for no other purpose. Tenant shall not use or permit the use of the Premises contrary to any applicable statute, ordinance or regulation or in violation of the Certificate of Occupancy of the Building, or in a manner which would cause structural injury to the Building. (b) Tenant acknowledges that the value of the Premises and the reputation of Landlord will be seriously injured if the Premises are used for any obscene or pornographic purposes or if any obscene or pornographic material is permitted on the Premises. Tenant further agrees that Tenant will not permit any such uses by Tenant or a sublessee of the Premises or an assignee of this lease. This Paragraph shall directly bind any successors in interest to Tenant. Tenant agrees that, if at any time, Tenant violates any of the provisions of this Paragraph, such violation shall be deemed a breach of a substantial obligation of the terms of this lease and objectionable conduct. Pornographic material is defined for purposes of this Paragraph as any written or pictorial matter with prurient appeal or any objects or instruments that are primarily concerned with lewd or prurient sexual activity. Obscene material is defined here as it is in Penal Law ss.235.00. TAXES 5. (a) During the term of this lease, Tenant covenants and agrees to pay, in the manner set forth in this Article, all Real Estate Taxes, as additional rent. (b) The term "Real Estate Taxes" shall be deemed to mean all taxes and assessments, special or otherwise, assessed upon or with respect to the ownership and all other taxable interests in the land and improvements thereon of which the Demised Premises are part, imposed by Federal, State or local governmental authority or any other taxing authority having jurisdiction over Landlord's tax lot or lots, but shall not include income, intangible, franchise, capital stock, estate in inheritance taxes, or taxes based upon the receipt of rentals (unless the same shall be in lieu of "Real Estate Taxes" as herein defined by whatever name the tax may be designated). (c) Commencing on the Rent Commencement Date and continuing throughout the term of this lease, Tenant shall pay to Landlord the Real Estate Taxes for each tax year occurring in whole or part during the term of this lease. Any amount due to Landlord under the provisions of this Article shall be paid within five (5) days after receipt by Tenant from Landlord of an invoice therefor. Landlord shall furnish Tenant with evidence of the amount of such Real Estate Taxes. A copy of the tax bill shall be sufficient evidence of the amount of Real Estate Taxes imposed upon the Premises. Tenant shall also pay when due any occupancy taxes arising under or in connection with this lease. In addition to the foregoing, Tenant shall also be responsible for any increase in Real Estate Taxes resulting from Tenant's improvements performed by or on behalf of Tenant. (d) Landlord's failure during the term of this lease to prepare and deliver any of the foregoing invoices, tax statements, or other demand for payment of Real Estate Taxes or Landlord's failure to make a demand for any other item of additional rent due hereunder shall not in any way waive or cause Landlord to forfeit or surrender its rights to collect any of the foregoing items of additional rent which may have become due during the term of this lease. (e) If any mortgagee of the Premises requires that funds for the payment of Real Estate taxes be escrowed with such mortgagee, Tenant shall pay to such mortgagee, in a timely manner, the amounts required by such mortgagee to be escrowed for the payment of Real Estate Taxes. (f) Tenant shall pay to Landlord on demand any Real Estate Taxes relating to the term of this lease which may have been prepaid by Landlord. With respect to any period at the expiration of the term of this lease which shall constitute a partial tax year, Tenant shall be responsible for the Real Estate Taxes allocable to such partial tax year and Landlord's tax statement shall apportion the amount of the additional rental due hereunder. The obligation of Tenant in respect of such additional rent applicable for the last year of the term of this lease or part thereof shall survive the expiration of the term of this lease. CONDITION OF PREMISES AND DELIVERY OF POSSESSION 6. (a) Except as otherwise specifically set forth in Article 7 hereof, Tenant agrees to accept the Premises in its "as is" condition and understands and agrees that Landlord shall not be required to perform any work, supply any materials or incur any expense to prepare the Premises for Tenant's occupancy. (b) If Landlord shall be unable to deliver possession of the Premises by the Rent Commencement Date, Landlord shall not be subject to any liability for such failure to give possession and Tenant hereby waives the provisions of Section 223-a of the Real Property Law of the State of New York and any other law of like import now or hereafter enacted. INITIAL CONSTRUCTION 7. The heating, ventilating and air conditioning systems servicing the Premises shall be in good working order as of the Rent Commencement Date. Tenant shall, at Tenant's sole cost and expense, perform the work necessary to prepare the Premises for Tenant's occupancy in accordance with and pursuant to the provisions of Article 9 herein. Upon completion of the foregoing work and Landlord's satisfactory inspection of same, Landlord shall provide Tenant with a work allowance of Twenty Seven Thousand ($27,000.00) Dollars to be used by Tenant in connection with the work necessary to prepare the Premises for Tenant's occupancy. REPAIRS, MAINTENANCE, FLOOR LOADS AND PARKING RESTRICTUION 8. (a) Tenant shall at all times keep and maintain the Premises in good order, condition and repair, and shall make all nonstructural repairs to the Premises, including, without limiting the generality of the foregoing, (i) maintenance and repair of the electrical, plumbing, heating, air conditioning, ventilation and all other mechanical systems servicing the Premises; (ii) regularly-scheduled cleaning and maintenance of the interior of the Premises; (iii) the repair and maintenance of all plate glass; (iv) all common areas, landscaping, sidewalks, driveways and parking areas at the Building; and (vi) keeping the exterior Premises clean and free of debris, snow and ice. Tenant shall obtain and keep in full force and effect for the benefit of Landlord and Tenant, with a responsible company doing business in Nassau or Suffolk County, a service, repair and maintenance contract with respect to the heating, ventilating and air conditioning systems of the Premises. A copy of such contract and all renewals thereof shall, upon issuance and thereafter not later than ten (10) days prior to expiration, be furnished to Landlord together with evidence of payment. If Tenant fails to make any repairs or replacements required to be made by Tenant, Landlord may, without obligation, perform same for the account of Tenant at Tenant's expense and the cost thereof shall be due and payable by Tenant to Landlord as additional rent. In the event that structural repairs, replacements or alterations or any other repairs or replacements included under Article 8 (b) hereof shall be necessitated or occasioned, in whole or in part, by the acts, omissions, or negligence of Tenant or any person claiming through or under Tenant or any of their servants, employees, contractors, agents, visitors or licensees, or by the use or occupancy or manner of use or occupancy of the Premises by Tenant, or any such person, Landlord shall make such repairs, replacements or alterations at Tenant's sole cost and expense. (b) Landlord shall be responsible for maintenance and repair of the structural elements of the Building, excluding the roof, which Tenant shall be responsible to repair and maintain. In the event that maintenance and repair of the structural elements of the Building are caused or necessitated by the negligence or intentional acts of Tenant, its agents, servants, employees, licensees or invitees, Landlord shall perform such repairs at Tenant's sole cost and expense. Landlord shall not be required to commence any repairs required to be performed by it until after notice from Tenant that same are necessary, which notice, except in the case of emergency, shall be in writing and shall permit Landlord ten (10) days in which to commence such repair. When necessary by reason of accident or other casualty occurring in the Building or at the Premises or in order to make any necessary repairs, alterations or improvements in or relating to the Building or the Premises or other portions of Landlord's property, Landlord reserves the right to interrupt, temporarily, and on written notice to Tenant the supply of utility service until said repairs or improvements shall have been completed. There shall be no abatement in Rent because of any such interruption. (c) Tenant shall not place a load upon any floor of the Premises which exceeds the floor load per square foot area which such floor was designed to carry. If tenant shall desire a floor load in excess of that for which the floor of any portion of the Premises is designed, upon submission to Landlord of plans showing the location of and the desired floor live load for the area in question, Landlord may strengthen and reinforce the same, at Tenant's sole expense, so as to