-----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, VMx5/s0PVci44JJZjNsm/Xc+DjfTDmzxQc+X6APSXxHBBorzNZT35m08E/815vLl K0MGWWaYLM/wyIr7SNo46A== 0000047035-02-000006.txt : 20021025 0000047035-02-000006.hdr.sgml : 20021025 20021025123719 ACCESSION NUMBER: 0000047035-02-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020728 FILED AS OF DATE: 20021025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERLEY INDUSTRIES INC /NEW CENTRAL INDEX KEY: 0000047035 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 232413500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05411 FILM NUMBER: 02798260 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 INDUSTRIES INC DATE OF NAME CHANGE: 19831103 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 10-K 1 text10k07302002.txt ANNUAL REPORT FORM 10-K YEAR ENDED JULY 28, 2002 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 28, 2002 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.) 3061 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 $16.47 as of October 21, 2002 the aggregate market value of the voting stock held by non- affiliates of the registrant was $242,503,605. The number of shares outstanding of registrant's common stock, $ .10 par value as of October 21, 2002 was 14,723,959. 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 11 Item 4 Submission of Matters to a Vote of Security Holders 11 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 13 Item 7A Quantitative and Qualitative Disclosures About Market Risk 21 Item 8 Financial Statements and Supplementary Data 22 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III Item 10 Directors and Executive Officers of the Registrant 22 Item 11 Executive Compensation 22 Item 12 Security Ownership of Certain Beneficial Owners and Management 22 Item 13 Certain Relationships and Related Transactions 22 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8K 23 SIGNATURES 25 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 26 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 our financial position, business strategy and our plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements involve various important assumptions, risks, uncertainties and other factors which could cause our actual results to differ materially from those expressed in such forward-looking statements. Forward-looking statements in this Annual Report can be identified by words such as "anticipate," "believe," "estimate," "expect," "plan," "intend" or the negative of these terms or similar expressions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievement. 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. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report or the date of any document incorporated by reference, in this Annual Report. We are under no obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934. Item 1. Business BACKGROUND Herley is a leading supplier of microwave products and systems to defense and aerospace entities worldwide. Our primary customers include large defense prime contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing), the U.S. government (including the Department of Defense, NASA and other U.S. government agencies) and international customers (including the Egyptian, German, Japanese and South Korean militaries and suppliers to international militaries). We are a leading provider of microwave technologies for use in command and control systems, flight instrumentation, weapons sensors and electronic warfare systems. We have served the defense industry since 1965 by designing and manufacturing microwave devices for use in high technology defense electronics applications. Our products and systems are currently deployed on a wide range of high profile military platforms, including the F-16 Falcon, the F/A-18E/F Super Hornet, the RC-135 Rivet Joint, the E-2C Hawkeye, the AEGIS class surface combatants, the EA-6B Prowler and unmanned aerial vehicles, or UAVs, as well as high priority national security programs such as National Missile Defense and the Trident II D-5. ACQUISITIONS We have grown through internal growth and strategic acquisitions over the past ten years and have evolved from a component manufacturer to a systems and service provider. We have successfully integrated these acquisitions by targeting microwave technology companies and focusing their strengths into our existing operations. - - In September 1992, we acquired Micro-Dynamics, Inc. of Woburn, Massachusetts, a microwave subsystem designer and manufacturer. - - In June 1993, we acquired Vega Precision Laboratories, Inc. of Vienna, Virginia, a manufacturer of flight instrumentation products. 1 - - In July 1995, we acquired Stewart Warner Electronics Corp. of Chicago, Illinois, a manufacturer of high frequency radio and IFF interrogator systems. - - In August 1997, we acquired Metraplex Corporation of Frederick, Maryland, a manufacturer of airborne PCM and FM telemetry and data acquisition systems. - - In January 1999, we acquired General Microwave Corporation of Farmingdale, New York, a manufacturer of microwave components and electronic systems. - - In January 2000, we acquired Robinson Laboratories, Inc. of Nashua, New Hampshire, a designer, developer and manufacturer of microwave components and assemblies primarily for defense applications. - - In September 2000, we acquired American Microwave Technology, Inc. of Anaheim, California, a manufacturer of high power, solid state amplifiers for the scientific and medical markets, which enabled us to enter these markets. - - In September 2002, we acquired EW Simulation Technology, Limited ("EWST"), a British company of Aldershot, UK. EWST designs, develops and produces electronic warfare simulator systems for prime defense contractors and countries worldwide. BUSINESS STRATEGY Our goal is to continue to leverage our proprietary technology, microwave expertise and manufacturing capabilities to further expand our penetration in our market. Our strategies to achieve our objectives include: - - INCREASE LEVELS OF COMPONENT INTEGRATION AND VALUE ADDED CONTENT. Due to growth of engineering expertise, new product development, and acquisitions, we have increased our capability to provide more component integration. Management believes component integration adds value and will enable us to increase content in defense platforms and systems, thereby increasing our revenue and profitability. - - MAINTAIN LEADERSHIP IN MICROWAVE TECHNOLOGY. We intend to pursue further technological advances through continued investment in internally-funded and customer-funded research and product development. - - STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. We have developed mutually beneficial relationships with various agencies of the U.S. government and defense and commercial companies. We expect to continue to build and strengthen these relationships with industry leaders by anticipating and recognizing their needs and providing them with on-time and cost-effective solutions. - - CAPITALIZE ON OUTSOURCING DYNAMICS IN THE AEROSPACE AND DEFENSE INDUSTRY. Microwave technology has traditionally been an in-house resource of the prime contractors. However, the prime contractors are beginning to outsource the design and manufacture of this specialized engineering work to system sub-contractors. We are well positioned to generate more business as prime contractors continue to focus primarily on integration of defense electronics. - - PURSUE STRATEGIC ACQUISITIONS. We intend to continue to augment our existing technological base by acquiring specialized companies that complement or expand our product offerings and market strategies. We believe that expansion of our core competencies through the acquisition of such specialized technology companies, when combined with our current technological and manufacturing skills, will provide us with improved levels of horizontal and vertical integration, leading to the creation of subsystems and complete system products. 2 - - ENHANCE MANUFACTURING CAPABILITIES. We intend to continue to implement process manufacturing automation and believe that our ability to develop a high level of automated production and test capability will help to further improve our cost effectiveness and time to market. - - PURSUE SELECTIVE COMMERCIAL OPPORTUNITIES. We seek to identify and pursue selected commercial applications for our products and technologies where we can add value based on our microwave expertise. COMPETITIVE STRENGTHS Our competitive strengths include: - - TECHNICAL EXPERTISE. We have developed a leading position in the field of microwave technology through our 35 year focus on research and development and our state-of-the-art design and production capabilities. We have recently completed construction of state-of-the-art manufacturing facilities in Lancaster, Pennsylvania, where we have a full range of capabilities including long and short run production, hardware assembly and full-service engineering. In addition, we have highly capable manufacturing facilities located in Woburn, Massachusetts; Farmingdale, New York; and Jerusalem, Israel. We have developed and rewarded our engineers in order to maintain our expertise in-house. - - HIGH PROPORTION OF LONG-TERM SOLE-PROVIDER PRODUCTION PROGRAMS. We generate a significant proportion of our revenue from continuing, long-term programs, both in the production and upgrade phases, and continue to target high growth, high priority defense programs. Typically, on such long-term defense programs we are the sole provider of microwave equipment. - - DIVERSE PRODUCT AND CUSTOMER BASE. We have a diverse product and customer base, with only the U.S. government, at approximately 17%, representing more than 10% of our fiscal 2002 revenues. We are a first-tier supplier to all of the prime defense contractors, as well as a direct supplier to all of the service branches of the U.S. military, including products found on over 120 individual platforms. Foreign customers accounted for approximately 32% of our revenues in fiscal 2002. - - LONG-STANDING INDUSTRY RELATIONSHIPS. We have established long-standing relationships with the U.S. government and other key organizations in the aerospace and defense industry after 35 years in the defense electronic industry. Over this period, we have become recognized for our ability to develop new technologies and meet stringent program requirements. - - SUCCESSFUL ACQUISITION TRACK RECORD. We have demonstrated that we can successfully integrate acquired companies. We are experienced at evaluating prospective operations in order to increase efficiencies and capitalize on market and technological synergies. - - EMPHASIS ON RESEARCH AND DEVELOPMENT. In fiscal year 2002, we spent over $5.6 million on new product development, of which our customers funded approximately $3.3 million. Our emphasis on new product development enables us to maintain our technological leadership in current products and to develop new capabilities. This spending helps solidify and strengthen our position on different programs and may serve as a barrier to entry for competitors. - - EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over 21 years of experience in the defense electronics industry. 3 PRODUCTS AND SERVICES We operate in two markets: defense electronics and commercial technologies. DEFENSE ELECTRONICS We are a leading supplier of microwave products and systems to defense and aerospace entities worldwide. We design and manufacture microwave components and subassemblies which are embedded in a variety of radars, flight instrumentation, weapons sensors, electronic warfare systems and guidance systems. Our microwave devices are used on our subassemblies and integrated systems (e.g. command and control systems, telemetry systems, transponders, flight termination receivers and identification friend or foe, or IFF, interrogators), in addition to being sold on a component basis. The following are descriptions of our major systems and products: Telemetry Systems. Telemetry systems provide wireless data transmission between two or more sites for recording and analysis. 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. We have 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. We are a leading manufacturer of Pulse Code Modulation, or PCM, and Frequency Modulation, or FM, telemetry and data acquisition systems for severe environment applications, and our products are used worldwide for testing space launch vehicle instrumentation, aircraft flight testing, and amphibian, industrial and automotive vehicle testing. The product portfolio ranges in size and complexity from miniature encoders to completely programmable data acquisition systems. We offer a complete airborne data link system. With our digital capability in data encoding and acquisition elements combined with our radio frequency capability in providing telemetry transmitters and flight termination receivers, we offer a full line of narrow and wide-band airborne telemetry systems to meet a wide variety of industrial needs, both domestically and internationally. Command and Control Systems. Our command and control systems have been used to fly remotely a large variety of unmanned aerial vehicles, or UAVs, typically aircraft used as target drones or Remotely Piloted Vehicles, or RPVs. Our command and control systems also control surface targets. Operations have been conducted by users on the open ocean, remote land masses, and instrumented test and training ranges. Our command and control systems are currently in service throughout the world. Command and control systems permit a ground operator to fly a target or a UAV through a pre-planned mission. The mission may be for reconnaissance, where the vehicle is equipped with high definition TV sensors and the necessary data links to send information back to its command and control systems ground station. The UAV may also be used as a decoy, since the operator can direct the flight operations that will make the small drone appear to be a larger combat aircraft. Our MAGIC2 system affords over-the-horizon command and control using GPS guidance and control of multiple targets from a single ground station. The ability to control multiple targets at increased distances represents a significant product improvement. The MAGIC2 is a highly flexible, multiple processor design with high resolution graphics, which can be field-configured within minutes to fly or control any selected vehicle for which it is equipped. The MAGIC2 is used in support of missile, aircraft and other weapons systems development and testing. The system meets a growing requirement to test against multiple threats with the automated defense capabilities of ships like the AEGIS cruiser and the E-2C aircraft. 4 Transponders. We manufacture a variety of expendable transponders, including range safety, IFF, command and control, and range 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 transmits back a reply on a different frequency and signal level. This reply is a strong, noise-free signal upon which the tracking radar can "lock," and one which is far superior to skin reflection tracking, particularly under adverse weather conditions after the launch. In range safety applications, transponders enable accurate tracking of space launch and unmanned aerial vehicles, missiles, and target drones so that position and direction are known throughout its flight. In the case of several defense and commercial space launch vehicles (i.e., Delta, Atlas, Titan and Pegasus), our transponder is tracked by the ground launch team all the way to space orbit, and in certain instances through several orbits, as a reference location point in space to assure that the launch payload has been properly placed in orbit. IFF transponders, which are used in conjunction with the Federal Aviation Authority Air Traffic Control System, enable ground controllers to identify the unmanned targets, drones and cruise missiles on which these units fly and to vector other manned aircraft safely away from the flight path of the unmanned aerial vehicle. Command and control transponders provide the link through the telemetry system for relaying ground signals to direct the vehicle's flight. The uplink from the ground control station, a series of coded pulse groups, carries the signals that command the flight control guidance system of the vehicle. The downlink to the ground provides both tracking signals for range safety, as well as acknowledgment and status of the uplink commands and their implementation in the vehicle. The transponder is therefore the means to fly the vehicle. Scoring systems are mounted on both airborne and sea targets. Scoring systems enable test and evaluation engineers to determine the "miss-distance" between a projectile and the target at which it has been launched. Flight Termination Receiver. A flight termination receiver, or FTR, is installed in a test missile, UAV, target or 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, or 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. HF Communications and IFF Interrogators. We design and manufacture 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 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. We have been a significant supplier to the Republic of Korea for over twenty years and have a large, established installed base of equipment. We have been, and continue to be, a supplier to the Republic of Korea KDX destroyer program. High Power Amplifier. We design and manufacture high power amplifier systems with frequencies ranging from 1.5 MHz to 12GHz with power levels from multi-kilowatts up to 15W, depending on the frequency. Our high power amplifier applications include but are not limited to defense communication, electronic warfare, radar and avionics. We have an exclusive sales and marketing agreement with EADS ewation, Grintek Ewation, Sysdel Close Corporation and Teleplan AS regarding high power amplifiers for monitoring reconnaissance and countermeasures. Microwave Integrated Circuits. We design and manufacture complex microwave integrated circuits, or MICs, which consist of sophisticated assemblies that perform many functions, primarily involving switching of microwave signals. Our MICs are employed in many defense electronics systems and missile programs. We also manufacture magnetrons, which are the power source utilized in the production of our transponders. 5 High/Low Power Integrated Assembly. Our high power microwave devices are used in radar system transmitters and in long-range missiles. High power devices frequently use small amounts of nuclear material to enhance breakdown of high energy pulses, and we are one of very few companies with an active nuclear license that permits the handling of these trace amounts of nuclear materials. There are relatively few companies with the expertise or facilities to design, manufacture and test high power devices. We also produce lower power, broad band microwave integrated assemblies for the defense electronics industry. These complex assemblies combine microwave functions such as amplification, attenuation, switching of multiple signals, and phase and amplitude control. Their applications include Rear Warning Receivers, or RWRs, Electronics Countermeasure, or ECM, systems and highly sensitive receiver systems. Solid State Receiver Protector. We have become a preeminent supplier of solid-state receiver protector devices that are able to withstand high energy pulses without the use of nuclear materials. These high power devices protect a radar receiver from transient bursts of microwave energy and are employed in almost every military and commercial radar system. For our engineering efforts in designing solid-state receiver protectors for the F- 16, we received cash awards from the United States Air Force as part of the government's value engineering program. Digitally Tuned Oscillators (DTO's). We produce microwave sources, which generate signals that are used in microwave oscillators. Our microwave sources are sold to the U.S. defense industry and to various foreign governments. We specialize in digitally tuned oscillators, or DTOs, a critical component in many ECM systems. COMMERCIAL TECHNOLOGIES Our commercial technologies are comprised of scientific products and medical products. Scientific Products. Our scientific products are used extensively in Nuclear Magnetic Resonance (NMR) systems. These amplifiers, which have dual mode capability and can be operated in either a pulsed or continuous wave, cover the frequency ranges of 6 MHz to 950 MHz, with power levels as high as 2.0KW peak power at 10% duty cycle. Scientific customers include OEM, system manufacturers and research centers. Medical Products. Our medical products vary in complexity from single modules, to rack mounted amplifiers, to complete systems. The rack-mounted amplifiers and complete systems typically include detection/protection circuitry, built-in power supplies, front panel metering and digital and/or analog interface controls. Both forced air and/or water cooling are used, depending on the customer's requirements. Our medical products are used in Magnetic Resonance Imaging, or MRI, systems. All amplifiers have dual mode capability and can be operated in either a pulsed or continuous wave mode, and cover the frequency ranges of 10 MHz to 200 MHz with power levels as high as 12.0KW peak power at 10% duty cycle. Medical customers include both original equipment and systems manufacturers, as well as universities and research centers. All products feature highly reliable technical solutions designed for improved production and reliability. Producibility is enhanced through the use of surface mount components and circuit designs which eliminate the need for excessive alignment during the production cycle. High reliability is achieved through the implementation of conservative thermal and RF circuit design and sophisticated self-protection schemes. Reliability is further enhanced during the design phase by employing detailed environmental testing. CUSTOMERS During the fiscal year ended July 28, 2002, approximately 17% of our net 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 net sales. 6 We provide defense electronics equipment to major defense prime contractors for integration into larger platforms and systems. Some of our customers for defense electronics equipment include: Boeing BAE Systems Harris Lockheed Martin Northrop Grumman Raytheon During fiscal 2002, sales to foreign customers accounted for approximately 32% of our net sales. The governments of Egypt, Japan, South Korea, Taiwan and the United Kingdom are all significant customers of ours. All of our contracts with foreign customers are payable in U.S. dollars. International sales are subject to numerous risks, including political and economic instability in foreign markets, including currency and economic difficulties in the Pacific Rim, restrictive trade policies of foreign governments, inconsistent product regulation by foreign agencies or governments, imposition of product tariffs and burdens and costs of complying with a wide variety of international and U.S. export laws and regulatory requirements. Our international sales also are subject to us obtaining export licenses for certain products and systems. SALES AND MARKETING We market our products worldwide to the United States government, prime contractors and various countries in defense markets, and to OEMs, research institutions and universities in commercial markets. Sales are primarily through a sales force generally organized by geographic territory and markets. In addition, we have 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 our marketing efforts, we advertise in major trade publications and attend major industrial shows in the commercial, medical, satellite communications and defense markets. After we have identified key potential customers, we make sales calls with our own sales, management and engineering personnel. In order to promote widespread acceptance of our products and provide customers with support, our sales and engineering teams work closely with our customers to develop tailored solutions to their requirements. We believe that our customer engineering support provides us with a key competitive advantage. We also produce microwave components that are sold through our catalog, which for almost forty years has been an industry leader, and sell attenuating devices and IQ modulation and phase shifters through the microwave engineer's handbook. MANUFACTURING We manufacture our products from standard components, as well as from items that are manufactured by vendors to our specifications. A majority of our defense electronics and commercial assemblies and subsystems contain proprietary technology which is designed and tested by our engineers and technicians and is manufactured at our own facilities. We continue to invest in improving our proprietary manufacturing processes and the automation of the manufacturing processes. Automation is critical in meeting our customers' demands for price competitiveness, world class quality and on-time delivery. We are also investing to enhance our responsiveness to the production demands of our customers. We purchase electronic components and other raw materials used in our products from a large number of suppliers and all such materials are readily available from alternate sources. 7 We maintain minimal levels of finished products inventory to meet the needs of our medical products customers. We generally purchase raw materials for specific contracts, and we purchase common components for stock based on our firm fixed backlog. There are no significant environmental control procedures required concerning the discharge of materials into the environment that require us to invest in any significant capital equipment or that would have a material effect on our earnings or our competitive position. Quality assurance checks are performed on manufacturing processes, purchased items, work-in-process and finished products. Due to the complexity of our products, final tests are performed on some products by highly skilled engineers and technicians. Our 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 our manufacturing facilities located in the following cities: Lancaster, Pennsylvania Farmingdale, New York Woburn, Massachusetts Jerusalem, Israel BACKLOG Our total backlog of orders was approximately $82.7 million on July 28, 2002 as compared to $79.4 million on July 29, 2001. Of our total backlog of $82.7 million at July 28, 2002, $54.3 million is attributable to domestic orders and $28.4 million is attributable to foreign orders. Management anticipates that approximately $70.7 million of its backlog will be shipped during the fiscal year ending August 3, 2003. All of the orders included in backlog are covered by signed contracts or purchase orders. Backlog is not directly indicative of future sales. Accordingly, we do not believe that our backlog as of any particular date is representative of actual sales for any succeeding period. Substantially all of our contracts are fixed price contracts, some of which require delivery over time periods in excess of one year. With this type of contract, we agree 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 for cause or convenience. In the event of a termination for convenience, 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 us under the contract to the date of termination plus a fee based on the work completed. PRODUCT DEVELOPMENT We believe that our growth depends, in part, on our ability to renew and expand our technology, products, and design and manufacturing processes with an emphasis on cost effectiveness. Our primary efforts are focused on engineering design and product development activities rather than pure research. Our 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, was approximately $5.6 million in fiscal 2002, $4.6 million in fiscal 2001 and $3.5 million in fiscal 2000, of 8 which we paid approximately $2.3 million in fiscal 2002, $2.6 million in fiscal 2001 and $2.3 million in 2000. The remainder of these costs were paid by some of our customers. COMPETITION The microwave component and subsystems industry is highly competitive and we compete against many companies, both foreign and domestic. Many of these companies are larger, have greater financial resources and are better known. As a supplier, we also experience significant competition from the in-house capabilities of our customers. Competition is generally based upon technology, design, past performance and price. Our ability to compete depends, in part, on our ability to offer better design and performance than our competitors and our readiness in facilities, equipment and personnel to complete the programs. Many of the programs in which we participate are long standing programs in which we are the sole provider of our product. GOVERNMENT REGULATION Because of our participation in the defense industry, we are subject to audits by various government agencies for our compliance with government regulations. We are 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 used to manufacture our products. We believe that we operate our 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 our business, financial condition and results of operations. INTELLECTUAL PROPERTY We rely primarily on a combination of trade secrets and employee and third-party nondisclosure agreements to protect our intellectual property, as well as limiting access to the distribution of proprietary information. We cannot assure you that the steps taken to protect our intellectual property rights will be adequate to prevent misappropriation of our technology or to preclude competitors from independently developing such technology. Furthermore, we cannot assure you that, in the future, third parties will not assert infringement claims against us or with respect to our products for which we have indemnified certain of our customers. Asserting our rights or defending against third party claims could involve substantial costs and diversion of resources, thus materially and adversely affecting our business, financial condition and results of operations. In the event a third party were successful in a claim that one of our products infringed its proprietary rights, we may have to pay substantial royalties or damages, remove that product from the marketplace or expend substantial amounts in order to modify the product so that it no longer infringes on such proprietary rights, any of which could have a material adverse effect on our business, financial condition and results of operations. EMPLOYEES As of September 29, 2002, we employed 618 persons full time. Of these employees, 105 comprise the engineering staff, 445 constitute manufacturing personnel, 24 occupy sales and marketing positions, and 44 are in executive, management, and support functions. None of our employees are covered by collective bargaining agreements and we consider our employee relations to be satisfactory. We believe that our future success will depend, in part, on our continued ability to recruit and retain highly skilled technical, managerial and marketing personnel, including microwave engineers. To assist in recruiting and retaining such personnel, we have established competitive benefits programs, including a 401(k) employee savings plan and stock option plans. SUBSEQUENT EVENT The Company entered into an agreement as of September 1, 2002, to acquire all of the issued and outstanding common stock of EW Simulation Technology, Limited ("EWST"), a British company of Aldershot, UK, which is expected to be operated 9 as a wholly-owned subsidiary. EWST designs, develops and produces electronic warfare simulator systems for prime defense contractors and countries worldwide. The transaction, which closed on September 20, 2002, provides for payment of $3,000,000 in cash and a note for $1,500,000, including interest at 1.8%, payable in annual installments of $500,000. OFFICERS OF THE REGISTRANT Served as Name Age Officer Since Position(s) and Offices - ---- --- ------------- ----------------------- Lee N. Blatt 74 1965 Chairman of the Board Myron Levy 61 1988 Chief Executive Officer and Director John M. Kelley 49 1998 Executive Vice President Howard M. Eckstein 51 1998 Senior Vice President Mitchell Tuckman 52 1999 Senior Vice President William Wilson 53 2002 Senior Vice President Rozalie Schachter 55 2000 Senior Vice President Anello C. Garefino 55 1993 Vice President-Finance, Treasurer and Chief Financial Officer David H. Lieberman 57 1985 Secretary and Director Item 2. Properties Our facilities are as follows:
Owned or Location Purpose of Property Area Leased - -------- ------------------- ---- ------ Lancaster, PA (1) Production, engineering, administrative 86,200 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 14,000 sq. ft. Leased Jerusalem, Israel Production, engineering and administration 12,000 sq. ft. Owned Aldershot, England (3) Production, engineering and administration 6,300 sq. ft. Leased Chicago, IL Engineering and administration 3,000 sq. ft. Leased Lancaster, PA Land held for expansion 20.4 Acres Owned - -------------- (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 two 10 year lease agreements with a partnership owned by the children of Messrs Blatt and Levy. The leases provide for initial minimum annual rent of approximately $312,000 and $92,000, respectively, in each case subject to escalation of approximately 4% annually throughout the 10 year term. (3) As of September 1, 2002, the Company entered into an agreement to acquire all of the issued and outstanding common stock of EW Simulation Technology, Limited as discussed in Note R of the financial statements.
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. We believe that its facilities are adequate for its current and presently anticipated future needs. 10 Item 3. Legal Proceedings On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson ("Robinson") filed an Amended Complaint against Herley Industries, Inc. ("Herley"). Although the Amended Complaint sets forth fifteen counts, the core allegations are (i) that Herley failed to issue 97,841 shares of common stock in connection with certain earn out requirements contained in an Asset Purchase Agreement dated February 1, 2000; (ii) that Herley breached an Employment Agreement with Robinson by terminating his employment on August 5, 2001; and (iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with Robinson. RLI and Robinson asserted (i) violations of state and federal securities laws; (ii) fraud claims; (iii) breach of contract claims; and (iv) other equitable claims arising from the above core factual allegations. On September 17, 2001, Herley filed an Answer, Affirmative Defenses and Counterclaims in this matter. In the Answer and Affirmative Defenses, Herley denied the material allegations of the Amended Complaint. Herley also filed Counterclaims against both RLI and Robinson. In these counterclaims, Herley's core allegations concern Robinson's misconduct (i) in connection with the manner he attempted to satisfy RLI's earn out requirements; (ii) misrepresentations made in connection with the Asset Purchase Agreement; (iii) wrongdoing as a Herley employee leading to his termination and (iv) post-Herley employment wrongdoing in connection with a new company known as RH Laboratories. In addition to seeking a Declaratory Judgment pursuant to 28 U.S.C. ss. 2201 et. seq., Herley also asserted claims for, among other things, fraud, breach of contract, breach of fiduciary duty, unfair competition and tortious interference with actual and prospective contractual relationships. On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August 21, 2002 in which the jury determined, among other things, that (i) Herley was not required to pay any additional stock; (ii) Herley breached the Employment Agreement with Robinson and awarded Robinson $1.5 million in damages; (iii) Herley breached the Lease Agreement with Robinson and awarded Robinson approximately $552,000 in compensatory damages; (iv) Robinson breached fiduciary duties to Herley and awarded Herley $400,000 in compensatory damages; (v) Robinson and RLI breached indemnity obligations and awarded Herley $100,000 in damages; (vi) RLI breached representations and warranties given to Herley and awarded Herley $320,000 in damages. The court has still not entered final judgment following the jury verdict, and both parties are expected to appeal. Additionally, as the prevailing party in connection with the claims asserted by RLI relating to the earn-out stock, as well as claims advanced relating to the various breaches of the Asset Purchase Agreement, Herley intends to file a petition for attorney's fees and costs against both RLI and Robinson for approximately $2,000,000. The Company is involved in various other legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholders Matters (a) The Company's Common Stock is traded in the NASDAQ National Market under the symbol HRLY. The following table sets forth the high and low closing sales price as reported by the NASDAQ National Market for the Company's Common Stock for the periods indicated and gives effect retroactively to the three-for-two stock split of the Common Stock on September 10, 2001. 11 Common Stock ----------------- High Low ---- --- Fiscal Year 2001 First Quarter...............................$ 15.17 $ 11.63 Second Quarter.............................. 15.46 8.79 Third Quarter............................... 10.89 8.38 Fourth Quarter.............................. 13.15 9.97 Fiscal Year 2002 First Quarter............................... 18.50 11.17 Second Quarter.............................. 17.13 13.10 Third Quarter............................... 24.49 14.96 Fourth Quarter.............................. 22.33 17.55 Fiscal Year 2003 First Quarter (through October 21, 2002).... 21.30 14.73 The closing price on October 21, 2002 was $16.47. (b) As of October 21, 2002, there were approximately 234 holders of record 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 28, July 29, July 30, August 1, August 2, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net sales (4) $ 92,881 76,494 70,537 61,036 40,798 Income from continuing operations before extraordinary item $ 10,730 7,573 7,639 7,862 5,497 Loss from discontinued operations $ (921) (168) - - - Cumulative effect of adopting SFAS 142 $ (4,637) - - - - Net income $ 5,172 7,405 7,639 7,735 5,497 Per share data from continuing operations (1), (2), (3) Basic $ .89 .75 1.05 1 00 .74 Assuming Dilution $ .83 .69 .96 .92 .68 Total Assets $ 190,202 114,597 86,656 74,056 57,553 Total Current Liabilities $ 15,263 18,732 12,783 10,513 9,843 Long-Term Debt net of current portion $ 5,684 2,740 2,931 15,437 4,111 (1) As adjusted to give effect to a 3-for-2 stock split effective September 10, 2001. (2) Earnings per share from continuing operations are presented and calculated before extraordinary item in fiscal 1999, before discontinued operations in 2002 and 2001, and before cumulative effect of accounting change in 2002. (3) No cash dividends have been distributed in any of the years presented. (4) See "Acquisitions" under Item 1. "Business".
12 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 28, July 29, July 30, 2002 2001 2000 ---- ---- ---- Net sales 100.0 % 100.0 % 100.0 % Cost of products sold 66.7 % 66.3 % 62.9 % ----- ----- ----- Gross profit 33.3 % 33.7 % 37.1 % Selling and administrative expenses 14.3 % 19.0 % 19.2 % Litigation costs 2.2 % 0.3 % - Plant closing costs 0.4 % - - ----- ----- ----- Income from operations 16.4 % 14.4 % 17.9 % ----- ----- ----- Other income (expense), net: Investment income 0.8 % 0.9 % 0.3 % Interest expense (0.4)% (0.3)% (1.6)% ----- ----- ----- 0.4 % 0.6 % (1.3)% ----- ----- ----- Income from continuing operations before income taxes 16.8 % 15.0 % 16.6 % Provision for income taxes 5.2 % 5.1 % 5.8 % ----- ----- ----- Income from continuing operations 11.6 % 9.9 % 10.8 % Loss from discontinued operations 1.0 % 0.2 % - ----- ----- ----- Income before cumulative effect of change In accounting principle 10.6 % 9.7 % 10.8 % Cumulative effect of adopting SFAS 142 (5.0)% - - ----- ----- ----- Net income 5.6 % 9.7 % 10.8 % ===== ===== =====
13 Fiscal 2002 Compared to Fiscal 2001 Net sales from continuing operations for the 52 weeks ended July 28, 2002 were approximately $92,881,000 compared to $76,494,000 for fiscal 2001. The net sales increase of $16,387,000 (21.4%) is attributable to increased revenue in defense electronics of $18,638,000; offset by a decrease of $2,251,000 in commercial technologies. Gross profit of 33.3% for the 52 weeks ended July 28, 2002 is less than the prior year of 33.7%. The decline in margin is due primarily to lower margins on certain Robinson Labs contracts that were transferred to other facilities, and the investment in new product development related to commercial applications. The significant increase in net sales in defense electronics cushioned the decline in gross profit. Selling and administrative expenses for the 52 weeks ended July 28, 2002 were $13,229,000 compared to $14,545,000 for fiscal 2001, a net decrease of $1,316,000. In connection with the adoption of SFAS 142 as of July 30, 2001, the Company ceased amortization of goodwill (See Note A.8.). Selling and administrative expenses in fiscal 2001 included goodwill amortization of $916,000. Cost savings associated with the relocation of the AMT facility amounted to approximately $605,000. Other significant changes include an increase in incentive compensation of $363,000 and a reduction in payroll and related costs of $198,000. Legal costs in fiscal 2002 increased $1,814,000 over fiscal 2001, directly related to the Robinson Labs litigation. (See Item 3. "Legal Proceedings"). Plant closing costs in connection with the facilities in Nashua, NH and Anaheim, CA were accrued in October 2001 in the amount of $406,000 of which $348,000 was paid as of July 28, 2002. Other income increased approximately $39,000 from the prior year primarily from the investment of proceeds of approximately $64,812,000 from the sale of common stock to the public on April 30, 2002, partially offset by lower interest rates. Interest expense increased $100,000 as compared to fiscal 2001 due to the $3,000,000 financing of the expansion of the Lancaster facility through industrial revenue bonds and interest on temporary borrowings of $4,300,000 under the bank line of credit. The effective income tax rate decreased to 31.2% in fiscal 2002 from 33.8% in 2001 due to various favorable tax benefits including a lower effective tax rate on foreign-source income and recognition in the fourth quarter of the tax benefit attributable to extra territorial income. Fiscal 2001 Compared to Fiscal 2000 Net sales from continuing operations for the 52 weeks ended July 29, 2001 were approximately $76,494,000 compared to $70,537,000 for fiscal 2000. The net sales increase of $5,957,000 (8.4%) is attributable to the acquisition of American Microwave in the first quarter of fiscal 2001 which contributed $6,812,000 in net sales, as well as an increase in net sales of approximately $4,573,000 in commercial products. Defense electronics experienced a drop in revenue of approximately $5,428,000 due to delayed orders from various customers. Gross profit of 33.7% for the 52 weeks ended July 29, 2001 is less than the prior year of 37.1%. The decline in margin of 3.4% is due primarily to lower margins on commercial products and certain defense electronics products. Margins also have been impacted by certain inefficiencies at the Nashua facility. This operation is now being consolidated into the New England and Farmingdale facilities. Selling and administrative expenses for the 52 weeks ended July 29, 2001 were $14,545,000 compared to $13,497,000 for fiscal 2000, an increase of $1,048,000. The primary increase is due to businesses acquired which added $1,563,000 in fiscal 2001 and $486,000 in additional personnel expenses associated with power amplifier marketing costs. Incentive compensation decreased $707,000. 14 Other income increased approximately $447,000 from the prior year primarily from the investment of proceeds from the exercise of warrants in May and November 2000. Interest expense decreased $906,000 as compared to fiscal 2000 due to the repayment of bank borrowings out of the proceeds of the exercise of the warrants. The effective income tax rate decreased to 33.8% in fiscal 2001 from 35.0% in 2000 due to various favorable tax benefits including a lower effective tax rate on foreign-source income. Discontinued operations The Company entered into an agreement effective as of the close of business September 30, 2000, to acquire all of the issued and outstanding common stock of Terrasat, Inc. ("Terrasat"), a California corporation for cash in the amount of $6,000,000, $3,000,000 of which was paid in December 2000 and $3,000,000 of which was paid in December 2001. In addition, the agreement provided for additional cash payments in the future up to $2,000,000, based on gross revenues through December 31, 2001. The targeted gross revenues under the agreement were not achieved, therefore no additional cash payments were required. In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment of long-lived assets and for long- lived assets to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for segments of a business to be disposed of, but retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. The provisions of this statement were adopted by the Company effective on July 30, 2001. In January 2002 the Board of Directors of the Company decided to discontinue the operations of Terrasat and to seek a buyer for the business. The Company believed that Terrasat would not be able to generate sufficient returns to justify continued investment due to the overcapacity in the telecom industry and deteriorating economic conditions in Terrasat's primary markets. Consequently, the accompanying consolidated financial statements reflect Terrasat as discontinued operations in accordance with SFAS No. 144. The assets and liabilities of Terrasat at July 29, 2001 have been classified in the accompanying balance sheet as "Assets held for sale", and "Liabilities held for sale." Results of operations and cash flows of Terrasat have been classified as "Loss from discontinued operations", and "Net cash provided by (used in) discontinued operations", respectively. The sale of certain assets and liabilities, and the business of Terrasat was consummated on March 1, 2002, effective the close of business January 27, 2002, to certain current employees of Terrasat for cash and a note which approximates the value of the net assets held for sale as of January 27, 2002 of $878,000. Change in accounting principle In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142 "Goodwill and Other Intangible Assets" which requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill will not be amortized into results of operations, but instead will be reviewed for impairments which will be charged to results of operations in the periods in which the recorded value of goodwill is more than its fair value. The provisions of this statement were adopted by the Company on July 30, 2001. The adoption of SFAS No.142 resulted in the Company's discontinuation of amortization of its goodwill as of July 30, 2001. 15 In connection with the adoption of SFAS 142, the Company was required to assess goodwill for impairment within six months of adoption, and completed its assessment in the second quarter of fiscal 2002. The Company operates as a single integrated business and as such has one operating segment which is also the reportable segment as defined in SFAS 131. Within the operating segment, the Company has identified two components as reporting units as defined under SFAS 142, defense electronics and commercial technologies. The Company has determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of July 30, 2001. The Company has determined that an impairment of goodwill in the commercial technologies unit has occurred. Accordingly, a transition adjustment in the amount of $4,637,000 has been recorded as of July 30, 2001 as a cumulative effect of a change in accounting principle. There is no tax benefit associated with the adjustment since the impaired goodwill is not deductible for income tax purposes. There was no impairment in the remaining goodwill at July 28, 2002 of approximately $21,665,000 related to the defense electronics reporting unit based on current market capitalization of the Company. An annual impairment test will be performed in the fourth quarter of each fiscal year and any future impairment of goodwill will be charged to operations. Amortization of goodwill charged to continuing operations for the fiscal years ended July 29, 2001 and July 30, 2000 was approximately $1,296,000 and $958,000, respectively. Amortization of goodwill charged to discontinued operations for the fiscal year ended July 29, 2001 was approximately $208,000. 16 Quarterly Results The following is a summary of the unaudited quarterly operations for the 52 weeks ended July 28, 2002 and July 29, 2001 (in thousands, except for per share data).
October 28, January 27, April 28, July 28, 2001 2002 2002 2002 -------- -------- -------- --------- Net sales $ 22,213 21,840 23,499 25,329 Gross profit 7,639 7,036 8,323 7,936 Income from continuing operations 2,439 2,393 2,692 3,206 Loss from discontinued operations (144) (777) - - Cumulative effect of adopting SFAS 142 (4,637) - - - Net income (loss) $ (2,342) 1,616 2,692 3,206 ====== ====== ====== ====== Earnings (loss) per common share - Basic Income from continuing operations $ .23 .21 .23 .22 Loss from discontinued operations $ (.01) (.07) - - Cumulative effect of adopting SFAS 142 $ (.43) - - - ------ ------ ------ ------ Net income (loss) $ (.22) .14 .23 .22 ====== ====== ====== ====== Basic weighted average shares 10,695 11,238 11,559 14,671 ====== ====== ====== ====== Earnings (loss) per common share - Diluted Income from continuing operations $ .21 .20 .22 .21 Loss from discontinued operations $ (.01) (.06) - - Cumulative effect of adopting SFAS 142 $ (.40) - - - ------ ------ ------ ------ Net income (loss) $ (.20) .13 .22 .21 ====== ====== ====== ====== Diluted weighted average shares 11,695 11,986 12,495 15,580 ====== ====== ====== ======
October 29, January 28, April 29, July 29, 2000 2001 2001 2001 -------- -------- -------- --------- Net sales $ 17,758 17,065 18,987 22,684 Gross profit 6,777 5,718 6,578 6,730 Income from continuing operations 2,042 1,627 1,721 2,183 Loss from discontinued operations (12) (23) (47) (86) Net income $ 2,030 1,604 1,674 2,097 ====== ====== ====== ====== Earnings (loss) per common share - Basic Income from continuing operations $ .23 .16 .16 .21 Loss from discontinued operations $ - - - (.01) ------ ------ ------ ------ Net income $ .23 .16 .16 .20 ====== ====== ====== ====== Basic weighted average shares 8,985 10,263 10,530 10,535 ====== ====== ====== ====== Earnings (loss) per common share - Diluted Income from continuing operations $ .20 .15 .16 .19 Loss from discontinued operations $ - - - (.01) ------ ------ ------ ------ Net income $ .20 .14 .15 .19 ====== ====== ====== ====== Diluted weighted average shares 10,134 11,100 11,045 11,280 ====== ====== ====== ======
17 The gross profit margin from quarter to quarter is affected by the change in product mix. Income from continuing operations in the fourth quarter of fiscal 2002 was favorably affected by the lower effective income tax rate due to the recognition of the tax benefit attributable to extra territorial income, which was offset by litigation costs (See Item. 3 "Legal Proceedings"). Liquidity and Capital Resources As of July 28, 2002 and July 29, 2001, working capital was $129,012,000 and $46,804,000, respectively, and the ratio of current assets to current liabilities was 9.45 to 1 and 3.50 to 1, respectively. As is customary in the defense industry, inventory is partially financed by progress payments. In addition, it is customary for the Company to receive advanced payments from customers on major contracts at the time a contract is entered into. The unliquidated balance of these advanced payments was approximately $1,371,000 at July 28, 2002, and $261,000 at July 29, 2001. Net cash provided by continuing operations was approximately $13,139,000 in fiscal 2002 as compared to $3,858,000 in 2001. Significant items contributing to the sources of funds include income from operations of $14,647,000 (adjusted for depreciation and amortization), a decrease in accounts receivable of $1,583,000, increases in accounts payable and accrued expenses of $429,000, income taxes of $5,351,000, and advanced payments on contracts of $1,110,000. Offsetting these sources of funds are an increase in costs incurred and income recognized in excess of billings on uncompleted contracts of $6,341,000, an increase in inventory of $1,974,000, and a net change in deferred taxes of $1,183,000. Net cash used in investing activities consists of $5,488,000 for capital expenditures, $500,000 for a license of certain technology, and the $3,000,000 deferred payment of the Terrasat purchase price; offset by a partial distribution from the limited partnership of $626,000. In June 2002, the Company entered into a new $50,000,000 Revolving Credit Loan Syndication agreement with two banks on an unsecured basis 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, 2004. The Company may elect to borrow up to a maximum of $5,000,000 with interest based on the FOMC Federal Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of $45,000,000 with interest based on LIBOR plus a margin of 1.35% to 1.65%. The applicable incremental margin is based on the ratio of total liabilities to tangible net worth, as those terms are defined in the agreement, ranging from less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal Funds Target Rate and the LIBOR rate was 1.75% and 1.81%, respectively, at July 28, 2002. There is a fee of 15 basis points per annum on the unused portion of the $45,000,000 LIBOR based portion of the credit facility payable quarterly. There were no borrowings outstanding as of July 28, 2002 and July 29, 2001. During the fiscal year ended July 28, 2002, the Company borrowed and repaid $4,300,000 under the credit facility for working capital needs. Stand-by letters of credit were outstanding in the amount of $5,062,000 under the credit facility at July 28, 2002. During the fiscal year ended July 28, 2002, the Company received proceeds of $3,000,000 from the issuance of industrial revenue bonds in connection with the financing of the plant expansion in Lancaster PA, and received approximately $3,984,000 from the exercise of common stock options by employees. On April 30, 2002, the Company completed the sale of 3,000,000 shares of common stock to the public at $23.00 per share. The Company received net proceeds of approximately $64,812,000 after underwriting discounts and commissions and other expenses of the offering. The Company received 206,756 shares of common stock during the fiscal year valued at $3,847,000 in exchange for payroll taxes due from employees upon the exercise of stock options. 18 The Company believes that presently anticipated future cash requirements will be provided by internally generated funds, its existing unsecured credit facility, and the approximately $64,812,000 net proceeds from the sale of 3,000,000 shares of common stock to the public on April 30, 2002 (See Note M of the financial statements). A significant portion of the Company's revenue for fiscal 2003 will be generated from its existing backlog of sales orders. The backlog of orders at July 28, 2002 was approximately $82,678,000. All orders included in backlog are covered by signed contracts or purchase orders. Nevertheless, contracts involving government programs may be terminated at the discretion of the government. In the event of the cancellation of a significant amount of government contracts included in the Company's backlog, the Company will be required to rely more heavily on cash reserves and its existing credit facility to fund its operations. The Company is not aware of any events which are reasonably likely to result in any cancellation of its government contracts. The Company has $44,938,000 available under its bank credit facility, net of outstanding stand-by letters of credit of $5,062,000, and cash reserves at July 28, 2002 of approximately $86,210,000. Future payments required on long-term debt are as follows (in thousands): During Industrial fiscal Mortgage revenue year Total note bonds Other ---- ----- ---- ----- ----- 2003 $ 215 $ 81 $ 95 39 2004 208 86 100 22 2005 198 93 105 - 2006 211 101 110 - 2007 223 108 115 - Future 4,844 2,222 2,475 147 ----- ----- ----- --- $ 5,899 $ 2,691 $ 3,000 208 ===== ===== ===== === Stand-by letters of credit expire as follows: During fiscal year Amount ---- ------ 2003 $ 1,607 2004 3,065 2005 115 2006 275 Minimum annual rentals under noncancellable operating leases are as follows (in thousands): During fiscal year Amount ---- ------ 2003 $ 1,129 2004 966 2005 860 2006 875 2007 901 Future 2,049 19 Critical Accounting Policies The Company's established policies are outlined in the footnotes to the Consolidated Financial Statements entitled "Summary of Significant Accounting Policies" (contained in Part II, Item 8 of this Form 10-K). As part of its oversight responsibilities, management continually evaluates the propriety of its accounting methods as new events occur. Management believes that its policies are applied in a manner which is intended to provide the user of the Company's financial statements a current, accurate and complete presentation of information in accordance with Generally Accepted Accounting Principles. Important accounting practices that require the use of assumptions and judgments are outlined below. 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. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs. Risks and uncertainties inherent in the estimation process could affect the amounts reported in our financial statements. The key assumptions used in the estimate of costs to complete relate to labor costs and indirect costs required to complete the contract. The estimate of rates and hours as well as the application of overhead costs is reviewed on a regular basis. If our business conditions were different, or if we used different assumptions in the application of this and other accounting policies, it is likely that materially different amounts would be reported on our financial statements. Subsequent Event The Company entered into an agreement as of September 1, 2002, to acquire all of the issued and outstanding common stock of EW Simulation Technology, Limited ("EWST"), a British company of Aldershot, UK, which is expected to be operated as a wholly-owned subsidiary. EWST designs, develops and produces electronic warfare simulator systems for prime defense contractors and countries worldwide. The transaction, which closed on September 20, 2002, provides for payment of $3,000,000 in cash and a note for $1,500,000, including interest at 1.8%, payable in annual installments of $500,000. The transaction will be accounted for in accordance with the provisions of SFAS No. 141, "Business Combinations", which requires that all business combinations be accounted for using the purchase method. The allocation of the aggregate estimated purchase price will be determined based on detailed reviews of the fair value of assets acquired, including identified intangible assets, and liabilities assumed. Any remaining excess cost over the fair value of net assets acquired will be recognized as goodwill. New Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe the adoption of this standard will have a material impact on the Company's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement is effective for fiscal years beginning after May 15, 2002. SFAS 145 requires, among other things, eliminating reporting debt extinguishments as an extraordinary item in the income statement. Management does not believe the adoption of this standard will have a material impact on the Company's financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement is effective for fiscal years beginning after December 31, 2002. SFAS No. 146 20 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Management does not believe the adoption of this standard will have a material impact on the Company's financial position or results of operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with changes in interest rates, and foreign currency exchange. The Company has not entered into any market risk sensitive instruments for trading purposes. In October 2001, the Company entered into an interest rate swap with a bank pursuant to which it exchanged floating rate interest in connection with the Bonds discussed in Note H of the financial statements on a notional amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending October 1, 2011. The notional amount reduces each year in tandem with the annual installments due on the Bonds. The fixing of the interest rate for this period offsets the Company's exposure to the uncertainty of floating interest rates on the Bonds, and as such has been designated as a cash flow hedge. The hedge is deemed to be highly effective and any ineffectiveness will be recognized in interest expense in the reporting period. The fair value of the interest rate swap was a liability of $147,000 as of July 28, 2002. There was no material hedge ineffectiveness related to cash flow hedges during the period to be recognized in earnings. There was no gain or loss reclassified from accumulated other comprehensive income into earnings during the fiscal year ended July 28, 2002 as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. Other debt of the Company consists of a mortgage on its facility in Lancaster, PA at a fixed rate of 7.43%, and a $50,000,000 Revolving Credit Loan Syndication agreement with two banks on an unsecured basis 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, 2004. The Company may elect to borrow up to a maximum of $5,000,000 with interest based on the FOMC Federal Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of $45,000,000 with interest based on LIBOR plus a margin of 1.35% to 1.65%. The applicable incremental margin is based on the ratio of total liabilities to tangible net worth, as those terms are defined in the agreement, ranging from less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal Funds Target Rate and the LIBOR rate was 1.75% and 1.81%, respectively, at July 28, 2002. 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 2003. The table below provides information about the Company's debt that is sensitive to changes in interest rates. Future principal payment cash flows by maturity date as required under the mortgage and the industrial revenue bonds, and corresponding fair values are as follows: Fiscal year ending: Mortgage Bonds ------------------ -------- ----- 2003 $ 81 $ 95 2004 86 100 2005 93 105 2006 101 110 2007 108 115 2008 and later 2,222 2,475 ----- ----- $ 2,691 $ 3,000 ===== ===== Fair value $ 3,557 $ 3,000 ===== ===== 21 The Company does not consider the market risk exposure relating to foreign currency exchange or interest rates to be material. There were no borrowings outstanding under the revolving credit facility as of July 28, 2002. 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 2003, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year ended July 28, 2002. 22 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 August 7, 2001 (Exhibit 3.2 of Annual Report on Form 10-K for the fiscal year ended July 29, 2001). 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 2000 Stock Option Plan (Exhibit 4.1 of Report on Form S-8 dated October 12, 2001). 10.5 Employment Agreement between Herley Industries, Inc. and Lee N. Blatt dated as of July 29, 2002. 10.6 Employment Agreement between Herley Industries, Inc. and Myron Levy dated as of July 29, 2002. 10.7 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). 10.8 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). 10.9 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). 10.10 Loan Agreement dated June 19, 2002 among the Registrant and Allfirst Bank and Fulton Bank. 10.11 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). 10.12 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). 10.13 Amendment to Loan Agreement dated February 15, 2001 between Registrant and Allfirst Bank, successor to The First National Bank of Maryland (Exhibit 10.1 of Form 10-Q dated March 13, 2001). 10.14 Asset Purchase Agreement dated as of October 12, 2000 between Registrant and American Microwave Technology Inc. (Exhibit 10.1 of Form 10-Q dated December 12, 2000). 10.15 Common Stock Purchase Agreement dated as of December 4, 2000 between Registrant and Terrasat, Inc. (Exhibit 10.2 of Form 10-Q dated December 12, 2000). 10.16 Lease Agreement dated March 1, 2000 between Registrant and RSK Realty LTD (Exhibit 10.13 of Annual Report on Form 10-K for the fiscal year ended July 30, 2000). 10.17 Common Stock Purchase Agreement dated as of September 20, 2002 between Registrant and EW Simulation Technology, Limited. 10.18 Trust Indenture dated as of October 19, 2001 between Registrant, and East Hempfield Township Industrial Development Authority and Allfirst Bank, as Trustee. 23.1 Consent of Deloitte & Touche LLP. 99.1 Certification required by 18 U.S.C. ss. 906 of the Sarbanes-Oxley Act of 2002. (b) Financial Statements (1) See Index to Consolidated Financial Statements at Page F-1. (2) Schedule II - Valuation and Qualifying Accounts filed as part of this Form 10-K at page 27. 23 (c) Reports on Form 8-K During the fourth quarter of fiscal 2002, the Registrant filed the following reports under Form 8-K: The Company filed a report on May 24, 2002 for the appointment of Ernst & Young LLP as its independent auditors for the fiscal year ending July 28, 2002 to replace Arthur Andersen. The Company filed a report on July 17, 2002 for the appointment of Deloitte & Touche LLP as its independent auditors for the fiscal year ending July 28, 2002 to replace Arthur Andersen. 24 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 October 21, 2002. 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 21, 2002 by the following persons in the capacities indicated: By: /S/ Lee N. Blatt Chairman of the Board ------------------------------------------------ Lee N. Blatt By: /S/ Myron Levy Chief Executive Officer and ------------------------------------------------Director Myron Levy (Principal Executive Officer) By: /S/ Anello C. Garefino Vice President Finance, CFO, ------------------------------------------------Treasurer Anello C. Garefino (Principal Financial Officer) 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. 25 Certification of Chief Executive Officer pursuant to Section 302(a) of the SARBANES-OXLEY ACT OF 2002 I, Myron Levy, Chief Executive Officer of Herley Industries, Inc. (the "Registrant"), certify that: (a) I have reviewed this annual report on Form 10-K of Herley Industries, Inc. for the fiscal year ended July 28, 2002; (b) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and (c) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report. Dated: October 21, 2002 By: /s/ Myron Levy ------------------------ Myron Levy Chief Executive Officer Certification of Chief Financial Officer pursuant to Section 302(a) of the SARBANES-OXLEY ACT OF 2002 I, Anello C. Garefino, Chief Financial Officer of Herley Industries, Inc. (the "Registrant"), certify that: (a) I have reviewed this annual report on Form 10-K of Herley Industries, Inc. for the fiscal year ended July 28, 2002; (b) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and (c) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report. Dated: October 21, 2002 By: /s/ Anello C. Garefino ------------------------- Anello C. Garefino Chief Financial Officer 26
Schedule II - Valuation and Qualifying Accounts Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions Amount ------------------------------------- Charged to written Balance at Charged to other off Balance at beginning costs and accounts - against end of Description of period expenses describe reserve period ----------- --------- -------- -------- ------- ------ Valuation accounts deducted from assets to which they apply: July 28, 2002: Inventory $ 2,204,993 $ 202,035$ - $ - $ 2,407,028 July 29, 2001: Inventory 1,891,443 514,663 152,505 (1) 353,618 2,204,993 July 30, 2000: Inventory 1,935,832 83,317 - 127,706 1,891,443 (1) Reserve established for the acquisition of AMT.
27
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share data) July 28, July 29, 2002 2001 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 86,210 $ 13,041 Accounts receivable 14,486 16,069 Costs incurred and income recognized in excess of billings on uncompleted contracts 6,882 541 Other receivables 274 160 Inventories, net of allowance of $2,407 in 2002 and $1,774 in 2001 33,371 31,397 Prepaid income taxes 382 - Assets held for sale - 2,370 Deferred taxes and other 2,670 1,958 ---------- ---------- Total Current Assets 144,275 65,536 Property, Plant and Equipment, net 22,231 21,312 Goodwill 21,665 26,302 Intangibles, net of accumulated amortization of $145 in 2002 and $104 in 2001 423 464 Available-For-Sale Securities 46 146 Other Investments 195 773 Other Assets 1,367 64 ---------- ---------- $ 190,202 $ 114,597 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 215 $ 213 Accounts payable and accrued expenses 12,857 15,304 Billings in excess of costs incurred and income recognized on uncompleted contracts - 531 Income taxes payable - 1,061 Reserve for contract losses 820 472 Advance payments on contracts 1,371 261 Liabilities held for sale - 890 ---------- ---------- Total Current Liabilities 15,263 18,732 Long-term Debt 5,684 2,740 Deferred Income Taxes 3,897 4,452 ---------- ---------- 24,844 25,924 ---------- ---------- Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 14,680,960 in 2002 and 10,537,289 in 2001 1,468 1,054 Additional paid-in capital 116,579 45,250 Retained earnings 47,541 42,369 Accumulated other comprehensive loss (230) - ---------- ---------- Total Shareholders' Equity 165,358 88,673 ---------- ---------- $ 190,202 $ 114,597 ========== ==========
The accompanying notes are an integral part of these financial statements. F-4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) 52 weeks ended -------------------------------------------------- July 28, July 29, July 30, 2002 2001 2000 ------------- ------------- -------------- Net sales $ 92,881 $ 76,494 $ 70,537 ------------- ------------- -------------- Cost and expenses: Cost of products sold 61,947 50,691 44,382 Selling and administrative expenses 13,229 14,545 13,497 Litigation costs 2,079 265 - Plant closing costs 406 - - ------------- ------------- -------------- 77,661 65,501 57,879 ------------- ------------- -------------- Income from operations 15,220 10,993 12,658 Other income (expense), net 386 447 (906) ------------- ------------- -------------- Income from continuing operations before income taxes 15,606 11,440 11,752 Provision for income taxes 4,876 3,867 4,113 ------------- ------------- -------------- Income from continuing operations 10,730 7,573 7,639 Loss from discontinued operations (including net loss on sale of $1,166) net of income tax benefit (921) (168) - ------------- ------------- -------------- Income before cumulative effect of change in accounting principle 9,809 7,405 7,639 Cumulative effect of adopting SFAS 142 (4,637) - - ------------- ------------- -------------- Net income $ 5,172 $ 7,405 $ 7,639 ============= ============= ============== Earnings (loss) per common share - Basic Income from continuing operations .89 .75 1.05 Loss from discontinued operations (.08) (.02) - Cumulative effect of adopting SFAS 142 (.39) - - ------------- ------------- -------------- Net earnings $ .43 $ .73 $ 1.05 ============= ============= ============== Basic weighted average shares 12,041 10,082 7,308 ============= ============= ============== Earnings (loss) per common share - Diluted Income from continuing operations .83 .69 .96 Loss from discontinued operations (.07) (.02) - Cumulative effect of adopting SFAS 142 (.36) - - ------------- ------------- -------------- Net earnings $ .40 $ .68 $ .96 ============= ============= ============== Diluted weighted average shares 12,978 10,956 7,928 ============= ============= ==============
The accompanying notes are an integral part of these financial statements. F-5
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 52 weeks ended July 28, 2002, July 29, 2001 and July 30, 2000 (In thousands except share data) Accumulated Additional Other Common Stock Paid-in Retained Treasury Comprehensive Shares Amount Capital Earnings Stock Loss Total ------ ------ ------- -------- ----- ---- ----- 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 0 ----------- ------ -------- -------- -------- ------------- -------- Balance at July 30, 2000 5,993,870 $ 599 29,808 34,964 - - $ 65,371 Net income 7,405 7,405 Exercise of warrants issued in connection with business acquired in 1999 946,349 95 14,664 14,759 Exercise of stock options and warrants 94,134 10 1,239 1,249 Tax benefit upon exercise of stock options 83 83 Purchase of 10,800 shares of treasury stock (194) (194) Retirement of treasury shares (10,800) (1) (193) 194 0 Three-for-two stock split 3,513,736 351 (351) 0 ----------- ------ -------- -------- -------- ------------- -------- Balance at July 29, 2001 10,537,289 $ 1,054 45,250 42,369 - - $ 88,673 Net income 5,172 5,172 Net proceeds of public offering of 3,000,000 shares of common stock 3,000,000 300 64,512 64,812 Exercise of stock options and warrants 1,143,671 178 11,832 (11,873) 137 Tax benefit upon exercise of stock options 6,794 6,794 Retirement of treasury shares (64) (11,809) 11,873 0 Other comprehensive loss: Unrealized loss from available-for-sale securities (66) (66) Unrealized loss on interest rate swap (97) (97) Foreign currency translation loss (67) (67) ----------- ------ -------- -------- -------- ------------- -------- Balance at July 28, 2002 14,680,960 $ 1,468 116,579 47,541 - (230) $ 165,358 =========== ====== ======== ======== ======== ============= ========
The accompanying notes are an integral part of these financial statements. F-6
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 52 weeks ended ------------------------------------------- July 28, July 29, July 30, 2002 2001 2000 ---------- ---------- ---------- Cash flows from operating activities: Income from continuing operations $ 10,730 $ 7,573 $ 7,639 ---------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 3,917 4,772 3,998 Loss (gain) on sale of fixed assets 45 4 (21) Equity in income of limited partnership (48) (49) (71) (Increase) decrease in deferred tax assets (712) 962 (148) (Decrease) increase in deferred tax liabilities (471) (1,119) 342 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 1,583 (547) (1,568) (Increase) in costs incurred and income recognized in excess of billings on uncompleted contracts (6,341) (395) (146) (Increase) decrease in other receivables (2) 133 (20) (Increase) in inventories (1,974) (6,880) (1,625) Decrease in prepaid expenses and other - 25 4 Increase in accounts payable and accrued expenses 429 1,088 685 (Decrease) increase in billings in excess of costs incurred and income recognized on uncompleted contracts (531) 531 - Increase (decrease) in income taxes payable 5,351 (281) 1,458 Increase (decrease) in reserve for contract losses 348 (1,201) (1,038) Increase (decrease) in advance payments on contracts 1,110 (745) 195 Other, net (295) (13) 170 ---------- ---------- ---------- Total adjustments 2,409 (3,715) 2,215 ---------- ---------- ---------- Net cash provided by continuing operations 13,139 3,858 9,854 ---------- ---------- ---------- Cash flows from investing activities: Acquisition of businesses, net of cash acquired - (8,373) (6,095) Payment of deferred purchase price of acquired business (3,000) - - Investment in technology license (500) - - Proceeds from sale of fixed assets 85 16 4,142 Partial distribution from limited partnership 626 296 - Capital expenditures (5,488) (3,679) (2,618) ---------- ---------- ---------- Net cash used in investing activities (8,277) (11,740) (4,571) ---------- ---------- ---------- Cash flows from financing activities: Borrowings under bank line of credit 4,300 7,100 13,900 Proceeds from industrial revenue bond financing 3,000 - - Net proceeds from public offering of common stock 64,812 - - Proceeds from exercise of stock options and warrants, net 3,984 16,008 21,574 Payments under lines of credit (4,300) (7,100) (26,400) Payments of long-term debt (201) (908) (1,868) Purchase of treasury stock (3,847) (194) (7,565) ---------- ---------- ---------- Net cash provided by (used in) financing activities 67,748 14,906 (359) ---------- ---------- ---------- Net cash provided by (used in) discontinued operations 559 (1,648) - ---------- ---------- ---------- Net increase in cash and cash equivalents 73,169 5,376 4,924 Cash and cash equivalents at beginning of period 13,041 7,665 2,741 ---------- ---------- ---------- Cash and cash equivalents at end of period $ 86,210 $ 13,041 $ 7,665 ========== ========== ========== Supplemental cash flow information: Cashless exercise of stock options $ 8,026 $ - $ 80 ========== ========== ========== Stock issued for business acquired $ - $ - $ 514 ========== ========== ========== Tax benefit related to stock options $ 6,794 $ 83 $ 304 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-7 Item 8. Financial Statements and Supplementary Data HERLEY INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- INDEPENDENT AUDITORS' REPORT F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3 FINANCIAL STATEMENTS: Consolidated Balance Sheets, July 28, 2002 and July 29, 2001 F-4 Consolidated Statements of Income for the 52 weeks ended July 28, 2002, July 29, 2001 and July 30, 2000 F-5 Consolidated Statements of Shareholders' Equity for the 52 weeks ended July 28, 2002, July 29, 2001 and July 30, 2000 F-6 Consolidated Statements of Cash Flows for the 52 Weeks Ended July 28, 2002, July 29, 2001 and July 30, 2000 F-7 Notes to Consolidated Financial Statements F-8 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Herley Industries, Inc. We have audited the accompanying consolidated balance sheet of Herley Industries, Inc. and Subsidiaries ("the Company") as of July 28, 2002, and the related consolidated statement of income, shareholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 14 as it relates to the year ended July 28, 2002. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. The financial statements of the Company for the years ended July 29, 2001 and July 30, 2000 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated October 3, 2001, updated as of March 1, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 28, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule as it relates to the year ended July 28, 2002, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note A to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill by adopting Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ DELOITTE & TOUCHE LLP October 15, 2002 Baltimore, Maryland F-2 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 July 29, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for the 52 weeks ended August 1, 1999, July 30, 2000 and July 29, 2001. 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 consolidated financial position of Herley Industries, Inc. and Subsidiaries as of July 30, 2000 and July 29, 2001, and the consolidated results of their operations and their cash flows for the 52 weeks ended August 1, 1999, July 30, 2000 and July 29, 2001 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Lancaster, PA October 3, 2001 (except with respect to the matters discussed in Note P, as to which the date is March 1, 2002.) NOTE - This report represents a copy of the predecessor auditor's report included in the Company's Form S-3 dated April 4, 2002 and does not represent a reissuance of the report. Note P, as identified in the auditor's report, represents the Company's previous disclosure regarding discontinued operations which is included in Note Q of the current notes to the consolidated financial statements. F-3 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 defense and commercial 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 accounting principles generally accepted in the United States 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 defense, aerospace, and medical 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. F-8 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 other income (expense). 8. Goodwill and Other Intangible Assets The Company adopted the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets" on July 30, 2001. SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment and written down and charged to results of operations in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The adoption of SFAS No.142 resulted in the Company's discontinuation of amortization of its goodwill and certain intangible assets. The Company was required to assess its goodwill for impairment under the new standard within six months of adoption and completed its assessment in the second quarter of fiscal 2002. The Company operates as a single integrated business and as such has one operating segment which is also the reportable segment as defined in SFAS 131. Within the operating segment, the Company has identified two components as reporting units as defined under SFAS 142, defense electronics and commercial technologies. The Company determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of July 30, 2001. The Company determined that an impairment of goodwill in the commercial technologies unit had occurred due to the overcapacity in the telecom industry and deteriorating economic conditions. Accordingly, a transition adjustment in the amount of $4,637,000 was recorded as of July 30, 2001 as a cumulative effect of a change in accounting principle. There is no tax benefit associated with the adjustment since the impaired goodwill is not deductible for income tax purposes. Amortization of goodwill charged to continuing operations for the fifty-two weeks ended July 29, 2001 and July 30, 2000 was approximately $1,296,000 and $958,000 respectively. Amortization of goodwill charged to discontinued operations for the fifty-two weeks ended July 29, 2001 was approximately $208,000. Pro- forma income from continuing operations and net income and earnings per share in connection with the adoption of SFAS 142 is as follows (in thousands except per share data): F-9
Income from continuing operations: Fifty-two weeks ended --------------------- July 28, July 29, July 30, 2002 2001 2000 ---- ---- ---- Income from continuing operations as reported $ 10,730 $ 7,573 $ 7,639 Add goodwill amortization, net of income tax benefit - 850 623 ------ ------ ------ Adjusted income from continuing operations $ 10,730 $ 8,423 $ 8,262 ====== ===== ===== Earnings per common share-basic: From continuing operations as reported $ .89 $ .75 $ 1.05 Goodwill amortization - .08 .08 --- --- ---- Adjusted $ .89 $ .83 $ 1.13 === === ==== Earnings per common share-diluted: From continuing operations as reported $ .83 $ .69 $ .96 Goodwill amortization - .08 .08 --- --- ---- Adjusted $ .83 $ .77 $ 1.04 === === ====
Net income : Fifty-two weeks ended --------------------- July 28, July 29, July 30, 2002 2001 2000 ---- ---- ---- Net income as reported $ 5,172 $ 7,405 $ 7,639 Add goodwill amortization, net of income tax benefit - 987 623 ----- ----- ----- Adjusted net income $ 5,172 $ 8,392 $ 8,262 ===== ===== ===== Earnings per common share-basic: As reported $ .43 $ .73 $ 1.05 Goodwill amortization - .10 .08 --- --- ---- Adjusted $ .43 $ .83 $ 1.13 === === ==== Earnings per common share-diluted: As reported $ .40 $ .68 $ .96 Goodwill amortization - .09 .08 --- --- ---- Adjusted $ .40 $ .77 $ 1.04 === === ====
Intangibles, consisting of patents having an estimated useful life of fourteen years, are carried at an aggregate gross amount of $568,000 with accumulated amortization at July 29, 2002 of $145,000. Amortization expense for the fifty-two weeks ended July 29, 2002 and July 30, 2001 was approximately $41,000. The carrying amount of intangibles is evaluated on a recurring basis. There was no impairment in the remaining goodwill at July 28, 2002 of approximately $21,665,000 related to the defense electronics reporting unit based on current market capitalization of the Company. An annual impairment test is performed in the fourth quarter of each fiscal year and any future impairment of goodwill will be charged to operations. F-10 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 market value with net unrealized holding gains or losses, net of income taxes, reported as a separate component of other comprehensive loss. 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. 11. Revenue and Cost Recognition Substantially all of our customer contracts are firm, fixed price contracts, providing for a predetermined fixed price for the products that we sell, regardless of the costs we incur. 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 in the period when first determinable. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs and contract terms. 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. 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 $2,269,000, $2,588,000, and $2,264,000 in fiscal 2002, 2001, and 2000, respectively, and are included in cost of products sold. 13. 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. F-11 14. 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. 15. Foreign Currency Translation Financial statements of foreign subsidiaries are prepared in their respective functional currencies and translated into United States dollars at the current exchange rates for assets and liabilities and an average rate for the year for revenues, costs and expenses. Net gains or losses resulting from the translation of foreign financial statements are charged or credited directly to the 'Foreign currency translation' component of 'Accumulated other comprehensive loss' in the accompanying consolidated statements of shareholders' equity. 16. Derivatives The Company recognizes all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge") or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"). Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively. 17. New Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe the adoption of this standard will have a material impact on the Company's financial position or results of operations. F-12 In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement is effective for fiscal years beginning after May 15, 2002. SFAS 145 requires, among other things, eliminating reporting debt extinguishments as an extraordinary item in the income statement. Management does not believe the adoption of this standard will have a material impact on the Company's financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement is effective for fiscal years beginning after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Management does not believe the adoption of this standard will have a material impact on the Company's financial position or results of operations. NOTE B - ACQUISITIONS The Company entered into an agreement as of September 1, 2000 to acquire certain assets and the business, subject to the assumption of certain liabilities, of American Microwave Technology, Inc., ("AMT"), a California corporation, which operates as a division of Herley Industries, Inc. The transaction provided for the payment of $5,400,000 in cash, and the assumption of approximately $1,153,000 in liabilities. In addition, the Company entered into an exclusive license agreement for certain products providing for a royalty of 10% on the net shipments of such products through October 2004. The transaction has been accounted for under the purchase method. Accordingly, the consolidated statements of income include the results of AMT's operations from September 1, 2000. 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 operates as a division of Herley Industries, Inc. The transaction provided for the payment of $6,000,000 in cash, the issuance of 50,762 (as adjusted) shares of Common Stock of the Company valued at $10.125 per share, and the assumption of approximately $3,140,000 in liabilities. In addition, the agreement provided for the issuance of additional shares of Common Stock up to a maximum of 146,761 shares (as adjusted) based on new orders booked through January 2001. The Company determined that new orders booked through January 2001 did not meet the earn out provisions of the Asset Purchase Agreement (See Note F "Litigation"). The transaction has been accounted for under the purchase method. The consolidated statements of income include the results of Robinson's operations from January 3, 2000. Unaudited pro forma consolidated results of operations as if the acquisitions discussed above had taken place at the beginning of fiscal 2000 would not have been materially different from the amounts reported. As of September 1, 2002, the Company entered into an agreement to acquire all of the issued and outstanding common stock of EW Simulation Technology, Limited, as discussed in Note R. F-13 NOTE C - INVENTORIES The major components of inventories are as follows (in thousands): July 28, July 29, 2002 2001 ---- ---- Purchased parts and raw materials $18,680 $ 18,322 Work in process 15,707 12,854 Finished products 1,391 1,995 ------- ------- 35,778 33,171 Less reserve 2,407 1,774 ----- ----- $ 33,371 $ 31,397 ====== ====== NOTE D - 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 28, 2002 and July 29, 2001 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. The Company received partial distributions of approximately $626,000 and $296,000 from the Partnership in fiscal 2002 and 2001, respectively. As of July 28, 2002 the Company's limited partnership interest had a carrying value of $195,000. NOTE E - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are comprised of the following (in thousands): July 28, July 29, Estimated 2002 2001 Useful Life ---- ---- ----------- Land $ 2,908 $ 2,908 Building and building improvements 9,857 8,643 10-40 years Machinery and equipment 33,698 30,403 5- 8 years Furniture and fixtures 1,058 1,049 5-10 years Automobiles 91 91 3 years Tools 25 34 5 years Leasehold improvements 1,589 1,586 5-10 years ------- ------ 49,226 44,714 Less accumulated depreciation 26,995 23,402 ------ ------ $ 22,231 $ 21,312 ====== ====== Depreciation charges totaled $3,776,000, $3,127,000, and $2,889,000 in fiscal 2002, 2001, and 2000, respectively. NOTE F - 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 28, 2002, July 29, 2001, and July 30, 2000, was approximately $1,244,000, $1,506,000, and $1,053,000, respectively. F-14 Minimum annual rentals under noncancellable operating leases are as follows (in thousands): Amount Year ending fiscal 2003 $ 1,129 2004 966 2005 860 2006 875 2007 901 Future 2,049 Employment Agreements The Company has employment agreements with certain executives of the Company which expire December 31, 2007, subject to extension for additional one-year periods annually each January 1 with a final expiration date of December 31, 2010. The agreements provide for aggregate annual salaries as of July 29, 2002 of $1,327,000 and provide for a semi-annual cost of living adjustment based on the consumer price index. The agreements also provide for incentive compensation at 7% in the aggregate of pretax income of the Company. Incentive compensation in the amount of $956,000 and $971,000 was expensed in fiscal years 2002 and 2000, respectively. The executives waived their incentive for fiscal 2001. The 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 equal to the sum of the salary payable for the remainder of the employment term, plus the annual bonuses (based on the average of the three highest annual bonuses awarded during the ten preceding years) for the remainder of the employment term. As of July 29, 2002, the amount payable in the event of such termination would be approximately $12,416,000. The agreements also provide for consulting periods, one for five and one for ten years, at the end of the employment period at an annual compensation equivalent to one-half of the executive's annual salary at the end of the employment period, subject to annual cost of living adjustments. An employment contract of a retired executive provides for a consulting period which became effective October 1, 1998, and terminates December 31, 2010 at the annual rate of compensation of $100,000. Six officers of the Company have severance agreements providing for an aggregate lump-sum payment of $1,820,000 through September 30, 2004 in the event of a change of control of the Company as defined in the agreements. Litigation On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson ("Robinson") filed an Amended Complaint against Herley Industries, Inc. ("Herley"). Although the Amended Complaint sets forth fifteen counts, the core allegations are (i) that Herley failed to issue 97,841 shares of common stock in connection with certain earn out requirements contained in an Asset Purchase Agreement dated February 1, 2000; (ii) that Herley breached an Employment Agreement with Robinson by terminating his employment on August 5, 2001; and (iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with Robinson. RLI and Robinson asserted (i) violations of state and federal securities laws; (ii) fraud claims; (iii) breach of contract claims; and (iv) other equitable claims arising from the above core factual allegations. On September 17, 2001, Herley filed an Answer, Affirmative Defenses and Counterclaims in this matter. In the Answer and Affirmative Defenses, Herley denied the material allegations of the Amended Complaint. Herley also filed Counterclaims against both RLI and Robinson. In these counterclaims, Herley's core allegations concern Robinson's misconduct (i) in connection with the manner he attempted to satisfy RLI's F-15 earn out requirements; (ii) misrepresentations made in connection with the Asset Purchase Agreement; (iii) wrongdoing as a Herley employee leading to his termination and (iv) post-Herley employment wrongdoing in connection with a new company known as RH Laboratories. In addition to seeking a Declaratory Judgment pursuant to 28 U.S.C. ss. 2201 et. seq., Herley also asserted claims for, among other things, fraud, breach of contract, breach of fiduciary duty, unfair competition and tortious interference with actual and prospective contractual relationships. On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August 21, 2002 in which the jury determined, among other things, that (i) Herley was not required to pay any additional stock; (ii) Herley breached the Employment Agreement with Robinson and awarded Robinson $1.5 million in damages; (iii) Herley breached the Lease Agreement with Robinson and awarded Robinson approximately $552,000 in compensatory damages; (iv) Robinson breached fiduciary duties to Herley and awarded Herley $400,000 in compensatory damages; (v) Robinson and RLI breached indemnity obligations and awarded Herley $100,000 in damages; (vi) RLI breached representations and warranties given to Herley and awarded Herley $320,000 in damages. The court has still not entered final judgment following the jury verdict, and both parties are expected to appeal. Additionally, as the prevailing party in connection with the claims asserted by RLI relating to the earn-out stock, as well as claims advanced relating to the various breaches of the Asset Purchase Agreement, Herley intends to file a petition for attorney's fees and costs against both RLI and Robinson for approximately $2,000,000. The Company is involved in various other 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, 2004. At July 28, 2002 stand-by letters of credit aggregating approximately $5,062,000 were outstanding under this facility. NOTE G - INCOME TAXES Income tax expense consisted of the following (in thousands): 52 Weeks ended -------------------------------------- July 28, July 29, July 30, 2002 2001 2000 ---- ---- ---- Current Federal $ 5,333 $ 3,050 $ 3,573 State 520 275 192 Foreign 204 202 154 ----- ----- ----- 6,057 3,527 3,919 ----- ----- ----- Deferred Federal (1,090) 248 215 State (106) 92 (21) Foreign 15 - - ----- ----- ----- (1,181) 340 194 ----- ----- ----- $ 4,876 $ 3,867 $ 4,113 ===== ===== ===== The Company paid income taxes of approximately $680,000, $4,427,000, and $2,241000 in fiscal 2002, 2001, and 2000, respectively. The following is a reconciliation of the U. S. statutory income tax rate and F-16 the effective tax rate on pretax income: 52 Weeks ended ------------------------------ July 28, July 29, July 30, 2002 2001 2000 ---- ---- ---- Statutory income tax rate 34.0 % 34.0 % 34.0 % State income taxes, net of federal income tax benefit 0.9 2.4 0.9 Benefit of foreign sales corporation - (2.6) (2.1) Benefit of extra territorial income (2.4) - - Non-deductible expenses 0.2 2.5 1.8 Benefit of foreign and foreign-source income (1.4) (2.3) (1.8) Other, net (0.1) 0.4 2.2 ---- ---- ---- Effective tax rate 31.2 % 34.4 % 35.0 % ==== ==== ==== 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 non-remitted earnings of subsidiaries outside the United States permanently. The tax effects of significant items comprising deferred income taxes are as follows (in thousands): July 28, 2002 July 29, 2001 --------------------- --------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities Intangibles $ - $ 1,738 $ - $ 1,943 Accrued vacation pay 386 - 446 - Accrued bonus 53 - 39 - Warranty costs 136 - 100 - Inventory 1,101 - 838 - Depreciation - 2,159 - 2,873 Contract losses 362 - 146 - Net operating loss carry-forwards 230 - 230 - Other 120 - 342 99 ----- ----- ----- ----- $ 2,388 $ 3,897 $ 2,141 $ 4,915 ===== ===== ===== ===== As of July 28, 2002 the Company has available net operating loss carry-forwards for federal and state income tax purposes of approximately $489,000 and $956,000, respectively which expire through 2020. The Federal net operating loss arose through the acquisition of Terrasat and its utilization is subject to certain limitations. F-17 NOTE H- LONG-TERM DEBT Long-term debt is summarized as follows (in thousands): July 28, July 29, Rate 2002 2001 --------------- ---- ---- Revolving loan facility (a) 3.25% and 3.16% $ - $ - Mortgage note (b) 7.43% 2,691 2,765 Industrial Revenue Bonds (c) 4.07% 3,000 - Other - 208 188 ----- ----- 5,899 2,953 Less current portion 215 213 ----- ----- $ 5,684 $ 2,740 ===== ===== (a) In June 2002, the Company entered into a new $50,000,000 Revolving Credit Loan Syndication agreement with two banks on an unsecured basis 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, 2004. The Company may elect to borrow up to a maximum of $5,000,000 with interest based on the FOMC Federal Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of $45,000,000 with interest based on LIBOR plus a margin of 1.35% to 1.65%. The applicable incremental margin is based on the ratio of total liabilities to tangible net worth, as those terms are defined in the agreement, ranging from less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal Funds Target Rate and the LIBOR rate was 1.75% and 1.81%, respectively, at July 28, 2002. There is a fee of 15 basis points per annum on the unused portion of the $45,000,000 LIBOR based portion of the credit facility payable quarterly. There are no borrowings under the line at July 28, 2002 and July 29, 2001. The agreement contains various financial covenants, including, among other matters, minimum tangible net worth, total liabilities to tangible net worth, debt service coverage, and restrictions on other borrowings. The Company is in compliance with all covenants at July 28, 2002. (b) The mortgage loan is for a term of ten years commencing February 16, 1999 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 $1,845,000. The proceeds of the mortgage loan were used 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. The Company is in compliance with all covenants at July 28, 2002. 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 sheets at July 28, 2002 and July 29, 2001, and are being amortized over the term of the loan (10 years). (c) On October 19, 2001, the Company received $3,000,000 in proceeds from the East Hempfield Township Industrial Development Authority Variable Rate Demand/Fixed Rate Revenue Bonds Series of 2001 (the "Bonds"). The Bonds are due in varying annual installments through October 1, 2021. The initial installment of $95,000 is due October 1, 2002 and increases each year until the final payment of $225,000 in 2021. The interest rate on the Bonds is reset weekly at the prevailing market rate of the BMA Municipal index. The initial rate of interest was 2.1%, which, after giving effect to a ten year interest rate swap agreement (See Note O) becomes a fixed rate of 4.07%. The interest rate at July 28, 2002 was 1.59%. The bond agreement requires a sinking fund payment on a monthly basis to fund the annual Bonds redemption installment. Proceeds from the Bonds were used for the F-18 construction of a 15,000 square foot expansion of the Company's facilities in Lancaster PA, and for manufacturing equipment. The Bonds are secured by a letter of credit expiring October 18, 2006 and a mortgage on the related properties pledged as collateral. The net book value of the land and building covered by the mortgage is approximately $1,802,000 at July 28, 2002. The Company paid interest of approximately $316,000 in 2002, $289,000 in 2001, and $1,200,000 in 2000. Future payments required on long-term debt are as follows (in thousands): Fiscal year ending during: Amount ------------- ------ 2003 $ 215 2004 208 2005 198 2006 211 2007 223 Future 4,844 ----- $ 5,899 NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses include the following (in thousands): July 28, July 29, 2002 2001 ---- ---- Accounts payable $ 5,832 $ 6,760 Accrued payroll and bonuses 3,724 3,002 Due for business acquired - 3,000 Accrued commissions 822 591 Accrued interest 11 - Accrued legal expenses 1,018 174 Accrued warranty costs 235 255 Accrued severance 706 780 Accrued rent expense 163 132 Lease termination cost 58 54 Unearned income 108 - Other accrued expenses 180 556 ------ ------ $ 12,857 $ 15,304 ====== ====== NOTE J - EMPLOYEE BENEFIT PLANS In August 1985, the Board of Directors approved an Employee Savings Plan ("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. The Company has recognized expenses of approximately $533,000, $164,000, and $415,000 under the Plan for the 52 weeks ended July 28, 2002, July 29, 2001, and July 30, 2000, respectively. F-19 Employees of General Microwave Corporation (" 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 company matching contributions and has been frozen. 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 of November 1, 1999. All plan assets were liquidated and distributed to plan participants or used to purchase annuities on their behalf. Excess plan assets in the amount of approximately $470,000 were transferred in January 2001 directly into the Plan discussed above and inured to the benefit of Plan employees. Net pension income recorded by the Company in fiscal 2000 includes the following components (in thousands): July 30, 2000 -------- Service cost - benefits earned during the period $ - Interest cost 237 Return on assets (736) ---- Net pension income $ (499) ==== The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheet at July 30, 2000 (in thousands): July 30, 2000 -------- Projected benefit obligation at beginning of period $ 4,841 Service costs - Interest cost 237 Actuarial gain (348) Benefit payments (214) ------- Projected benefit obligation, end of year $ 4,516 ------- Change in fair value of plan assets: Fair value at beginning of period $ 4,342 Return on assets 823 Benefit payments (214) ------ Fair value at end of year 4,951 ------ Funded status (435) Unrecognized net gain 435 ------ Accrued pension costs $ - ======= Assumptions used were: Discount rate 5.00% Expected return on plan assets 10.00% NOTE K - RELATED PARTY TRANSACTIONS On January 16, 2001, the Board of directors approved the purchase of an industrial parcel of land adjacent to the existing facility in Lancaster, PA for $747,000 from a partnership of which the Chairman is general partner. Settlement on the property was on July 27, 2001. The Company used this land for a 15,000 square foot addition. In connection with the move of the Amityville facilities of GMC in fiscal 1999, the Company entered into F-20 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 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 L - 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 28, 2002 July 29, 2001 July 30, 2000 ------------- ------------- ------------- Numerator: Income from continuing operations $ 10,730 $ 7,573 $ 7,639 Loss from discontinued operations (921) (168) - Cumulative effect of adopting SFAS 142 (4,637) - - ------ ----- ----- Net Income $ 5,172 $ 7,405 $ 7,639 ====== ===== ===== Denominator: Basic weighted-average shares 12,041 10,082 7,308 Effect of dilutive securities: Employee stock options and warrants 937 874 620 ------ ------ ----- Diluted weighted-average shares 12,978 10,956 7,928 ====== ====== ===== Stock options and warrants not included in computation 126 544 2,472 === === =====