carry the live load desired. Business machines and mechanical equipment used by Tenant which cause vibration or noise that may be transmitted to or through the Building shall be placed and maintained by Tenant, at its expense, in settings of cork, rubber or spring-type vibration eliminators sufficient to eliminate such vibration or noise. (d) Tenant shall comply with the following restrictions with respect to the Premises: (i) Tenant shall store all trash and refuse in appropriate sealed and covered containers either within the Premises or in a concealed location at the rear of the Building and shall attend to the regular disposal and removal thereof. (ii) Tenant shall receive all deliveries, load and unload goods, merchandise, supplies, fixtures, equipment, furniture and rubbish only through proper service doors and loading docks serving the Building, but in no event through the main front entrance thereof. (iii) Tenant shall not change the exterior colors or architectural treatment of the Premises or make any alterations or changes to the exterior of the Building or to the grading, planting or landscaping of the exterior of the Building without the consent of Landlord which shall not be unreasonably withheld. (iv) Tenant shall not place or install or suffer to be placed or installed any sign upon the Building or the Premises unless such sign shall be approved by Landlord and shall be harmonious with the signs of adjoining properties. In any event, Tenant shall not place or cause to be placed upon the Building any awning, canopy, banner, flag, pennant, aerial, antenna or the like. All signs or lettering on or about the Premises or the Building shall be neat and of reasonable size. The following are strictly prohibited: (x) Paper signs and stickers; (y) Moving, flickering or flashing lights; (z) Exposed neon or florescent tubes or other exposed light sources. (v) Tenant shall not permit the parking of any vehicle on the streets and roadways adjoining or surrounding the Building and Tenant shall require its employees, customers, invitees, licensees and visitors to park only in the parking areas serving the Premises. Tenant agrees that any violators of this parking restriction may be towed away by Landlord at Tenant's sole cost and expense and Tenant shall indemnify, defend and hold Landlord harmless against any claims or liabilities (including Landlord's attorneys' fees) arising by reason of such towing by Landlord. (vi) Tenant shall not manufacture or store any item which, in the opinion of Landlord, causes offensive odors, irritations, or any discomfort to occupants of the Building of which the Premises form a part. TENANT'S ALTERATION 9. Tenant shall not make, without Landlord's prior written consent, any installations, repairs, alterations, improvements or changes in or to the Premises. All improvements, alterations and replacements, and all building service equipment made or installed by or on behalf of Tenant, shall immediately upon completion or installation thereof be and become the property of Landlord (except for purposes of sales tax which shall remain Tenant's obligation) and shall remain upon the Premises at the expiration or sooner termination of this lease. Notwithstanding the foregoing, all trade fixtures, movable partitions, furniture and furnishings installed at the expense of Tenant shall remain the property of Tenant and Tenant may remove the same or any part thereof during the term of this lease, or if the term shall end prior to the date herein specifically fixed for such termination, then within a reasonable time thereafter, but Tenant shall, at its expense, repair any and all damage to the Premises resulting from or caused by such removal. Title to any property which Tenant elects not to remove or which is abandoned by Tenant shall, at the end of the term, vest in Landlord. Tenant shall not make any repairs, alterations or improvements until it shall have first submitted to Landlord all drawings, plans, layouts and specifications for such work (plans and specifications") and Landlord shall have approved same. All such work to be performed by Tenant shall be in accordance with the approved plans and specifications and Landlord shall have the right at any time during the pendency of such work to inspect the Premises and the manner of construction. All plans and specifications shall be compatible with the Landlord's building plans; comply with all applicable laws, including without limitation, the Americans with Disabilities Act of 1990, as amended, and the rules, regulations, requirements and orders of any and all government agencies, departments or bureaus having jurisdiction; and be fully detailed, including locations and complete dimensions. Tenant shall, at Tenant's expense, (i) cause all plans and specifications to be filed with the governmental agencies having jurisdiction thereover, (ii) obtain when necessary all governmental permits, licenses and authorizations required for the work to be done in connection therewith, and (iii) obtain all necessary certificates of occupancy, both temporary and permanent. Landlord shall execute such documents as may be reasonably required in connection with the foregoing and Landlord shall otherwise cooperate with Tenant in connection with obtaining the foregoing, but without any expense to Landlord. No work shall commence in the Premises until (i) Tenant has procured all necessary permits therefor and has delivered copies of same to Landlord, (ii) Tenant has procured a paid builder's risk insurance policy with a combined single limit of Three Million ($3,000,000.00) Dollars for personal injury, death and property damage claims arising out of any one occurrence naming Landlord as an additional insured and has delivered to Landlord a certificate of insurance evidencing such policy, and (iii) Tenant or its contractor has procured a worker's compensation insurance policy covering the activities of all persons working at the Premises and has delivered to Landlord a certificate of insurance evidencing such policy. Tenant may use any licensed architect or engineer, reasonably approved by Landlord, to prepare its plans and specifications to file for permits. However, all such plans and permit applications shall be subject to review, revision and approval by Landlord or its architect. In the event of any such repairs, alterations or improvements, Landlord shall have the option to require Tenant to deliver to Landlord at Tenant's cost and expense a bond satisfactory to Landlord in the sum equal to the cost of the work. Any mechanic's liens filed at any time against the Premises, for work claimed to have been performed or for materials claimed to have been furnished to Tenant or Tenants contractors or subcontractors, shall be discharged by Tenant within ten (10) days after filing by bonding, payment or otherwise, and upon Tenant's failure to timely discharge any such lien, Landlord may discharge same through payment, bonding or otherwise and Tenant shall reimburse Landlord, upon demand, for all costs incurred by Landlord in connection therewith. UTILITIES 10. (a) Tenant shall provide (through a provider selected by Landlord), at its own expense, fuel, heat, water, electricity and all other utilities required in connection with its use of the Premises. Landlord shall be obligated only to make available to Tenant the utility lines and facilities servicing the Premises in working order at the commencement of the term of this lease. (b) Tenant shall be responsible for all deposits required by the respective utilities for service. Tenant shall comply with all requirements of the utilities supplying said service. Landlord shall have no responsibility for the installation of telephone or data service. REQUIREMENTS OF LAW, SPRINKLERS 11. (a) Tenant shall promptly execute and comply with all statutes, ordinances, rules, orders, regulations and requirements (including those which require structural alterations) of the federal, state, county and local government and of any and all their departments and bureaus applicable to the Premises, for the correction, prevention or abatement of nuisances or other grievances in, upon, or connected with the Premises during the term; and shall also promptly comply with and execute all rules, orders and regulations of the New York Board of Fire Underwriters for the prevention of fires at the Tenant's own cost and expense. In the event Tenant is required by the provisions of this paragraph to make a structural alteration, Landlord shall perform such alteration at Tenant's sole cost and expense. b) Tenant shall keep and maintain any sprinkler system now or hereafter installed in the Premises in good repair and working condition, and if the New York Board of Fire Underwriters or the New York Fire Insurance Exchange or any bureau, department or official of any federal, state or local governmental or quasi-governmental authority shall require or recommend any changes, modifications or alterations, including, without limitation, additional sprinkler heads or other equipment, to be made or supplied by reason of the Tenant's business or the location of partitions, trade fixtures, or other contents of the Premises, or if such changes, modifications, alterations, additional sprinkler heads or other equipment in the Premises are necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in