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 $17.42 to $19.52, which expire at various dates through May 21, 2007 were outstanding as of July 28, 2002. NOTE M - SHAREHOLDERS' EQUITY The authorized shares of Common Stock of the Company is 20,000,000 shares. On April 30, 2002, the Company completed the sale of 3,000,000 shares of common stock to the public at $23.00. The Company received net proceeds of approximately $64,812,000 after underwriting discounts and commissions and other expenses of the offering. On August 7, 2001 the Board of Directors declared a 3-for-2 stock split effected as a stock dividend payable September 10, 2001 to holders of record on August 28, 2001. The distribution increased the number of shares outstanding from 7,027,553 to 10,541,329. The amount of $351,373 was transferred from the additional paid-in capital to the common stock account to record this distribution. All share and per share data (other than common stock issued and outstanding on the 2000 Consolidated Balance Sheet and 1999 and 2000 Consolidated Statements of Shareholders' Equity), including stock options and warrants, included in this annual report have been restated to reflect the stock split on a retroactive basis. 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 F-21 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. 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 28, 2002 July 29, 2001 July 30, 2000 ------------- ------------- ------------- Expected life of options 1.51 years .73 years .71 years Volatility .68 .70 .72 Risk-free interest rate 2.8% 3.4% 6.1% Dividend yield zero zero zero Had compensation cost for stock options granted in fiscal years 2002, 2001, and 2000 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): 2002 2001 2000 ---- ---- ---- Net income - as reported $ 5,172 $ 7,405 $ 7,639 Net income - pro forma 747 5,795 5,952 Earnings per share - as reported Basic $.43 $.73 $1.05 Diluted .40 .68 .96 Earnings per share - pro forma Basic $.06 $.57 $.81 Diluted .06 .53 .75 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 September 2000, the Board of Directors approved the 2000 Stock Option Plan which covers 1,500,000 shares of the Company's common stock. Options granted under the plan are 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. The nature and terms of the options to be granted are determined at the time of grant by the compensation committee or the board of directors. The options expire no later than ten years from the date of grant, subject to certain restrictions. Options for 1,010,250 and 375,000 shares were granted during the fiscal years ended July 28, 2002 and July 29, 2001, respectively. In April 1998, the Board of Directors approved the 1998 Stock Option Plan which covers 2,250,000 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 are determined at the time of grant by the compensation committee or the board of directors. The options F-22 expire no later than ten years from the date of grant, subject to certain restrictions. Options for 368,342, 440,250 and 969,750 shares were granted during the fiscal years ended July 28, 2002, July 29, 2001 and July 30, 2000, respectively. In May 1997, the Board of Directors approved the 1997 Stock Option Plan which covers 2,500,000 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 are determined at the time of grant by the compensation committee or the board of directors. The options expire no later than ten years from the date of grant, subject to certain restrictions. Options for 21,151, 14,250, and 129,000 shares were granted during the fiscal years ended July 28, 2002, July 29, 2001 and July 30, 2000, respectively. In October 1995, the Board of Directors approved the 1996 Stock Option Plan which covers 1,000,000 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 are determined at the time of grant by the compensation committee or 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 7,007 shares were granted during the fiscal year ended July 28, 2002. A summary of stock option activity under all plans for the 52 weeks ended July 28, 2002, July 29, 2001 and July 30, 2000 is as follows:
Non-Qualified Stock Options -------------------------------------------------------------------------- Weighted Warrant Agreements Average ----------------------- Number Price Range Exercise Number Price per of shares per share Price of shares share --------- ------------- ----- ---------- ----- Outstanding August 1, 1999 2,091,925 $ 1.69 - 10.97 $ 7.15 320,000 $ 3.09 Granted 1,098,750 9.25 - 11.91 10.33 Exercised (155,985) 1.69 - 9.83 4.68 Canceled (20,550) 7.41 - 10.46 8.47 --------- ------------ -------- ------- ------ Outstanding July 30, 2000 3,014,140 $ 4.06 - 11.91 $ 8.43 320,000 $ 3.09 Granted 829,500 8.38 - 14.25 8.99 Exercised (37,254) 4.06 - 10.46 6.72 Canceled (48,600) 4.31 - 14.25 10.76 --------- ------------- ------- ------- ------ Outstanding July 29, 2001 3,757,786 $ 4.06 - 13.67 $ 8.55 320,000 $ 3.09 Granted 1,406,750 11.90 - 19.52 16.05 Exercised (1,454,660) 4.06 - 13.67 7.50 (320,000) 3.09 Cancelled (282,700) 7.63 - 13.15 10.31 --------- ------------- ------ ------- ------ Outstanding July 28, 2002 3,427,176 $ 4.06 - 19.52 $ 11.92 - ========= =======
F-23 Options Outstanding and Exercisable by Price Range as of July 28, 2002, with expiration dates ranging from May 12, 2005 to May 21, 2012 are as follows:
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 ---------------------------- ----------- ---------------- -------------- ----------- -------------- $ 4.06 - $ 8.08 274,726 5.7 $ 6.21 234,751 $ 5.97 8.38 - 8.67 638,350 6.5 8.38 392,500 8.38 8.77 - 10.46 1,044,900 6.4 10.08 838,125 10.04 10.50 - 13.10 818,200 7.9 12.95 23,800 11.26 15.90 - 19.52 651,000 9.1 19.47 547,500 19.52 ---------- --- ----- --------- ----- $ 4.06 - $ 19.52 3,427,176 7.2 $ 8.55 2,714,738 $ 8.21 ========= =========
In December 1995, common stock warrants were issued to certain officers for the right to acquire 440,000 shares of common stock of the Company at the fair market value of $3.09 per share at date of issue. The warrants vest immediately and expire December 13, 2005. The remaining warrants for 320,000 shares outstanding at July 29, 2001 were exercised during the fiscal year ended July 28, 2002. NOTE N - SIGNIFICANT SEGMENTS, MAJOR CUSTOMERS, AND EXPORT SALES The Company's chief operating decision makers are considered to be the Chairman and the Chief Executive Officer (CEO). The Company's Chairman and CEO evaluate both consolidated and disaggregated financial information consisting of revenue information in deciding how to allocate resources and assess performance. The Chairman and CEO also use certain disaggregated financial information for the Company's product groups. The Company does not determine a measure of operating income or loss by product group. The Company's 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 operates as a single integrated business and as such has one operating segment as a provider of complex microwave radio frequency (RF) and millimeter wave components and subsystems for defense and commercial customers worldwide. All of the Company's revenues result from sales of its products. Revenues for fiscal years 2002, 2001 and 2000 were as follows: defense electronics, $80,615,000, $61,977,000 and $67,405,000, respectively; and commercial technologies, $12,266,000, $14,517,000, and $3,132,000, respectively. Net sales to the U.S. Government in 2002, 2001 and 2000 accounted for approximately 17%, 19% and 26% of net sales, respectively. No other customer accounted for shipments in excess of 10% of consolidated net sales in fiscal 2002, 2001 or 2000. Foreign sales amounted to approximately $30,070,000, $20,683,000 and $16,506,000 in fiscal 2002, 2001 and 2000, respectively. NOTE O - DERIVATIVE FINANCIAL INSTRUMENTS In October 2001, the Company entered into an interest rate swap with a bank pursuant to which it exchanged floating rate interest in connection with the Bonds discussed in Note H on a notional amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending October 1, 2011. The notional amount reduces each year in tandem with the annual installments due on the Bonds. The fixing of the interest rate for this period offsets the Company's exposure to the uncertainty of floating interest rates on the Bonds, and as such has been designated as a cash flow hedge. The hedge is deemed to be highly effective and any ineffectiveness will be recognized in interest expense in the reporting period. The fair value of the interest rate swap was a liability of $147,000 as of July 28, 2002. There was no material hedge ineffectiveness related to cash flow F-24 hedges during the period to be recognized in earnings. There was no gain or loss reclassified from accumulated other comprehensive income into earnings during the fiscal year ended July 28, 2002 as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. 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. 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 and industrial revenue bonds (including the related interest rate swap) were estimated using discounted cash flow analyses, 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 28, 2002 --------------------------- Carrying Amount Fair Value --------------- ---------- Cash and cash equivalents $ 86,210 $ 86,210 Available-for-sale securities 46 46 Long-term debt 5,684 6,550 NOTE Q - DISCONTINUED OPERATIONS The Company entered into an agreement effective as of the close of business September 30, 2000, to acquire all of the issued and outstanding common stock of Terrasat, Inc. ("Terrasat"), a California corporation for cash in the amount of $6,000,000, $3,000,000 of which was paid in December 2000 and $3,000,000 of which was paid in December 2001. In addition, the agreement provided for additional cash payments in the future up to $2,000,000, based on gross revenues through December 31, 2001. The targeted gross revenues under the agreement were not achieved, therefore no addition cash payments were required. In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for segments of a business to be disposed of, but retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. The provisions of this statement were adopted by the Company effective on July 30, 2001. In January 2002 the Board of Directors of the Company decided to discontinue the operations of Terrasat and to seek a buyer for the business. The Company believed that Terrasat would not be able to generate F-25 sufficient returns to justify continued investment due to the overcapacity in the telecom industry and deteriorating economic conditions in Terrasat's primary markets. Consequently, the accompanying consolidated financial statements reflect Terrasat as discontinued operations in accordance with SFAS No. 144. The assets and liabilities of Terrasat at July 29, 2001 have been classified in the accompanying balance sheet as "Assets held for sale", and "Liabilities held for sale." Results of operations and cash flows of Terrasat have been classified as "Loss from discontinued operations", and "Net cash provided by (used in) discontinued operations", respectively. The sale of certain assets and liabilities, and the business of Terrasat was consummated on March 1, 2002, effective the close of business January 27, 2002, to certain current employees of Terrasat for cash and a note which approximates the value of the net assets held for sale as of January 27, 2002 of $878,000. The following table shows the components of assets and liabilities of Terrasat held for sale as of July 29, 2001: Assets held for sale: Accounts receivable $ 978 Prepaid expenses 21 Inventory 1,371 ----- $ 2,370 ===== Liabilities held for sale: Accounts payable $ 626 Accrued expenses 264 --- $ 890 === Summarized below are the results of discontinued operations: 52 weeks ended ------------------- July 28, July 29, 2002 2001 ---- ---- Net sales $ 2,147 $ 4,103 ----- ----- Loss from discontinued operations (1,395) (147) Income tax (benefit) provision (474) 21 ------ ----- Net loss from discontinued operations $ (921) $ (168) === === NOTE R - SUBSEQUENT EVENT The Company entered into an agreement as of September 1, 2002, to acquire all of the issued and outstanding common stock of EW Simulation Technology, Limited ("EWST"), a British company of Aldershot, UK, which is expected to be operated as a wholly-owned subsidiary. EWST designs, develops and produces electronic warfare simulator systems for prime defense contractors and countries worldwide. The transaction, which closed on September 20, 2002, provides for payment of $3,000,000 in cash and a note for $1,500,000, including interest at 1.8%, payable in annual installments of $500,000. The transaction will be accounted for in accordance with the provisions of SFAS No. 141, "Business Combinations", which requires that all business combinations be accounted for using the purchase method. The allocation of the aggregate estimated purchase price will be determined based on detailed reviews of the fair value of assets acquired, including identified intangible assets, and liabilities assumed. Any remaining excess cost over the fair value of net assets acquired will be recognized as goodwill. ************ F-26 EX-10 3 ex105blatt.txt EXHIBIT 10.5 EMPLOYMENT AGREEMENT LEE N. BLATT Exhibit 10.5 - ------------ EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of July 29, 2002, by and between HERLEY INDUSTRIES, INC., a Delaware corporation, with its principal office located at 3061 Industry Drive, Lancaster, Pennsylvania 17603 (together with its successors and assigns permitted under this Agreement, "Herley") and LEE N. BLATT ("Blatt"), amends and restates in its entirety the Employment Agreement made and entered into as of October 1, 1998, as amended on January 26, 1999 and July 30, 1999 between Herley and Blatt (the "Prior Agreement"). WITNESSETH: WHEREAS, Herley has determined that it is in the best interests of Herley and its stockholders to continue to employ Blatt and to set forth in this Agreement the obligations and duties of both Herley and Blatt; and WHEREAS, Herley wishes to assure itself of the services of Blatt for the period hereinafter provided, and Blatt is willing to be employed by Herley for said period, upon the terms and conditions provided in this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, Herley and Blatt (individually a "Party" and together the "Parties" ) agree as follows: 1. DEFINITIONS. (a) "Beneficiary" shall mean the person or persons named by Blatt pursuant to Section 17 below or, in the event that no such person is named who survives Blatt, his estate. (b) "Board" shall mean the Board of Directors of Herley. (c) "Cause" shall mean: (i) Blatt's conviction of a felony involving an act or acts of dishonesty on his part and resulting in gain or personal enrichment at the expense of Herley; (ii) willful and continued failure of Blatt to perform his obligations under this Agreement, resulting in demonstrable material economic harm to Herley, or (iii) a willful and material breach by Blatt of the provisions of Sections 14 or 15 below to the demonstrable and material detriment of Herley. Notwithstanding the foregoing, in no event shall Blatt's failure to perform the duties associated with his position caused by his mental or physical disability constitute Cause for his termination. For purposes of this Section 1(c), no act or failure to act on the part of Blatt shall be considered "willful" unless it is done, or omitted to be done, by him in bad faith or without reasonable belief that his action or omission was in the best interests of Herley. Any act or failure to act based upon authority given pursuant to a resolution adopted by the Board or based upon the advice of counsel for Herley shall be conclusively presumed to be done, or omitted to be done, by Blatt in good faith and in the best interests of Herley. (d) "Change in Control" shall mean the occurrence of any of the following events: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of Herley when such acquisition causes such Person to beneficially own 20 percent or more of the combined voting power of the then outstanding voting securities of Herley entitled to vote generally in the election of directors (the "Outstanding Herley Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from Herley, (B) any acquisition by Herley, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Herley or any corporation controlled by Herley or (D) any acquisition pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Herley Voting Securities reaches or exceeds 20 percent as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of Herley, such subsequent acquisition shall be treated as an acquisition that causes such Person to beneficially own 20 percent or more of the Outstanding Herley Voting Securities; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Herley's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a reorganization, merger or consolidation or sale or other disposition of all or subsequently all of the assets of Herley or the acquisition of assets of another entity ("Business Combination"); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Herley Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60 percent of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Herley Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of Herley or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20 percent or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns Herley or all or substantially all of Herley's assets either directly or through one or more subsidiaries) were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the stockholders of Herley of a complete liquidation or dissolution of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board. (g) "Consulting Period" shall mean the period specified in Section 13 below during which Blatt serves as a consultant to Herley. (h) "Disability" shall mean the illness or other mental or physical disability of Blatt, as determined by a physician acceptable to Herley and Blatt, resulting in his failure during the Employment Term or the Consulting Period, as the case may be, (i) to perform substantially his applicable material duties under this Agreement for a period of twelve consecutive months and (ii) to return to the performance of his duties within 90 days after receiving written notice of termination. (i) "Employment Term" shall mean the period specified in Section 2(b) below. (j) "Fiscal Year" shall mean the 52-week period beginning on or about August 1 and ending on or about the next subsequent July 31, or such other 12-month period as may constitute Herley's fiscal year at any time hereafter. (k) "Good Reason" shall mean, at any time during the Employment Term, in each case (except for clause (vi) below) without Blatt's prior written consent or his acquiescence: (i) reduction in his then current Salary; (ii) diminution, reduction or other adverse change in the bonus or incentive compensation opportunities available to Blatt (with respect to the level of bonus or incentive compensation opportunities, the applicable performance criteria and otherwise the manner in which bonuses and incentive compensation are determined) in the aggregate from those available as of the date hereof in accordance with Section 4(a) below; (iii) Herley's failure to pay Blatt any amounts otherwise vested and due him hereunder or under any plan or policy of Herley; (iv) diminution of Blatt's titles, position, authorities or responsibilities, including not serving on the Board; (v) assignment to Blatt of duties incompatible with his position of Chairman; (vi) termination by Blatt of his employment within one year following a Change in Control other than (a) for Cause or (b) by reason of death or Disability; (vii) imposition of a requirement that Blatt report other than directly to the full Board; (viii) a material breach of the Agreement by Herley that is not cured within 10 business days after written notification by Blatt of such breach; or (ix) relocation of Herley's corporate headquarters to a location more than 35 miles from the location first above described. (l) "Retirement" shall mean termination of Blatt's employment subsequent to the date hereof, other than (i) due to death or Disability, (ii) for Cause or Good Reason or (iii) without Cause. (m) "Salary" shall mean the annual salary provided for in Section 3 below, as adjusted from time to time. (n) "Spouse" shall mean, during the Term of Employment and the Consulting Period, the woman who as of any relevant date is legally married to Blatt. (o) "Subsidiary" shall mean any corporation of which Herley owns, directly or indirectly, more than 50 percent of its voting stock. 2. EMPLOYMENT TERM, POSITIONS AND DUTIES. (a) Employment of Blatt. Herley hereby continues to employ Blatt, and Blatt hereby accepts continued employment with Herley, in the positions and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. Blatt shall render services to Herley principally from his home offices where he has created work space and his responsibilities do not require attendance at any Herley office. These responsibilities include, among other things, conducting executive recruiting tasks and visiting customers, investment banks and potential acquisition candidates for Herley. Blatt shall also do limited traveling on behalf of Herley as shall be reasonably required in the course of the performance of his duties hereunder. (b) Employment Term. The Employment Term shall commence as of July 29, 2002 and shall terminate on December 31, 2007, provided that the Employment Term shall extend for additional one-year periods annually each January 1, unless this agreement is terminated under the provisions of Section 10 below. In no event, however, shall the Employment Term extend beyond December 31, 2010. (c) Titles and Duties. (i) Until the date of termination of his employment hereunder, Blatt shall be employed as Chairman of the Board, reporting to the full Board. In his capacity as Chairman of the Board, Blatt shall have the customary powers, responsibilities and authorities of chairmen of corporations of the size, type and nature of Herley including, without limitation, authority, in conjunction with the Board as appropriate, to hire and terminate other employees of Herley. (ii) During the Employment Term, Herley shall uses its best efforts to secure the election of Blatt to the Board and to the chairmanship thereof. During the Employment Term, if the Board forms an executive or similar committee, Blatt shall serve thereon. (d) Time and Effort. (i) Blatt agrees to devote his best efforts and abilities, and such of his business time and attention as is reasonably necessary, to the affairs of Herley in order to carry out his duties and responsibilities under this Agreement. (ii) Notwithstanding the foregoing, nothing shall preclude Blatt from (A) serving on the boards of a reasonable number of trade associations, charitable organizations and/or businesses not in competition with Herley, (B) engaging in charitable activities and community affairs and (C) managing his personal investments and affairs; provided, however, that, such activities do not materially interfere with the proper performance of his duties and responsibilities specified in Section 2 (c) above. 3. SALARY. (a) Initial Salary. Blatt shall receive from Herley a Salary, payable in accordance with the regular payroll practices of Herley, in a minimum amount of $736,868. (b) Cost-of-Living Increase. During the Employment Term Blatt's Salary shall be increased semiannually by an amount equal to the change in the cost of living index since the prior semiannual adjustment , as reported in the "Consumer Price Index, New York and Northeastern New Jersey, All Items, Series ID CUURA101SA0" published by the United States Department of Labor, Bureau of Labor Statistics (or, if such index is no longer published, a successor or comparable index that is published), using June 30, 2002 as the base year of computation. Such amount shall be calculated and paid to Blatt in a single sum on or before the first day of the second month following the applicable calendar half year, and thereafter his Salary shall be adjusted to include the amount of any such increase. The first calculation and payment shall be made with respect to the six month period from and after August 1, 2002. If Blatt's employment shall terminate during any such six-month period, the cost-of-living increase provided in this Section 3(b) shall be prorated accordingly. (c) Salary Increase. Any amount to which Blatt's Salary is increased, as provided in Section 3(b) above or otherwise, shall not thereafter be reduced without his consent, and the term "Salary" as used in this Agreement shall refer to his Salary as thus increased. 4. ANNUAL BONUS. Not later than one hundred twenty (120) days after the end of the fiscal year of the Company and each subsequent fiscal year of the Company ending during employment term, the Company shall pay to Employee, as incentive compensation an amount equal to four (4%) percent of the Consolidated Pretax Earnings of the Company. For purposes hereof, the term "Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the consolidated income, if any, of the Company for such fiscal year as set forth in the audited, consolidated financial statements (the "Financial Statements") of the Company and its subsidiaries included in its Annual Report to stockholders for such fiscal year, before deduction of taxes based on income or of the incentive compensation to be paid to Employee for such fiscal year under this Agreement as defined in this clause 4. 5. LONG-TERM INCENTIVE. During the Employment Term, Blatt shall be eligible for an award under any long-term incentive compensation plan established by Herley for the benefit of Blatt or, in the absence thereof, under any such plan established for the benefit of members of the senior management of Herley. 6. EQUITY OPPORTUNITY. During the Employment Term, Blatt shall be eligible to receive grants of options to purchase shares of Herley's stock and awards of shares of Herley's stock, either or both as determined by the Committee, under and in accordance with the terms of applicable plans of Herley and related option and award agreements. It is the intention of Herley to grant stock options to Blatt during the Employment Term. Also, to the extent permitted by any such plan, Blatt shall be eligible during any Consulting Period to receive grants of options and awards of shares of Herley's stock in the same manner. 7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS. During the Employment Term and any Consulting Period, Blatt shall be entitled to prompt reimbursement by Herley for all reasonable out-of-pocket expenses incurred by him in performing services under this Agreement. In addition, Blatt shall be entitled to payment by Herley of all reasonable costs and expenses, including attorneys' and consultants' fees and disbursements, incurred by him in connection with adoption of this Agreement and any related compensatory arrangements that Herley adopts solely for his benefit. 8. PERQUISITES. During the Employment Term and any Consulting Period, Herley shall provide Blatt with the following perquisites: (a) an office of a size and with furnishings and other appointments, and exclusive personal secretarial and other assistance, at least equal to that provided to Blatt by Herley as of the date hereof; and (b) use of an automobile and payment of related expenses on the same terms as in effect on the date hereof or, if more favorable to Blatt, as made available generally to other executive officers of Herley and its affiliates at any time thereafter. 9. EMPLOYEE BENEFIT PLANS. (a) General. During the Employment Term, Blatt shall be entitled to participate in all employee benefit plans and programs made available to Herley's senior executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, pension and other retirement plans, profit-sharing plans, savings and similar plans, group life insurance, accidental death and dismemberment insurance, travel accident insurance, hospitalization insurance, surgical insurance, major and excess major medical insurance, dental insurance, short-term and long-term disability insurance, sick leave (including salary continuation arrangements), holidays, vacation (not less than six weeks in any calendar year) and any other employee benefit plans or programs that may be sponsored by Herley from time to time, including plans that supplement the above-listed types of plans, whether funded or unfunded. (b) Medical Care Reimbursement and Insurance. During the Employment Term and Consulting Period, Herley shall reimburse Blatt for 100 percent of any medical expenses incurred by him for himself and his Spouse that are not reimbursed by insurance or otherwise. Herley shall provide Blatt and his Spouse, during his lifetime, with life insurance (for which Blatt shall receive an allowance of $56,000 annually, which shall be paid semi-annually by Herley on August 1 and February 1) hospitalization insurance, surgical insurance, major and excess major medical insurance and dental insurance in accordance with the most favorable plans, policies, programs and practices of Herley and its Subsidiaries made available generally to other senior executive officers of Herley and its Subsidiaries as in effect from time to time. (c) Disability Benefit. In consideration of the benefit payable to Blatt in the event of termination of his employment due to Disability, as provided in Section 10(d) below, or, if applicable, in the event of termination of Blatt's consulting services due to Disability during the Consulting Period, as provided in Section 13(d) below, Herley shall not be obligated to provide Blatt with long-term disability insurance. If Herley elects to provide Blatt with such insurance, he shall be the owner of any individual policies obtained and shall pay the premiums thereon; provided, however, that Herley shall reimburse Blatt for any premiums that he pays. 10. TERMINATION OF EMPLOYMENT. (a) Voluntary Termination and Termination by Mutual Agreement. Blatt may terminate his employment voluntarily at any time after December 31, 2002 in accordance with the provisions of Section 10(g). If he does so, except for Good Reason, his entitlement shall be the same as if Herley had terminated his employment for Cause. The Parties may terminate this Agreement by mutual agreement at any time. If they do so, Blatt's entitlements shall be as the Parties mutually agree. (b) General. Notwithstanding anything to the contrary herein, in the event of termination of Blatt's employment under this Agreement, he or his Beneficiary, as the case may be, shall be entitled to receive (in addition to payments and benefits under, and except as specifically provided in, subsections (c) through (h) below, as applicable): (i) his Salary through the date of termination; (ii) any unused vacation from prior years; (iii) any annual or special bonus awarded but not yet paid to him; (iv) any other compensation or benefits, including without limitation long-term incentive compensation described in Section 5 above, benefits under equity grants and awards described in Section 6 above and employee benefits under plans described in Section 9 above, that have vested through the date of termination or to which he may then be entitled in accordance with the applicable terms and conditions of each grant, award or plan; and (v) reimbursement in accordance with Sections 9(a) and (b) above of any business and medical expenses incurred by Blatt or his Spouse, as applicable, through the date of termination but not yet paid to him. (c) Termination due to Death. In the event that Blatt's employment is terminated due to his death, his Beneficiary shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination. (d) Termination due to Disability. In the event of Disability, Herley or Blatt may terminate Blatt's employment. If Blatt's employment is terminated due to Disability, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination, offset by any long-term disability insurance benefit that Herley may have elected to provide for him. (e) Termination by Herley for Cause. Herley may terminate Blatt's employment hereunder for Cause only upon written notice to Blatt not less than 30 days prior to any intended termination, which notice shall specify the grounds for such termination in reasonable detail. Cause shall in no event be deemed to exist except upon a finding reflected in a resolution approved by a majority (excluding Blatt) of the members of the Board (whose findings shall not be binding upon or entitled to any deference by any court, arbitrator or other decision-maker ruling on this Agreement) at a meeting of which Blatt shall have been given proper notice and at which Blatt (and his counsel) shall have a reasonable opportunity to present his case. In the event that Blatt's employment is terminated for Cause, he shall be entitled only to the compensation and benefits specified in Section 10(b). (f) Termination Without Cause or by Blatt for Good Reason. (i) Termination without Cause shall mean termination of Blatt's employment by Herley and shall exclude termination (A) due to death, Disability or Cause, (B) by Blatt voluntarily or (C) by mutual written agreement of Blatt and Herley. Herley shall provide Blatt 15 days' prior written notice of termination by it without Cause, and Blatt shall provide Herley 15 days' prior written notice of his termination for Good Reason. (ii) In the event of termination by Herley of Blatt's employment without Cause or of termination by Blatt of his employment for Good Reason, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to: (A) a lump-sum payment equal to the Salary payable to him for the remainder of the Employment Term at the rate in effect immediately before such termination; (B) a lump sum payment equal to the annual bonuses for the remainder of the Employment Term (including a prorated bonus for any partial Fiscal Year) equal to the average of the three highest annual bonuses awarded to him during the ten Fiscal Years preceding the Fiscal Year of termination; (C) continued medical reimbursement for the remainder of the Employment Term and thereafter the lifetime medical benefits described in Section 9(b) above; (D) continued participation in all employee benefit plans or programs available to Herley employees generally in which Blatt was participating on the date of termination of his employment until the end of the Employment Term; provided; however, that (x) if Blatt is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (D), he shall be entitled to the after-tax economic equivalent of the benefits under the plan or program in which he is unable to participate until the end of the Employment Term, and (y) the economic equivalent of any benefit foregone shall be deemed to be the lowest cost that Blatt would incur in obtaining such benefit on an individual basis; and (E) other benefits in accordance with applicable plans and programs of the Company. (iii) Prior written consent by Blatt to any of the events described in Section 1(k) above shall be deemed a waiver by him of his right to terminate for Good Reason under this Section 10(f) solely by reason of the events set forth in such waiver. (g) Voluntary Termination by Blatt. At any time after December 31, 2002, Blatt shall have the right, upon 60 days' prior written notice, voluntarily to terminate his employment without Good Reason, in which event his employment shall cease and the Employment Term shall terminate as of the date stated in such notice, and the Consulting Period shall begin on the next succeeding business day, and he shall be entitled to receive compensation and benefits as if Herley had terminated his employment for Cause, as provided in Section 10(e). (h) Change in Control. Notwithstanding anything to the contrary in this Section 10, termination of Blatt's employment within the one-year period following a Change in Control for any reason other than Cause, death or Disability, shall be governed by Section 10(f). In the event of any such termination, Blatt shall be entitled to compensation and benefits in accordance with the provisions of Section 10(f)(ii). 11. NO DUTY TO MITIGATE. Blatt shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payment hereunder be subject to offset in the event Blatt does receive compensation for services from any other source. 12. PARACHUTES. (a) Application. If all, or any portion, of the payments provided under this Agreement, and/or any other payments and benefits that Blatt receives or is entitled to receive from Herley, a Subsidiary or any other person, whether or not under an existing plan, arrangement or other agreement, constitutes an excess "parachute payment" within the meaning of Section 280G(b) of the Code (each such parachute payment, a "Parachute Payment") and will result in the imposition on Blatt of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which Blatt is entitled under this Agreement, Herley shall pay him an amount in cash equal to the sum of the excise taxes payable by him by reason of receiving Parachute Payments, plus the amount necessary to put him in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including without limitation any payments under this Section 12) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). (b) Computation. The amount of any payment under this Section 12 shall be computed by a certified public accounting firm of national reputation selected by Herley and acceptable to Blatt. If Herley or Blatt disputes the computation rendered by such accounting firm, Herley shall select an alternative certified public accounting firm of national reputation to perform the applicable computation. If the two accounting firms cannot agree upon the computations, Blatt and Herley shall jointly appoint a third certified public accounting firm of national reputation within 10 calendar days after the two conflicting computations have been rendered. Such third accounting firm shall be asked to determine within 30 calendar days the computation of the Parachute Gross-up to be paid to Blatt, and payments shall be made accordingly. (c) Payment. In any event, Herley shall pay to Blatt or pay on his behalf the Parachute Gross-up as computed by the accounting firm initially selected by Blatt by the time any taxes payable by him as a result of the Parachute Payments become due, with Blatt agreeing to return the excess amount of such payment over the final computation rendered from the process described in Section 12(b). Blatt and Herley shall provide the accounting firms with all information that any of them reasonably deems necessary in order to compute the Parachute Gross-up. The cost and expenses of all the accounting firms retained to perform the computations described above shall be borne by Herley. In the event that the Internal Revenue Service ("IRS") or the accounting firm computing the Parachute Gross-up finally determines that the amount of excise taxes thereon initially paid was insufficient to discharge Blatt's excise tax liability, Herley shall make additional payments to him as may be necessary to reimburse him for discharging the full liability. Blatt shall apply to the IRS for a refund of any excise taxes paid and remit to Herley the amount of any such refund that he receives. Herley shall reimburse Blatt for his expenses in seeking a refund of excise taxes and for any interest and penalties imposed on excise taxes that he is required to pay. 13. CONSULTING PERIOD. (a) General. Effective upon the end of the Employment Term (but only if the Employment Term ends by reason of its expiration or, if earlier, upon termination of Blatt's employment (i) voluntarily, (ii) by mutual agreement or (iii) by Retirement), Blatt shall become a consultant to Herley, in recognition of the continued value to Herley of his extensive knowledge and expertise. Unless earlier terminated, as provided in Section 13(e), the Consulting Period shall continue for five years. (b) Duties and Extent of Services. (i) During the Consulting Period, Blatt shall consult with Herley and its senior executive officers regarding its respective businesses and operations. Such consulting services shall not require more than 50 days in any calendar year, nor more than one day in any week, it being understood and agreed that during the Consulting Period Blatt shall have the right, consistent with the prohibitions of Sections 14 and 15 below, to engage in full-time or part-time employment with any business enterprise that is not a competitor of Herley. (ii) Blatt's service as a consultant shall only be required at such times and such places as shall not result in unreasonable inconvenience to him, recognizing his other business commitments that he may have to accord priority over the performance of services for Herley. In order to minimize interference with Blatt's other commitments, his consulting services may be rendered by personal consultation at his residence or office wherever maintained, or by correspondence through mail, telephone, fax or other similar mode of communication at times, including weekends and evenings, most convenient to him. (iii) During the Consulting Period, Blatt shall not be obligated to serve as a member of the Board or to occupy any office on behalf of Herley or any of its Subsidiaries. (c) Compensation. During the Consulting Period, Blatt shall receive from Herley each year an amount equivalent to one-half of his Salary at the end of the Employment Term, payable and subject to annual increase as provided in Section 3 above. (d) Disability. In the event of Disability during the Consulting Period, Herley or Blatt may terminate Blatt's consulting services. If Blatt's consulting services are terminated due to Disability, he shall be entitled to compensation, in accordance with Section 13(c), for the remainder of the Consulting Period. (e) Termination. The Consulting Period shall terminate after five years or, if earlier, upon Blatt's death or upon his failure to perform consulting services as provided in Section 13(b), pursuant to 30 days' written notice by Herley to Blatt of the grounds constituting such failure and reasonable opportunity afforded Blatt to cure the alleged failure. Upon any such termination, payment of consulting fees and benefits (with the exception of lifetime medical benefits under Section 9(b) above) shall cease. (f) Other. During the Consulting Period, Blatt shall be entitled to expense reimbursement (including secretarial, telephone and similar support services) and perquisites and medical benefits, pursuant to the terms of Sections 7, 8 and 9(b), respectively. 