the fire insurance rate as fixed by said Exchange or by any fire insurance company with respect to the Building, the Premises or any adjoining or nearby buildings or improvements, Tenant shall at Tenant's sole cost and expense, promptly make and supply such changes, modifications, alterations, additional sprinkler heads or other equipment. (c) If by reason of Tenant's use and occupancy or abandonment of the Premises, or if by reason of the improper or careless conduct of any business upon or use of the Premises, the fire insurance rates for the Building, or any other tenants or occupants of the Building or any adjoining or nearby buildings or improvements (including contents and equipment coverage) shall at any time be higher than it otherwise would be, Tenant shall reimburse Landlord, as additional rent hereunder, for that part of all fire insurance premiums charged to such other owners, tenants or occupants because of the improper or careless conduct of any business upon or use of the Premises, and shall make such reimbursement upon the first day of the month following billing thereof by Landlord. In any action or proceeding based upon or arising out of this provision, a schedule or "make up" of rates of the Building or any other affected insurance coverage purporting to have been issued by the New York Fire Insurance Exchange, or other body making fire insurance rates, shall be prima facie evidence of the facts therein stated. (d) Tenant shall keep or cause the Premises to be kept free of Hazardous Materials (hereafter defined). Without limiting the foregoing, Tenant shall not cause or permit the Premises to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials excepts in compliance with all applicable federal, state and local laws or regulations, nor shall Tenant cause or permit, as a result of any intentional or unintentional act or omission on the part of Tenant or any subtenant, a release of Hazardous Materials onto the Premises or onto any other property. Tenant shall comply with and ensure compliance by all subtenants with all applicable federal, state and local laws, ordinances, rules and regulations whenever and by whomever triggered, and shall obtain and comply with and ensure that all subtenants obtain and comply with, any and all approvals, registrations or permits required thereunder. Tenant shall (A) conduct and complete all investigations, studies, samplings, and testing, and all remedial removal, and other actions necessary to clean up and remove all Hazardous Materials, on, from, or affecting the Premises (i) in accordance with all applicable federal, state and local laws, ordinances, rules, regulations, and policies, (ii) to the satisfaction of Landlord, and (iii) in accordance with the orders and directives of all federal, state, and local governmental authorities, and (B) defend, indemnify, and hold harmless Landlord, its employees, agents, officers, and directors from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs, or expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out of, or in any way related to, (i) the presence, disposal, release or threatened release of any Hazardous Materials which are on, from, or affecting the soil, water, vegetation, buildings, personal property, persons, animals, otherwise; (ii) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials; (iii) any lawsuit brought or threatened, settlement reached, or government order relating to such Hazardous Materials; and/or (iv) any violation of laws, orders, regulations, requirements, or demands of government authorities, or any policies or requirements of Landlord which are based upon or in any way related to such Hazardous Materials, including, without limitation, attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses. In the event this lease is terminated, or Tenant is dispossessed, Tenant shall deliver the Premises to Landlord free of any and all Hazardous Materials so that the conditions of the Premises shall conform with all applicable Federal, State and Local laws, ordinances, rules or regulations affecting the Premises. For purposes of this paragraph, "Hazardous Materials" includes, without limit, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or related materials defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U. S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U. S. C. Sections 1801 et seq.), the Resource Conservation and Recovery Act, as amended (42 U. S. C. Sections 9601, et seq.), and in the regulations adopted and publications promulgated pursuant thereto, or any other federal, state or local environmental law, ordinance, rule, or regulation. INSURANCE 12. (a) Tenant shall obtain and keep in full force and effect during the Term, at its own cost and expense, (i) General Comprehensive Commercial Liability Insurance, such insurance to afford protection in an amount of not less than Three Million $3,000,000) Dollars combined single limit coverage for injury, death and property damage arising out of any one occurrence, protecting Tenant as insured and Landlord as additional insured against any and all claims for personal injury, death or property damage, such policy or policies to cover the Premises, inclusive of sidewalks and parking facilities; and (ii) Fire and Extended Coverage Insurance on Tenant's property, insuring against damage by fire, and such other risks and hazards as are insurable under present and future standard forms of fire and extended coverage insurance policies, to Tenant's property for the full insurable value thereof, protecting Tenant as insured and Landlord as additional insured. (b) Said insurance is to be written in form and substance satisfactory to Landlord by a good and solvent insurance company of recognized standing, admitted to do business in the State of New York, which shall be reasonably satisfactory to Landlord. Tenant shall procure, maintain and place such insurance and pay all premiums and charges therefor and upon failure to do so Landlord may, but shall not be obligated to, procure, maintain and place such insurance or make such payments, and in such event the Tenant agrees to pay the amount thereof, plus interest at the maximum rate permitted by law, to Landlord on demand and said sum shall be in each instance collectible as additional rent on the first day of the month following the date of payment by Landlord. Tenant shall cause to be included in all such insurance policies a provision to the effect that the same will be non-cancelable except upon twenty (20) days written notice to landlord. At least ten (10) days prior to Tenant's occupancy of the Premises, the original insurance policies or appropriate certificates shall be deposited with landlord. Any renewals, replacements or endorsements thereto shall also be deposited with Landlord to the end that said insurance shall be in full force and effect during the Term. (c) Each party agrees to use its best efforts to include in each of its insurance policies (insuring the Building and Landlord's property , in the case of Landlord, and insuring Tenant's property, in the case of Tenant, against loss, damage or destruction by fire or casualty) a waiver of the insurer's right of subrogation against the other party, or if such waiver should be unobtainable or unenforceable (i) an express agreement that such policy shall not be invalidated if the insured waives or has waived before the casualty, the right of recovery against any party responsible for a casualty covered by the policy, or (ii) any other form of permission for the release of the other party, or (iii) the inclusion of the other party as an additional insured, but not a party to whom any loss shall be payable. If such waiver, agreement or permission shall not be, or shall cease to be, obtainable without additional charge or at all, the insured party shall so notify the other party promptly after learning thereof. In such case, if the other party shall agree in writing to pay the insurer's additional charge therefor, such waiver, agreement or permission shall be included in the policy, or the other party shall be named as an additional insured in the policy, but not a party to whom any loss shall be payable. Each such policy which shall so name a party hereto as an additional insured shall contain, if obtainable, agreements by the insurer that the policy will not be cancelled without at least twenty (20) days prior notice to both insureds and that the act or omission of one insured will not invalidate the policy as to the other insured. (d) As long as Landlord's fire insurance policies then in force include the waiver of subrogation or agreement or permission to release liability referred to in Subsection (c) or name the tenant as an additional insured, Landlord hereby waives (i) any obligation on the part of Tenant to make repairs to the Premises necessitated or occasioned by fire or other casualty that is an insured risk under such policies, and (ii) any right of recovery against Tenant, any other permitted occupant of the Premises, and any of their servants, employees, agents or contractors, for any loss occasioned by fire or other casualty that is an insured risk under such policies. In the event that at anytime Landlord's fire insurance carriers shall not include such or similar provisions in Landlord's fire insurance policies, the waivers set forth in the