14. CONFIDENTIAL INFORMATION. (a) General. (i) Blatt understands and hereby acknowledges that as a result of his employment with Herley he will necessarily become informed of and have access to certain valuable and confidential information of Herley and any of its Subsidiaries, joint ventures and affiliates, including, without limitation, inventions, trade secrets, technical information, computer software and programs, know-how and plans ("Confidential Information"), and that any such Confidential Information, even though it may be developed or otherwise acquired by Blatt, is the exclusive property of Herley to be held by him in trust solely for Herley's benefit. (ii) Accordingly, Blatt hereby agrees that, during the Employment Term and the Consulting Period and subsequent to both, he shall not, and shall not cause others to, use, reveal, report, publish, transfer or otherwise disclose to any person, corporation or other entity any Confidential Information without prior written consent of the Board, except to (A) responsible officers and employees of Herley or (B) responsible persons who are in a contractual or fiduciary relationship with Herley or who need such information for purposes in the interest of Herley. Notwithstanding, the foregoing, the prohibitions of this clause (ii) shall not apply to any Confidential Information that becomes of general public knowledge other than from Blatt or is required to be divulged by court order or administrative process. (b) Return of Documents. Upon termination of his employment with Herley for any reason or, if applicable, upon expiration of the Consulting Period, Blatt shall promptly deliver to Herley all plans, drawings, manuals, letters, notes, notebooks, reports, computer programs and copies thereof and all other materials, including without limitation those of a secret or confidential nature, relating to Herley's business that are then in his possession or control. (c) Remedies and Sanctions. In the event that Blatt is found to be in violation of Section 14(a) or (b) above, Herley shall be entitled to relief as provided in Section 16 below. 15. NONCOMPETITION/NONSOLICITATION. (a) Prohibitions. During the Employment Term and, if applicable, the Consulting Period, Blatt shall not, without prior written authorization of the Board, directly or indirectly, through any other individual or entity: (i) become on officer or employee of, or render any service to, any direct competitor of Herley; (ii) solicit or induce any customer of Herley to cease purchasing goods or services from Herley or to become a customer of any competitor of Herley; or (iii) solicit or induce any employee of Herley to become employed by any competitor of Herley. (b) Remedies and Sanctions. In the event that Blatt is found to be in violation of Section 15(a) above, Herley shall be entitled to relief as provided in Section 16 below. (c) Exceptions. Notwithstanding anything to the contrary in Section 15(a) above, its provisions shall not: (i) apply if Herley terminates Blatt's employment without Cause or Blatt terminates his employment for Good Reason, each as provided in Section 10(f) above; or (ii) be construed as preventing Blatt from investing his assets in any business that is not a direct competitor of Herley. 16. REMEDIES/SANCTIONS. Blatt acknowledges that the services he is to render under this Agreement are of a unique and special nature, the loss of which cannot reasonably or adequately be compensated for in monetary damages, and that irreparable injury and damage may result to Herley in the event of any breach of this Agreement or default by Blatt. Because of the unique nature of the Confidential Information and the importance of the prohibitions against competition and solicitation, Blatt further acknowledges and agrees that Herley will suffer irreparable harm if he fails to comply with his obligations under Section 14(a) or (b) above or Section 15(a) above and that monetary damages would be inadequate to compensate Herley for any such breach. Accordingly, Blatt agrees that, in addition to any other remedies available to either Party at law, in equity or otherwise, Herley will be entitled to seek injunctive relief or specific performance to enforce the terms, or prevent or remedy the violation, of any provisions of this Agreement. 17. BENEFICIARIES/REFERENCES. Blatt shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following his death by giving Herley written notice thereof. In the event of Blatt's death, or of a judicial determination of his incompetence, reference in this Agreement to Blatt shall be deemed to refer, as appropriate, to his beneficiary, estate or other legal representative. 18. WITHHOLDING TAXES. All payments to Blatt or his Beneficiary under this Agreement shall be subject to withholding on account of federal, state and local taxes as required by law. 19. INDEMNIFICATION AND LIABILITY INSURANCE. Nothing herein is intended to limit Herley's indemnification of Blatt, and Herley shall indemnify him to the fullest extent permitted by applicable law consistent with Herley's Certificate of Incorporation and By-Laws as in effect at the beginning of the Employment Term, with respect to any action or failure to act on his part while he is an officer, director or employee of Herley or any Subsidiary. Herley shall cause Blatt to be covered at all times by directors' and officers' liability insurance on terms no less favorable than the directors' and officers' liability insurance maintained by Herley in effect on the date hereof in terms of coverage and amounts. Herley shall continue to indemnify Blatt as provided above and maintain such liability insurance coverage for him after the Employment Term and, if applicable, the Consulting Period for any claims that may be made against him with respect to his service as a director or officer of Herley or a consultant to Herley. 20. EFFECT OF AGREEMENT ON OTHER BENEFITS. The existence of this Agreement shall not prohibit or restrict Blatt's entitlement to participate fully in compensation, employee benefit and other plans of Herley in which senior executives are eligible to participate. 21. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Blatt) and assigns. No rights or obligations of Herley under this Agreement may be assigned or transferred by Herley except pursuant to (a) a merger or consolidation in which Herley is not the continuing entity or (b) sale or liquidation of all or substantially all of the assets of Herley, provided that the surviving entity or assignee or transferee is the successor to all or substantially all of the assets of Herley and such surviving entity or assignee or transferee assumes the liabilities, obligations and duties of Herley under this Agreement, either contractually or as a matter of law. Herley further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall use its best efforts to have such assignee or transferee expressly agree to assume the liabilities, obligations and duties of Herley hereunder; provided, however, that notwithstanding such assumption, Herley shall remain liable and responsible for fulfillment of the terms and conditions of this Agreement; and provided, further, that in no event shall such assignment and assumption of this Agreement adversely affect Blatt's right upon a Change in Control, as provided in Section 10(h) above. No rights or obligations of Blatt under this Agreement may be assigned or transferred by him. 22. REPRESENTATIONS. The Parties respectively represent and warrant that each is fully authorized and empowered to enter into this Agreement and that the performance of its or his obligations, as the case may be, under this Agreement will not violate any agreement between such Party and any other person, firm or organization. Herley represents and warrants that this Agreement has been duly authorized by all necessary corporate action and is valid, binding and enforceable in accordance with its terms. 23. ENTIRE AGREEMENT. Except to the extent otherwise provided herein, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes any prior agreements, whether written or oral, between the Parties concerning the subject matter hereof, including without limitation the Prior Agreement. Payments and benefits provided under this Agreement are in lieu of any payments or other benefits under any severance program or policy of Herley to which Blatt would otherwise be entitled. 24. AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by both Blatt and an authorized officer of Herley. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Party to be charged with the waiver. No delay by either Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 25. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 26. SURVIVAL. The respective rights and obligations of the Parties under this Agreement shall survive any termination of Blatt's employment with Herley. 27. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and construed and interpreted in accordance with the laws of New York, without reference to principles of conflict of laws. 28. COSTS OF DISPUTES. Herley shall pay, at least monthly, all costs and expenses, including attorneys' fees and disbursements, of Blatt in connection with any proceeding, whether or not instituted by Herley or Blatt, relating to any provision of this Agreement, including but not limited to the interpretation, enforcement or reasonableness thereof; provided, however, that, if Blatt instituted the proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that his claims were frivolous or were made in bad faith, he shall pay his own costs and expenses and, if applicable, return any amounts theretofore paid to him or on his behalf under this Section 28. Pending the outcome of any proceeding, Herley shall pay Blatt all amounts due to him without regard to the dispute; provided, however, that if Herley shall be the prevailing party in such a proceeding, Blatt shall promptly repay all amounts that he received during pendency of the proceeding (other than amounts received pursuant to this Section 28). 29. NOTICES. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered either personally, by fax, by overnight delivery service (such as Federal Express) or sent by certified or registered mail postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as the Party may subsequently give notice of. If to Herley or the Board: Herley Industries, Inc. 3061 Industry Drive Lancaster, Pennsylvania 17603 Fax No. 717-397-9503 With a copy to: Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle, Suite 225 Jericho, NY 11753 Fax No. 516-822-4824 If to Blatt: 734 Yokum Pond Road Becket, Massachusetts 01223 And to: 741 North Arrowhead Trail Vero Beach, FL 32963 With a copy to: Lee N. Blatt c/o Herley Industries, Inc. 3061 Industry Drive Lancaster, Pennsylvania 17603 Fax No. 717-397-9503 30. HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 31. COUNTERPARTS. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of July 29, 2002. HERLEY INDUSTRIES, INC. Attest: ___________________________ By: _________________________ Myron Levy Attest: ____________________________ By: __________________________ John M. Kelley EMPLOYEE Witness: ___________________________ _________________________ Lee N. Blatt EX-10 4 ex106levy.txt EXHIBIT 10.6 EMPLOYMENT AGREEMENT MYRON LEVY Exhibit 10.6 - ------------ EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of July 29, 2002, by and between HERLEY INDUSTRIES, INC., a Delaware corporation, with its principal office located at 3061 Industry Drive, Lancaster, Pennsylvania 17603 (together with its successors and assigns permitted under this Agreement, "Herley") and MYRON LEVY ("Levy"), amends and restates in its entirety the Employment Agreement made and entered into as of October 1, 1998, as amended on January 26, 1999 and July 30, 1999 between Herley and Levy (the "Prior Agreement"). WITNESSETH: WHEREAS, Herley has determined that it is in the best interests of Herley and its stockholders to continue to employ Levy and to set forth in this Agreement the obligations and duties of both Herley and Levy; and WHEREAS, Herley wishes to assure itself of the services of Levy for the period hereinafter provided, and Levy is willing to be employed by Herley for said period, upon the terms and conditions provided in this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, Herley and Levy (individually a "Party" and together the "Parties" ) agree as follows: 1. DEFINITIONS. (a) "Beneficiary" shall mean the person or persons named by Levy pursuant to Section 17 below or, in the event that no such person is named who survives Levy, his estate. (b) "Board" shall mean the Board of Directors of Herley. (c) "Cause" shall mean: (i) Levy's conviction of a felony involving an act or acts of dishonesty on his part and resulting in gain or personal enrichment at the expense of Herley; (ii) willful and continued failure of Levy to perform his obligations under this Agreement, resulting in demonstrable material economic harm to Herley, or (iii)a willful and material breach by Levy of the provisions of Sections 14 or 15 below to the demonstrable and material detriment of Herley. Notwithstanding the foregoing, in no event shall Levy's failure to perform the duties associated with his position caused by his mental or physical disability constitute Cause for his termination. For purposes of this Section 1(c), no act or failure to act on the part of Levy shall be considered "willful" unless it is done, or omitted to be done, by him in bad faith or without reasonable belief that his action or omission was in the best interests of Herley. Any act or failure to act based upon authority given pursuant to a resolution adopted by the Board or based upon the advice of counsel for Herley shall be conclusively presumed to be done, or omitted to be done, by Levy in good faith and in the best interests of Herley. (d) "Change in Control" shall mean the occurrence of any of the following events: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of Herley when such acquisition causes such Person to beneficially own 20 percent or more of the combined voting power of the then outstanding voting securities of Herley entitled to vote generally in the election of directors (the "Outstanding Herley Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from Herley, (B) any acquisition by Herley, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Herley or any corporation controlled by Herley or (D) any acquisition pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Herley Voting Securities reaches or exceeds 20 percent as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of Herley, such subsequent acquisition shall be treated as an acquisition that causes such Person to beneficially own 20 percent or more of the Outstanding Herley Voting Securities; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Herley's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii)consummation of a reorganization, merger or consolidation or sale or other disposition of all or subsequently all of the assets of Herley or the acquisition of assets of another entity ("Business Combination"); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Herley Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60 percent of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Herley Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of Herley or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20 percent or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns Herley or all or substantially all of Herley's assets either directly or through one or more subsidiaries) were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the stockholders of Herley of a complete liquidation or dissolution of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board. (g) "Consulting Period" shall mean the period specified in Section 13 below during which Levy serves as a consultant to Herley. (h) "Disability" shall mean the illness or other mental or physical disability of Levy, as determined by a physician acceptable to Herley and Levy, resulting in his failure during the Employment Term or the Consulting Period, as the case may be, (i) to perform substantially his applicable material duties under this Agreement for a period of twelve consecutive months and (ii) to return to the performance of his duties within 90 days after receiving written notice of termination. (i) "Employment Term" shall mean the period specified in Section 2(b) below. (j) "Fiscal Year" shall mean the 52-week period beginning on or about August 1 and ending on or about the next subsequent July 31, or such other 12-month period as may constitute Herley's fiscal year at any time hereafter. (k) "Good Reason" shall mean, at any time during the Employment Term, in each case (except for clause (vi) below) without Levy's prior written consent or his acquiescence: (i) reduction in his then current Salary; (ii) diminution, reduction or other adverse change in the bonus or incentive compensation opportunities available to Levy (with respect to the level of bonus or incentive compensation opportunities, the applicable performance criteria and otherwise the manner in which bonuses and incentive compensation are determined) in the aggregate from those available as of the date hereof in accordance with Section 4(a) below; (iii)Herley's failure to pay Levy any amounts otherwise vested and due him hereunder or under any plan or policy of Herley; (iv) diminution of Levy's titles, position, authorities or responsibilities, including not serving on the Board; (v) assignment to Levy of duties incompatible with his position of Chief Executive Officer; (vi) termination by Levy of his employment within one year following a Change in Control other than (a) for Cause or (b) by reason of death or Disability; (vii)imposition of a requirement that Levy report other than directly to the full Board; (viii) a material breach of the Agreement by Herley that is not cured within 10 business days after written notification by Levy of such breach; or (ix) relocation of Herley's corporate headquarters to a location more than 35 miles from the location first above described. (l) "Retirement" shall mean termination of Levy's employment subsequent to the date hereof, other than (i) due to death or Disability, (ii) for Cause or Good Reason or (iii) without Cause. (m) "Salary" shall mean the annual salary provided for in Section 3 below, as adjusted from time to time. (n) "Spouse" shall mean, during the Term of Employment and the Consulting Period, the woman who as of any relevant date is legally married to Levy. (o) "Subsidiary" shall mean any corporation of which Herley owns, directly or indirectly, more than 50 percent of its voting stock. 2. EMPLOYMENT TERM, POSITIONS AND DUTIES. (a) Employment of Levy. Herley hereby continues to employ Levy, and Levy hereby accepts continued employment with Herley, in the positions and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. Levy shall render services to Herley principally at Herley's corporate headquarters, and shall do such traveling on behalf of Herley as shall be reasonably required in the course of the performance of his duties hereunder. (b) Employment Term. The Employment Term shall commence as of July 29, 2002 and shall terminate on December 31, 2007, provided that the Employment Term shall extend for additional one-year periods annually each January 1, unless this agreement is terminated under the provisions of Section 10 below. In no event, however, shall the Employment Term extend beyond December 31, 2010. (c) Titles and Duties. (i) Until the date of termination of his employment hereunder, Levy shall be employed as Chief Executive Officer, reporting to the full Board. In his capacity as Chief Executive Officer, Levy shall have the customary powers, responsibilities and authorities of chief executive officers of corporations of the size, type and nature of Herley including, without limitation, authority, in conjunction with the Board as appropriate, to hire and terminate other employees of Herley. (ii) During the Employment Term, Herley shall uses its best efforts to secure the election of Levy to the Board. During the Employment Term, if the Board forms an executive or similar committee, Levy shall serve thereon. (d) Time and Effort. (i) Levy agrees to devote his best efforts and abilities, and such of his business time and attention as is reasonably necessary, to the affairs of Herley in order to carry out his duties and responsibilities under this Agreement. (ii) Notwithstanding the foregoing, nothing shall preclude Levy from (A) serving on the boards of a reasonable number of trade associations, charitable organizations and/or businesses not in competition with Herley, (B) engaging in charitable activities and community affairs and (C) managing his personal investments and affairs; provided, however, that, such activities do not materially interfere with the proper performance of his duties and responsibilities specified in Section 2 (c) above. 3. SALARY. (a) Initial Salary. Levy shall receive from Herley a Salary, payable in accordance with the regular payroll practices of Herley, in a minimum amount of $589,946. (b) Cost-of-Living Increase. During the Employment Term Levy's Salary shall be increased semiannually by an amount equal to the change in the cost of living index since the prior semiannual adjustment, as reported in the "Consumer Price Index, New York and Northeastern New Jersey, All Items, Series ID CUURA101SA0" published by the United States Department of Labor, Bureau of Labor Statistics (or, if such index is no longer published, a successor or comparable index that is published), using June 30, 2002 as the base year of computation. Such amount shall be calculated and paid to Levy in a single sum on or before the first day of the second month following the applicable calendar half year, and thereafter his Salary shall be adjusted to include the amount of any such increase. The first calculation and payment shall be made with respect to the six month period from and after August 1, 2002. If Levy's employment shall terminate during any such six-month period, the cost-of-living increase provided in this Section 3(b) shall be prorated accordingly. (c) Salary Increase. Any amount to which Levy's Salary is increased, as provided in Section 3(b) above or otherwise, shall not thereafter be reduced without his consent, and the term "Salary" as used in this Agreement shall refer to his Salary as thus increased. 4. ANNUAL BONUS. Not later than one hundred twenty (120) days after the end of the fiscal year of the Company and each subsequent fiscal year of the Company ending during the employment term, the Company shall pay to Employee, as incentive compensation an amount equal to three (3%) percent of the Consolidated Pretax Earnings of the Company. For purposes hereof, the term "Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the consolidated income, if any, of the Company for such fiscal year as set forth in the audited, consolidated financial statements (the "Financial Statements") of the Company and its subsidiaries included in its Annual Report to stockholders for such fiscal year, before deduction of taxes based on income or of the incentive compensation to be paid to Employee for such fiscal year under this Agreement as defined in this clause 4. 5. LONG-TERM INCENTIVE. During the Employment Term, Levy shall be eligible for an award under any long-term incentive compensation plan established by Herley for the benefit of Levy or, in the absence thereof, under any such plan established for the benefit of members of the senior management of Herley. 6. EQUITY OPPORTUNITY. During the Employment Term, Levy shall be eligible to receive grants of options to purchase shares of Herley's stock and awards of shares of Herley's stock, either or both as determined by the Committee, under and in accordance with the terms of applicable plans of Herley and related option and award agreements. It is the intention of Herley to grant stock options to Levy during the Employment Term. Also, to the extent permitted by any such plan, Levy shall be eligible during any Consulting Period to receive grants of options and awards of shares of Herley's stock in the same manner. 7. EXPENSE REIMBURSEMENT; CERTAIN OTHER COSTS. During the Employment Term and any Consulting Period, Levy shall be entitled to prompt reimbursement by Herley for all reasonable out-of-pocket expenses incurred by him in performing services under this Agreement. In addition, Levy shall be entitled to payment by Herley of all reasonable costs and expenses, including attorneys' and consultants' fees and disbursements, incurred by him in connection with adoption of this Agreement and any related compensatory arrangements that Herley adopts solely for his benefit. 8. PERQUISITES. During the Employment Term and any Consulting Period, Herley shall provide Levy with the following perquisites: (a) an office of a size and with furnishings and other appointments, and exclusive personal secretarial and other assistance, at least equal to that provided to Levy by Herley as of the date hereof; and (b) use of an automobile and payment of related expenses on the same terms as in effect on the date hereof or, if more favorable to Levy, as made available generally to other executive officers of Herley and its affiliates at any time thereafter. 9. EMPLOYEE BENEFIT PLANS. (a) General. During the Employment Term, Levy shall be entitled to participate in all employee benefit plans and programs made available to Herley's senior executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, pension and other retirement plans, profit-sharing plans, savings and similar plans, group life insurance, accidental death and dismemberment insurance, travel accident insurance, hospitalization insurance, surgical insurance, major and excess major medical insurance, dental insurance, short-term and long-term disability insurance, sick leave (including salary continuation arrangements), holidays, vacation (not less than four weeks in any calendar year) and any other employee benefit plans or programs that may be sponsored by Herley from time to time, including plans that supplement the above-listed types of plans, whether funded or unfunded. (b) Medical Care Reimbursement and Insurance. During the Employment Term and Consulting Period, Herley shall reimburse Levy for 100 percent of any medical expenses incurred by him for himself and his Spouse that are not reimbursed by insurance or otherwise, offset by any amounts that are reimbursable by Medicare if Levy and his Spouse, when eligible, elect to be covered by Medicare. Herley shall provide Levy and his Spouse, during his lifetime, with life insurance, hospitalization insurance, surgical insurance, major and excess major medical insurance and dental insurance in accordance with the most favorable plans, policies, programs and practices of Herley and its Subsidiaries made available generally to other senior executive officers of Herley and its Subsidiaries as in effect from time to time. (c) Disability Benefit. In consideration of the benefit payable to Levy in the event of termination of his employment due to Disability, as provided in Section 10(d) below, or, if applicable, in the event of termination of Levy's consulting services due to Disability during the Consulting Period, as provided in Section 13(d) below, Herley shall not be obligated to provide Levy with long-term disability insurance. If Herley elects to provide Levy with such insurance, he shall be the owner of any individual policies obtained and shall pay the premiums thereon; provided, however, that Herley shall reimburse Levy for any premiums that he pays. 10. TERMINATION OF EMPLOYMENT. (a) Voluntary Termination and Termination by Mutual Agreement. Levy may terminate his employment voluntarily at any time after December 31, 2002 in accordance with the provisions of Section 10(g). If he does so, except for Good Reason, his entitlement shall be the same as if Herley had terminated his employment for Cause. The Parties may terminate this Agreement by mutual agreement at any time. If they do so, Levy's entitlements shall be as the Parties mutually agree. (b) General. Notwithstanding anything to the contrary herein, in the event of termination of Levy's employment under this Agreement, he or his Beneficiary, as the case may be, shall be entitled to receive (in addition to payments and benefits under, and except as specifically provided in, subsections (c) through (h) below, as applicable): (i) his Salary through the date of termination; (ii) any unused vacation from prior years; (iii)any annual or special bonus awarded but not yet paid to him; - (iv) any other compensation or benefits, including without limitation long-term incentive compensation described in Section 5 above, benefits under equity grants and awards described in Section 6 above and employee benefits under plans described in Section 9 above, that have vested through the date of termination or to which he may then be entitled in accordance with the applicable terms and conditions of each grant, award or plan; and (v) reimbursement in accordance with Sections 9(a) and (b) above of any business and medical expenses incurred by Levy or his Spouse, as applicable, through the date of termination but not yet paid to him. (c) Termination due to Death. In the event that Levy's employment is terminated due to his death, his Beneficiary shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination. (d) Termination due to Disability. In the event of Disability, Herley or Levy may terminate Levy's employment. If Levy's employment is terminated due to Disability, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to his Salary payable for the remainder of the Employment Term at the rate in effect immediately before such termination, offset by any long-term disability insurance benefit that Herley may have elected to provide for him. (e) Termination by Herley for Cause. Herley may terminate Levy's employment hereunder for Cause only upon written notice to Levy not less than 30 days prior to any intended termination, which notice shall specify the grounds for such termination in reasonable detail. Cause shall in no event be deemed to exist except upon a finding reflected in a resolution approved by a majority (excluding Levy) of the members of the Board (whose findings shall not be binding upon or entitled to any deference by any court, arbitrator or other decision-maker ruling on this Agreement) at a meeting of which Levy shall have been given proper notice and at which Levy (and his counsel) shall have a reasonable opportunity to present his case. In the event that Levy's employment is terminated for Cause, he shall be entitled only to the compensation and benefits specified in Section 10(b). (f) Termination Without Cause or by Levy for Good Reason. (i) Termination without Cause shall mean termination of Levy's employment by Herley and shall exclude termination (A) due to death, Disability or Cause, (B) by Levy voluntarily or (C) by mutual written agreement of Levy and Herley. Herley shall provide Levy 15 days' prior written notice of termination by it without Cause, and Levy shall provide Herley 15 days' prior written notice of his termination for Good Reason. (ii) In the event of termination by Herley of Levy's employment without Cause or of termination by Levy of his employment for Good Reason, he shall be entitled, in addition to the compensation and benefits specified in Section 10(b), to: (A) a lump-sum payment equal to the Salary payable to him for the remainder of the Employment Term at the rate in effect immediately before such termination; (B) a lump sum payment equal to the annual bonuses for the remainder of the Employment Term (including a prorated bonus for any partial Fiscal Year) equal to the average of the three highest annual bonuses awarded to him during the ten Fiscal Years preceding the Fiscal Year of termination; (C) continued medical reimbursement for the remainder of the Employment Term and thereafter the lifetime medical benefits described in Section 9(b) above; (D) continued participation in all employee benefit plans or programs available to Herley employees generally in which Levy was participating on the date of termination of his employment until the end of the Employment Term; provided; however, that (x) if Levy is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (D), he shall be entitled to the after-tax economic equivalent of the benefits under the plan or program in which he is unable to participate until the end of the Employment Term, and (y) the economic equivalent of any benefit foregone shall be deemed to be the lowest cost that Levy would incur in obtaining such benefit on an individual basis; and (E) other benefits in accordance with applicable plans and programs of the Company. (iii)Prior written consent by Levy to any of the events described in Section 1(k) above shall be deemed a waiver by him of his right to terminate for Good Reason under this Section 10(f) solely by reason of the events set forth in such waiver. (g) Voluntary Termination by Levy. At any time after December 31, 2002, Levy shall have the right, upon 60 days' prior written notice, voluntarily to terminate his employment without Good Reason, in which event his employment shall cease and the Employment Term shall terminate as of the date stated in such notice, and the Consulting Period shall begin on the next succeeding business day, and he shall be entitled to receive compensation and benefits as if Herley had terminated his employment for Cause, as provided in Section 10(e). (h) Change in Control. Notwithstanding anything to the contrary in this Section 10, termination of Levy's employment within the one-year period following a Change in Control for any reason other than Cause, death or Disability, shall be governed by Section 10(f). In the event of any such termination, Levy shall be entitled to compensation and benefits in accordance with the provisions of Section 10(f)(ii). 11. NO DUTY TO MITIGATE. Levy shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payment hereunder be subject to offset in the event Levy does receive compensation for services from any other source. 12. PARACHUTES. (a) Application. If all, or any portion, of the payments provided under this Agreement, and/or any other payments and benefits that Levy receives or is entitled to receive from Herley, a Subsidiary or any other person, whether or not under an existing plan, arrangement or other agreement, constitutes an excess "parachute payment" within the meaning of Section 280G(b) of the Code (each such parachute payment, a "Parachute Payment") and will result in the imposition on Levy of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which Levy is entitled under this Agreement, Herley shall pay him an amount in cash equal to the sum of the excise taxes payable by him by reason of receiving Parachute Payments, plus the amount necessary to put him in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including without limitation any payments under this Section 12) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). (b) Computation. The amount of any payment under this Section 12 shall be computed by a certified public accounting firm of national reputation selected by Herley and acceptable to Levy. If Herley or Levy disputes the computation rendered by such accounting firm, Herley shall select an alternative certified public accounting firm of national reputation to perform the applicable computation. If the two accounting firms cannot agree upon the computations, Levy and Herley shall jointly appoint a third certified public accounting firm of national reputation within 10 calendar days after the two conflicting computations have been rendered. Such third accounting firm shall be asked to determine within 30 calendar days the computation of the Parachute Gross-up to be paid to Levy, and payments shall be made accordingly. (c) Payment. In any event, Herley shall pay to Levy or pay on his behalf the Parachute Gross-up as computed by the accounting firm initially selected by Levy by the time any taxes payable by him as a result of the Parachute Payments become due, with Levy agreeing to return the excess amount of such payment over the final computation rendered from the process described in Section 12(b). Levy and Herley shall provide the accounting firms with all information that any of them reasonably deems necessary in order to compute the Parachute Gross-up. The cost and expenses of all the accounting firms retained to perform the computations described above shall be borne by Herley. In the event that the Internal Revenue Service ("IRS") or the accounting firm computing the Parachute Gross-up finally determines that the amount of excise taxes thereon initially paid was insufficient to discharge Levy's excise tax liability, Herley shall make additional payments to him as may be necessary to reimburse him for discharging the full liability. Levy shall apply to the IRS for a refund of any excise taxes paid and remit to Herley the amount of any such refund that he receives. Herley shall reimburse Levy for his expenses in seeking a refund of excise taxes and for any interest and penalties imposed on excise taxes that he is required to pay. 13. CONSULTING PERIOD. (a) General. Effective upon the end of the Employment Term (but only if the Employment Term ends by reason of its expiration or, if earlier, upon termination of Levy's employment (i) voluntarily, (ii) by mutual agreement or (iii) by Retirement), Levy shall become a consultant to Herley, in recognition of the continued value to Herley of his extensive knowledge and expertise. Unless earlier terminated, as provided in Section 13(e), the Consulting Period shall continue for ten years. (b) Duties and Extent of Services. (i) During the Consulting Period, Levy shall consult with Herley and its senior executive officers regarding its respective businesses and operations. Such consulting services shall not require more than 50 days in any calendar year, nor more than one day in any week, it being understood and agreed that during the Consulting Period Levy shall have the right, consistent with the prohibitions of Sections 14 and 15 below, to engage in full-time or part-time employment with any business enterprise that is not a competitor of Herley. (ii) Levy's service as a consultant shall only be required at such times and such places as shall not result in unreasonable inconvenience to him, recognizing his other business commitments that he may have to accord priority over the performance of services for Herley. In order to minimize interference with Levy's other commitments, his consulting services may be rendered by personal consultation at his residence or office wherever maintained, or by correspondence through mail, telephone, fax or other similar mode of communication at times, including weekends and evenings, most convenient to him. (iii) During the Consulting Period, Levy shall not be obligated to serve as a member of the Board or to occupy any office on behalf of Herley or any of its Subsidiaries. (c) Compensation. During the Consulting Period, Levy shall receive from Herley each year an amount equivalent to one-half of his Salary at the end of the Employment Term, payable and subject to annual increase as provided in Section 3 above. (d) Disability. In the event of Disability during the Consulting Period, Herley or Levy may terminate Levy's consulting services. If Levy's consulting services are terminated due to Disability, he shall be entitled to compensation, in accordance with Section 13(c), for the remainder of the Consulting Period. (e) Termination. The Consulting Period shall terminate after ten years or, if earlier, upon Levy's death or upon his failure to perform consulting services as provided in Section 13(b), pursuant to 30 days' written notice by Herley to Levy of the grounds constituting such failure and reasonable opportunity afforded Levy to cure the alleged failure. Upon any such termination, payment of consulting fees and benefits (with the exception of lifetime medical benefits under Section 9(b) above) shall cease. (f) Other. During the Consulting Period, Levy shall be entitled to expense reimbursement (including secretarial, telephone and similar support services) and perquisites and medical benefits, pursuant to the terms of Sections 7, 8 and 9(b), respectively. 14. CONFIDENTIAL INFORMATION. (a) General. (i) Levy understands and hereby acknowledges that as a result of his employment with Herley he will necessarily become informed of and have access to certain valuable and confidential information of Herley and any of its Subsidiaries, joint ventures and affiliates, including, without limitation, inventions, trade secrets, technical information, computer software and programs, know-how and plans ("Confidential Information"), and that any such Confidential Information, even though it may be developed or otherwise acquired by Levy, is the exclusive property of Herley to be held by him in trust solely for Herley's benefit. (ii) Accordingly, Levy hereby agrees that, during the Employment Term and the Consulting Period and subsequent to both, he shall not, and shall not cause others to, use, reveal, report, publish, transfer or otherwise disclose to any person, corporation or other entity any Confidential Information without prior written consent of the Board, except to (A) responsible officers and employees of Herley or (B) responsible persons who are in a contractual or fiduciary relationship with Herley or who need such information for purposes in the interest of Herley. Notwithstanding, the foregoing, the prohibitions of this clause (ii) shall not apply to any Confidential Information that becomes of general public knowledge other than from Levy or is required to be divulged by court order or administrative process. (b) Return of Documents. Upon termination of his employment with Herley for any reason or, if applicable, upon expiration of the Consulting Period, Levy shall promptly deliver to Herley all plans, drawings, manuals, letters, notes, notebooks, reports, computer programs and copies thereof and all other materials, including without limitation those of a secret or confidential nature, relating to Herley's business that are then in his possession or control. (c) Remedies and Sanctions. In the event that Levy is found to be in violation of Section 14(a) or (b) above, Herley shall be entitled to relief as provided in Section 16 below. 15. NONCOMPETITION/NONSOLICITATION. (a) Prohibitions. During the Employment Term and, if applicable, the Consulting Period, Levy shall not, without prior written authorization of the Board, directly or indirectly, through any other individual or entity: (i) become on officer or employee of, or render any service to, any direct competitor of Herley; (ii) solicit or induce any customer of Herley to cease purchasing goods or services from Herley or to become a customer of any competitor of Herley; or (iii)solicit or induce any employee of Herley to become employed by any competitor of Herley. (b) Remedies and Sanctions. In the event that Levy is found to be in violation of Section 15(a) above, Herley shall be entitled to relief as provided in Section 16 below. (c) Exceptions. Notwithstanding anything to the contrary in Section 15(a) above, its provisions shall not: (i) apply if Herley terminates Levy's employment without Cause or Levy terminates his employment for Good Reason, each as provided in Section 10(f) above; or (ii) be construed as preventing Levy from investing his assets in any business that is not a direct competitor of Herley. 16. REMEDIES/SANCTIONS. Levy acknowledges that the services he is to render under this Agreement are of a unique and special nature, the loss of which cannot reasonably or adequately be compensated for in monetary damages, and that irreparable injury and damage may result to Herley in the event of any breach of this Agreement or default by Levy. Because of the unique nature of the Confidential Information and the importance of the prohibitions against competition and solicitation, Levy further acknowledges and agrees that Herley will suffer irreparable harm if he fails to comply with his obligations under Section 14(a) or (b) above or Section 15(a) above and that monetary damages would be inadequate to compensate Herley for any such breach. Accordingly, Levy agrees that, in addition to any other remedies available to either Party at law, in equity or otherwise, Herley will be entitled to seek injunctive relief or specific performance to enforce the terms, or prevent or remedy the violation, of any provisions of this Agreement. 17. BENEFICIARIES/REFERENCES. Levy shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following his death by giving Herley written notice thereof. In the event of Levy's death, or of a judicial determination of his incompetence, reference in this Agreement to Levy shall be deemed to refer, as appropriate, to his beneficiary, estate or other legal representative. 18. WITHHOLDING TAXES. All payments to Levy or his Beneficiary under this Agreement shall be subject to withholding on account of federal, state and local taxes as required by law. 19. INDEMNIFICATION AND LIABILITY INSURANCE. Nothing herein is intended to limit Herley's indemnification of Levy, and Herley shall indemnify him to the fullest extent permitted by applicable law consistent with Herley's Certificate of Incorporation and By-Laws as in effect at the beginning of the Employment Term, with respect to any action or failure to act on his part while he is an officer, director or employee of Herley or any Subsidiary. Herley shall cause Levy to be covered at all times by directors' and officers' liability insurance on terms no less favorable than the directors' and officers' liability insurance maintained by Herley in effect on the date hereof in terms of coverage and amounts. Herley shall continue to indemnify Levy as provided above and maintain such liability insurance coverage for him after the Employment Term and, if applicable, the Consulting Period for any claims that may be made against him with respect to his service as a director or officer of Herley or a consultant to Herley. 20. EFFECT OF AGREEMENT ON OTHER BENEFITS. The existence of this Agreement shall not prohibit or restrict Levy's entitlement to participate fully in compensation, employee benefit and other plans of Herley in which senior executives are eligible to participate. 21. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Levy) and assigns. No rights or obligations of Herley under this Agreement may be assigned or transferred by Herley except pursuant to (a) a merger or consolidation in which Herley is not the continuing entity or (b) sale or liquidation of all or substantially all of the assets of Herley, provided that the surviving entity or assignee or transferee is the successor to all or substantially all of the assets of Herley and such surviving entity or assignee or transferee assumes the liabilities, obligations and duties of Herley under this Agreement, either contractually or as a matter of law. Herley further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall use its best efforts to have such assignee or transferee expressly agree to assume the liabilities, obligations and duties of Herley hereunder; provided, however, that notwithstanding such assumption, Herley shall remain liable and responsible for fulfillment of the terms and conditions of this Agreement; and provided, further, that in no event shall such assignment and assumption of this Agreement adversely affect Levy's right upon a Change in Control, as provided in Section 10(h) above. No rights or obligations of Levy under this Agreement may be assigned or transferred by him. 22. REPRESENTATIONS. The Parties respectively represent and warrant that each is fully authorized and empowered to enter into this Agreement and that the performance of its or his obligations, as the case may be, under this Agreement will not violate any agreement between such Party and any other person, firm or organization. Herley represents and warrants that this Agreement has been duly authorized by all necessary corporate action and is valid, binding and enforceable in accordance with its terms. 23. ENTIRE AGREEMENT. Except to the extent otherwise provided herein, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes any prior agreements, whether written or oral, between the Parties concerning the subject matter hereof, including without limitation the Prior Agreement. Payments and benefits provided under this Agreement are in lieu of any payments or other benefits under any severance program or policy of Herley to which Levy would otherwise be entitled. 24. AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by both Levy and an authorized officer of Herley. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Party to be charged with the waiver. No delay by either Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 25. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 26. SURVIVAL. The respective rights and obligations of the Parties under this Agreement shall survive any termination of Levy's employment with Herley. 