foregoing sentence shall be deemed of no further force or effect. (e) As long as Tenant's fire insurance policies then in force include the waiver or subrogation or agreement or permission to release liability referred to in Subsection (c), or name the Landlord as an additional insured, Tenant hereby waives (and agrees to cause any other permitted occupants of the Premises to execute and deliver to Landlord written instruments waiving) any right of recovery against Landlord, any other tenants or occupants of the Building, and any servants, employees, agents or contractors of Landlord or of any such other tenants or occupants for any; loss occasioned by fire or other casualty which is an insured risk under such policies. In the event that at any time Tenant's fire insurance carriers shall not include such or similar provisions in Tenant's fire insurance policies, the waiver set forth in the foregoing sentence shall, upon notice given by Tenant to Landlord, be deemed of no further force or effect with respect to any insured risks under such policy from and after the giving of such notice. During any period while the foregoing waiver of right of recovery is in effect, Tenant, or any other permitted occupant of the Premises, as the case may be, shall look solely to the proceeds of such policies to compensate Tenant or such other permitted occupant for any loss occasioned by fire or other casualty which is an insured risk under such policies. (f) Tenant shall reimburse Landlord, as additional rent, for one hundred (100%) percent of all premiums payable by Landlord for fire insurance upon the Building, including extended coverage, rental value, vandalism and malicious mischief, to be maintained upon the Building during the Term of this lease. The aforesaid charge shall be due and payable to Landlord as additional rent on the Rent date next following the giving of notice to Tenant by Landlord of the amount due for such premium. The parties shall apportion such premium at the commencement and termination of the lease Term. DAMAGE OR DESTRUCTION 13. (a) If the Building or the Premises or any part thereof shall be damaged by fire or other casualty and Tenant gives prompt notice thereof to Landlord, Landlord shall proceed with reasonable diligence to repair or cause to be repaired such damage. The minimum annual rent shall be abated to the extent that the Premises shall have been rendered untenantable, such abatement to be from the date of such damage or destruction to the date the Premises shall be substantially repaired or rebuilt, in proportion which the area of the part of the Premises so rendered untenantable bears to the total area of the Premises. (b) If the Premises shall be totally damaged or rendered wholly untenantable by fire or other casualty, and Landlord has not terminated this lease pursuant to Subsection (c) and Landlord has not completed making of the required repairs and restored and rebuilt the Premises an/or access thereto within twelve (12) months from the date of such damage or destruction, and such additional time after such date (but in no event to exceed six (6) months) as shall equal the aggregate period Landlord may have been delayed in doing so by unavoidable delays or adjustment of insurance, Tenant may serve notice on Landlord of its intention to terminate this lease, and, if within thirty (30) days thereafter Landlord shall not have completed the making of the required repairs and restored and rebuilt the Premises, this lease shall terminate on the expiration of such thirty (30) day period as if such termination date were the Expiration Date, and the Rent shall be apportioned as of such date any prepaid portion of Rent for any period after such date shall be refunded by Landlord to Tenant. (c) If the Premises shall be totally damaged or rendered wholly untenable by fire or other casualty or if the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Landlord's opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), then in any of such events Landlord may, at its option, terminate this lease and the Term and estate hereby granted, by giving Tenant thirty (30) days notice of such termination within ninety (90) days after the date of such damage. In the event that such notice of termination shall be given, this lease and the Term and estate hereby granted, shall terminate as of the date provided in such notice of termination (whether or not the Term shall have commenced) with the same effect as if that were the Expiration Date, and the Rent shall be apportioned as of such date or sooner termination and any prepaid portion of minimum annual rent or additional rent for any period after such date shall be refunded by Landlord to Tenant. (d) Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage by fire or other casualty or the repair thereof. Landlord will not carry insurance of any kind on Tenant's property, and Landlord shall not be obligated to repair any damage thereto or replace the same. (e) This lease shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty, and Section 227 of the Real Property Law of the State of New York providing for such a contingency in the absence of such express agreement, and any other law of like import now or hereafter enacted, shall have no application in such case. SUBORDINATION 14. This lease shall be subject and subordinate at all times to the lien of any mortgages (i) now encumbering the Building or the Premises and to all advances made or hereafter to be made upon the security thereof, and (ii) hereafter made provided same are made to a lending institution. Tenant shall execute and deliver such further instrument or instruments subordinating this lease to the lien of any such mortgage or mortgages as shall be desired by any mortgagee or proposed mortgagee and Tenant hereby appoints Landlord the attorney-in-fact of Tenant, irrevocably, to execute and deliver any such instrument or instruments for the Tenant. As used in this lease, the term "lending institution" shall mean savings bank, savings and loan association, bank or trust company, real estates investment trust, investment bank or an affiliate thereof, insurance company, university, public or private, or employee, welfare, pension or retirement fund or system. (b) Upon demand, Tenant shall furnish to Landlord certified balance sheets and operating statements for the past five (5) years and such other information, financial or otherwise, concerning Tenant which may reasonably be required by any prospective mortgagee. (c) Tenant shall, upon not less than five (5) days' prior request by Landlord, execute, acknowledge and deliver to Landlord a statement in writing certifying (i) that the lease is unmodified and in full force and effect (or if there have been modifications that the same are in full force and effect as modified and identifying the modifications), (ii) the dates to which the Rent and other charges have been paid, and (iii) that so far as the person making the certificate knows, Landlord is not in default under any provision of this lease. It is intended that any such statement may be relied upon by any person proposing to acquire Landlord's interest in this lease, any prospective purchaser of the Premises, or any prospective mortgagee, or assignee of any mortgage upon the Premises. (d) So long as there is a first mortgage lien encumbering the Premises, Landlord and Tenant shall not, without first obtaining the written consent of such mortgagee, enter into any agreement, the effect of which would be to (i) modify, cancel, terminate or surrender this lease; (ii) grant any concession in respect thereof; (iii) reduce the Rent or require the prepayment of any rent in advance of the due date thereof; (iv) create any offsets or claims against Rent; (v) assign in whole or in part any of the rents therefrom or Tenant's interests in this lease or sublet the whole or any portion of the Premises except as provided in this lease. (e) Tenant shall, within ninety (90) days after the end of each fiscal year of Tenant, furnish to Landlord and any first mortgagee of the Premises, copies of balance sheets of Tenant for such fiscal year, certified by a certified public accountant. (f) In the event of any act or omission by Landlord which would give Tenant the right to terminate this lease or to claim a partial or total eviction, Tenant shall not exercise any such right until (i) it shall have served written notice, by registered mail, of such act or omission, to Landlord and to the holder of any mortgage whose name and address shall have been furnished to Tenant in writing, at the last address so furnished, and (ii) a reasonable period of time for remedying such act or omission shall have elapsed following the serving of such notice; provided, however, that following the serving of such notice, Landlord or said holder shall, with reasonable diligence, have commenced and continued to remedy such act or omission or to cause the same to be remedied. INDEMNIFICATION 15. Tenant shall indemnify, defend, save and hold Landlord harmless from and against any and all liability and damages and any and all injury, loss, claim, damage or suite of every kind and nature, including Landlord's reasonable counsel fees, to any person, firm, association or corporation or to any property, arising out of or based upon, related to, or in any way connected with, the use or occupancy of the Premises or the conduct or operation of Tenant's business unless such injury, loss, claim or damage is attributable solely to the negligence of Landlord or its agents, servants or employees. EMINENT DOMAIN 16. (a) If the whole of the Premises be taken under the power of eminent domain for any public or quasi-public improvement or use, the term of this lease shall expire as of the date of vesting of title in the condemning authority. (b) If 25% or more of the Building is taken under the power of eminent domain or for any public or quasi-public purpose, Landlord shall have the option of cancelling and terminating this lease by written notice served within sixty (60) days after the taking, and this lease shall thereupon expire on the 90th day after the serving by Landlord of said notice. (c) If less than 25% of the Building is taken, this lease shall remain in full force and effect, however, minimum annual rent shall be reduced in proportion to the percentage of square feet of the Building so taken. If Tenant's parking area only is taken, then (i) if 25% or less is taken, this lease shall not terminate but minimum annual rent only shall be apportioned pro rata in accordance with the size and usefulness of the portion taken, unless Landlord provides substitute parking for Tenant within reasonable walking distance of the Premises, substantially equal in size to that which was taken, within sixty (60) days after the taking; or (ii) if more than 25% is taken, then, unless Landlord provides substitute parking, substantially equal in size to that which was taken, and within reasonable walking distance of the Premises, within sixty (60) days after the taking, this lease shall, at the option of either Landlord or Tenant, by written notice served between the 61st and 90th day after the taking, be canceled and terminated effective (60) days from the date of said taking and if such notice is not served, this lease shall not terminate but minimal annual rent only shall be apportioned pro rata in accordance with the size and usefulness of the portion taken. (d) If this lease is not terminated or terminable under the provisions of this Article 16, Landlord shall, with reasonable dispatch and at Landlord's sole cost and expense, restore, reconstruct and rebuild the remaining portion of the Premises and the Building and all the appurtenances, equipment, utilities, facilities and installations to their condition prior to such taking, in such manner that the resulting building and parking area and driveways; shall be a complete and integrated structural, architectural and functional unit similar to and of equal material and workmanship to the Building and parking area and driveways prior to such taking, with all the appurtenances, equipment, utilities, facilities and installations throughout in good working order so as to put both the parking area and driveways and the Premises in proper condition to be used by Tenant for the same purpose as at the time of such taking, all in accordance with plans and specifications to be prepared by Landlord, at the sole cost and expense of Landlord. (e) If the nature of the work to be performed as a result of the taking is such as to prevent the operation of the business then being conducted thereon, or to make it impractical so to do, then the Rent and other charges to be paid by Tenant under this lease shall abate until substantial completion of such work by Landlord. (f) If in the event of any taking under the power of eminent domain, Landlord shall be entitled to and shall receive the entire award, except that Tenant shall be entitled to and shall receive any part of any award made for Tenant's cost of moving Tenant's trade fixtures (provided same does not reduce the amount of Landlord's award). (g) In the event of any dispute under the provisions of this Article 16, it shall be resolved by arbitration in Suffolk County, New York before three disinterested and impartial arbitrators, in accordance with the rules of the American Arbitration Association. Each arbitrator shall have a minimum of then (10) years experience in dealing with, renting or appraising industrial real estate. All fees and expenses of the arbitrators and the American Arbitration Association shall be borne equally by the parties. RIGHT TO SUBLET OR ASSIGN 17. (a) Tenant covenants that it shall not assign this lease nor sublet the Demised Premises or any part thereof by operation of law or otherwise, including, without limitation, an assignment or subletting as defined in (d) below, without the prior written consent of Landlord in each instance, except on the conditions hereinafter stated. Tenant may assign this lease or sublet all or a portion of the Demised Premises with Landlord's written consent, provided: (i) That such assignment or sublease is for a use which is in compliance with this lease and the then existing zoning regulations and the Certificate of Occupancy; (ii) That, at the time of such assignment or subletting, there is no default under the terms of this lease on the Tenant's part; (iii) That, in the event of an assignment, the assignee shall assume in writing the performance of all of the terms and obligations of the within lease; (iv) That a duplicate original of said assignment or sublease shall be delivered by certified mail to the Landlord at the address herein set forth within ten (10) days from the said assignment or sublease and within ninety (90) days of the date that Tenant first advises Landlord of the name and address of the proposed subtenant or assignee, as required pursuant to subparagraph (b) hereof; (v) Such assignment or subletting shall not, however, release the within Tenant or any successor tenant or any guarantor from their liability for the full and faithful performance of all of the terms and conditions of this lease; (vi) If this lease be assigned, or if the Demised Premises or any part thereof be underlet or occupied by anybody other than Tenant, Landlord may after default by Tenant collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved; and (vii) That, in the event Tenant shall request Landlord's consent to a proposed assignment of this lease or proposed sublease of all or a portion of the Demised Premises, Tenant shall pay or reimburse to Landlord the reasonable attorney fees incurred by Landlord in processing such request. (b) Notwithstanding anything contained in this Article 17 to the contrary, no assignment or underletting shall be made by Tenant in any event until Tenant has offered to terminate this lease as of the last day of any calendar month during the Term hereof and to vacate and surrender the Demised Premises to Landlord on the date fixed in the notice served by Tenant upon Landlord (which date shall be prior to the date of such proposed assignment or the commencement date of such proposed lease). Simultaneously with said offer to terminate this lease, Tenant shall advise the Landlord, in writing, of the name and address of the proposed assignee or subtenant, a reasonably detailed statement of the proposed subtenant/assignee's business, reasonably detailed financial references, and all the terms, covenants, and conditions of the proposed sublease or assignment. (c) Tenant may, without the consent of Landlord, assign this lease to an affiliated (i.e., a corporation 20% or more of whose capital stock is owned by the same stockholders owning 20% or more of Tenant's capital stock), a parent or subsidiary corporation of Tenant or to a corporation to which it sells or assigns all or substantially all of its assets or stock or with which it may be consolidated or merged, provided such purchasing, consolidated, merged, affiliated or subsidiary corporation shall, in writing, assume and agree to perform all of the obligations of Tenant under this lease and it shall deliver such assumption with a copy of such assignment to Landlord within ten (10) days thereafter, and provided further than Tenant shall not be released to discharged from any liability under this lease by reason of such assignment. (d) For purposes of this Article 17, (i) the transfer of a majority of the issued and outstanding capital stock of any corporate tenant, or of a corporate subtenant, or the transfer of a majority of the total interest in any partnership tenant or subtenant, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this lease, or of such sublease, as the case may be; (ii) any person or legal representative of Tenant, to whom Tenant's interest under this lease passes by operation of law or otherwise, shall be bound by the provisions of this Article 17; and (iii) a modification or amendment of a sublease shall be deemed a sublease. (e) Whenever Tenant shall claim under this Article or any other part of this lease that Landlord has unreasonably withheld or delayed its consent to some request of Tenant, Tenant shall have no claim for damages by reason of such alleged withholding or delay, and Tenant's sole remedy thereof shall be a right to obtain specific performance or injunction but in no event with recovery of damages. (f) Tenant shall not mortgage, pledge, hypothecate or otherwise encumber its interest under this lease without Landlord's prior written consent. (g) Notwithstanding anything contained in this Article 17 to the contrary, no assignment or underletting shall be made by Tenant to any brokerage