27. GOVERNING LAW/JURISDICTION. This Agreement shall be governed by and construed and interpreted in accordance with the laws of New York, without reference to principles of conflict of laws. 28. COSTS OF DISPUTES. Herley shall pay, at least monthly, all costs and expenses, including attorneys' fees and disbursements, of Levy in connection with any proceeding, whether or not instituted by Herley or Levy, relating to any provision of this Agreement, including but not limited to the interpretation, enforcement or reasonableness thereof; provided, however, that, if Levy instituted the proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that his claims were frivolous or were made in bad faith, he shall pay his own costs and expenses and, if applicable, return any amounts theretofore paid to him or on his behalf under this Section 28. Pending the outcome of any proceeding, Herley shall pay Levy all amounts due to him without regard to the dispute; provided, however, that if Herley shall be the prevailing party in such a proceeding, Levy shall promptly repay all amounts that he received during pendency of the proceeding (other than amounts received pursuant to this Section 28). 29. NOTICES. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered either personally, by fax, by overnight delivery service (such as Federal Express) or sent by certified or registered mail postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as the Party may subsequently give notice of. If to Herley or the Board: Herley Industries, Inc. 3061 Industry Drive Lancaster, Pennsylvania 17603 Fax No. 717-397-9503 With a copy to: Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle, Suite 225 Jericho, NY 11753 Fax No. 516-822-4824 If to Levy: 807 Bent Creek Drive Lititz, Pennsylvania 17543 With a copy to: Myron Levy c/o Herley Industries, Inc. 3061 Industry Drive Lancaster, Pennsylvania 17603 Fax No. 717-397-9503 30. HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 31. COUNTERPARTS. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of July 29, 2002. HERLEY INDUSTRIES, INC. Attest: ___________________________ By: _________________________ Lee N. Blatt Attest: ____________________________ By: _________________________ John M. Kelley EMPLOYEE Witness: ___________________________ _________________________ Myron Levy EX-10 5 ex1010allfirstloan.txt EXHIBIT 10.10 ALLFIRST AND FULTON LOAN AGREEMENT Exhibit 10.10 - ------------- LOAN AGREEMENT THIS LOAN AGREEMENT is made as of ______ ___, 2002, by and among HERLEY INDUSTRIES, INC. (the "Borrower"), ALLFIRST BANK AND FULTON BANK (each a "Lender" and, collectively, the "Lenders," as further defined herein), and ALLFIRST BANK, as agent (in such capacity, the "Agent"). 1. DEFINITIONS. ----------- 1.1 Defined Terms. ------------- As used in this Agreement the following terms have the following meanings: "Acquisition": the acquisition of (i) a controlling equity or other ownership interest in another Person (including the purchase of an option, warrant or convertible or similar type security to acquire such a controlling interest at the time it becomes exercisable by the holder thereof), whether by purchase of such equity or other ownership interest or upon exercise of an option or warrant for, or conversion of securities into, such equity or other ownership interest, or by merger or consolidation, or (ii) assets of another Person that constitute all or any material part of the assets of such Person or of a line or lines of business conducted by such Person. "Advance": a Target Rate Advance or LIBOR Advance, as the case may be. "Agent's Counsel": Rhoads & Sinon LLP, counsel to the Agent in connection with the transactions contemplated by this Agreement. "Aggregate LIBOR Advances Commitments": on any date, the sum of the LIBOR Advances Commitments on such date. "Aggregate Revolving Credit Commitments": on any date, the sum of the Revolving Credit Commitments on such date. "Agreement": this Loan Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Applicable Margin": (i) with respect to the unpaid principal amount of Target Rate Advances, the percentage set forth below under the heading "Target Rate Margin" next to the applicable period and (ii) with respect to the unpaid principal amount of LIBOR Advances, the percentage set forth below under the heading "LIBOR Margin" next to the applicable period: Target Rate Period Margin LIBOR Margin ---------------------------------------- ------ ------------ when the Ratio of Total Liabilities to 1.50% 1.35% Tangible Net Worth is less than 0.40:1.0 when the Ratio of Total Liabilities to 1.65% 1.50% Tangible Net Worth is equal to or greater than 0.40:1.0 but not greater than 1.0:1.0 when the Ratio of Total Liabilities to 1.80% 1.65% Tangible Net Worth is greater than 1.0:1.0 Changes in the Applicable Margin resulting from a change in the Ratio of Total Liabilities to Tangible Net Worth, as set forth in a Compliance Certificate delivered pursuant to Section 5.1(c) evidencing such a change, shall become effective upon the forty-fifth (45th) day after each fiscal quarter of the Borrower. If the Borrower shall fail to deliver a Compliance Certificate within 45 days after the end of each fiscal quarter, then for purposes of determining the Applicable Margin, the Ratio of Total Liabilities to Tangible Net Worth from and including the date by which such Compliance Certificate was to have been delivered to the actual date of delivery shall be conclusively presumed to be greater than 1.0:1.0. "Assignment and Acceptance Agreement": an assignment and acceptance agreement executed by an assignor and an assignee pursuant to which the assignor assigns to the assignee all or any portion of such assignor's Notes and Revolving Credit Commitment, as contemplated by Section 9.9(a), in form and content satisfactory to the Agent. "Authorized Signatory": the president or the chief financial officer. "Borrowing Date": any Business Day on which a Loan is made. "Borrowing Request": a written request for Loans in the form supplied or specified by the Agent. "Business Day": any day on which commercial banks located in Maryland are open for domestic and international business including deals in U.S. Dollar deposits. "Collections": all payments (including payments made by or on behalf of the Borrower or received by the Agent on account of the Borrower's obligations under the Loan Documents or pursuant to enforcement proceedings thereunder) received by the Agent in respect of the Notes and/or the Loan Agreement including, without limitation, late fees and charges, the Unused Facility Fee and other fees collected by the Agent pursuant to the terms of the Loan Agreement; provided, however, that the term "Collections" shall not include any sums (or accrued interest thereon) paid to the Agent on account of the costs of closing, administering or enforcing the Loan Documents, transaction and service expenses, processing fees, inspection fees, legal fees and costs or late charges, to the extent a Lender has not shared in the payment of such expenses, fees, costs or charges. "Compliance Certificate": a written certificate made by the Borrower and delivered to the Agent pursuant to Section 5.1(c). "Conversion Date": as the case may be, the date on which a Target Rate Advance is converted to a LIBOR Advance, the date on which a LIBOR Advance is converted to a Target Rate Advance, or the date on which a LIBOR Advance is renewed for a successive 30 day Interest Period as contemplated by Section 2.1.4(b). "Cost of Acquisition": with respect to any Acquisition, as at the date of entering into any agreement therefor, the sum of the following (without duplication): (i) the value of the capital stock, warrants or options to acquire capital stock of the Borrower or any subsidiary to be transferred in connection therewith, (ii) the amount of any cash and fair market value of other property (excluding property described in clause (i) and the unpaid principal amount of any debt instrument) given as consideration, (iii) the amount (determined by using the face amount or the amount payable at maturity, whichever is greater) of any Indebtedness incurred, assumed or acquired by the Borrower or any subsidiary in connection with such Acquisition, (iv) all additional purchase price amounts in the form of earnouts and other contingent obligations that should be recorded on the financial statements of the Borrower and its subsidiaries in accordance with GAAP, (v) all amounts paid in respect of covenants not to compete, consulting agreements that should be recorded on financial statements of the Borrower and its subsidiaries in accordance with GAAP, (vi) the aggregate fair market value of all other consideration given by the Borrower or any subsidiary in connection with such Acquisition, and (vii) out-of-pocket transaction costs for the services and expenses of attorneys, accountants and other consultants incurred in effecting such transaction, and other similar transaction costs so incurred and capitalized in accordance with GAAP. "Debt": for any date of determination, the aggregate of all amounts outstanding on the Loans and all other indebtedness for which the Borrower is liable, whether as borrower, maker, guarantor or endorser (excluding payment instruments endorsed for deposit or collection in the ordinary course of business). "Debt Service Coverage Ratio": with respect to Borrower, Borrower's Net Profit After Tax for its four (4) most recently completed fiscal quarters, less dividends to stockholders with respect to such period, plus non-cash charges (such as depreciation and amortization) for such period, divided by scheduled principal payments on Borrower's Debt for such period. "Default": any event or condition which constitutes an Event of Default or which, with the giving of notice, the lapse of time, or any other condition, would, unless cured or waived, become an Event of Default. "Environmental Laws": any and all federal, state and local laws relating to the environment, the use, storage, transporting, manufacturing, handling, discharge, disposal or recycling of hazardous substances, materials or pollutants or industrial hygiene and including, without limitation, (i) the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 USCA ss.9601 et seq.; (ii) the Resource Conservation and Recovery Act of 1976, as amended, 42 USCA ss.6901 et seq.; (iii) the Toxic Substance Control Act, as amended, 15 USCA ss.2601 et seq.; (iv) the Water Pollution Control Act, as amended, 33 USCA ss.1251 et seq.; (v) the Clean Air Act, as amended, 42 USCA ss.7401 et seq.; (vi) the Hazardous Material Transportation Act, as amended, 49 USCA ss.1801 et seq.; and (vii) all rules, regulations, judgments, decrees, injunctions and restrictions thereunder and any similar state law. "Event of Default": any of the events specified in Section 8.1, provided that any requirement for the giving of notice, the lapse of time or any other condition has been satisfied. "GAAP": generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statement by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination, consistently applied. "Governmental Authority": any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator. "Guarantor" and "Guarantors": one or more of HMS Investments, Inc., Herley Wireless Technologies, Inc., Terrasat, Inc., General Microwave Corporation, General Microwave Israel Corporation, General Microwave Israel, Ltd., and any additional operating subsidiaries which Borrower or any Guarantor may create or acquire at any time a Loan remains outstanding and unpaid or any other amount is owing under any Loan Document. "Hazardous Substance": any hazardous or toxic substance, material or waste, including, but not limited to, (i) those substances, materials and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto and replacements therefor and (ii) any substance, pollutant or material defined as, or designated in, any Environmental Law as a "hazardous substance," "toxic substance," "hazardous material," "hazardous waste," "restricted hazardous waste," "pollutant," "toxic pollutant" or words of similar import. "Highest Lawful Rate": with respect to Lender, the maximum rate of interest, if any, that at any time or from time to time may be contracted for, taken, charged or received by Lender on the Notes or which may be owing to Lender pursuant to this Agreement under the laws applicable to Lender and this Agreement. "Interest Period": with respect to any LIBOR Advance requested by the Borrower, the thirty (30) day period beginning on, as the case may be, the Borrowing Date or the Conversion Date with respect to such LIBOR Advance; provided, however: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, and (ii) no Interest Period shall end, in the case of a Revolving Credit Loan, after the Revolving Credit Maturity Date and, in the case of a Term Loan, after the maturity date of the applicable Term Loan Note. "Lender" and "Lenders": one or more of Allfirst Bank, in its capacity as a Lender, Fulton Bank, and each Person that becomes a Lender pursuant to the provisions of Section 9.9(a) of this Agreement. "LIBOR": with respect to any Interest Period applicable to a LIBOR Advance, a per annum rate of interest equal to the 30 day London Interbank Offered Rate as quoted by the Agent from time to time two (2) Business Days prior to the first day of such Interest Period, adjusted for Federal Reserve Board reserve requirements and FDIC insurance. The LIBOR will be quoted by the Agent as published in the money rates table of The Wall Street Journal or otherwise publicly quoted or published from time to time. If the LIBOR shall become unavailable, a per annum rate of interest equal to the Agent's Base Rate minus 0.5% shall be substituted for the LIBOR. The "Agent's Base Rate," which is not necessarily the lowest rate of interest charged by Agent, is defined as the prime rate of interest on domestic commercial loans established by the Agent from time to time. "LIBOR Advances": collectively, the Loans (or any portions thereof) at such time as they (or such portions) are made and/or being maintained at a rate of interest based upon the LIBOR. "LIBOR Advances Commitment": in respect of any Lender having a LIBOR Advances Commitment, such Lender's undertaking during the Revolving Credit Commitment Period to make LIBOR Advances to the Borrower, subject to the terms and conditions hereof, in an aggregate outstanding principal amount not exceeding the amount set forth next to the name of such Lender in Exhibit A under the heading "Revolving Credit Commitments" and on the "LIBOR Advances Commitment" line with respect to such Lender. "LIBOR Advances Commitment Percentage": in respect of any Lender having a LIBOR Advances Commitment, the percentage that the amount of such Lender's LIBOR Advances Commitment comprises of the Aggregate LIBOR Advances Commitments, as set forth next to the name of such Lender in Exhibit A under the heading "LIBOR Advances Commitment Percentage". "Lien": any mortgage, pledge, hypothecation, assignment, deposit or preferential arrangement, encumbrance, lien (statutory or other), or other security agreement or security interest of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement and any capital or financing lease having substantially the same economic effect as any of the foregoing. "Loans": the Revolving Credit Loans and/or the Term Loans, as the case may be. "Loan Documents": collectively, this Agreement, the Notes and all other documents executed and delivered in connection with the Loans, and any future or additional loan documents executed and delivered in connection with the Loans, and any amendments or modifications thereof. "Maximum LIBOR Advances Amount": $45,000,000.00. "Maximum Target Rate Advances Amount": $5,000,000.00. "Note": a Revolving Credit Note or a Term Loan Note, as the case may be. "Notes": the Revolving Credit Notes and/or the Term Loan Notes, as the case may be. "Permitted Liens": any of the liens described in clauses (i) through (v) of Section 6.4 of this Agreement. "Person": an individual, a partnership, a corporation, a business trust, a joint stock company, a trust, a limited liability company, an unincorporated association, a joint venture, a Governmental Authority or any other entity of whatever nature. "Required Lenders": Lenders having Revolving Credit Commitments equal to at least 66-2/3% of the Aggregate Revolving Credit Commitments of all the Lenders. "Revolving Credit Commitment": in respect of any Lender having a Revolving Credit Commitment, such Lender's undertaking during the Revolving Credit Commitment Period to make Revolving Credit Loans to the Borrower, subject to the terms and conditions hereof, in an aggregate outstanding principal amount not exceeding the amount set forth next to the name of such Lender in Exhibit A under the heading "Revolving Credit Commitments." "Revolving Credit Commitment Percentage": in respect of any Lender having a Revolving Credit Commitment, the percentage that the amount of such Lender's Revolving Credit Commitment comprises of the Aggregate Revolving Credit Commitments, as set forth next to the name of such Lender in Exhibit A under the heading "Revolving Credit Commitment Percentage." "Revolving Credit Commitment Period": the period from the date of this Agreement through the day preceding the Revolving Credit Maturity Date. "Revolving Credit Loan" and "Revolving Credit Loans": as defined in Section 2.1. "Revolving Credit Maturity Date": January 31, 2004, or such earlier date on which the Revolving Credit Notes shall become due and payable, whether by acceleration or otherwise. "Revolving Credit Note" and "Revolving Credit Notes": as defined in Section 2.1.1. "Tangible Net Worth": with respect to any Person, at any time of determination, that amount which is equal to the excess of all of such Person's assets (excluding inter-affiliate items and any and all intangible assets, such as, but not limited to, customer lists, covenants not to compete, deferred financing costs, deferred charges, goodwill, intellectual property, licenses, organization costs, officer and stockholder advances or receivables, mineral rights and the like) over all of such Person's liabilities (except inter-affiliate items), determined in accordance with GAAP. "Target Rate": the Federal Funds Target Rate as established by the Federal Open Market Committee of the Federal Reserve Board from time to time. "Target Rate Advances": collectively, the Loans (or any portions thereof) at such time as they (or such portions) are made and/or being maintained at a rate of interest based upon the Target Rate. "Target Rate Advances Commitment": in respect of any Lender having a Target Rate Advances Commitment, such Lender's undertaking during the Revolving Credit Commitment Period to make Target Rate Advances to the Borrower, subject to the terms and conditions hereof, in an aggregate outstanding principal amount not exceeding the amount set forth next to the name of such Lender in Exhibit A under the heading "Revolving Credit Commitments" and on the "Target Rate Advances Commitment" line with respect to such Lender. "Term Loan" and "Term Loans": as defined in Section 2.2. "Term Loan Note" and "Term Loan Notes": as defined in Section 2.2.1. "Term Loan Notice": as defined in Section 2.2. 1.2 Other Definitional Provisions. ----------------------------- (a) All terms defined in this Agreement shall have the meanings given such terms herein when used in the Loan Documents or any certificate, opinion or other document made or delivered pursuant hereto or thereto, unless otherwise defined therein. (b) As used in the Loan Documents and in any certificate, opinion or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof," "herein," "hereto" and "hereunder" and similar words when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, schedule and exhibit references contained herein shall refer to Sections hereof or schedules or exhibits hereto unless otherwise expressly provided herein. (d) The word "or" shall not be exclusive; "may not" is prohibitive and not permissive, and an "agreement" of a Person shall include any applicable promise, covenant, representation, warranty or other undertaking of such Person. (e) Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular. (f) Unless specifically provided in a Loan Document to the contrary, references to time shall refer to the prevailing time in Lancaster, Pennsylvania. 2. AMOUNT AND TERMS OF REVOLVING CREDIT LOANS AND TERM LOANS. --------------------------------------------------------- 2.1 Revolving Credit Loans. ---------------------- Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans (each a "Revolving Credit Loan" and, as the context may require, collectively with all Revolving Credit Loans of such Lender and with the Revolving Credit Loans of all other Lenders, the "Revolving Credit Loans") to the Borrower from time to time during the Revolving Credit Commitment Period, in an aggregate outstanding principal amount at any one time outstanding not to exceed such Lender's Revolving Credit Commitment. At no time shall the aggregate outstanding principal amount of the Revolving Credit Loans of all Lenders exceed the Aggregate Revolving Credit Commitments. During the Revolving Credit Commitment Period, the Borrower may borrow, prepay in whole or in part and reborrow under the Revolving Credit Commitments, all in accordance with the terms and conditions of this Agreement. Subject to the provisions of Section 2.1.3, Revolving Credit Loans may be (a) Target Rate Advances, (b) LIBOR Advances, or (c) a combination thereof, provided that the aggregate outstanding principal amount of all Target Rate Advances shall not exceed the Maximum Target Rate Advances Amount and the aggregate outstanding principal amount of all LIBOR Advances shall not exceed the Maximum LIBOR Advances Amount. The Borrower covenants that it will not request any borrowing under the Revolving Credit Loans that would cause the aggregate outstanding principal amounts of the Revolving Credit Loans to exceed the aforesaid limitations. Any termination of the Revolving Credit Loans, whether by expiration of the Commitment Period or as a result of the existence or continuance of any Event of Default, shall relieve each Lender of the Lender's obligation hereunder to lend money or to make financial accommodations to or for the Borrower and for any of its accounts, but shall in no way release, terminate, discharge or excuse the Borrower from its absolute duty to pay or perform any or all of its obligations under this Agreement. The application of the preceeding sentence is intended to apply as long as any sums remain outstanding, due or owing under any Revolving Credit Loan. 2.1.1 Revolving Credit Notes. The Revolving Credit Loans made by a Lender shall be evidenced by a Revolving Loan Note of the Borrower, the terms and conditions of which are incorporated herein by reference. The (i) date and amount of each Revolving Credit Loan made by a Lender, (ii) its character as a Target Rate Advance, a LIBOR Advance, or a combination thereof, (iii) the interest rates and periods that such rates are applicable, and (iv) each payment and prepayment of principal and/or interest, shall be recorded by such Lender on its books and records, but any failure of such Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make payment when due of any amount owing under the Loan Documents. All repayments shall be credited to the balances due under a Lender's Revolving Credit Loans in accordance with the normal and customary practices of the Lender. Interest accrued under a Lender's Revolving Credit Loans shall be computed on the outstanding balances as reflected on the Lender's books and records. 2.1.2 Procedure for Borrowing. The Borrower may borrow under the Revolving Credit Commitments on any Business Day during the Revolving Credit Commitment Period, provided, however, that the Borrower shall notify the Agent (by telephone or telecopy) no later than 11:00 A.M. on the requested Borrowing Date, specifying (A) the aggregate principal amount to be borrowed under the Revolving Credit Commitments, (B) whether the Advance is to be a Target Rate Advance or a LIBOR Advance (if no interest rate option is specified, then the Borrower shall be deemed to have specified the Target Rate Advance option) and (C) the requested Borrowing Date. Each such notice shall be irrevocable and confirmed immediately by delivery to the Agent of a Borrowing Request. The Agent and each Lender shall be authorized to rely upon any Borrowing Request made by any representative of the Borrower as constituting an authorized Borrowing Request under the Revolving Credit Loans by the Borrower. Upon receipt of each notice of borrowing from the Borrower, the Agent shall promptly notify each Lender thereof. Subject to the provisions of Section 2.1.3 hereof and its receipt of the notice referred to in the preceding sentence, each Lender will make the amount of its Revolving Credit Commitment Percentage of each borrowing of Revolving Credit Loans available to the Borrower not later than 3:00 P.M. on the relevant Borrowing Date requested by the Borrower, in funds immediately available to the Borrower, by crediting an account of the Borrower maintained with Agent for such purpose with the amount of such borrowing. 2.1.3 Attribution of Target Rate Advances and LIBOR Advances. All Target Rate Advances shall be made solely by Agent in its capacity as a Lender. All LIBOR Advances shall be made by the Lenders on a pro rata basis in accordance with their respective LIBOR Advances Commitment Percentages. For example, by way of illustration only, assuming the aggregate outstanding principal amount of all Revolving Credit Loans is $10,000,000, of which $3,000,000 constitute Target Rate Advances made solely by Agent in its capacity as a Lender, and $7,000,000 constitute LIBOR Advances, then: (i) $3,920,000 (56 percent of $7,000,000) of the LIBOR Advances shall be made by the Agent in its capacity as a Lender, and (ii) $3,080,000 (44 percent of $7,000,000) of the LIBOR Advances shall be made by Fulton Bank. 2.1.4 Repayment. Payments of principal, interest and other amounts due and owing under each Revolving Credit Note shall be made by the Borrower to the Agent for the account of the respective Lender in immediately available funds as and when provided in Section 2.4(c) with respect to interest, and with respect to principal, as and when provided in such Revolving Credit Note or as otherwise provided in this Agreement. The Agent will promptly remit to each Lender its pro rata share of all Collections when received by the Agent, together with interest at the Federal Funds Rate from the date received until remitted, subject to the following: (a) After deduction of reasonable expenses and other charges incurred by the Agent and reimbursable by the Borrower, Collections shall be applied first to the payment of all accrued but unpaid interest then due and payable in the order of maturity of the installments of such interest on a pro rata basis in relation to the respective aggregate amounts of accrued but unpaid interest on each Lender's Revolving Credit Loans constituting LIBOR Advances, and the balance, if any, to the payment to Agent in its capacity as a Lender of all accrued but unpaid interest then due and payable on all Target Rate Advances; and (b) Second, to the repayment of all amounts of principal on a pro rata basis in relation to the respective outstanding principal balance of each Lender's Revolving Credit Loans constituting LIBOR Advances, and the balance, if any, to the payment to the Agent in its capacity as a Lender of the outstanding principal balance of Target Rate Advances; provided, however, that principal amounts constituting LIBOR Advances may be repaid only on the last day of the respective Interest Period applicable to such LIBOR Advance and, if repayment of a LIBOR Advance does not occur on the last day of the respective Interest Period and the Borrower has not otherwise provided the Agent with timely notice of the conversion of such LIBOR Advance to a Target Rate Advance in accordance with Section 2.1.5 of this Agreement, then such LIBOR Advance shall be deemed to constitute a renewed LIBOR Advance for a successive thirty (30) day Interest Period. Outstanding principal amounts constituting Target Rate Advances may be repaid at any time and Collections not otherwise applied to reimbursed expenses and charges, interest or principal amounts constituting LIBOR Advances as provided in the foregoing provisions of this Section 2.1.4 shall be paid to Agent in its capacity as a Lender as repayments of Target Rate Advances; and (c) Notwithstanding the provisions of Sections 2.1.4(a) and (b) above, following the occurrence of an Event of Default and the acceleration by the Lenders of the amounts due under the Notes, the Agent shall distribute Collections, after deduction of reasonable expenses and other charges incurred by the Agent and reimbursable by the Borrower, to the Lenders on a pro rata basis in relation to the respective aggregate outstanding principal balance of each Lender's Loans to the aggregate outstanding principal balance of all Loans. 2.1.5 Conversions. The Borrower may elect from time to time to convert Target Rate Advances to LIBOR Advances by giving the Agent irrevocable notice of such election no later than 12:00 Noon, three (3) Business Days prior to the date of such conversion, specifying the amount to be so converted. In addition, the Borrower may elect from time to time to convert LIBOR Advances to Target Rate Advances by giving the Agent irrevocable notice of such election no later than 12:00 Noon, one (1) Business Day prior to such conversion, provided that any such conversation of LIBOR Advances to Target Rate Advances shall only be made on a Business Day and only on the last day of the Interest Period applicable to the LIBOR Advances which are to be converted to Target Rate Advances. The Agent shall promptly provide the Lenders with notice of any such election. LIBOR Advances and Target Rate Advances may be converted pursuant to this Section in whole or in part. Notwithstanding anything in this Section to the contrary, no conversion will be effected, if the Borrower or the Agent has knowledge that a Default or Event of Default has occurred and is continuing either (i) at the time the Borrower notifies the Agent of its election to convert or (ii) on the requested Conversion Date. 2.1.6 Duration of the Revolving Credit Loans. All sums outstanding under the Loans shall be paid in full and the Revolving Credit Loans shall expire on the Revolving Credit Maturity Date. 2.2 Term Loans. ---------- Subject to the terms and conditions hereof, Borrower shall have the option, exercisable by written notice (each a "Term Loan Notice") to the Agent received at any time and from time to time prior to the Revolving Credit Maturity Date at least three (3) Business Days prior to the requested date of conversion, to convert all or a part of the outstanding principal balance of the Revolving Credit Loans constituting LIBOR Advances, in the amount or amounts specified in such Term Loan Notice, to one or more term loans (each a "Term Loan" and, as the context may require, collectively with all Term Loans of a Lender and with the Term Loans of all other Lenders, the "Term Loans") payable in not more than sixty (60) consecutive equal monthly installment payments of principal, plus accrued and unpaid interest. At no time, however, shall the aggregate original principal amount of the Term Loans of any Lender then outstanding, together with the aggregate outstanding principal amount of the Revolving Credit Loans of such Lender, exceed such Lender's Revolving Credit Commitment; nor shall the aggregate original principal amount of the Term Loans of all Lenders outstanding, together with the aggregate outstanding principal amount of the Revolving Credit Loans of all Lender's, exceed the Aggregate Revolving Credit Commitments. For purposes of accruing interest on the outstanding principal balance of each and every Term Loan, each such Term Loan shall be deemed to be comprised solely of LIBOR Advances. 2.2.1 Term Loan Notes. The Term Loans made by a Lender shall be evidenced by a Term Loan Note of the Borrower, substantially in the form of Exhibit B hereto, with appropriate insertions therein as to date, principal amount and identity of the Lender, the terms and conditions of which shall be incorporated herein by reference. Each such Term Loan Note will supplement and be in addition to, but not supersede or replace, the Revolving Loan Notes. 2.2.2 Attribution of Term Loan Amounts. Upon receipt of a Term Loan Notice, the Agent shall promptly determine the pro rata amount of the principal amount specified to be converted that is to be attributable to each Lender, such that the aggregate original principal amounts of each Lender's Term Loans when made, together with the aggregate outstanding principal balance of each Lender's Revolving Credit Loans at that time, shall equal in amount each such Lender's Revolving Credit Commitment Percentage of the aggregate original principal amounts of all Lenders Term Loans, together with the aggregate outstanding principal balance of all Lender's Revolving Credit Loans. 2.2.3 Duration of Term Loans. Notwithstanding the expiration of the Revolving Credit Commitment Period, all sums outstanding under the Term Loans shall be paid in full in accordance with the terms and conditions of the respective Term Loan Note. 2.3 Prepayments of the Loans. ------------------------ The Borrower may, at its option, prepay Target Rate Advances, in whole or in part, without premium or penalty, at any time and from time to time. The Borrower may pay a LIBOR Advance, in whole or in part, only at the end of the Interest Period applicable to such LIBOR Advance. 2.4 Interest Rate and Payment Dates. ------------------------------- (a) Prior to Maturity. Except as otherwise provided in Section 2.4(b), prior to maturity the Loans shall bear interest on the outstanding principal balances thereof at the applicable interest rate or rates per annum set forth below. Advances Rate -------- ---- Target Rate Advance Target Rate plus the Applicable Margin LIBOR Advance LIBOR plus the Applicable Margin (b) Event of Default. After the occurrence and during the continuance of an Event of Default, the outstanding principal balance of the Loans and any overdue interest or other amount payable under the Loan Documents shall bear interest at a rate per annum equal to two percent (2%) plus the rate which would otherwise be applicable under Section 2.4(a) of this Agreement. (c) General. Interest shall be calculated on the basis of a three hundred sixty (360) days per year factor applied to the actual days on which there exists an outstanding principal balance on a Loan. Interest shall be payable in the case of Revolving Credit Loans in arrears on the first day of each month during the Revolving Credit Commitment Period in respect of Target Rate Advances, on the last day of the applicable Interest Period in respect of LIBOR Advances, and on the Revolving Credit Maturity Date. Interest shall be payable in the case of Term Loans in arrears on the last day of each successive Interest Period during the term of the respective Term Loan Note and the maturity date thereof. Any change in the interest rate on a Loan resulting from a change in the Target Rate shall become effective as of the opening of business on the day on which such change shall become effective. The Agent shall notify the Borrower of the effective date and the amount of each such change in the Target Rate, but any failure to so notify shall not in any manner affect the obligation of the Borrower to pay interest on the Loans in the amounts and on the dates required. Each determination of the Target Rate and LIBOR, as the case may be, by the Agent pursuant to this Agreement shall be conclusive and binding on the Borrower absent manifest error. At no time shall the interest rate payable on the Loans of any Lender, together with all other amounts payable under the Loan Documents to the extent the same are construed to constitute interest, exceed the Highest Lawful Rate applicable to such Lender. If interest payable to a Lender on any date would exceed the maximum amount permitted by the Highest Lawful Rate applicable to such Lender, such interest payment shall automatically be reduced to such maximum permitted amount, and interest for any subsequent period, to the extent less than the maximum amount permitted for such period by the Highest Lawful Rate, shall be increased by the unpaid amount of such reduction. Any interest actually received for any period in excess of such maximum allowable amount for such period shall be deemed to have been applied as a prepayment of the Loans. The Borrower acknowledges that to the extent interest payable on a Loan is based on the Target Rate or LIBOR, such rates are only some of the bases for computing interest on loans made by the Lenders, and by basing interest payable on any of such rates, the Lenders have not committed to charge, and the Borrower has not in any way bargained for, interest based on a lower or the lowest rate at which the Lenders may now or in the future make loans to other borrowers. 2.5 Use of Proceeds. --------------- (a) The proceeds of the Loans shall be used for working capital and general corporate purposes including, without limitation, financing Acquisitions (subject, however, to the conditions of Section 6.2). (b) To the extent that the Agent, in its sole discretion, determines that funds are available under the Revolving Credit Commitments, each Lender agrees to severally issue standby letters of credit on behalf of the Borrower upon request, subject to such terms and conditions as may be required and approved by the Agent and the Lenders in their collective discretion, including without limitation, the terms of the letters of credit and the terms of repayment to be set forth in separate reimbursement agreements in form and substance acceptable to the Agent and the Lenders. The Agent shall attribute between or among the Lenders the amounts of letters of credit requested by the Borrower as if such letters of credit were Term Loans to be attributed pursuant to Section 2.2.2. 2.6 Fees. ---- (a) The Borrower agrees to pay to the Agent an "Unused Facility Fee" equal to 15 basis points (0.15%) per annum (calculated on the basis of a 360 day year for the actual days elapsed) of the unused portion of the Maximum LIBOR Advances Amount (such unused portion being determined by subtracting the aggregate amount of all outstanding LIBOR Advances on the applicable date of determination from the Maximum LIBOR Advances Amount). For purposes of calculating the unused portion of the Maximum LIBOR Advances Amount, Letters of Credit made under the Loans and the original principal amounts of Term Loans then outstanding shall be deemed to be used portions of the Maximum LIBOR Advances Amount. The Unused Facility Fee shall be paid in immediately available funds and shall be calculated on the basis of the average daily unused portion of the Maximum LIBOR Advances Amount and shall be payable quarterly in arrears and on the Revolving Credit Maturity Date. When received, the Agent will promptly remit to each Lender its pro rata share of the Unused Facility Fee based upon such Lender's Revolving Credit Commitment Percentage. (b) If the Lenders are requested to issue standby letters of credit pursuant to Section 2.5(b) of this Agreement, a separate letter of credit fee equal in amount to one percent (1.00%) of the aggregate amounts of the letters of credit shall be due and payable by the Borrower to the Lender upon the issuance of the letters of credit and at each anniversary of the issuance date occurring during the terms of the letters of credit. (c) All such fees shall be the absolute property of the Lenders upon payment. Payment of such fees shall not be considered payment of any of the Lenders' expenses incurred in connection with the Loans. No portion of such fees shall be refunded in the event the Borrower prepays any Loan including, without limitation, any prepayment of the Borrower's obligations under a letter of credit reimbursement agreement, whether in whole or in part. 2.7 Agent's Records. --------------- The Agent's records with respect to the Loans, the interest rates applicable thereto, each payment by the Borrower of principal and interest on the Loans, and fees, expenses and any other amounts due and payable in connection with the Loan Documents shall be presumptively correct absent manifest error as to the amount of the Loans, the amount of principal and interest paid by the Borrower in respect of each Loan and as to the other information relating to the Loans, and amounts paid and payable by the Borrower hereunder and under the Notes and other Loan Documents. 2.8 Set-Off: Payment From Accounts. ------------------------------ 2.8.1 Security Interest in Money and Property Held By ------------------------------------------------ Lender; Set-Offs. ---------------- [Not Applicable] 2.8.2 Application of Deposits. ------------------------- In addition to any rights of set-off arising under the Loan Documents or under law, upon the occurrence of an Event of Default, the Borrower hereby authorizes the Lenders to apply any amount on deposit in any deposit account of the Borrower now or hereafter maintained with a Lender against any of the Borrower's indebtedness under the Loan Documents. 3. CONDITIONS OF LENDING - GENERAL. ------------------------------- In addition to the conditions precedent set forth in Section 4, the obligation of the Lenders to make the Loans shall be subject to the fulfillment of the following conditions precedent: 3.1 Evidence of Action. ------------------ The Agent shall have received a certificate dated as of the closing date of the Secretary or Assistant Secretary of the Borrower (i) attaching a true and complete copy of the resolutions of the Borrower's Board of Directors and of all documents evidencing other necessary corporate action (in form and substance satisfactory to the Agent) taken by it to authorize the Loan Documents to which it is a party and the transactions contemplated thereby, (ii) attaching a true and complete copy of the Borrower's articles of incorporation and by-laws, (iii) setting forth the incumbency of the Borrower's officer or officers who may sign the Loan Documents to which it is a party, including therein a signature specimen of each such officer, and (iv) attaching certificates of good standing of the Secretaries of State of the Commonwealth of Pennsylvania and the State of Delaware. 3.2 This Agreement. -------------- The Agent shall have received counterparts of this Agreement duly executed by an Authorized Signatory of the Borrower and of each Lender party hereto. 3.3 Notes. ----- The Agent shall have received the Revolving Credit Notes duly executed by an Authorized Signatory of the Borrower. 3.4 Security Agreement. [ Not Applicable] ------------------ 3.5 Opinion of Counsel to the Borrower. ---------------------------------- The Agent shall have received an opinion of counsel to the Borrower, addressed to the Agent and Agent's Counsel, dated the closing date, in form and substance satisfactory to the Agent and covering such matters as the Agent may reasonably request. 3.6 Litigation. ---------- There shall be no injunction, writ, preliminary restraining order or other order of any nature issued by any Governmental Authority in any respect affecting the transactions provided for herein and no action or proceeding by or before any Governmental Authority shall have been commenced and be pending or, to the knowledge of the Borrower, threatened, seeking to prevent or delay the transactions contemplated by the Loan Documents or challenging any other terms and provisions hereof or thereof or seeking any damages in connection therewith. 3.7 Search Reports. -------------- The Agent shall have received UCC, tax and judgment lien search reports with respect to each applicable public office where Liens are filed disclosing that there are no Liens of record in such official's office covering any of the Borrower's property or showing the Borrower as a debtor, except for Permitted Liens. 3.8 Property, Public Liability and Other Insurance. ---------------------------------------------- The Agent shall have received a certificate or certificates of all insurance maintained by the Borrower in form and substance reasonably satisfactory to the Lender, together with the endorsements described in Section 5.3. 3.9 Other Documents. --------------- The Agent shall have received such other documents as the Agent shall reasonably request. 3.10 Fees and Expenses of Agent's Counsel. ------------------------------------ The fees and expenses of Agent's Counsel in connection with the preparation, negotiation and closing of the Loan Documents shall have been paid by Borrower. 3.11 Guarantors. ---------- Each of the Guarantors shall have executed and delivered to the Agent Guaranty and Suretyship Agreements in form and substance acceptable to the Agent, providing joint and several suretyship for the absolute, full and timely payment and performance by the Borrower of the terms and conditions of each of the Loan Documents. 4. CONDITIONS OF LENDING - ADVANCES. -------------------------------- The obligation of a Lender to make any Advance under the Loans is subject to the satisfaction of the following additional conditions precedent as of each Borrowing Date: 4.1 Compliance. ---------- On each Borrowing Date and after giving effect to the Advance to be made thereon, (a) the Borrower shall be in compliance with all of the terms, covenants and conditions of the Loan Documents, (b) the representations and warranties set forth in the various Loan Documents shall be true and correct with the same force and effect as if made on and as of each such Borrowing Date (except to the extent any such representation or warranty may expressly relate solely to an earlier date); (c) there shall exist no Default or Event of Default, and (d) the outstanding principal amounts of the Loans will not exceed the limitations as to the maximum outstanding principal amount of the Loans specified in Sections 2.1 and 2.2 of this Agreement. Each borrowing by the Borrower shall constitute a certification by the Borrower as of the date of such borrowing that each of the foregoing matters is true and correct in all respects. 4.2 Loan Documentation. ------------------ All documents required by the provisions of the Loan Documents to be executed or delivered to the Agent on or before the applicable Borrowing Date shall have been executed and shall have been delivered at the office of the Agent set forth in Section 9.6 on or before such Borrowing Date. 4.3 Documentation and Proceedings. ----------------------------- All corporate and legal proceedings and all documents and papers in connection with the transactions contemplated by the Loan Documents shall be in form and substance reasonably satisfactory to the Agent and the Agent shall have received all information and copies of all documents which the Agent may reasonably have requested in connection therewith, such documents (where appropriate) to be certified by an Authorized Signatory of the Borrower or proper Governmental Authorities. 4.4 Required Acts and Conditions. ---------------------------- All acts, conditions and things (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any filings, recordings or registrations) required to be done, performed and to have happened on or prior to such Borrowing Date and which are necessary for the continued effectiveness of the Loan Documents, shall have been done and performed and shall have happened in due compliance with all applicable laws. 4.5 Approval of Counsel. ------------------- All legal matters in connection with the making of each Advance shall be reasonably satisfactory to Agent 's Counsel. 4.6 Supplemental Opinions. --------------------- If requested by the Agent with respect to the applicable Borrowing Date, there shall have been delivered to the Agent favorable supplementary opinions of counsel to the Borrower, addressed to the Agent and dated such Borrowing Date, covering such matters incident to the transactions contemplated herein as the Agent may reasonably request. 4.7 Other Documents. --------------- The Agent shall have received such other documents as the Agent shall reasonably request. 5. AFFIRMATIVE COVENANTS. --------------------- The Borrower covenants and agrees that, so long as this Agreement is in effect, any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender, the Borrower shall, except as otherwise specifically provided: 5.1 Reports to Agent. ---------------- Deliver to the Agent the following reports: (a) The Borrower's financial statements as follows: (i) quarterly consolidated statements certified by the Borrower's chief financial officer within forty-five (45) days after the end of each of the Borrower's first three (3) fiscal quarters in each fiscal year; and (ii) year-end consolidated statements within ninety (90) days after Borrower's fiscal year-end, which year-end statements shall be audited by an independent certified public accountant and include an unqualified opinion of such accountant, any management letter issued to the Borrower by such accountant and the Borrower's response to such management letter. All financial statements shall be prepared in accordance with GAAP consistently applied. (b) The Borrower's quarterly report on Form 10-Q and annual report on Form 10-K as filed with the Securities and Exchange Commission within ten (10) days after filing. (c) With the quarterly financial statements required under Section 5.1(a)(1), a certificate of compliance with the requirements set forth in Sections 6.11, 6.12 and 6.13 of this Agreement signed by the Borrower's chief financial officer. (d) Such other reports as may be reasonably requested by the Agent from time to time. All of the foregoing reports shall be in form and substance reasonably satisfactory to the Agent. If the reports are required to be audited by an independent certified public accountant, such independent certified public accountant shall be reasonably acceptable to the Agent. 