firm. RIGHT TO INSPECT; POSTING SIGNS 18. (a) Tenant shall permit Landlord or Landlord's agents to enter the Premises at all reasonable hours for the purpose of (i) inspecting the same; (ii) making repairs required by the terms of this lease to be made by Tenant and which Tenant neglects or refuses to make; (iii) exhibiting the Premises to prospective purchasers and mortgagees; (iv) during the twelve (12) months preceding the expiration of this lease, exhibiting the Premises to brokers and prospective tenants; and (v) for the purpose of making any additions or alterations to the Building or to any surrounding building provided, in each and every case, Landlord shall use its reasonable effort not to unreasonably interfere with the conduct of Tenant's business at the Premises. If, at reasonable hours, admission to the Premises for the aforesaid purposes cannot be obtained or, if at any time entry shall be deemed necessary for the inspection or protection of the Premises or for making any repairs, whether for the benefit of Tenant or not, Landlord or Landlord's agents may enter the Premises by any lawful means without rendering Landlord or its agents liable to Tenant for damages by reason thereof. (b) During the twelve (12) months preceding the end of the term, Landlord may post and maintain, without hindrance or molestation, signs or notices indicating that the Premises are for sale and/or for rent; however, no such sign shall be affixed to a door or window of the premises. BANKRUPTCY 19. (a) If, at any time prior to the commencement of the term of this lease, or if at any time during the term, there shall be filed by or against Tenant in any court, pursuant to any statute, either of the United States of any State, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's property, and within thirty (30) days thereof Tenant fails to secure a discharge thereof, or if Tenant makes an assignment for the benefit of creditors or petition for or enters into an arrangement, this lease at the option; of Landlord, exercised within a reasonable time after notice of the happening of any one or more of such events, may be canceled and terminated, in which event neither Tenant nor any person claiming through or under Tenant by virtue of any statute or of any order of any court, shall be entitled to possession or to remain in possession of the Premises but shall forthwith quit and surrender the Premises, and Landlord, in addition to any other rights, may retain any rent, security deposit or monies received by it from Tenant or others in behalf of Tenant as partial liquidated damages. (b) In the event of the termination of this lease pursuant to paragraph (a) of this Article 19, Landlord shall forthwith, notwithstanding any other provision of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the Rent reserved hereunder for the unexpired portion of the term and the then fair and reasonable rental value of the Premises for the same period. In the computation of such damages, the difference between any installment of Rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the Premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of 4% per annum. If the Premises, or any part thereof, be relet by Landlord for the unexpired term of this lease, the amount of rent reserved upon such reletting shall prima facie be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. Nothing herein contained shall limit or prejudice the right of Landlord to prove for and obtain as liquidated damages by reason of such termination an amount equal to the maximum allowed by any statute or rule of law, in effect at the time when, and governing the proceeding in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. DEFAULT 20. (a) If Tenant shall fail to pay any installment of minimum annual rent or any additional rent or other charges within five (5) days of the day on which same are required to be paid hereunder, or if Tenant defaults in fulfilling any of the other covenants of this lease and such default shall continue for a period of ten (10) days after notice, or if Tenant shall dissolve or liquidate or commence to dissolve or liquidate, or if the Premises become vacant or deserted, or if the said default or omission complained of shall be such a nature that the same cannot be completely cured or remedied within said ten (10) day period, and if Tenant shall not have diligently commenced during such default within such ten (10) day period, and shall not thereafter with reasonable diligence and in good faith proceed to remedy or cure such default, then, in any one or more of such events, Landlord may serve a written three (3) day notice of cancellation of this lease upon Tenant, and upon the expiration of said three (3) days, this lease and the term thereunder shall end and expire as fully and completely as if the date of expiration of such three (3) day period were the day herein definitely fixed for the end and expiration of this lease, and the term thereof, and Tenant shall then quit and surrender the Premises to Landlord butTenant shall remain liable as hereinafter provided. If Tenant shall default (i) in the timely payment of any item of Rent, and such default shall continue or be repeated for two consecutive months for a total of four months in any period of twelve months, or (ii) in the performance of any particular term, condition or covenant of this lease more than six times in any period of twelve months, then, notwithstanding that such defaults shall have each been cured within the period after notice, if any, as provided in this lease, any further similar default shall be deemed to be deliberate and Landlord thereafter may serve a written ten (10) day notice of termination of this lease to Tenant without affording Tenant an opportunity to cure such further default. (b) If (i) the notice provided for in paragraph (a) above shall have been given and the term shall expire as aforesaid, or (ii) if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the Premises or any part thereof shall be taken or occupied or attempted to be taken or occupied by someone other than Tenant, or (iii) if Tenant shall make default with respect to any other lease between Landlord and Tenant, or (iv) if Tenant shall fail to move into or take possession of the Premises within fifteen (15) days after the Premises are substantially complete, then, and in any of such events Landlord may, without notice, re-enter the Premises either by force or by any lawful means, and dispossess Tenant (or the legal representative of Tenant or other occupant of the Premises) by summary proceedings or otherwise and remove their effects and hold the Premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall be in default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Landlord may cancel and terminate such renewal or extension agreement by written notice. REMEDIES OF LANDLORD 21. (a) If this lease is terminated or if Landlord re-enters the Premises under Article 20 or any other such default provision contained herein, Tenant shall pay to Landlord as damages, at the election of Landlord, sums equal to the minimum annual rent and additional rent that would have been payable by Tenant through and including the Expiration date had this lease not terminated or had Landlord not re-entered the Premises, payable upon the due dates therefor specified in this lease; provided, that if Landlord shall relet all or any part of the Premises for all or any part of the period commencing on the day following the date of such termination or re-entry to and including the Expiration date, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the expenses incurred or paid by Landlord in terminating this lease and of re-entering the Premises and of securing possession thereof, as well as the expenses of reletting, including, without limitation, altering and preparing the Premises for new tenants, brokers' commissions, and all other expenses properly chargeable against the Premises and the rental therefrom in connection with such reletting, it being understood that any such reletting may; be for a period equal to or shorter or longer than said period; provided, further, that (i) in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord under this lease, (ii) in no event shall Tenant be entitled, in any suit for the collection of damages pursuant to this Article 21(a), to a credit in respect of any net rents from a reletting except to the extent that such net rents are actually received by Landlord prior to the commencement of such suit, and (iii) Landlord shall have not obligation to so relet the Premises and Tenant hereby waives any right Tenant may have, at law or in equity, to require Landlord to so relet the Premises. At any time after the Demised Term shall have expired and come to an end or Landlord shall have re-entered upon the premises, as the case may be, whether or not Landlord shall have collected any monthly deficiencies as provided below, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, as and for liquidated and agreed final damages, a sum equal to the amount by which the minimum annual rent and additional rent reserved in this lease for the period which otherwise would have constituted the unexpired portion of the Demised Term exceeds the then fair and reasonable rental value of the Premises for the same period, both discounted to present