5.2 Certificates; Other Information. ------------------------------- Furnish to the Agent prompt written notice if: (i) any indebtedness of the Borrower is declared or shall become due and payable prior to its stated maturity, or called and not paid when due, (ii) a default shall have occurred under any note (other than the Notes) or the holder of any such note, or other evidence of indebtedness, certificate or security evidencing any such indebtedness or any obligee with respect to any other indebtedness of the Borrower has the right to declare any such indebtedness due and payable prior to its stated maturity, or (iii) there shall occur and be continuing a Default or an Event of Default. 5.3 Insurance. --------- (a) Borrower shall maintain insurance as follows: (i) Insurance against loss or damage to the Borrower's assets and properties by fire and any of the risks covered by insurance of the type now known as "fire and extended coverage," in an amount not less than the percentage of the full replacement cost of all such properties and assets, required to satisfy any applicable co-insurance requirement in such policy and with not more than $25,000.00 deductible from the loss payable for any casualty. The policies of insurance carried in accordance with this subparagraph (i) shall contain the "Replacement Cost Endorsement"; (ii) Comprehensive public liability insurance on an "occurrence basis" against claims for "personal injury," including without limitation bodily injury, death or property damage, such insurance to afford immediate minimum protection to a limit of not less than $1,000,000 under a primary policy of insurance together with a limit of not less than $2,000,000 under an umbrella policy of insurance with respect to personal injury or death to any one or more persons or damage to property; (iii) Worker's compensation insurance (including employer's liability insurance, if requested by Agent) for all employees of Borrower in such amount as is reasonably satisfactory to Agent, or if such limits are established by law, in such amounts; (iv) Directors and Officers liability insurance to a limit of not less than $3,000,000. (v) Such other insurance, and in such amounts, as may from time to time be reasonably required by Agent against the same or other hazards. (b) All policies of insurance required by the terms of paragraph (a) shall contain an endorsement or agreement by the insurer that any loss shall be payable in accordance with the terms of such policy notwithstanding any act or negligence of Borrower which might otherwise result in forfeiture of such insurance and the further agreement of the insurer waiving all rights of set-off, counterclaim or deduction against Borrower. (c) All policies of insurance shall be issued by companies and in amounts reasonably satisfactory to Agent. All policies of insurance shall have attached thereto a lender's clause in favor of Agent, and in form reasonably satisfactory to Agent, providing that the Agent shall not be subject to contribution, and a lender's loss payable endorsement for benefit of Agent, all of a form satisfactory to Agent. Borrower shall furnish Agent with a signed duplicate original policy with respect to all required insurance coverage. If Agent consents to Borrower providing any of the required insurance through blanket policies carried by Borrower and covering more than one location, then Borrower shall furnish Agent with a signed certificate of insurance for each such policy setting forth the coverage, the limits of liability, the name of the carrier, the policy number, and the expiration date, and listing Agent as lender or loss payee. At least twenty (20) days prior to the expiration of each such policy, Borrower shall furnish Agent with evidence satisfactory to Agent of payment of premium and the reissuance of a policy continuing insurance in force as required by this Agreement. All such policies, including policies for any amount carried in excess of the required minimum and policies not specifically required by Agent, shall be in form satisfactory to Agent, shall be maintained in force and effect, shall be assigned and delivered to Agent, with premiums prepaid as collateral security for payment of the indebtedness secured hereby, and shall contain a provision that such policies will not be canceled or materially amended which term shall include any reduction in the scope or limits of coverage, without at least ten (10) days prior written notice to Agent. If the insurance, or any part thereof, shall expire, or be withdrawn, or become void or unsafe by reason of Borrower's breach of any condition thereof, or become void or unsafe by reason of the value or impairment of the capital of any company in which the insurance may then be carried, or if for any reason whatever the insurance shall be reasonably deemed by Agent to be unsatisfactory, Borrower shall obtain new insurance reasonably satisfactory to Agent. (d) In the event the Borrower fails to provide, maintain, keep in force or deliver or furnish to Agent the policies of insurance required by this Agreement, Agent may procure such insurance or single-interests insurance for such risks covering Agent 's interest, and Borrower will pay all premiums thereon promptly upon demand by Agent, and until such payment is made by Borrower, the amount of all such premiums, together with interest thereon at the rate specified in the Note. (e) In the event of loss in excess of $100,000.00, Borrower will give immediate notice thereof to Agent, and Agent may make proof of loss if not made promptly by Borrower. Each insurance company concerned is hereby authorized and directed to make payment under such insurance, including return of unearned premiums, directly to Agent instead of to Borrower and Agent jointly, and Borrower appoints Agent irrevocably, as Borrower's attorney-in-fact to endorse any draft therefor. If otherwise, such policies, including all right, title and interest of the Borrower thereunder, shall become the absolute property of the Agent. 5.4 Taxes. ----- Duly pay and discharge all taxes or other claims which might become a Lien upon any of Borrower's properties except to the extent that such items are being in good faith appropriately contested with adequate reserves therefor having been set aside and with security satisfactory to the Agent. 5.5 Properties. ---------- Maintain, preserve and keep Borrower's properties in good repair, working order and condition, and make all reasonable repairs, replacements, additions, betterments and improvements thereto. 5.6 Corporate Existence. ------------------- Maintain Borrower's corporate existence and comply with all statutes, rules and regulations, the non-compliance with which would materially and adversely affect its business, assets or condition, financial or otherwise. 5.7 Issuance Taxes. -------------- Pay all stamp or issuance taxes, if any, payable by reason of the execution, delivery or issuance of this Agreement, the Notes or Loan Documents under any applicable ordinance or statute now existing or hereafter enacted, and the Borrower will at all times indemnify and hold harmless the Lenders against any liability in respect thereof. 5.8 Audits by Agent. --------------- Upon the occurrence of an Event of Default or if the Agent reasonably believes that an Event of Default is imminent based on reports or financial reports received by Agent, permit the Agent and its duly authorized agents to make, or cause to be made, inspections of any of Borrower's properties and examinations and audits of any books, records and papers of the Borrower and to make extracts therefrom at all such reasonable times and as often as the Agent may reasonably require. 5.9 Management. ---------- Maintain the current management and executive personnel of the Borrower or other management and executive personnel reasonably satisfactory to the Agent, and furnish to the Agent within five (5) days of any election or appointment of officers or directors written notice of any change of such officers and directors. 5.10 Compliance With Laws. -------------------- Fully comply with all applicable Laws with respect to: (a) products that the Borrower sells and services it performs, (b) the conduct of its business generally, (c) its use, maintenance and operation of the real and personal properties owned or leased by it; and, without limiting the foregoing, the Borrower shall obtain and maintain all permits, licenses and approvals necessary or appropriate to engage in its business as presently conducted and presently contemplated. 5.11 Employee Benefit Plans. ---------------------- Comply, and shall cause each of Borrower's employee benefit plans to comply, with all applicable provisions of law. 5.12 Environmental Matters. --------------------- Comply, and shall cause Borrower's properties (whether owned or leased) to comply, with all applicable Environmental Laws. Without limiting the foregoing, (a) the Borrower shall: (1) promptly notify the Agent and each other Person that it is required under applicable Environmental Laws to notify upon the Borrower's acquiring knowledge of a release or threatened release of any Hazardous Substance on, from, or near any of its properties, (2) promptly notify the Agent once an environmental investigation or clean-up proceeding is instituted by any Person in connection with the Borrower or any of its properties, (3) comply in all material respects with and provide such assistance as may be reasonably required in any such environmental investigation and clean-up proceeding, (4) promptly execute and complete remedial actions necessary to ensure that no environmental liens or encumbrances are levied against or exist with respect to any of the Borrower's properties or other assets, and (5) promptly notify the Agent of any citation, notification, complaint, or written notice of violation which it receives from any Person which relates or pertains to the making, storing, handling, treating, disposing, generating, transporting or release of any Hazardous Substance; and (b) the Borrower shall not use, produce, transport, dispose of or otherwise handle any Hazardous Substances or permit any other Person to do so at or from any of the Borrower's properties except in the ordinary course of Borrower's business and in compliance with all applicable Environmental Laws. The Borrower, promptly upon the written request of the Agent from time to time after (1) the occurrence of an Event of Default, or (2) the occurrence of any release of any Hazardous Substance in, on or from any property of the Borrower in violation of any Environmental Law, shall provide the Agent with an environmental site assessment or report, all in scope, form, and content satisfactory to the Agent. Upon any such event, the Agent, or its designated agent, may interview any or all of the agents and employees of the Borrower regarding environmental matters, including any consultants or experts retained by the Borrower, all of whom are directed to discuss environmental issues fully and openly with the Agent or its designated agent and to provide such information as may be requested. All of the costs and expenses incurred by the Agent with respect to the audits, tests, inspections, and examinations which the Agent may conduct pursuant to this Section, including the fees of the engineers, laboratories, and contractors, shall be paid by the Borrower. The Borrower shall indemnify and hold harmless the Agent from all loss, liability, damage, reasonable costs and expenses (including, but not limited to, reasonable legal fees), fines, or other penalties or payments, for failure of the Borrower or any of its properties to comply fully with all environmental Laws. The provisions of this Section shall survive the payment and satisfaction of the Loans and the termination of this Agreement. 5.13 Deposit Relationship. -------------------- Maintain a meaningful deposit relationship with the Agent. 5.14 Further Assurances And Power Of Attorney. ---------------------------------------- Execute from time to time such other and further documents, which in the opinion of the Agent or the Agent's counsel, may be reasonably necessary to perfect, confirm, establish, reestablish, continue, or complete the agreements of the Borrower under the Loan Documents and the purposes and intentions of this Agreement, it being the intention of the Borrower to provide hereby a full and absolute warranty of further assurance to the Agent, provided that Borrower shall not be obligated under this Section 5.14 to execute any document that could effect an amendment or modification of any term or condition of this Agreement or any other Loan Document. If the Borrower fails to execute any document requested by the Agent pursuant to this Section 5.14, the Borrower hereby appoints the Lender or any officer of the Agent as the Borrower's attorney in fact for purposes of executing such documents in the Borrower's name, place and stead, which power of attorney shall be considered as coupled with an interest and irrevocable. 6. NEGATIVE COVENANTS. ------------------ The Borrower agrees that, so long as this Agreement is in effect, any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to a Lender, the Borrower will not, directly or indirectly, except as expressly permitted with respect to Section 6.2, without prior adequate notice to Lender with respect to Section 6.3 and without the prior written consent of the Agent for all other Sections: 6.1 Borrower's Indebtedness. [Not Applicable] ----------------------- 6.2 Acquisitions. ------------ Enter into any agreement, contract, binding commitment or other arrangement providing for any Acquisition, or take any action to solicit the tender of securities or proxies in respect thereof in order to effect any Acquisition, unless (i) the Borrower shall have first reviewed the proposed Acquisition with the Agent, (ii) no Event of Default shall have occurred and be continuing either immediately prior to or after giving effect to the Acquisition and, (iii) if the cost of Acquisition is in excess of $20,000,000 and is being financed in whole or in part by one or more Loans made pursuant to this Agreement, the Agent shall not have objected to the Acquisition in writing within five (5) Business Days after receipt of such information regarding the Acquisition and its anticipated effect on the Borrower as Agent reasonably may request. 6.3 Loans and Investments. --------------------- Lend or advance money, credit or property to or invest in (by capital contribution, loan, purchase or otherwise) any firm, corporation, or other person, except: (a) extensions of credit to customers in the ordinary course of business, (b) securities with maturities of 180 days or less from the date of acquisition issued or fully guaranteed or insured by the United States government or any agency thereof and backed by the full faith and credit of the United States, (c) certificates of deposit, eurodollar time deposits, overnight bank deposits and bankers' acceptances of any domestic commercial bank having capital and surplus in excess of $500,000,000 having maturities of one year or less from the date of acquisition, (d) commercial paper of an issuer rated at least A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Services, Inc., or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, in each case, with maturities of not greater than sixty (60) days from the date acquired, (e) loans to employees of the Borrower made in the ordinary course of business, and (f) joint ventures entered into by the Borrower in the ordinary course of business. 6.4 Create Encumbrances. ------------------- Create, assume or permit to exist, any mortgage, pledge, Lien or encumbrance of or upon, or security interest in, any of its property or assets now owned or hereafter acquired except (i) currently existing mortgages, Liens, pledges and security interests in favor of Allfirst Bank as a lender of other loans to the Borrower; (ii) other Liens, charges and encumbrances incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not materially impair the use thereof in the operation of its business; (iii) Liens for taxes or other governmental charges which are not delinquent or which are being contested in good faith and for which a reserve shall have been established in accordance with generally accepted accounting principles; (iv) any Lien created under the Loan Documents; and (v) any purchase money security interest securing indebtedness incurred in the ordinary course of business. 6.5 Guaranties. ---------- Assume, endorse, be or become liable for or guarantee the obligations of any person or entity except the endorsement of negotiable instruments for deposit or collection in the ordinary course of business and performance bonds and indemnities with bonding companies and similar entities entered into in the ordinary course of business. 6.6 Dividends and Other Distributions of Capital. -------------------------------------------- [Not Applicable] 6.7 Impairment of Assets. -------------------- Permit anything to be done that may materially impair the value of its properties and assets. 6.8 Changes in Business. ------------------- Make or permit to be made any material change in the nature, character, name or conduct of the Borrower's business as conducted on the date hereof. 6.9 Articles of Incorporation and By-Laws. ------------------------------------- Amend or otherwise modify the Borrower's articles of incorporation or by-laws in any way which would adversely affect the interests of the Lenders under any of the Loan Documents. 6.10 Prepayments of Indebtedness. --------------------------- Prepay or obligate itself to prepay, in whole or in part, any indebtedness (other than the obligations under the Loan Documents). 6.11 Minimum Tangible Net Worth. -------------------------- Permit the Tangible Net Worth of the Borrower, on a consolidated basis, to be less than $115,000,000 at the time any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender. 6.12 Maximum Total Liabilities to Tangible Net Worth Ratio. ----------------------------------------------------- Permit a Total Liabilities to Tangible Net Worth Ratio of the Borrower at not greater than 1.50-to-1 at any time any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender. 6.13 Minimum Debt Service Coverage Ratio. ----------------------------------- Permit the Debt Service Coverage Ratio of the Borrower to be less than 2.0-to-1 at any time any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender. 7. REPRESENTATIONS AND WARRANTIES. ------------------------------ In order to induce the Lenders to enter into this Agreement and to make the Loans, the Borrower makes the following representations and warranties to the Agent and the Lenders and acknowledges the Agent's and each Lender's justifiable right to rely upon these representations and warranties: 7.1 Corporate Organization. ---------------------- The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is in good standing and duly qualified to conduct business in the Commonwealth of Pennsylvania and in each other jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. 7.2 Enforceability of Documents. --------------------------- This Agreement, the Notes and each of the other Loan Documents to which the Borrower is a party have been duly authorized, executed and delivered and constitute the valid and legally binding obligation of the Borrower, enforceable in accordance with their respective terms. 7.3 Legality of Documents. --------------------- The execution and delivery of this Agreement, the Notes and all of the other Loan Documents to which the Borrower is a party and performance thereof will not violate any provision of law or of the articles of incorporation or by-laws of the Borrower or any agreement, indenture or instrument to which the Borrower is a party or its properties or assets may be bound or affected or of any other agreement to which the Borrower is a party. 7.4 Pending or Threatened Litigation. -------------------------------- As of the date hereof, there are no outstanding judgments, actions or proceedings pending before any court or governmental authority, bureau or agency, with respect to or threatened against or affecting the Borrower which would result in a material adverse change in the financial condition of the Borrower or its subsidiaries. Borrower agrees to promptly provide to Agent written notice of any and all outstanding judgments, actions or proceedings which may at any time hereafter be pending before any court or governmental authority, bureau or agency, with respect to or threatened against or affecting the Borrower which may reasonably be expected to have a material adverse effect on the Borrower, its financial condition, business, properties or prospects, or the ability of any Lender to enforce the Loan Documents in accordance with their respective terms. 7.5 No Defaults. ----------- As of the date hereof the Borrower is not in material default under, or in material violation of, nor will the execution, delivery or performance of this Agreement, the Notes or any of the other Loan Documents to which the Borrower is a party constitute a default under or violation of, any term of any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment used in the conduct of the Borrower's business or by which Borrower is bound. The operations of the Borrower comply in all material respects with all laws, ordinances and regulations applicable to it and no consents, authorizations or approvals of any Governmental Authority are required by the Borrower in connection with the Loan Documents. 7.6 No Onerous Agreements. --------------------- The Borrower is not a party to nor bound by, nor are any of the properties or assets owned by it or used in the conduct of its business affected by, any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment, or subject to any charter or other corporate restriction, which materially and adversely affects its business, assets or condition, financial or otherwise. 7.7 Financial Statements. -------------------- All balance sheets, profit and loss statements and other financial information heretofore furnished to the Agent by the Borrower are true, correct and complete in all material respects, and present fairly the financial condition of the Borrower and its subsidiaries, if any, as at the date thereof and for the periods covered thereby, including contingent liabilities of every kind, which financial condition has not materially adversely changed since the date of the most recently dated balance sheet of the Borrower heretofore furnished to the Agent. 7.8 No Margin Stock Purchases. ------------------------- No part of the proceeds of the Loans will be used directly or indirectly for the purpose of purchasing or carrying, or for payment in full or in part of indebtedness which was incurred for the purpose of purchasing or carrying, any margin stock as such term is defined by Regulation U of the Board of Governors of the Federal Reserve System. 7.9 Power and Authority. ------------------- The Borrower has the power to execute and deliver this Agreement, the Notes and all other Loan Documents to which it is a party and has taken all necessary action to authorize the execution, delivery and performance of the same. 7.10 Properties. ---------- The Borrower has good and marketable title to all of its assets, subject to no Liens except Permitted Liens. 7.11 Taxes. ----- The Borrower has filed all returns and reports that are required to be filed by it in connection with any federal, state or local tax, duty or charge levied, assessed or imposed upon it or its property or withheld by it, including unemployment, social security and similar taxes and all of such taxes have been either paid or adequate reserve or other provision has been made. 7.12 Environmental Matters. --------------------- (a) The Borrower is in compliance with the requirements of all applicable Environmental Laws. (b) To the best of the Borrower's knowledge, no Hazardous Substances have been generated or manufactured on, transported to or from, treated at, stored at or discharged from any property owned or occupied by the Borrower in violation of any Environmental Laws; no Hazardous Substances have been discharged into subsurface waters under any such property in violation of any Environmental Laws; no Hazardous Substances have been discharged from any such property on or into property or waters (including subsurface waters) adjacent to any such property in violation of any Environmental Laws; and any underground or above ground storage tanks situated on any such property and regulated under any Environmental Laws are in compliance with all applicable Environmental Laws. (c) The Borrower (i) has not received notice (written or oral) or otherwise learned of any claim, demand, suit, action, proceeding, event, condition, report, directive, Lien, violation, non-compliance or investigation indicating or concerning any potential or actual liability (including, without limitation, potential liability for enforcement, investigatory costs, cleanup costs, government response costs, removal costs, remedial costs, natural resources damages, property damages, personal injuries or penalties) arising in connection with: (x) any non-compliance with or violation of the requirements of any applicable Environmental Laws, or (y) the presence of any Hazardous Substance on any property owned or occupied by the Borrower or the release or threatened release of any Hazardous Substance into the environment, (ii) has not received notice of any threatened or actual liability in connection with the presence of any Hazardous Substance on any property owned or occupied by the Borrower or the release or threatened release of any Hazardous Substance into the environment, (iii) has not received notice of any federal or state investigation evaluating whether any remedial action is needed to respond to the presence of any Hazardous Substance on any property owned or occupied by the Borrower or a release or threatened release of any Hazardous Substance into the environment for which the Borrower is or may be liable, or (iv) has not received notice that the Borrower is or may be liable to any Person under any Environmental Law. 7.13 Employee Benefit Plans. ---------------------- Each employee benefit plan as to which the Borrower may have any liability complies in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), including minimum funding requirements, and (i) no Prohibited Transaction (as defined under ERISA) has occurred with respect to any such plan, (ii) no Reportable Event (as defined under Section 4042 of ERISA) has occurred with respect to any such plan which would cause the Pension Benefit Guaranty Corporation to institute proceedings under Section 4042 of ERISA, (iii) the Borrower has not withdrawn from any such plan or initiated steps to do so, and (iv) no steps have been taken to terminate any such plan. 7.14 Solvency. -------- As of the date hereof and after giving effect to the transactions contemplated by the Loan Documents, (i) the aggregate value of the Borrower's assets will exceed its liabilities (including contingent, subordinated, unmatured and unliquidated liabilities), (ii) the Borrower will have sufficient cash flow to enable it to pay its debts as they mature, and (iii) the Borrower will not have unreasonably small capital for the business in which it is engaged. 7.15 Subsidiaries. ------------ As of the date of this Agreement, the only direct or indirect subsidiaries of the Borrower are the Guarantors. 7.16 Disclosure. ---------- No representation or warranty by the Borrower set forth in this Agreement, any other Loan Document or in any other document or instrument delivered by the Borrower to the Agent pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements made not misleading. 8. DEFAULT. ------- 8.1 Events of Default. ----------------- If any one or more of the following Events of Default, each constituting an "Event of Default," shall occur, the obligations of the Lenders to make Advances shall cease and the entire unpaid balance of the principal of and interest on the Loans shall immediately become due and payable in the case of (g) or at the option of the Agent in all other cases, without notice, presentment, protest or demand (all of which are expressly waived by the Borrower) to the Borrower being required except as specified below: (a) Failure of the Borrower to make any payment of principal or interest in respect of any Loan within 10 days after it is due; or (b) The failure of the Borrower to pay the amount by which the aggregate outstanding principal amount of all Loans exceeds Aggregate Revolving Credit Commitments within two (2) Business Days after written notice thereof shall have been given by the Agent to the Borrower; or (c) Failure by the Borrower or any Guarantor to perform any other term, condition or covenant of this Agreement, the Notes, any Loan Document or any other agreement, instrument or document delivered pursuant hereto or in connection herewith or therewith, which shall remain unremedied for the period of thirty (30) days after written notice thereof shall have been given by the Agent to the Borrower; provided, however, if such failure be such that it cannot be corrected within thirty (30) days, it shall not be an Event of Default if, in the reasonable discretion of the Agent, the Borrower is taking appropriate corrective action to cure the failure and such failure will not impair the ability of the Borrower to pay or perform the Borrower's obligations under the Loan Documents; or (d) Default is made with respect to any evidence of indebtedness for borrowed money of the Borrower to any Person, whether now existing or hereafter created, if as a result of such default the maturity of such evidence of indebtedness is accelerated, or any such indebtedness, if owed to the Agent or any Lender, is not paid when due and payable; or (e) A material breach of or material default by the Borrower under the terms, covenants or conditions of any agreements, loans or other transactions of the Borrower with the Agent or any other lender, after the expiration of any applicable grace or cure period; or (f) Any representation or warranty made in writing to the Agent and/or the Lenders in this Agreement, the Notes or other Loan Documents or in connection with the making of any Loan or any certificate, statement or report made in compliance with this Agreement, shall have been false in any material respect when made; or (g) The Borrower or any Guarantor or endorser or surety thereof shall make an assignment for the benefit of creditors, file a petition under the Federal Bankruptcy Code or any similar law, state or federal, be adjudicated insolvent or bankrupt, petition or apply to any tribunal for the appointment of a receiver, or trustee or a custodian for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or if there shall have been filed any such petition or application, or any such petition or application, or any such proceeding shall have been commenced against it, which remains undismissed for a period of sixty (60) days or more; or the Borrower or any endorser or surety by any act or omission shall indicate its consent to approval of or acquiescence in any such petition, application or proceeding or the appointment of a receiver, or trustee or a custodian for it or any substantial part of any of its properties, or shall suffer any such receivership, trusteeship, or custodianship to continue undischarged for a period of sixty (60) days or more; or (h) Any judgment against the Borrower in excess of $500,000.00, or any attachment, levy or execution against any of its properties in excess of $500,000.00 shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of thirty (30) days or more; or (i) The Borrower shall be unable, or admit its inability, to meet its obligations as they come due or failure of the Borrower generally to pay its debts as they become due; or (j) Occurrence, in Agent's sole and independent discretion, reasonably exercised, of a material adverse change in the business, properties or financial condition of the Borrower, or an event or condition which, in Agent's sole and independent discretion reasonably exercised would be expected to result in such a material adverse change. 8.2 Remedies. -------- In the event of the occurrence and during the continuation of any Event of Default, the Agent may, but shall not be required to (i) proceed to apply to the payment of the Loans the balance to the credit of any account or accounts maintained with any Lender by the Borrower and all property of Borrower now or at any time in any Lender's possession in any capacity whatsoever (set-off) and (ii) the obligation of any Lender to make loans or otherwise extend credit to the Borrower shall immediately terminate. The Agent may exercise any other right or remedy provided pursuant to the Loan Documents and hereby granted or allowed to it by law, and each and every right and remedy provided pursuant to the Loan Documents and hereby granted to the Agent or any Lender or allowed to one or the other by law shall be cumulative and not exclusive the one of the other, and may be exercised by the Agent from time to time and as often as may be necessary. The Agent shall have at any time, in its discretion, the right to enforce collection and payment by appropriate action or proceedings, and the net amounts received therefrom, after deduction of all costs and expenses incurred in connection therewith, shall be applied on account of the Loan and any other indebtedness or liabilities of the Borrower aforesaid, all without notice to the Borrower. The Agent shall not be required to marshall any security or guarantees or to resort to the same in any particular order. 9. THE AGENT. --------- 9.1 Appointment. ----------- Each Lender hereby irrevocably designates and appoints Allfirst Bank, as the Agent of such Lender under the Loan Documents and each such Lender hereby irrevocably authorizes Allfirst Bank, as the Agent for such Lender, to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of the Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in any Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth therein, or any fiduciary relationship with any Lender, and no implied (or express) covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Loan Documents or otherwise exist against the Agent, whether arising under principles of agency or otherwise under applicable law. The term "Agent" is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship among independent contracting parties. 9.2 Administration. In the course of its administration of the Loans and the Loan Documents, the Agent may, without notice to or consent of the Lenders, in its sole discretion except as otherwise provided below, exercise or refrain from exercising any powers or rights vested in the Agent under the Loan Documents or any document relating thereto or which the Agent may be entitled to assert at law or in equity or otherwise enforce or refrain from enforcing the obligations of the Borrower. Notwithstanding the foregoing, the Agent will not, without the consent of all of the Lenders: (i) consent to the reduction of (A) any amount due and owing by the Borrower pursuant to the Loan Documents, (B) any rate of interest payable under the Loan Documents, or (C) the rate at which fees accrue under the Loan Documents; (ii) increase the amounts of or reinstate any Loan other than such reinstatement as is provided in the Loan Documents; (iii) extend the maturity date of any Loan; (iv) postpone the due date for any payment to be made by Borrower pursuant to the Loan Documents; (vi) consent to or waive any failure by the Borrower to pay money to the Lenders if such failure would otherwise constitute an Event of Default under the Loan Documents; (vii) waive any Event of Default under the Loan Documents; (viii) waive compliance with any of the terms and conditions of the Loan Documents; (ix) give or withhold consents to or approvals of any action or failure to act by the Borrower; (x) change the definition of "Required Lenders"; (xi) release any Guarantor from Liability under its respective Guaranty and Suretyship Agreement; or (xii) amend this Section 9.2 or any other provision of this Agreement providing for consent or other action by the Required Lenders; provided, however, that items (viii) and (ix) shall require the consent of the Required Lenders only. Notwithstanding any other provision to the contrary, Agent agrees to promptly provide to each Lender a copy of each report, certificate or other notice or request received from or on behalf of Borrower or any Guarantor pursuant to Sections 5.1, 5.2 and/or 5.3 of this Agreement or otherwise, as well as a copy of each notice the Agent provides to the Borrower or any Guarantor pursuant to this Agreement or any other Loan Document. 9.3 Delegation of Duties. -------------------- The Agent may execute any of its duties under the Loan Documents by or through agents or attorneys-in-fact and shall be entitled to rely upon the advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any such agent or attorney-in-fact in the absence of the Agent's own gross negligence or willful misconduct. 9.4 Exculpatory Provisions. ---------------------- Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Loan Documents (except for its own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any Guarantor or any officer thereof contained in the Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, the Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Loan Documents or for any failure of the Borrower or any other Person to perform its obligations thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Loan Documents, or to inspect the properties, books or records of any Loan Party. The Agent shall not be under any liability or responsibility whatsoever, as Agent, to the Borrower or any other Person as a consequence of any failure or delay in performance, or any breach, by any Lender of any of its obligations under any of the Loan Documents. 9.5 Reliance by Agent. ----------------- The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, opinion, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent may treat each Lender, or the Person designated in the last notice filed with it under this Section, as the holder of all of the interests of such Lender in its Loans and in its Notes until written notice of transfer, signed by such Lender (or the Person designated in the last notice filed with the Agent) and by the Person designated in such written notice of transfer, in form and substance satisfactory to the Agent, shall have been filed with the Agent. The Agent shall not be under any duty to examine or pass upon the validity, effectiveness or genuineness of the Loan Documents or any instrument, document or communication furnished pursuant thereto or in connection therewith, and the Agent shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be. The Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request or direction of the Required Lenders, and such request or direction and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. Where this Agreement expressly permits or prohibits an action unless the Required Lenders otherwise determine, the Agent shall, and in all other instances, the Agent may, but shall not be required to, initiate any solicitation for the consent or a vote of the Lenders. 9.6 Notice of Default. ----------------- The Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default, except with respect to default in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent has received written notice thereof from a Lender or the Borrower referring to this Agreement, describing such Event of Default and stating that such notice is a "notice of default." In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders, provided, however, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem to be in the best interests of the Lenders. 9.7 Non-Reliance on Agent and Other Lenders. --------------------------------------- Each Lender expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates ("Agent-Related Persons") has made any representations or warranties to it and that no act by the Agent or any Agent-Related Person hereinafter, including any review of the affairs of the Borrower or any other Person, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own evaluation of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and the Guarantors and made its own decision to enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, evaluations and decisions in taking or not taking action under any Loan Document, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower and the Guarantors. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrower and the Guarantors which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 9.8 Indemnification. --------------- Each Lender agrees to indemnify and reimburse the Agent in its capacity as such (to the extent not promptly reimbursed by the Borrower and without limiting the obligation of the Borrower or any Guarantor) upon demand, pro rata according to its Revolving Credit Commitment, from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever (including, without limitation, any amounts paid to the Lenders (through the Agent) by the Borrower pursuant to the terms of the Loan Documents, that are subsequently rescinded or avoided, or must otherwise be restored or returned) which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, the Loan Documents or any other documents contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing to the extent the Agent is not reimbursed for such expenses by or on behalf of the Borrower; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting solely from the gross negligence or willful misconduct of the Agent. The agreements in this Section shall survive the payment of all amounts payable under the Loan Documents, the termination of the Aggregate Revolving Credit Commitments and the resignation of the Agent. 9.9 Agent in Its Individual Capacity. -------------------------------- Allfirst Bank and its respective affiliates may make loans to, accept deposits from, issue letters of credit for the account of, and generally engage in any kind of business with, the Borrower and/or any Guarantor as though Allfirst Bank was not Agent hereunder and without notice to or consent of any Lender. The Lenders acknowledge that pursuant to such activities, Allfirst Bank or its affiliates may receive information regarding the Borrower or a Guarantor (including information that may be subject to confidentiality obligations in favor of the Borrower or such Guarantor) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to Allfirst Bank's Revolving Credit Commitment and the Notes issued to Allfirst Bank hereunder, Allfirst Bank shall have the same rights and powers under the Loan Documents as any Lender and may exercise the same as though it was not the Agent, and the terms "Lender" and "Lenders" shall in each case include Allfirst Bank in its individual capacity. 9.10 Successor Agent. --------------- If at any time the Agent deems it advisable, in its sole discretion, it may submit to each of the Lenders a written notice of its resignation as Agent under this Agreement, such resignation to be effective upon the earlier of (i) the written acceptance of the duties of the Agent under the Loan Documents by a successor Agent and (ii) on the 30th day after the date of such notice. Upon any such resignation, the Required Lenders shall have the right to appoint from among the Lenders a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and accepted such appointment in writing within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which successor Agent shall be a commercial bank organized under the laws of the United States of America or any State thereof. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent's rights, powers, privileges and duties as Agent under the Loan Documents shall be terminated. The Borrower and the Lenders shall execute such documents as shall be necessary to effect such appointment. After any retiring Agent's resignation hereunder as Agent, the provisions of the Loan Documents shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. If at any time hereunder there shall not be a duly appointed and acting Agent, the Borrower agrees to make each payment due under the Loan Documents directly to the Lenders entitled thereto during such time. 10. GENERAL. ------- 10.1 Survival of Warranties. ---------------------- All agreements, representation and warranties made herein shall survive the delivery of this Agreement. 10.2 Modification of Documents. ------------------------- No modification or waiver of any provision of this Agreement, the Notes, the other Loan Documents or other instruments or consent to any departure by the Borrower from any of the terms or conditions thereof, shall in any event be effective unless it shall be in writing and signed by the Agent (and, but only to the extent specifically required by Section 9.2, each Lender) and the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrower in any case shall, of itself, entitle the Borrower to any other or further notice or demand in similar or other circumstances. 10.3 Rights Cumulative. ----------------- Each and every right granted to the Agent or a Lender hereunder or under any other document delivered hereunder or in connection herewith, or allowed one or the other by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Agent to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. 10.4 Construction and Severability. ----------------------------- This Agreement, the Notes and the other Loan Documents and the rights and obligations of the parties shall be construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. The provisions of this Agreement are severable and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Agreement in any jurisdiction. 10.5 Conflict of Documents. --------------------- The provisions of this Agreement are in addition to, and not in limitation of, the provisions of the Notes and the other Loan Documents. In the event of conflict between the provisions of this Agreement and the provisions of the Notes or any Loan Document, the provisions of this Agreement shall prevail. 10.6 Notices. ------- Notices by one party to the other shall be in writing and shall be deemed to have been validly given at the time when posted in the U.S. Mails, postage prepaid, or hand delivered to the following address or to any alternate address designated in writing by the recipient: The Borrower: Herley Industries, Inc. 3061 Industry Drive Lancaster, Pennsylvania 17603 Attn: Myron Levy, CEO The Agent: Allfirst Bank 1703 Oregon Pike Lancaster, Pennsylvania 17601-4201 Attn: Jane E. Kline, Vice President The Lender: Fulton Bank One Penn Square Lancaster, PA 17108-1146 Attn: William T. Kepler Vice President 10.7 Expenses of the Agent. --------------------- The Borrower shall pay all fees and expenses reasonably incurred by the Agent in connection with the preparation, execution, delivery and performance of this Agreement, the Notes, the other Loan Documents and all other instruments executed in connection herewith or in connection with the collection of the indebtedness hereunder, or any part thereof. These fees and expenses shall include, without limitation, fees and disbursements of Agent's Counsel. 10.8 Binding Effect. -------------- This Agreement and any other documents and instruments delivered or required to be delivered pursuant hereto shall inure to the benefit of and shall be binding upon the parties hereto and their heirs, executors, administrators, personal representatives, successors and permitted assigns of the parties hereto. The Borrower may not assign its rights or obligations hereunder without the prior written consent of Agent and all of the Lenders. 