worth at the rate of four (4%) percent per annum. If, before presentation of proof of such liquidated damages to any court, commission, or tribunal, the Premises, or any part thereof, shall have been relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Demised Term, or any part thereof, the amount of Rent reserved upon such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. Suit or suits for the recovery of any damages payable hereunder by Tenant or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall require Landlord to postpone suit until the date when the Term would have expired but for such termination or re- entry. In all cases hereunder, and in any suit, action or proceeding of any kind between the parties, it shall be presumptive evidence of the fact of the existence of a charge being due, if Landlord shall produce a bill, notice or certificate of any public official entitled to give such bill, notice or certificate to the effect that such charge appears of record on the books in his or her office and has not been paid. (b) Nothing contained in this lease shall be construed as limiting or precluding the recovery by Landlord against Tenant of any sums or damages to which, in ddition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Anything in this lease to the contrary notwithstanding, during the continuation of any default by Tenant, Tenant shall not be entitled to exercise any rights or options, or to receive any funds or proceeds being held, under or pursuant to this lease. (c) The specified remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may lawfully be entitled, and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not herein provided for. ATTORNEY'S FEES 22. If Tenant shall at any time be in default hereunder, and if Landlord shall institute an action or summary proceeding against Tenant based upon such default and Landlord shall be successful, or if Landlord shall otherwise engage an attorney in connection with the enforcement of any provision of this lease, then Tenant shall reimburse Landlord for the reasonable expenses of attorney's fees and disbursements incurred by Landlord. The amount of such expenses shall be deemed to be "additional rent" hereunder and shall be due from Tenant to Landlord on the first day of the month following the incurring of such expenses. WAIVER OR REDEMPTION, COUNTERCLAIM, TRIAL BY JURY 23. Tenant hereby expressly (i) waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause or in the event of Landlord obtaining possession of the Premises by reason of the violation by Tenant of any of the covenants and conditions of this lease or otherwise; (ii) waives all rights to stay summary proceedings; and (iii) agrees that it shall not interpose any counterclaim in any summary proceeding or any action based on non-payment of Rent or any other payments or charges required to be made by Tenant to Landlord. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either of them against the other with respect to any matters arising out of or connected with this lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the premises, and/or any claim of injury or damage and any emergency statutory or any other statutory remedy. NO WAIVER 24. No act or thing done by Landlord or Landlord's agents during the term hereby demised shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys of the Premises prior to the termination of this lease. The delivery of keys to any employee of Landlord or of Landlord's agents shall not operate as a termination of this lease or a surrender of the premises. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this lease shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach. No provision of this lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord. The words "re-enter" and "re-entry" as used herein are not restricted to their technical legal meaning. END OF TERM 25. (a) On the last day of the term hereof or on the earlier termination thereof, Tenant shall peaceably and quietly leave, surrender and deliver the Premises up to Landlord, broom clean, together with any and all alterations, changes, additions, and improvements which may have been made upon the Premises (except movable furniture or movable trade fixtures installed at the expense of Tenant) in good repair and good order and safe condition, except for reasonable wear and tear and damage by; fire, other insured casualty or the elements excepted, and Tenant shall remove all of its personal property from the Premises and any property not so removed shall be deemed to have been abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without notice to Tenant and without obligations to account therefor. Tenant's obligation under this Article 25 shall survive the expiration or other termination of this lease. (b) In the event of any holding over by Tenant after the expiration or termination of this lease without the consent of Landlord, Tenant shall: (i) pay as holdover rental for each month of the holdover tenancy an amount equal to the greater of (y) the fair market rental value of the Premises for such month (as reasonably determined by Landlord) or (z) two hundred (200%) percent of the minimum annual rent payable by Tenant for the third month prior to the Expiration Date of the term of this lease, and otherwise observe, fulfill and perform all of its obligations under this lease, including but not limited to, those pertaining to additional rent, in accordance with its terms; (ii) be liable to Landlord for any payment or rent concession which Landlord may be required to make to any tenant in order to induce such tenant not to terminate an executed lease covering all or any portion of the Premises by reason of the holdover by Tenant; and (iii) be liable to Landlord for any damages suffered by Landlord as the result of Tenant's failure to surrender the Premises. No holding over by Tenant after the Term shall operate to extend the Term. The holdover, with respect to all or any part of the Premises, of a person deriving an interest in the Premises from or through Tenant, including, but not limited to, an assignee or subtenant, shall be deemed a holdover by Tenant. Notwithstanding anything in this Article contained to the contrary, the acceptance of any Rent paid by Tenant pursuant to this Paragraph 25 (b), shall not preclude Landlord from commencing and prosecuting a holdover or eviction action or proceeding or any action or proceeding in the nature thereof. The preceding sentence shall be deemed to be an "agreement expressly providing otherwise" within the meaning of Section 232-c of the Real Property Law of the State of New York and any successor law of like import. (c) If at any time during the last month of the term of this lease Tenant shall have removed all or substantially all of Tenant's property from the Premises, Landlord may, and Tenant hereby irrevocably grants to Landlord a license to, immediately enter and alter, renovate and redecorate the Premises, without elimination, diminution or abatement of minimum annual rent or additional rent, or incurring liability to Tenant for any compensation, and such acts shall have no effect upon this lease. BROKER 26. Tenant represents that this lease was brought about by M. Barrett Associates LLC as broker and all negotiations with respect to this lease were conducted exclusively through said broker. Tenant agrees that if any claim is made for commissions by any broker other than said broker, by, through or on account of any acts of Tenant, Tenant will hold Landlord free and harmless from any and all liabilities and expenses in connection therewith, including Landlord's reasonable attorney's fees. QUIET ENJOYMENT 27. Landlord covenants that if and so long as Tenant pays the minimum annual rent and additional rent and other charges reserved by this lease, and performs all the terms, covenants and conditions of this lease on the part of Tenant to be performed, Tenant shall quietly enjoy the premises subject, however, to the terms of this lease and of any mortgage or mortgages to which this lease by its terms is subject. NONLIABILITY OF LANDLORD 28. (a) Landlord and Landlord's agents and employees shall not be liable for, and Tenant waives all claims for, loss or damage to Tenant's business or damage to person or property sustained by Tenant resulting from any accident or occurrence (unless caused by or resulting from the negligence of Landlord, its agents, servants or employees other than accidents or occurrences against which Tenant is insured) in or upon the Premises or the Building, including, but not limited to, claims for damage resulting from: (i) any equipment or appurtenances becoming out of repair; (ii) injury done or occasioned by wind; (iii) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or installation thereof, gas, water, or steam pipes, stairs, porches, railings or walks; (iv) broken glass; (v) the backing up of any sewer pipe or downspout; (vi) the bursting, leaking or running of any tank, tub, washstand, water closet, waste pipe, drain or other pipe or tank in, upon or about the Building or the Premises; (vii) the escape of steam or hot water; (viii) water, snow or ice being upon or coming through the roof, skylight, trapdoor, stairs, doorways, windows, walks or any other place upon or near the Building or the Premises or otherwise; (ix) the falling of any fixture, plaster, tile or stucco; and (x) any act, omission or negligence of other tenants, licensees or of any other persons or occupants of the Building or of adjoining or contiguous buildings or of owners of adjacent or contiguous property. (b) If Landlord or a successor in interest is an individual (which term as used herein includes aggregates of individuals such as joint ventures, general or limited partnerships, or associations), such individual shall be under no personal liability with respect to its obligations under this lease, Tenant shall look solely to the equity of such individual in the land and building constituting the Premises for the satisfaction of Tenant's remedies, and in no event shall Tenant attempt to secure any personal judgement against any such individual or any principal, partner, employee or agent of Landlord by reason of such default by Landlord. (c) The word "Landlord" as used herein means only the owner in fee for the time being of the Premises, and in the event of any sale of the Premises, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder and it shall be deemed and construed without further agreement between the parties or between the parties and the purchaser of the Premises, that such purchaser has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. NO ABATEMENT 29. No diminution or abatement of Rent or other compensation shall be claimed or allowed for inconvenience or discomfort arising from the Landlord's making of additions, repairs or improvements to the Building or to its equipment and fixtures, nor for any space taken to comply with any law, ordinance or order of a governmental authority except as specifically provided in this lease. APPLICABLE LAW AND CONSTRUCTION 30. The laws of the State of New York shall govern the validity, performance and enforcement of this lease. The invalidity or unenforceability of any provision of this lease shall not affect or impair any other provision. The submission of this document to Tenant for examination does not constitute an offer to lease, or a reservation of or option to lease, and becomes effective only upon execution and delivery thereof by Landlord and Tenant. All negotiations, considerations, representations and understandings between the parties are incorporated in this lease. Landlord or Landlord's agents have made no representations or promises with respect to the Building or the Premises except as herein expressly set forth. The headings of the several articles and sections contained herein are for convenience only and do not define, limit or construe the contents of such articles or sections. Whenever herein the singular number is used, the same shall include the plural, and the neuter gender shall include the masculine and feminine genders. Neither this lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. CONSTRUCTION ON ADJACENT PREMISES OR BUILDINGS 31. If any construction is in progress at, on or about the Building or any excavation or other building operation shall be about to be made or shall be made on any premises adjoining or above or below the Premises or on any portion of the Building, Tenant shall permit Landlord or the adjoining owner or tenant and their respective agents, employees, licensees and contractors, to enter the Premises and to shore the foundations and/or walls thereof and to erect scaffolding and/or protective barricades around and about the Premises (but not so as to preclude entry thereto) and to do any act or thing necessary for the safety or preservation of the Premises. Tenant's obligations under this lease shall not be affected by any such construction or excavation work, shoring-up, scaffolding or barricading. Landlord shall not be liable in any such case for any inconvenience, disturbance, loss of business or any other annoyance arising from such construction, excavation, shoring-up, scaffolding or barricades, but Landlord shall use its best efforts so that such work will cause as little inconvenience, annoyance or disturbance to Tenant as possible consistent with accepted construction practice in the vicinity and so that such work shall be expeditiously completed. UTILITY EASEMENT 32. This lease is subject and subordinate to any utility, gas, water, electric, or telephone line easements, now or hereafter granted, affecting the Premises, the Building, or the land upon which they are located, provided that the same do not unreasonably interfere with the Building nor unreasonably interfere with the use of the Premises by Tenant. NOTICES 33. All notices to be given hereunder shall be in writing and given by hand delivery or by certified or registered mail addressed to either of the parties at the address hereinabove given or at any other subsequent mailing address they may indicate by written notice. Any notice given hereunder by mail shall be deemed delivered when deposited in a United States general or branch post office, addressed as above provided. Tenant hereby authorizes and designates the manger of the Premises as an officer authorized to accept and receive service of process. BINDING EFFECT OF LEASE 34. The covenants, agreements and obligations contained in this Lease shall, except as herein otherwise provided, extend to, bind and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and permitted assigns. Each covenant, agreement, obligation or other provision herein contained shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the same, not dependent on any other provision of this lease unless otherwise expressly provided. UNAVOIDABLE DELAYS 35. Whenever Landlord shall be required by the terms of this lease or otherwise to make any improvements or repairs, to furnish any service, to perform any construction or reconstruction, or to fulfill in other obligation hereunder, and Landlord shall be delayed in, or prevented from, so doing, Landlord shall not be deemed to be in default and this lease and the obligation of Tenant to pay Rent hereunder and to perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall not be affected, impaired or excused, and any time limit herein fixed for Landlord's performance thereof shall be extended if and so long as Landlord's non-performance, delay or default shall be caused by reason of strike or labor troubles, accidents, any rule, order, regulation or delay of any governmental agency, or any department or subdivision thereof, governmental pre-emption in connection with any national emergency or war, insurance claim or adjustment, the conditions of supply and demand which have been or are affected by war or other emergency, or any other cause beyond Landlord's reasonable control. SANITARY SYSTEMS 36. Tenant shall only permit sanitary discharge into the sanitary system servicing the Premises. Tenant shall comply with all requirements of the County of Suffolk, Department of Public Works, as they relate to use of the sanitary system, including the payment of any excess volume charges as determined by the County of Suffolk. PARKING 37. Tenant shall have the right to use the parking areas designated for the Building. The parking areas available for the use of Tenant herein are to be used by Tenant, its servants, employees, agents, business invitees and patrons subject to the rules and regulations of Landlord and it is also understood and agreed that Landlord shall have the right at any time to modify or alter the parking layout and traffic pattern in the parking areas and to diminish the available parking areas without any liability to Tenant or any diminution or abatement of rent or additional rent. Tenant shall not use nor permit any of its officers, agents or employees to use any parking spaces in excess of Tenant's allotted number of spaces therein. CLEANING, RUBBISH REMOVAL 38. All janitorial work at the Premises shall be done at the cost and expense of Tenant. Tenant shall provide for its own trash, rubbish and garbage removal at its own expense and all rubbish, trash and garbage shall be kept at the Premises subject to the rules and regulations of the appropriate municipal authorities having jurisdiction thereof, and subject to the reasonable rules and regulations set by Landlord, and shall at all times be kept in closed containers reasonably acceptable to Landlord. IN WITNESS WHEREOF, the parties have executed this agreement as of the day and year first above written. Landlord: ________________________ By: M. Barrett Managing Agent Tenant: ________________________ By: Anello C. Garefino Secretary, Treasurer EX-23 4 0004.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated September 20, 2000 (except with respect to the matters discussed in Note Q, as to which the date is October 13, 2000) included in this Form 10-K, into Herley Industries, Inc.'s previously filed Registration Statement File Nos. 333-72427, 333-17369, 333-19739, 333-46777, 333-35485 and 333-95327. /s/ ARTHUR ANDERSEN LLP Lancaster, PA October 23, 2000 EX-27 5 0005.txt FDS--JUL-30-2000
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 52 WEEKS ENDED JULY 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (In thousands except per share data) YEAR JUL-30-2000 AUG-2-1999 JUL-30-2000 7,665 0 14,315 0 23,045 48,259 38,280 20,276 86,656 12,783 0 0 0 599 64,772 86,656 70,537 70,537 44,382 57,879 0 0 1,138 11,752 4,113 7,639 0 0 0 7,639 1.57 1.45
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