10.9 Participations and Assignments. ------------------------------ (a) Each Lender with the prior written consent of the Agent and the Borrower (which consent of the Borrower shall not be unreasonably withheld and shall not be required upon the occurrence and during the continuance of an Event of Default), shall have the right to assign all or any part of such Lender's Loans, Revolving Credit Commitment and Notes, on a pro rata basis, to any other lender; provided, however, notwithstanding the foregoing, that any such assignment by Fulton Bank and each Fulton Affiliate (as hereinafter defined) shall be permitted without such consent if made to a Fulton Affiliate. For the purposes of Section 10.9, the term "Fulton Affiliate" shall mean any commercial bank organized under the laws of the United States of America or any State thereof that is, directly or indirectly, wholly-owned by the entity that is Fulton Bank's "ultimate parent entity" as such term is defined in 16 CFR ss.801.1. For each assignment, the parties to such assignment shall execute and deliver to the Agent for its acceptance and recording an Assignment and Acceptance Agreement. Upon such execution, delivery, acceptance and recording by the Agent, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, the assignor Lender thereunder shall be released from its obligations under the Loan Documents. The Borrower agrees upon written request of the Agent and at the Borrower's expense to execute and deliver (1) to such assignee, Notes, dated the effective date of such Assignment and Acceptance Agreement, in an aggregate principal amount equal to the Loans assigned to, and Revolving Credit Commitment assumed by, such assignee and (2) to such assignor Lender, Notes, dated the effective date of such Assignment and Acceptance Agreement, in an aggregate principal amount equal to the balance of such assignor Lender's Loans and Revolving Credit Commitment, if any, and each assignor Lender shall cancel and return to the Borrower its existing Notes. Upon any such assignment, the applicable Revolving Credit Commitment and Revolving Credit Commitment Percentages set forth in Exhibit A shall be adjusted accordingly by the Agent and a new Exhibit A shall be distributed by the Agent to the Borrower and each Lender. (b) Each Lender may grant participations in all or any part of its Loans, its Notes and its Revolving Credit Commitment to one or more lenders, provided that (i) such Lender's obligations under the Loan Documents shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties to the Loan Documents for the performance of such obligations, (iii) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents, (iv) no sub-participations shall be permitted and (v) the voting rights of any holder of any participation shall be limited to decisions that only do any of the following: (A) subject the participant to any additional obligation, (B) reduce the principal of, or interest on the Notes or any fees or other amounts payable hereunder to the extent such participant has an interest therein, (C) postpone any date fixed for the payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder to the extent such participant has an interest therein; provided, however, notwithstanding the foregoing, that any such participation granted by Fulton Bank and each Fulton Affiliate shall require the prior written consent of the Agent if made to any lender other than a Fulton Affiliate. 10.10 Indemnification by the Borrower. ------------------------------- In addition to all amounts payable hereunder, the Borrower shall protect, indemnify, and save harmless the Agent, each Lender and their respective officers, employees and agents (collectively, the "Indemnitees") against and from any and all liabilities, suits, actions, claims, demands, losses, expenses and costs of every kind and nature incurred by, or asserted or imposed against any Indemnitee by reason of (a) any accident, injury (including death) or damage to any person or property, however caused (other than the negligence or willful misconduct of such Indemnitee), resulting from, connected with or growing out of any act of commission or omission of the Borrower, or any officers, employees, agents, assignees, contractors or subcontractors of the Borrower, or (b) any untrue statement by the Borrower or any of its officers, employees or agents of a material fact or any omission by the Borrower or any of its officers, employees or agents to state a material fact necessary in order to make any statements made, in light of the circumstances under which they were made, not misleading and made in connection with the Loans and the transactions contemplated by this Agreement; and, in any such case, regardless of whether such liabilities, suits, actions, claims, demands, damages, losses, expenses and costs be against, or be suffered or sustained by, any Indemnitee, or be against, or be suffered or sustained by, legal entities, officers, agents, or other persons to whom an Indemnitee may become liable therefor. The Borrower may, and if so requested by the Indemnitee shall, undertake to defend, at its sole cost and expense, any and all suits, actions and proceedings brought against such Indemnitee in connection with any of the matters indemnified against in this Section. The Agent and each Lender agree to give the Borrower timely notice of and shall forward to the Borrower every demand, notice, summons or other process received with respect to any claim or legal proceeding within the purview hereof, but the failure to give such notice shall not affect an Indemnitee's rights to indemnification hereunder unless the failure to give notice shall have deprived the Borrower of a reasonable opportunity to contest any such matter. If the indemnification provided for herein is held by a court to be unavailable or is insufficient to hold harmless the Indemnitees in respect of any losses, claims, damages or liabilities (or actions in respect thereof), then the Borrower shall contribute to the amount paid or payable by the Indemnitees as a result of the losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Borrower on the one hand and the Indemnitees on the other hand, as well as any other relevant equitable considerations. The provisions of this Section shall survive the expiration of the Revolving Credit Commitment Period, the repayment, satisfaction or discharge of the Loans, and the Resignation of the Agent or replacement of any Lender. 10.11 Integration. ----------- All Exhibits to a Loan Document shall be deemed to be a part thereof. The Loan Documents embody the entire agreement and understanding among the Borrower, the Agent, the Lenders and the other parties thereto with respect to the subject matter thereof and supersede all prior agreements and understandings among the Borrower, the Agent, the Lenders and the other parties with respect to the subject matter thereof including, without limitation, those portions of that certain Credit Agreement dated February 16, 1999 by and between The First National Bank of Maryland, a division of FMB Bank (a predecessor to Allfirst Bank), as the same has been amended and supplemented, and the related Loan Documents, specifically relating to the Revolving Loan as defined therein; provided, however, that the provisions of said prior Credit Agreement and the related Loan Documents, to the extent the same apply to the Mortgage Loan as defined therein, shall continue in full force and effect. 10.12 Waiver of Trial by Jury. ----------------------- THE AGENT, EACH LENDER AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREIN. FURTHER, THE BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE AGENT OR ANY LENDER, OR COUNSEL THERETO, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT OR ANY LENDER WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES THAT THE AGENT AND THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION. 10.13 Jurisdiction and Venue. The Borrower hereby irrevocably consents to the exclusive jurisdiction of any state or federal court for the county or judicial district where the Agent's office indicated in Section 10.6 of this Agreement is located, and consents that all service of process be sent by nationally recognized overnight courier service directed to the Borrower at the Borrower's address set forth herein and service so made will be deemed to be completed on the business day after deposit with such courier; provided that nothing contained in this Agreement will prevent the Agent or any Lender from bringing any action, enforcing any award or judgment or exercising any rights against the Borrower individually, against any security or against any property of the Borrower within any other country, state or other foreign or domestic jurisdiction. The Agent and the Borrower agree that the venue provided above is the most convenient forum for both the Agent and the Borrower. The Borrower waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Agreement. The Borrower acknowledges that it has read and understands all the provisions of this Agreement, including Waiver of Trial by Jury, and has been advised by counsel as necessary or appropriate. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Agreement to be duly executed on its respective behalf on the date first set forth above. ATTEST: HERLEY INDUSTRIES, INC. By: By: ------------------------------------- ------------------- Anello C. Garefino, Treasurer and CFO Myron Levy, CEO (SEAL) ALLFIRST BANK, in its capacities as Agent and Lender By: -------------------- Vice President FULTON BANK By: -------------------- Vice President EXHIBIT A REVOLVING CREDIT COMMITMENTS AND REVOLVING CREDIT COMMITMENT PERCENTAGES Revolving Credit Revolving Credit LIBOR Advances Lender Commitments Commitment % Commitment % - --------------------- ---------------- ---------------- -------------- Allfirst Bank $30,000,000.00 60% Target Rate Advances $5,000,000.00 -- -- LIBOR Advances Commitment $25,000,000.00 -- 56% Fulton Bank $20,000,000.00 40% LIBOR Advances $20,000,000.00 44% Commitment EX-10 6 ex1017ewst.txt EXHIBIT 10.17 EWST STOCK PURCHASE AGREEMENT Exhibit 10.17 - ------------- Share Purchase Agreement Herley Industries, Inc. And Dr Robert S. Andrews And Mrs Ann Andrews And EW Simulation Technology Limited for the sale and purchase of all of the issued shares of EW Simulation Technology Limited September 2002 CONTENTS CLAUSE PAGE - ------ ---- 1. Service Agreement...............................................2 2. List of Contracts...............................................2 3. Business Plan...................................................2 1. INTERPRETATION..................................................3 2. SALE AND PURCHASE...............................................6 3. COMPLETION......................................................7 4. WARRANTIES, INDEMNITIES AND CONTRIBUTIONS......................10 5. PROTECTION OF GOODWILL.........................................11 6. INTELLECTUAL PROPERTY..........................................12 7. CONFIDENTIAL INFORMATION.......................................13 8. ANNOUNCEMENTS..................................................13 9. ASSIGNMENT.....................................................13 10. COSTS..........................................................14 11. EFFECT OF COMPLETION...........................................14 12. FURTHER ASSURANCES.............................................14 13. ENTIRE AGREEMENT...............................................14 14. VARIATIONS.....................................................15 15. WAIVER.........................................................15 16. INVALIDITY.....................................................16 17. NOTICES........................................................16 18. COUNTERPARTS...................................................17 19. GOVERNING LAW AND JURISDICTION.................................17 20. THIRD PARTY RIGHTS.............................................17 SCHEDULE 1............................................................19 Particulars relating to the Sellers...................................19 SCHEDULE 2............................................................20 Particulars relating to the Company...................................20 SCHEDULE 3............................................................21 The Warranties........................................................21 SCHEDULE 4............................................................65 Form of Resignation...................................................65 SCHEDULE 5............................................................66 Sellers' Limitations on Liability.....................................66 SCHEDULE 6............................................................69 The Property..........................................................69 AGREED FORM DOCUMENTS 1. Service Agreement 2. List of Contracts 3. Business Plan 4. List of Employees - 36 - JAA\2784198.05 THIS AGREEMENT is made on 2002 BETWEEN: (1) HERLEY INDUSTRIES, INC. whose corporate and principal office is at 3061 Industry Drive, Lancaster, PA 17603-4025, United States of America (the "Buyer"); (2) DR ROBERT S. ANDREWS whose address is 2 Mayfield, Rowledge, Farnham, Surrey GU10 4DZ ("Dr. Andrews"); (3) MRS ANN ANDREWS whose address is 2 Mayfield Rowledge, Farnham, Surrey GU10 4DZ ("Mrs Andrews"); and (4) EW SIMULATION TECHNOLOGY LIMITED (No. 3155211) whose registered office is at 2 Mayfield, Rowledge, Farnham, Surrey GU10 4DZ (the "Company"). THE PARTIES AGREE AS FOLLOWS: 1. INTERPRETATION 1.1 In this agreement the following words and expressions and abbreviations have the following meanings, unless the context otherwise requires: "Accounts Date" means 31 March 2002; "associated company" has the meaning given to it in sections 416 et seq. TA; "Business Day" means a day (excluding Saturdays) on which banks generally are open in London for the transaction of normal banking business; "Buyer's Group" means the Buyer, its holding companies and the subsidiary undertakings and associated companies from time to time of it and of such holding companies, all of them and each of them as the context admits; "Buyer's Solicitors" means Ashurst Morris Crisp of Broadwalk House, 5 Appold Street, London EC2A 2HA; "Company Intellectual Property" means Intellectual Property, used by, owned by or licensed to the Company together with the goodwill relating thereto including without prejudice to the generality of the foregoing the registered Intellectual Property and the unregistered Intellectual Property rights set out in the document headed Intellectual Property in the agreed terms; "Completion" means the completion of the sale and purchase of the Shares in accordance with clause 3; "Completion Date" means the date on which Completion occurs; "Confidential Information" means all information relating to the Company's business, or financial or other affairs (including future plans and targets of the Company) which is of a confidential nature and not in the public domain; "connected person" means a person who is connected with another for the purpose of section 839 of the TA; "Disclosure Letter" means a letter of today's date together with the attachments thereto addressed by the Warrantor to the Buyer disclosing exceptions to the Warranties; "Encumbrance" means any mortgage, charge (fixed or floating), pledge, lien, hypothecation, trust, right of set off or other third party right or interest (legal or equitable) including any right of pre-emption, assignment by way of security, reservation of title or any other security interest of any kind however created or arising or any other agreement or arrangement (including a sale and repurchase arrangement) having similar effect; "Intellectual Property" means any and all patents, trade marks, rights in designs, get-up, trade, business or domain names, copyrights, and topography rights, (whether registered or not and any applications to register or rights to apply for registration of any of the foregoing), rights in inventions, Know-How, trade secrets and other confidential information, rights in databases and all other intellectual property rights of a similar or corresponding character which may now or in the future subsist in any part of the world; "Know-How" means confidential or proprietary industrial or technical information and techniques in any form (including paper, electronically stored data, magnetic media, files and micro-film) including, without limitation, drawings, data relating to inventions, formulae, test results, reports, research reports, project reports and testing procedures, shop practices, instruction and training manuals, specifications, lists and particulars of customers and suppliers, marketing methods and procedures; "Loan Notes" means the Loan Notes to be issued pursuant to the Loan Note Instrument; "Loan Note Instrument" means the instrument constituting the Guaranteed Unsecured Loan Notes 2005 of the Buyer in the agreed terms; "London Stock Exchange" means the London Stock Exchange plc; "Permit" means a permit, licence, consent, approval, certificate, qualification, specification, registration and other authorisation and a filing of a notification report or assessment necessary in any jurisdiction for the proper and efficient operation of the Company's business, its ownership, possession, occupation or use of an asset or the execution and performance of this agreement; "Property" means the property described in schedule 6 or any part or parts thereof; "Related Person" means in relation to the Buyer its holding companies and the subsidiary undertakings and associated companies from time to time of it and any such holding company, all of them and each of them as the context admits; "Sellers" means Dr. Andrews and Mrs Andrews; "Sellers' Solicitors" means Mundays of Crown House, Church Road, Claygate, Esher, Surrey KT10 0LP; "Service Agreement" means the service agreement to be entered into on Completion between the Company and Dr. Andrews in the agreed terms; "Shares" means all of the issued shares in the capital of the Company; "TA" means the Income and Corporation Taxes Act 1988; "Tax Deed" means a deed of indemnity in the agreed terms; "UK Listing Authority" means the Financial Service Authority in its capacity as the competent authority for the purposes of Part VI of the Financial Services and Markets Act 2000; "Warranties" means the warranties and representations set out in schedule 3; and "Warrantor" means Dr. Andrews. 1.2 In this agreement unless otherwise specified, reference to: (a) a "subsidiary undertaking" is to be construed in accordance with section 258 of the Companies Act 1985 and a "subsidiary" or "holding company" is to be construed in accordance with section 736 of that Act; (b) a document in the "agreed terms" is a reference to that document in the form approved and for the purposes of identification signed by or on behalf of each party; (c) "FA" followed by a stated year means the Finance Act of that year; (d) "includes" and "including" shall mean including without limitation; (e) a "party" means a party to this agreement and includes its permitted assignees (if any) and/or the successors in title to that part of its undertaking which includes this agreement and, in the case of an individual, to his or her estate and personal representatives; (f) a "person" includes any person, individual, company, firm, corporation, government, state or agency of a state or any undertaking (whether or not having separate legal personality and irrespective of the jurisdiction in or under the law of which it was incorporated or exists); (g) a "statute" or "statutory instrument" or "accounting standard" or any of their provisions is to be construed as a reference to that statute or statutory instrument or accounting standard or such provision as the same may have been amended or re-enacted before the date of this agreement; (h) "clauses", "paragraphs" or "schedules" are to clauses and paragraphs of and schedules to this agreement; (i) "writing" includes any methods of representing words in a legible form (other than writing on an electronic or visual display screen) or other writing in non-transitory form; (j) words denoting the singular shall include the plural and vice versa and words denoting any gender shall include all genders; and (k) the time of day is reference to time in London, England. 1.3 The schedules form part of the operative provisions of this agreement and references to this agreement shall, unless the context otherwise requires, include references to the schedules. 1.4 The index to and the headings and the descriptive notes in brackets relating to provisions of taxation statutes in this agreement are for information only and are to be ignored in construing the same. 1.5 The obligations and liabilities of the Sellers under this agreement shall be joint and several. 1.6 Any question of whether a person is connected with another shall be determined in accordance with section 839 of the TA (except that in construing section 839 "control" has the meaning given by section 840 or section 416 of the TA so that there is control whenever section 840 or 416 requires) which shall apply in relation to this agreement as it applies in relation to the TA. 2. SALE AND PURCHASE 2.1 Upon the terms and subject to the conditions of this agreement, the Sellers as legal and beneficial owners and with full title guarantee shall sell and the Buyer shall purchase the respective numbers of Shares of which each of the Sellers is the registered holder and beneficial owner being set out opposite his or her name in column 2 of schedule 1 with effect from Completion free from any Encumbrance, together with all accrued benefits and rights attached thereto and all dividends declared (other than as set out in the Disclosure Letter (but excluding any attachments thereto)) after the Accounts Date in respect of the Shares. 2.2 Each of the Sellers waives or agrees to procure the waiver of any rights or restrictions conferred upon any of them or any other person which may exist in relation to the transfer of the Shares under the articles of association of the Company or otherwise. 2.3 The Buyer shall not be obliged to complete the purchase of any of the Shares unless the Sellers complete the sale of all of the Shares simultaneously, but completion of the purchase of some Shares shall not affect the rights of the Buyer with respect to its rights to the other Shares. 2.4 The consideration for such sale and purchase shall be the sum of US$3,000,000 and (pound)965,001 to be satisfied on Completion in accordance with the following provisions of this clause 2. 2.5 The consideration for such sale and purchase shall be satisfied at Completion by: (a) the payment in cash to the Sellers of the amounts set out opposite their respective names in schedule 1; and (b) the remainder to be satisfied by the issue to the Sellers of such number of Loan Notes as are set out opposite their respective names in schedule 1 credited as fully paid. 3. COMPLETION 3.1 Completion shall take place at the offices of the Buyer's Solicitors immediately after the execution of this agreement. 3.2 On Completion, the Sellers shall deliver to or, if the Buyer shall so agree, make available to the Buyer: (a) transfers in common form relating to all the Shares duly executed in favour of the Buyer (or as it may direct); (b) share certificates relating to the Shares; (c) any waivers or consents by the Company or other persons which the Buyer has reasonably specified prior to Completion so as to enable the Buyer or its nominees to be registered as the holders of the Shares; (d) a resignation in the form set out in schedule 4 duly executed as a deed by Mrs Andrews together with delivery to the Buyer of all property of the Company in her possession or under her control; (e) the written resignation of the auditors of the Company containing an acknowledgement that they have no claim against the Company for compensation for loss of office, professional fees (save as stated in such letter of resignation) or otherwise and a statement under section 394(1) of the Companies Act 1985; (f) the common seals, certificates of incorporation and statutory books, share certificate books and cheque books of the Company; (g) the Tax Deed duly executed by the Warrantor; (h) the Service Agreement duly executed by Dr. Andrews; (i) all land certificates, charge certificates, leases, title deeds and other documents relating to the Property (except to the extent that the same are in the possession of mortgagees pursuant to mortgages disclosed in schedule 6); (j) to the extent not in the possession of the Company, all books of account or references as to customers and/or suppliers and other records of the Company and all insurance policies relating to the Company; and (k) to the extent not in the possession of the Company, all licences, consents, permits and authorisations obtained by or issued to the Company or any other person in connection with the business carried on by any of them. 3.3 At Completion, the Sellers shall procure the passing of board resolutions of the Company in the agreed terms: (a) sanctioning for registration, subject to due stamping, the transfers in respect of the Shares; (b) authorising the delivery to the Buyer of share certificates in respect of the Shares; (c) appointing Mr Myron Levy to be a director (in addition to Dr Andrews) and Mr John Kelley to be the secretary of the Company; (d) revoking all mandates to bankers and giving authority in favour of the directors appointed under clause 3.3(c) above or such other persons as the Buyer may nominate to operate the bank accounts thereof; (e) resolving that the registered office of the Company be changed to Unit 1, The Royston Centre, Lynchford, Ash Vale, Aldershot, Hampshire GU12 5PQ; (f) changing the accounting reference date of the Company to 31 July; (g) resolving that the Company and Dr. Andrews enter into the Service Agreement; (h) resolving that(pound)38,432 owed by the Company to the Seller are repaid forthwith. 3.4 The Sellers shall procure that at Completion: (a) there is repaid all sums (if any) owing to the Company by any of the Sellers or by the director or the secretary of the Company or any of their connected persons (other than the Company) and whether or not such sums are due for repayment; (b) the Company is released from any guarantee, indemnity, bond, letter of comfort or Encumbrance or other similar obligation given or incurred by it which relates in whole or in part to debts or other liabilities or obligations, whether actual or contingent, of any person other than the Company, and prior to such repayment or release the Sellers undertake to the Buyer (on behalf of themselves and as trustee on behalf of the Company) to keep the Company fully indemnified against any failure to make any such repayment or any liability arising under any such guarantee, indemnity, bond, letter of comfort or Encumbrance. 3.5 Upon compliance by the Sellers with the provisions of clauses 3.2, 3.3 and 3.4, the Buyer shall: (a) provide for the transfer of US$3,000,000 to the Sellers' Solicitors at Barclays Bank plc, Barclays Business Centre, PO Box 193, 8/12 Church Street, Walton on Thames, Surrey KT12 2YW Sort Code 20-90-56, Account No. 63196677 and receipt by such bank of such sum shall be good discharge to the Buyer; (b) allot to the Sellers such amount of Loan Notes as are set out opposite their respective names in schedule 1 and enter the names of the Sellers in the register of loan note holders of the Buyer as the holders of such amounts of Loan Notes as aforesaid; and (c) deliver to the Sellers' Solicitors: (i) a counterpart of the Tax Deed duly executed by the Buyer; (ii) a counterpart of the Service Agreement duly executed by Dr. Andrews; and (iii) definitive certificates in respect of the Loan Notes. 3.6 If in any respect the obligations of the Sellers (or Buyer) are not complied with on Completion the party not in default may: (a) defer Completion to a date not more than 28 days after Completion should have taken place but for the default (and so that the provisions of this clause 3, apart from this clause 3.6(a), shall apply to Completion as so deferred); or (b) proceed to Completion so far as practicable (without prejudice to its rights hereunder); or (c) terminate this agreement without prejudice to the rights and liabilities which accrued prior to termination which shall continue to subsist including those under clauses 8, 10 and 13 to 20 (inclusive), by means of a notice in writing served by Dr. Andrews on the Buyer, if the Buyer is in default, or served by the Buyer on Dr. Andrews if either or both of the Sellers are in default. 3.7 Forthwith after Completion, the Buyer and Dr. Andrews shall use their reasonable endeavours to procure that the Company: (a) and each of Mike Barton, Neil Chapman and Elizabeth O' Conner enter into service agreements; and (b) Geoff Hawkins and Paul Shepard acting on behalf of the consultancy company in which they are shareholders, Aware Simulation Limited, enter into consultancy agreements. It is hereby acknowledged that it is the intention of the Buyer that, as an incentive to sign such service agreements and consultancy agreements, such persons will be granted options in the Buyer. 3.8 Within six months of Completion, Dr. Andrews shall: (a) use his best endeavours to dispose of his 60 per cent. shareholding in EWST Australia Pty Limited; and (b) resign from his position as a director of EWST Australia Pty Limited. 3.9 The Sellers shall assign, or shall procure the assignment of, to the Buyer of the benefit of any confidentiality undertakings given to either of them by any person within the last two years in relation to a sale or potential sale by the Sellers of the Company or its assets and undertakings or to any investment, by way of the subscription of equity or otherwise, in the Company. 4. WARRANTIES, INDEMNITIES AND CONTRIBUTIONS 4.1 The Warrantor warrants with the Buyer in the terms of the Warranties. 4.2 Any information supplied by or on behalf of the Company to or on behalf of the Warrantor in connection with the Warranties, the Disclosure Letter or otherwise in relation to the business and affairs of the Company shall not constitute a representation or warranty or guarantee as to the accuracy thereof by the Company and each of the Sellers agrees with the Buyer and the Company (and their respective directors, officers, employees, agents and advisers) that he and/or she hereby irrevocably waives any and all claims which he and/or she and/or their connected persons might otherwise have against the Company or any of their respective directors, officers, employees, agents or advisers in respect thereof and any and all other claims against the Company (unless such claim is covered by insurance) or any such persons in respect of any cause, matter or thing whatsoever and hereby releases the Company and each such persons from any liability or obligation to him and/or her whatsoever (save, in the case of Dr Andrews, for obligations and liabilities under his Service Agreement with the Company). 4.3 Each of the Warranties shall be construed as a separate warranty and representation and (unless expressly provided to the contrary) shall not be limited by the terms of any of the other Warranties or by any other term of this agreement. 4.4 The liability of the Warrantor under the Warranties shall be limited if and to the extent that the limitations referred to in schedule 5 apply. 4.5 No information relating to the Company of which the Buyer has knowledge (actual or constructive) other than that contained in or referred to in this agreement and/or included in the Disclosure Letter and no investigation by or on behalf of the Buyer shall prejudice any claim by the Buyer under the Warranties or reduce any amount recoverable thereunder. 4.6 The Sellers shall give to the Buyer all such information and documentation relating to the Company as the Buyer shall reasonably require to enable it to satisfy itself as to whether there has been any breach of the Warranties, provided that the Sellers have reasonable grounds for believing that there has been such a breach. 4.7 The Sellers irrevocably and unconditionally agree with the Buyer and their professional advisers that they will not bring any claim or other action (including a claim for contribution under the Civil Liability (Contributions) Act 1978) of whatever nature and which exists now or may exist in the future and whether known or not known to the Sellers or either of them at the date hereof and whether in relation to a matter which is past, present or future and in respect of negligence or otherwise ("Claim") against any professional advisers of the Buyer in relation to any matter arising (directly or indirectly) out of or in connection with this agreement. To the extent that any such Claim exists (if any and without prejudice to the aforesaid), the Sellers irrevocably and unconditionally waive the right to bring any form of claim against or recover any sums from any of the Buyer's professional advisers in relation to any Claim and unconditionally and irrevocably release the Buyer's professional advisers from any liability in respect of any such Claim. It is intended that any relevant professional adviser of the Buyer shall be entitled to the benefit of the undertakings, releases and waivers provided for in this clause for the purpose of, inter alia, the Contracts (Rights of Third Parties) Act 1999. 4.8 Nothing in this clause 4 shall exclude or limit liability in respect of Claims arising directly out of any statements made fraudulently or arising as a direct result of wilful concealment by the Buyer's professional advisers. 4.9 The Sellers agree with and undertake to the Buyer and each of its Related Persons (including, without limitation, the Company together with its directors, officers or employees) to indemnify and hold each of them harmless from and against any and all costs (including, without limitation, legal costs and registration or administrative costs or fees), liabilities, losses, expenses and claims whatsoever incurred by any of them arising out of the employment or termination of employment by the Company of Mrs Andrews. 4.10 In the event that any independent or self employed contractors or consultants of the Company bring an employment related claim against the Company, the Sellers shall indemnify the Company on demand against all liabilities, obligations, costs, claims and demands arising from or in respect of any such employment related claim (including without limitation any claim for unfair dismissal, in relation to redundancy rights or under the Working Time Regulations 1998 or the Part Time Workers (Prevention of Less Favourable Treatment) Regulations 2000)). 5. PROTECTION OF GOODWILL 5.1 The Sellers hereby undertake to procure that (except as otherwise agreed in writing with the Buyer) they will not (and their respective connected persons will not) either directly or indirectly and either solely or jointly with any other person (either on their own account or as the agent of any other person) and in any capacity whatsoever: (a) subject to clause 5.2, for a period of three years from Completion carry on or be engaged or concerned or (except as the holder of shares in a listed company which confer not more than five per cent. of the votes which can generally be cast at a general meeting of the company) interested in a business which competes with the type of business carried on by the Company at Completion in any of the countries in which the business was then carried on; (b) for a period of three years from Completion solicit or accept the custom of any person in respect of goods or services competitive with those manufactured or supplied by the Company during the period of 12 months prior to Completion, such person having been a customer of the Company in respect of such goods or services during such period; (c) for a period of three years from Completion induce, solicit or endeavour to entice to leave the service or employment of the Company, any person who during the period of 12 months prior to Completion was an employee of the Company occupying a senior or managerial position and likely (in the opinion of the Buyer) to be: (i) in possession of confidential information relating to; or (ii) able to influence the customer relationships or connections of the Company; or (d) use any trade or domain name (including the expressions "EWST" and "EW Simulation Technology") or e-mail address used by the Company at any time during the three years immediately preceding the date of this agreement or any other name intended or likely to be confused with any such trade or domain name or e-mail address. 5.2 For a period of six months from Completion, Dr. Andrews shall be permitted to hold not more than 60 per cent. of the issued share capital of EWST Australia Pty Limited, provided such company shall only perform the services that it is currently performing, details of which are set out in the Disclosure Letter. 5.3 The Sellers agree that the undertakings contained in this clause 5 are reasonable and are entered into for the purpose of protecting the goodwill of the business of the Company and that accordingly the benefit of the undertakings may be assigned by the Buyer and its successors in title without the consent of any of the Sellers. 5.4 Each undertaking contained in this clause 5 is and shall be construed as separate and severable and if one or more of the undertakings is held to be against the public interest or unlawful or in any way an unreasonable restraint of trade or unenforceable in whole or in part for any reason the remaining undertakings or parts thereof, as appropriate, shall continue to bind the Sellers. 5.5 If any undertaking contained in this clause 5 shall be held to be void but would be valid if deleted in part or reduced in application, such undertaking shall apply with such deletion or modification as may be necessary to make it valid and enforceable. Without prejudice to the generality of the foregoing, such period (as the same may previously have been reduced by virtue of this clause 5.5) shall take effect as if reduced by six months until the resulting period shall be valid and enforceable. 6. INTELLECTUAL PROPERTY 6.1 Following Completion, to the extent it subsequently transpires that any Company Intellectual Property is vested in the Sellers or any other third party employed or contracted by the Company to develop such Intellectual Property, the Sellers shall do and execute or procure that there shall be done and executed all such documents, deeds, matters, acts and things as the Buyer may at any time require properly to vest such Intellectual Property in the Company or otherwise to perfect the Company's title thereto. 6.2 The Sellers shall be responsible for all costs that have been or may be incurred as a result of any assignment of Company Intellectual Property executed between any of the Sellers or any of their connected persons prior to Completion including the costs of recordal of such assignments. 7. CONFIDENTIAL INFORMATION 7.1 The Sellers shall not and shall procure that none of their connected persons shall use or disclose to any person Confidential Information. 7.2 Clause 7.1 does not apply to: (a) disclosure of Confidential Information to or at the written request of the Buyer; (b) use or disclosure of Confidential Information required to be disclosed by law, regulation, any revenue authority or the London Stock Exchange or the UK Listing Authority; (c) disclosure of Confidential Information to professional advisers for the purpose of advising the Sellers; or (d) Confidential Information which is in the public domain other than by a breach by any of the Sellers of clause 7.1. 8. ANNOUNCEMENTS 8.1 Save for an announcement in the agreed terms between the parties, no party shall disclose the making of this agreement nor its terms nor any other agreement referred to in this agreement (except those matters set out in the press release in the agreed terms and subject to clause 9.3) and in the case of the Buyer shall procure that its Related Persons and its professional advisers shall not make any such disclosure without the prior consent of the other party unless disclosure is: (a) to its professional advisers; or (b) required by law or the rules or standards of the London Stock Exchange or the Listing Rules of the UK Listing Authority or the rules and requirements of any other regulatory body; provided that this clause 8.1 does not apply to announcements, communications or circulars made or sent by the Buyer and/or the Company after Completion to customers, clients or suppliers of the Company to the extent that it informs them of the Buyer's acquisition of the Shares or to any announcements containing only information which has become generally available. 8.2 The restrictions contained in clause 8.1 shall apply without limit of time and whether or not this agreement is terminated. 9. ASSIGNMENT 9.1 This agreement is personal to the parties and accordingly. Subject to clause 9.2 no party without the prior written consent of the other shall assign, transfer or declare a trust of the benefit of all or any of any other party's obligations nor any benefit arising under this agreement. 9.2 The Buyer may (without the consent of any of the Sellers) assign to any member of the Buyer's Group the benefit of all or any of any of the Sellers' obligations or any benefit it enjoys under this agreement provided however that such assignment shall not be absolute but shall be expressed to have effect only for so long as the assignee remains a member of the Buyer's Group and that immediately before ceasing to be such a member the assignee shall assign the benefit to a member of the Buyer's Group. The sale or transfer of all or part of the business of the Company to any member of the Buyer's Group shall not affect the liability of any of the Sellers under any provision of this agreement whatsoever. 9.3 The Buyer may disclose to a proposed assignee information in its possession relating to the provisions of this agreement the subject matter of this agreement and the other parties which it is necessary to disclose for the purposes of the proposed assignment, notwithstanding the provisions of clause 9 provided that such disclosure shall be made only after notice has been given to the other party of the identity of the proposed assignee. 10. COSTS Unless expressly otherwise provided in this agreement each of the parties shall bear its own legal, accountancy and other costs, charges and expenses connected with the sale and purchase of the Shares, provided that no costs, charges or expenses shall be charged to the Company. 11. EFFECT OF COMPLETION 11.1 The terms of this agreement (insofar as not performed at Completion and subject as specifically otherwise provided in this agreement) shall continue in force after and notwithstanding Completion. 11.2 The remedies of the Buyer in respect of any breach of any of the Warranties shall continue to subsist notwithstanding Completion. 12. FURTHER ASSURANCES Following Completion the Sellers shall from time to time forthwith upon request from the Buyer at the Sellers' expense do or procure the doing of all acts and/or execute or procure the execution of all such documents in a form reasonably satisfactory to the Buyer for the purpose of vesting in the Buyer the full legal and beneficial title to the Shares and otherwise giving the Buyer the full benefit of this agreement. 13. ENTIRE AGREEMENT Each party on behalf of itself and, in the case of the Buyer, as agent for each of its Related Persons or, in the case of the Sellers, their connected persons, acknowledges and agrees with each of the other party (each such party acting on behalf of itself and as agent for each of its Related Persons or, in the case of the Sellers, their connected persons) that: (a) this agreement together with any other documents referred to in this agreement (together the "Transaction Documents") constitute the entire and only agreement between the parties and their respective Related Persons or, in the case of the Sellers, their connected persons, relating to the subject matter of the Transaction Documents; (b) neither it nor any of its Related Persons or, in the case of the Sellers, their connected persons, has been induced to enter into any Transaction Document in reliance upon, nor has any such party been given, any warranty, representation, statement, assurance, covenant, agreement, undertaking, indemnity or commitment of any nature whatsoever other than as are expressly set out in the Transaction Documents and, to the extent that any of them has been, it (acting on behalf of itself and as agent on behalf of each of its Related Persons or, in the case of the Sellers, their connected persons), unconditionally and irrevocably waives any claims, rights or remedies which any of them might otherwise have had in relation thereto; PROVIDED THAT the provisions of this clause 13 shall not exclude any liability which any of the parties or, where appropriate, their Related Persons in the case of the Buyer or, in the case of the Sellers, their connected persons, would otherwise have to any other party or, where appropriate, to any other party's Related Persons in the case of the Buyer or, in the case of the Sellers, their connected persons, or any right which any of them may have in respect of any statements made fraudulently by any of them prior to the execution of this agreement or any rights which any of them may have in respect of fraudulent concealment by any of them. 14. VARIATIONS This agreement may be varied only by a document signed by each of the Sellers and the Buyer. 15. WAIVER 15.1 A waiver of any term, provision or condition of, or consent granted under, this agreement shall be effective only if given in writing and signed by the waiving or consenting party and then only in the instance and for the purpose for which it is given. 15.2 No failure or delay on the part of any party in exercising any right, power or privilege under this agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 15.3 No breach of any provision of this agreement shall be waived or discharged except with the express written consent of the Sellers and the Buyer. 15.4 The rights and remedies herein provided are cumulative with and not exclusive of any rights or remedies provided by law. 16. INVALIDITY 16.1 If any provision of this agreement is or becomes invalid, illegal or unenforceable in any respect under the law of any jurisdiction: (a) the validity, legality and enforceability under the law of that jurisdiction of any other provision; and (b) the validity, legality and enforceability under the law of any other jurisdiction of that or any other provision, shall not be affected or impaired in any way. 17. NOTICES 17.1 Any notice, demand or other communication given or made under or in connection with the matters contemplated by this agreement shall be in writing and shall be delivered personally or sent by fax or prepaid first class post (air mail if posted to or from a place outside the United Kingdom): In the case of the Buyer to: Herley Industries, Inc. 3061 Industry Drive Lancaster Pennsylvania Fax: 001 717 3979503 Attention: Chief Executive Officer In the case of the Sellers to: 2 Mayfield Rowledge Farnham Surrey GU10 4DZ Attention: Dr. Andrews and shall be deemed to have been duly given or made as follows: (a) if personally delivered, upon delivery at the address of the relevant party; (b) if sent by first class post, two Business Days after the date of posting; (c) if sent by air mail, seven Business Days after the date of posting; and (d) if sent by fax, when despatched, provided that if, in accordance with the above provisions, any such notice, demand or other communication would otherwise be deemed to be given or made after 5.00 p.m. on a Business Day such notice, demand or other communication shall be deemed to be given or made at 9.00 a.m. on the next Business Day. 17.2 A party may notify the other party to this agreement of a change to its name, relevant addressee, address or fax number for the purposes of clause 17.1 provided that such notification shall only be effective on: (a) the date specified in the notification as the date on which the change is to take place; or (b) if no date is specified or the date specified is less than five Business Days after the date on which notice is given, the date falling five Business Days after notice of any such change has been given. 18. COUNTERPARTS This agreement may be executed in any number of counterparts which together shall constitute one agreement. Any party may enter into this agreement by executing a counterpart and this agreement shall not take effect until it has been executed by all parties. 19. GOVERNING LAW AND JURISDICTION 19.1 This agreement (and any dispute, controversy, proceedings or claim of whatever nature arising out of or in any way relating to this agreement or its formation) shall be governed by and construed in accordance with English law. 19.2 Each of the parties to this agreement irrevocably agrees that the courts of England shall have exclusive jurisdiction to hear and decide any suit, action or proceedings, and/or to settle any disputes, which may arise out of or in connection with this agreement or its formation (respectively, "Proceedings" and "Disputes") and, for these purposes, each party irrevocably submits to the jurisdiction of the courts of England. 20. THIRD PARTY RIGHTS 20.1 Any person (other than the parties to this agreement) who is given any rights or benefits under clauses 4.2, 4.9 and 14 (a "Third Party") shall be entitled to enforce those rights or benefits against the parties in accordance with the Contracts (Rights of Third Parties) Act 1999. 20.2 Save as provided in clause 20.1 above the operation of the Contracts (Rights of Third Parties) Act 1999 is hereby excluded. 20.3 The parties may amend, vary or terminate this agreement in such a way as may affect any rights or benefits of any Third Party which are directly enforceable against the parties under the Contracts (Rights of Third Parties) Act 1999 without the consent of such Third Party. 20.4 Any Third Party entitled pursuant to the Contracts (Rights of Third Parties) Act 1999 to enforce any rights or benefits conferred on it by this agreement may not veto any amendment, variation or termination of this agreement which is proposed by the parties and which may affect the rights or benefits of the Third Party. IN WITNESS whereof this agreement has been executed as a deed on the date first above written.
SCHEDULE 1 Particulars relating to the Sellers Column 1 2 3. 4. Names & Address of Number of Cash Consideration Loan Notes ((pound)) Sellers Shares held (US$) - --------------- ---------------------------- ----------------- ------------------------- ------------------------- 1. Dr. Robert S Andrews 51 1,530,000 492,151 2 Mayfield Rowledge Farnham Surrey GU10 4DZ - --------------- ---------------------------- ----------------- ------------------------- ------------------------- 2. Mrs Ann Andrews 49 1,470,000 472,850 2 Mayfield Rowledge Farnham Surrey GU10 4DZ - --------------- ---------------------------- ----------------- ------------------------- ------------------------- Totals: 100 US$3,000,000 (pound)965,001 - --------------- ---------------------------- ----------------- ------------------------- -------------------------
SCHEDULE 2 Particulars relating to the Company Registration number: 3155211 Authorised share capital: 1,000 ordinary shares of(pound)1 each Issued share capital: 100 ordinary shares of(pound)1 each Shareholders (number of shares) Dr. Andrews (51) Mrs Andrews (49) Director: Dr. Andrews Secretary: Mrs Andrews Auditors: Brebner Allen & Trapp Accounting reference date: 31 March Registered Office: 2 Mayfield Rowledge Farnham Surrey GU10 4DZ SCHEDULE 3 The Warranties Any Warranty expressed to be given "to the best of the Warrantor's knowledge and belief" or "so far as the Warrantor is aware" or otherwise qualified by reference to the knowledge of the Warrantor shall not be qualified in the manner stated unless the Warrantor can establish that, where it is reasonable for him to do so, he has made all reasonable enquiries of the company secretary, employees and agents of the Company and relevant third parties to establish the truth and accuracy of that Warranty. In this schedule 3, the following words have the following meanings, unless the context otherwise requires: "Accounts" means the audited financial statements of the Company, comprising the balance sheet, profit and loss account and cash flow statement of the Company together with the notes thereon, directors' report and auditors' certificate, as at and for the financial period ended on the Accounts Date; "2001 Accounts" means the audited financial statements of the Company, comprising the balance sheet, profit and loss account and cash flow statement of the Company together with the notes thereon, directors' report and auditors' certificate, as at and for the financial period ended on the 2001 Accounts Date; "2001 Accounts Date" means 31 March 2001; "Activities" means any activity, operation or process carried out by the Company at any property whether or not currently owned, occupied or used by the Company; "Business Plan" means the agreed form document 3 entitled "Business Plan for the Expansion of EW Simulation Technology Ltd" dated 19 March 2002 and initialled, for the purposes of identification only, by the parties hereto; "Claim for Tax" means any of the following: (a) any liability to make a payment of Tax and any claim, assessment, demand, notice or other document issued or action taken by or on behalf of any person, authority or body whatsoever and of whatever country, including any Tax Authority, which claims payment of Tax; (b) any non-availability or loss of or reduction of any relief (including in particular a right to repayment); "distribution" means a distribution as defined by sections 209 to 211 (inclusive) of the TA and section 418 of the TA; "Environment" means any and all living organisms (including man), ecosystems, property and the media of air (including air in buildings, natural or man-made structures, below or above ground) water, (as defined in section 104(1) of the Water Resources Act 1991 and within drains and sewers) and land (including under any water as described above and whether above or below surface); "Environmental Consent" means any consent, approval, permit, licence, order, filing, authorisation, exemption, registration, permission, reporting or notice requirement and any related agreement required under any Environmental Law; "Environmental Laws" means all international, EU, national, federal, state or local statutes, (which for the avoidance of doubt shall include section 57 and schedule 22 of the Environment Act 1995 and the guidance and regulations adopted under those provisions,) by-laws, orders, regulations or other law or subordinate legislation or common law, all orders, ordinances, decrees or regulatory codes of practice, circulars, guidance notes and equivalent controls concerning the protection of human health or which have as a purpose or effect the protection or prevention of harm to the Environment or health and safety which are binding in relation to the Property and/or upon the Company in the relevant jurisdiction in which the Company has been or is operating (including by the export of its products, or its waste thereto) on or before Completion; "ERA" means the Employment Rights Act 1996; "Hazardous Substance" means any natural or artificial substance (whether solid, liquid, gas, noise, ion, vapour, electromagnetic or radiation, and whether alone or in combination with any other substance) which is capable of causing harm to or have a deleterious effect on the Environment, being a nuisance, or which restricts or makes more costly the use, development, ownership or occupation of the Property; "IHTA" means the Inheritance Tax Act 1984; "Leases" means the leases specified in the Disclosure Letter; "List of Contracts" means the agreed form document 2 entitled "List of Contracts", dated the same date of this agreement and initialled, for the purposes of identification only, by the parties hereto; "List of Workers" means the agreed form document 4 entitled "List of Workers", dated the same date of this agreement and initialled, for the purposes of identification only, by the parties hereto; "Permit" means a permit, licence, consent, approval, certificate, qualification, specification, registration and other authorisation and a filing of a notification report or assessment necessary in any jurisdiction for the proper and efficient operation of the Company's business, its ownership, possession, occupation or use of an asset or the execution and performance of this agreement; "Substantial Customer" means a customer accounting for more than five per cent. of the Company's sales in the financial year ended on the Accounts Date; "Substantial Supplier" means a supplier accounting for more than five per cent. of the Company's purchases in the financial year ended on the Accounts Date; "Systems" means all plant, equipment, systems, devices and components which contain or are controlled or monitored by computer systems, microprocessors or software; "Tax" or "tax" means any tax, and any duty, contribution, impost, withholding, levy or charge in the nature of tax, whether domestic or foreign, and any fine, penalty, surcharge or interest connected therewith and includes corporation tax, advance corporation tax, income tax (including income tax required to be deducted or withheld from or accounted for in respect of any payment), national insurance and social security contributions, capital gains tax, inheritance tax, value added tax, customs excise and import duties, stamp duty, stamp duty reserve tax, insurance premium tax, air passenger duty, rates and water rates, land fill tax, petroleum revenue tax, advance petroleum revenue tax, gas levy and any other payment whatsoever which any person is or may be or become bound to make to any person and which is or purports to be in the nature of taxation; "Taxation Authority" means any local, municipal, governmental, state, federal or fiscal, revenue, customs or excise authority, body, agency or official anywhere in the world having or purporting to have power or authority in relation to Tax including the Inland Revenue and HM Customs and Excise; "Taxation Statutes" means all statutes, statutory instruments, orders enactments, laws, by-laws, directives and regulations, whether domestic or foreign decrees, providing for or imposing any Tax; "TCGA" means the Taxation of Chargeable Gains Act 1992; "TMA" means the Taxes Management Act 1970; "Transfer Regulations" means the Transfer of Undertakings (Protection of Employment) Regulations 1981; "TULR(C)A" means the Trade Union and Labour Relations (Consolidation) Act 1992; "VATA" means the Value Added Tax Act 1994 and "VAT legislation" means VATA and all regulations and orders made thereunder; "Waste" means waste including anything which is discarded or which the holder intends or is required to discard and anything which is abandoned, unwanted or surplus irrespective of whether it is capable of being recovered or recycled or has any value such that there is likely to be a breach of Environmental Law or such that any investigation, treatment or remediation of the Property is or would be required or would be undertaken by a prudent owner or occupier; "Workers" means the employees, directors, officers, workers and consultants of the Company; "Year 2000 Conformity" shall have the meaning set out in the document published with reference number DISC PD2000-1 by the part of the British Standards Institution called DISC entitled "A Definition of Year 2000 Conformity Requirements". In construing the meaning of this definition, regard shall be had to the Amplification of the Definition and Rules set out in the same document. 1. THE COMPANY AND THE SHARES 1.1 Incorporation and Existence The Company is a limited company incorporated under English law and has been in continuous existence since incorporation. 1.2 The Shares (a) The Sellers are the only legal and beneficial owners of the Shares. (b) The Company has not allotted any shares other than the Shares and the Shares are fully paid or credited as fully paid. (c) There is no Encumbrance in relation to any of the Shares or unissued shares in the capital of the Company. No person has claimed to be entitled to an Encumbrance in relation to any of the Shares and the Company is not under any obligation (whether actual or contingent) to sell, charge or otherwise dispose of any of the Shares or any interest therein to any person. (d) Other than this agreement, there is no agreement, arrangement or obligation requiring the creation, allotment, issue, sale, transfer, redemption or repayment of, or the grant to a person of the right (conditional or not) to require the allotment, issue, sale, transfer, redemption or repayment of, a share in the capital of the Company (including an option or right of pre-emption or conversion). 1.3 The Subsidiaries (a) The Company does not have any subsidiaries nor any subsidiary undertakings. (b) The Company does not own any shares or stock in the capital of nor does it have any beneficial or other interest in any company or business organisation nor does the Company control or take part in the management of any other company or business organisation. 2. ACCOUNTS 2.1 General (a) The Accounts and the 2001 Accounts show a true and fair view of the: (i) assets, liabilities, financial position and state of affairs at the Accounts Date (or, in the case of the 2001 Accounts, as at the 2001 Accounts Date); and (ii) the profits and losses for the financial year ended on the Accounts Date (or, in the case of the 2001 Accounts, as at the 2001 Accounts Date), of the Company. (b) The Accounts and the 2001 Accounts have been prepared and audited in accordance with the standards, principles and practices specified on the face of the Accounts and the 2001 Accounts applied on a consistent basis and subject thereto in accordance with the law and Generally Accepted Accounting Standards, Principles and Policies in the United Kingdom consistently applied. (c) The Accounts and the 2001 Accounts have been prepared on a basis consistent with the basis upon which all audited accounts of the Company have been prepared in respect of the three years before the Accounts Date (or, in the case of the 2001 Accounts, the 2001 Accounts Date). 2.2 Liabilities The Accounts and the 2001 Accounts make full provision or reserve for or disclose all liabilities (including all contingent or deferred liability to Tax) of the Company whether actual, contingent or otherwise. 2.3 Extraordinary and Exceptional Items The results shown by the audited profit and loss account of the Company for each of the three financial years of the Company ended on the Accounts Date (or, in the case of the 2001 Accounts, the 2001 Accounts Date) have not (except as disclosed in those accounts) been affected by an extraordinary, exceptional or non recurring item or by any other matter making the profits or losses for a period covered by any of those accounts unusually high or low. 2.4 Valuation of Stock In the Accounts and the 2001 Accounts: (a) stock was valued in the same way as in the two preceding financial years to such accounts and on the basis of the lower of cost and net realisable value; and (b) all redundant and obsolete stock was written off and full provision was made for all slow-moving and damaged stock. 2.5 Depreciation The rates of depreciation and amortisation used in the audited accounts of the Company for the three financial years of the Company ended on the Accounts Date (or, in the case of the 2001 Accounts, the 2001 Accounts Date) were sufficient to ensure that each fixed asset of the Company will be written down to nil by the end of its useful life. 2.6 Fixed Assets The value of all of the fixed assets of the Company as shown in the Accounts and the 2001 Accounts is at cost thereof less depreciation deducted from time to time in a consistent manner and there has been no revaluation of such fixed assets since their acquisition. 2.7 Off Balance Sheet Financing The Company is not engaged in any financing (including the incurring of any borrowing or any indebtedness in the nature of acceptances or acceptance credits) of a type which would not be required to be shown or reflected in the Accounts and the 2001 Accounts. 2.8 Accounting and other Records (a) The books of account and all other records of the Company (including any which it may be obliged to produce under any contract now in force) are up-to-date, in its possession and are true and complete in accordance with the law and applicable standards, principles and practices generally accepted in the United Kingdom. (b) All deeds and documents (properly stamped where stamping is necessary for enforcement thereof) belonging to the Company or which ought to be in the possession of the Company are in the possession of the Company. 2.9 Accounting Reference Date The accounting reference date of the Company under section 224 of the Companies Act 1985 is, and during the last six years has always been, 31 March. 2.10 Management Accounts The management accounts of the Company for the period from the Accounts Date to 31 July 2002 (a copy of which are annexed to the Disclosure Letter) have been prepared on a basis consistent with the Accounts and, to the best of the knowledge, information and belief of the Warrantor, give a true and fair view of the assets and liabilities (whether present or future, actual or contingent) of the Company as at such date and of the state of affairs, financial position and results of the Company for the period from the Accounts Date to such date and comply with the terms of Warranties 2.2 - 2.6 (inclusive) above. 3. CHANGES SINCE THE ACCOUNTS DATE 3.1 General Since the Accounts Date: (a) the Company has carried on its business prudently and in the ordinary and usual course and so as to maintain the business as a going concern; (b) there has been no material adverse change in the financial or trading position or prospects of the Company; and (c) there has been no material reduction in the value of those fixed assets specified in the Accounts, to the extent still owned by the Company. 3.2 Specific Since the Accounts Date: (a) the Company has not, other than in the ordinary course of trading: (i) disposed of, or agreed to dispose of, an asset; or (ii) assumed, incurred or paid or agreed to assume or incur or pay a liability, obligation or expense (actual or contingent) or made any payment, and in the case of a disposal or agreement to dispose of an asset for an amount which is lower than book value or an open market arm's length value, whichever is the higher; (b) the Company has not acquired or agreed to acquire an asset for an amount which is higher than open market arm's length value; (c) the Company has not made, or agreed to make, capital expenditure exceeding in total (pound)10,000 or incurred, or agreed to incur, a commitment or connected commitments involving capital expenditure exceeding in total (pound)10,000; (d) no Substantial Supplier or Substantial Customer has ceased or substantially reduced its trade with the Company or has altered the terms of trade to the Company's disadvantage; (e) the Company has not declared, paid or made a dividend or other distribution (including a distribution within the meaning of the TA) except to the extent provided in the Accounts; (f) no resolution of the shareholders of the Company has been passed (except for those representing the ordinary business of an annual general meeting); (g) the Company has not repaid or redeemed share or loan capital, or made (whether or not subject to conditions) an agreement or arrangement or undertaken an obligation to do any of those things; (h) the Company has not repaid any sum in the nature of borrowings in advance of any due date or made any loan or incurred any indebtedness (including in each case inter group); (i) the Company has not incurred or paid any liability for any financial, legal, accountancy, surveyors, valuers or other professional advisers fees; and (j) the Company has not paid nor is under an obligation to pay any service, management or similar charges or any interest or amount in the nature of interest to any other person or incurred any liability to make such a payment or made any payment to any of the Sellers or any of their connected persons whatsoever. 4. ASSETS 4.1 Title and Condition (a) There are no Encumbrances, nor has the Company agreed to create any Encumbrances, over any part of its undertaking or assets and each asset used by the Company (tangible or intangible) is: (i) legally and beneficially owned by the Company; and (ii) where capable of possession, in the possession of the Company. (b) The Company owns each asset (tangible or intangible) necessary for the operation of its business as currently conducted and without limitation no rights (other than rights as shareholders in the Company) relating to the business of the Company are owned or otherwise enjoyed by or on behalf of any of the Sellers of any of their connected persons. (c) All plant, machinery, vehicles and equipment owned or used by the Company are in good condition and working order and have been regularly and properly maintained. None is dangerous or in need of renewal or replacement. 4.2 Hire Purchase and Leased Assets Copies of any bill of sale or any hiring or leasing agreement, hire purchase agreement, credit or conditional sale agreement, agreement for payment on deferred terms or any other similar agreement to which the Company is a party are annexed to the Disclosure Letter. 4.3 Stock of components (a) The Company's stock of components is of satisfactory quality for the purpose for which they are used. (b) So far as the Warrantor is aware, the Company has not supplied, or agreed to supply, goods which have been, or will be, defective or which fail, or will fail, to comply with their terms of sale. (c) The Company's level of stock of components is reasonable having regard to current and anticipated demand. (d) The Company has not acquired nor agreed to acquire any material part of its stock of components on terms that the property therein does not pass until full payment is made. 4.4 Debts Except to the extent to which specific provision or reserve has been made in the Accounts, all indebtedness owed to the Company and whether included in the Accounts or arising since the Accounts Date will be duly paid in the ordinary course of business and none of such debts has been factored, sold or agreed to be sold by the Company. 5. INTELLECTUAL PROPERTY (a) Save for Intellectual Property licensed to the Company, the Company is the sole and absolute legal and beneficial owner of all Company Intellectual Property . (b) All Intellectual Property created by any individual or any other party on the Company's behalf, as an employee, a consultant, a sub-contractor or otherwise has been assigned by such parties to the Company and forms part of the Company Intellectual Property. No further steps are necessary in order to vest each Intellectual Property in the Company. (c) The interest of the Company in the Company Intellectual Property is free from Encumbrances and in the case of confidential information, any disclosure obligation and are subsisting, valid, exercisable and enforceable. 5.2 Renewals/maintenance (a) Neither the Company nor the Sellers are the registered proprietors of any registered Company Intellectual Property. (b) All steps have been taken diligently for the maintenance and protection of unregistered Company Intellectual Property. (c) All taxes and other payments have been made in respect of Company Intellectual Property and all governmental approvals have wherever necessary for the exercise of the Company Intellectual Property been obtained. 5.3 Sufficiency (a) The Company Intellectual Property is all the Intellectual Property necessary for the operation of the business of the Company as now conducted and it will not be adversely affected by the transaction contemplated by this agreement. Neither of the Sellers owns any Intellectual Property used by the Company or necessary for the operation of the business of the Company as it was conducted at Completion. 5.4 Licences (a) Completion will not affect the rights of the Company under any such licences. Save as disclosed neither the Company nor either of the Sellers is obliged to enter into any such agreement relating to Company Intellectual Property. There has been or is no breach nor is there any fact or matter which would or may create a breach of such agreement, consent, undertaking or licence. (b) The terms of any order given or measure imposed by a court or other body of competent jurisdiction relating to the Company Intellectual Property against or in favour of the Company or the Sellers or their connected persons are set out in the Disclosure Letter and there is no breach of any such orders. 5.5 Infringement (a) The use by the Company of the Company Intellectual Property and the Business Intellectual Property does not and is not likely to infringe and the processes or methods employed, services provided, the business conducted and the products used, manufactured and dealt in or supplied by the Company, do not nor did they at the time used, manufactured, dealt in or supplied, infringe the Intellectual Property of any other person. (b) No proceedings claims or complaints have been brought or threatened by any third party or competent authority in relation to the Company Intellectual Property and/or Intellectual Property licensed to the Company including any concerning title, subsistence, validity or enforceability or grant of any right or interest in such Intellectual Property. (c) So far as the Warrantor is aware no third party is infringing or misusing or threatening to infringe or misuse the Company Intellectual Property and/or Intellectual Property licensed to the Company. (d) The Company is not subject to any injunction, undertaking or court order or order of any other authority of competent jurisdiction not to use or restricting the use any Company Intellectual Property. 5.6 Use of name The Company does not carry on and has not in the last two years carried on any business under any name other than its corporate name. 5.7 Confidential Agreements Save as disclosed, the Company has not and none of the Sellers nor any of their connected persons have entered into any confidentiality or other agreement or is subject to any duty which restricts the free use or disclosure of any information used in the business of the Company and there is no breach of any such agreement or duty. 5.8 Documents All documents material to the title to the Company Intellectual Property form part of the records or materials in the possession and ownership of the Company. 6. EFFECT OF SALE 6.1 So far as the Warrantor is aware, neither the execution nor performance of this agreement or any document to be executed at or before Completion will: (a) result in the Company losing the benefit of a Permit or an asset, licence, grant, subsidy, right or privilege which it enjoys at the date of this agreement in any jurisdiction; or (b) conflict with, or result in a breach of, or give rise to an event of default under, or require the consent of a person under, or enable a person to terminate, or relieve a person from an obligation under, an agreement, arrangement or obligation to which the Company is a party or a legal or administrative requirement in any jurisdiction; or (c) result in any Substantial Customer being entitled (and if a Substantial Customer is so entitled, so far as the Warrantor is aware, it will not exercise any such entitlement) to cease dealing with the Company or substantially to reduce its existing level of business or to change the terms upon which it deals with the Company; or (d) result in any Substantial Supplier being entitled (and if a Substantial Supplier is so entitled, so far as the Warrantor is aware, it will not exercise any such entitlement) to cease supplying the Company or substantially to reduce its supplies to or to change the terms upon which it supplies the Company; (e) result in any officer or senior employee leaving the Company; or (f) make the Company liable to offer for sale, transfer or otherwise dispose of or purchase or otherwise acquire any assets, including shares held by it in other bodies corporate under their articles of association or any agreement or arrangement. 7. CONSTITUTION 7.1 Intra Vires The Company has the power to carry on its business as now conducted and the business of the Company has at all times been carried on intra vires. 7.2 Memorandum and Articles The memorandum and articles of association of the Company in the form annexed to the Disclosure Letter are true and complete and have embodied therein or annexed thereto copies of all resolutions and agreements as are referred to in section 380 of the Companies Act 1985, and all amendments thereto (if any) were duly and properly made. 7.3 Register of Members The register of members of the Company has been properly kept and contains true and complete records of the members from time to time of the Company and the Company has not received any notice or allegation that any of them is incorrect or incomplete or should be rectified. 7.4 Powers of Attorney The Company has not executed any power of attorney or conferred on any person other than its directors, officers and employees any authority to enter into any transaction on behalf of or to bind the Company in any way and which power of attorney remains in force or was granted or conferred within three years of the Completion Date. 7.5 Statutory Books and Filings (a) The statutory books of the Company are up to date, in its possession and are true and complete in accordance with the law. (b) All resolutions, annual returns and other documents required to be delivered to the Registrar of Companies (or other relevant company registry or other corporate authority in any jurisdiction) have been properly prepared and filed and are true and complete and the common seal of the Company is in its possession. 8. INSURANCE 8.1 Policies The Disclosure Letter contains a list of each current insurance and indemnity policy in respect of which the Company has an interest (together the "Policies"). Each of the Policies is valid and enforceable and is not void or voidable. There are no circumstances which might make any of the Policies void or voidable or enable any insurer to refuse payment of all or part of any claim under the Policies. 8.2 Insurance of Assets Each insurable asset of the Company has at all material times been and is at the date of this agreement insured to its full replacement value (with no provision for deduction or excess) against each risk normally insured against by a prudent person operating the types of business operated by the Company. 8.3 Other Insurance The Company has at all material times been and is at the date of this agreement adequately insured against accident, damage, injury, third party loss (including product liability), loss of profits and any other risk normally insured by a prudent person operating the types of business operated by the Company and has at all times effected all insurances required by law. 8.4 Claims No claim is outstanding under any of the Policies and no matter exists which might give rise to a claim under any of the Policies. 8.5 Premiums The Company has paid all premiums due in respect of all the Policies and has not done or omitted to do anything which might result in an increase in the premium payable under any of the Policies. 9. CONTRACTUAL MATTERS 9.1 Validity of Agreements (a) Neither the Company nor the Sellers have any knowledge of the invalidity of, or a ground for termination, avoidance or repudiation of, an agreement, arrangement or obligation to which the Company is a party. No party with whom the Company has entered into an agreement, arrangement or obligation has given notice of its intention to terminate, or has sought to repudiate or disclaim, the agreement, arrangement or obligation. (b) No party with whom the Company has entered into an agreement or arrangement is in material breach of the agreement or arrangement. No matter exists which might give rise to such breach. (c) The Company is not in breach of any agreement or arrangement and, so far as the Warrantor is aware, no matter exists which might give rise to such breach. 9.2 Standard Terms and Conditions A copy of the standard terms and conditions of business of the Company are annexed to the Disclosure Letter and the Company has not entered into an agreement or arrangement with a customer or supplier different from these. 9.3 Supply Contracts Full and accurate details of all agreements or arrangements for the supply of stock, raw materials, products or goods to or by the Company which involve or are likely to involve the supply of goods the aggregate sale value of which will represent in excess of five per cent. of the turnover for the financial year of the Company ended on the Accounts Date are contained in the Disclosure Letter and copies annexed to it. 9.4 Material Agreements (a) The Company is not a party to and is not liable under any contract, transaction, arrangement or liability which involves, or is likely to involve obligations or liabilities which, by reason of their nature or magnitude, ought reasonably to be made known to an intending buyer of the Shares including any which: (i) is of an unusual or abnormal nature, or outside the ordinary and proper course of business; (ii) is of a long-term nature (that is, unlikely to have been fully performed, in accordance with its terms, more than six months after the date on which it was entered into or undertaken); (iii)is incapable of termination in accordance with its terms, by the Company, on 60 days' notice or less; (iv) cannot readily be fulfilled or performed by the Company on time without undue or unusual expenditure of money, effort or personnel; (v) involves payment by the Company by reference to fluctuations in the index of retail prices, or any other index or in the rate of exchange for any currency; (vi) involves an aggregate outstanding expenditure or other liability by the Company of more than(pound)10,000; or (vii)restricts its freedom to engage in any activity or business or confines its activity or business to a particular place; (b) The Company is not a party to and is not liable under: (i) an agreement, arrangement or obligation by which the Company is a member of a joint venture, consortium, partnership or association (other than a bona fide trade association); or (ii) a distributorship, agency, marketing, licensing or management agreement or arrangement. 9.5 Contracts with Connected Persons There is, and during the three years ending on the date of this agreement there has been, no agreement or arrangement (legally enforceable or not) to which the Company or any employee of the Company is or was a party and in which any of the Sellers or a person connected with any of them is or was interested in any way. The Company does not owe any obligation or sum to nor does it and neither will it nor any of its employees immediately after Completion have any contractual or other arrangements of any sort with the Sellers or any of their connected persons and since the Accounts Date no payment or benefit has been made or given or received or agreed to be made given or received (including in particular interest) between or for the benefit of any of the Sellers or any of the Sellers' connected persons on the one hand and the Company or any employee of the Company on the other hand. 9.6 Conditions and Warranties in respect of Goods or Services Except for a condition or warranty implied by law or contained in its standard terms of business or otherwise given in the usual course of trading, the Company has not given a condition or warranty, or made a representation, in respect of goods or services supplied or agreed to be supplied by it, or accepted an obligation that could give rise to a liability after the goods or services have been supplied by it. 9.7 Backlog contracts (a) The List of Contracts is a full and complete list of all the current unfulfilled contracts with customers of the Company in existence at the date of the management accounts referred to in Warranty 2.10 which were, at that date, wholly or partly uninvoiced. (b) The terms of the contracts included in the List of Contracts have been fully and fairly disclosed to the Buyer on -------- September 2002. (c) The figures shown in List of Contracts are true, accurate and not misleading. (d) Each contract included in the List of Contracts will be profitable. The two contracts known to the parties as the "Mercury" and the "Wodin" contracts shall be aggregated for the purposes of determining profitability in accordance with this warranty 9.7(d). For the avoidance of doubt, such aggregation shall only apply in the case of these two named contracts. (e) Each contract included in the List of Contracts requires a Permit. Other than the Permits relating to projects Zeus and Vulcan, the Company has obtained and complied with the terms and conditions of such Permits. 9.8 EDO Corporation "(EDO") In respect of all products produced by the Company sold by or through EDO in the USA (whether under the EWST name, the EDO name or otherwise and whether as principal or as the Company's agent), no misrepresentation as to their origin has been made. 9.9 EWST Australia Pty Limited (a) EWST Australia Pty Limited has no other business other than performing those services set out in the Disclosure Letter. (b) The only transactions that EWST Australia Pty Limited have entered into in the last two financial years are set out in the Disclosure Letter. 10. INFORMATION TECHNOLOGY AND DATA PROTECTION 10.1 Future Adequacy of Systems The Systems used in connection with the business of the Company are adequate for the immediate needs of that business, including without limitation as to system capacity and ability to process current peak volumes and anticipated volumes in a timely manner. 10.2 No Systems failures In the 12 months prior to the date hereof the Company has not suffered and so far as the Warrantor is aware no other person has suffered any failures or bugs in or breakdowns of Systems used in connection with the business of the Company which have caused any substantial disruption or interruption in or to its use and the Warrantor is not aware of any fact or matter which may substantially disrupt or interrupt or affect the use of such equipment following the acquisition by the Buyer of the Shares pursuant to this agreement on the same basis as it is presently used. 10.3 Data Compliance All Systems used in the business of the Company are and have been Date Compliant and will not cease to be so. In this clause, "Date Compliant" means the ability to process eight digit date and four digit year data and to otherwise function in all respects without being adversely affected by any date or change of date, including any date in any century or leap year, in each case without workarounds. 10.4 Copyright in Technical Manuals None of the software or technical manuals used by the Company has been copied wholly or substantially by the Company from any material in which the Company does not own copyright. 10.5 Ownership of Systems All Systems, excluding software, used in the business of the Company are owned and operated by and are under the control of the Company and are not wholly or partly dependent on any facilities which are not under the ownership, operation or control of the Company. No action will be necessary to enable such systems to continue to be used in the business of the Company to the same extent and in the same manner as they have been used prior to the date hereof. 10.6 Litigation in respect of Software The Company is validly licensed to use the software used in its business and no action will be necessary to enable it to continue to use such software to the same extent and in the same manner as they have been used prior to the date hereof. 10.7 Internet Presence Other than the Company's web site, www.ewst.co.uk, the Company does not have any public, private or reserved presence on the world wide web, multi-party extranet, virtual private network or similar internet-based, linked system ("Internet Presence"). The Company's domain name(s), if any, are currently registered, are transferable to the Buyer and are in good standing. The Company's Internet Presence, if any, is wholly passive and informational in nature and involves no interactivity between third parties and the Company including purchases, sales, leases or other commercial transactions conducted in any degree by or through the Internet Presence. 10.8 Data Protection Act The Company complies in full with, and has in place all necessary registrations and procedures to comply with the Data Protection Act 1984 and the Data Protection Act 1998, as applicable. 11. LIABILITIES 11.1 Borrowings The total amount borrowed by the Company from its bankers does not exceed the limits of the applicable facilities and the total amount borrowed by the Company from whatsoever source does not exceed any limitation on its borrowing contained in its articles of association, or in any debenture or loan stock deed or other instrument. 11.2 Continuance of Facilities Full and accurate details of all overdrafts, loans or other financial facilities outstanding or available to the Company are set out in the Disclosure Letter and whether or not of a type which would be required to be shown in or reflected in the Accounts (including any indebtedness for moneys borrowed or raised under any acceptance credit, bond, note, bill of exchange or commercial paper, finance lease, hire purchase agreement, trade bills (other than those on terms normally obtained) forward sale or purchase agreement or conditional sale agreement or other transaction having the commercial effect of a borrowing) and copies of all documents relating to such matters are annexed to the Disclosure Letter. None of the Sellers' nor any of their connected persons has done anything whereby the continuance of any such facilities in full force and effect might be affected or prejudiced. 11.3 Bank Accounts A statement being in the agreed terms of all the bank accounts of the Company and of the credit or debit balances on such accounts as at a date not more than seven days before the date of this agreement has been supplied to the Buyer. The Company does not have any other bank or deposit accounts (whether in credit or overdrawn) not included in such statement. Since such statement there have been no payments out of any such accounts except for routine payments and the balances on current account are not now substantially different from the balances shown on such statements. 11.4 Working Capital Having regard to existing bank and other facilities, the Company has sufficient working capital for the purposes of continuing to carry on its business in its present form and at its present level of turnover for a period of 12 months from Completion and for the purposes of executing, carrying out and fulfilling in accordance with their terms all orders, projects and contractual obligations which have been placed with, or undertaken by, the Company. 11.5 Guarantees and Indemnities (a) The Company is not a party to and is not liable (including contingently) under a guarantee, indemnity or other agreement to secure or incur a financial or other obligation with respect to another person's obligation. (b) No part of the loan capital, borrowing or indebtedness in the nature of borrowing of the Company is dependent on the guarantee or indemnity of, or security provided by, another person. 11.6 Events of Default No event has occurred or is subsisting or been alleged or so far as the Warrantor is aware is likely to arise which: (a) constitutes an event of default, or otherwise gives rise to an obligation to repay, or to give security under an agreement relating to borrowing or indebtedness in the nature of borrowing (or will do so with the giving of notice or lapse of time or both); (b) will lead to an Encumbrance constituted or created in connection with borrowing or indebtedness in the nature of borrowing, a guarantee, an indemnity or other obligation of the Company becoming enforceable (or will do so with the giving of notice or lapse of time or both); or (c) with the giving of notice and/or lapse of time constitute or result in a default or the acceleration of any obligation under any agreement or arrangement to which the Company is a party or by which it or any of its property, revenues or assets is bound. 11.7 Grants The Company is not liable to repay an investment or other grant or subsidy made to it by any person (including the Department of Trade and Industry or its predecessor). No matter (including the execution and performance of this agreement) exists which might entitle a body to require repayment of, or refuse an application by the Company for, the whole or part of a grant or subsidy. 12. PERMITS 12.1 Compliance with Permits (a) Other than the Permits referred to in paragraph 9.7(e), the Company does not have any Permits. (b) So far as the Warrantor is aware, other than the Permits referred to in paragraph 9.7(e), the Company does not need or require any Permit to operate the business that the Company is currently operating. 12.2 Status of Permits There are no pending or threatened proceedings which might in any way affect the Permits and the Warrantor is not aware of any other reason why any of them should be suspended, threatened or revoked or be invalid. 13. INSOLVENCY 13.1 Winding up No order has been made, petition presented or resolution passed for the winding up or for the appointment of a provisional liquidator to the Company or any of the Sellers. 13.2 Administration No administration order has been made and no petition for an administration order has been presented in respect of the Company or any of the Sellers. 13.3 Receivership No receiver, receiver and manager or administrative receiver has been appointed of the whole or part of the Company's or the whole or part of any of the Seller's business or assets. 13.4 Compromises with Creditors (a) No voluntary arrangement under section 1 of the Insolvency Act 1986 has been proposed or approved in respect of the Company or any of the Sellers. (b) No compromise or arrangement under section 425 of the Companies Act 1985 has been proposed, agreed to or sanctioned in respect of the Company or any of the Sellers. (c) Neither the Company nor any of their Sellers have entered into any compromise or arrangement with any of the respective creditors or any class of their respective creditors generally. 13.5 Insolvency Neither the Company nor any of the Sellers are unable to pay their respective debts within the meaning of section 123 of the Insolvency Act 1986 (but for this purpose ignoring the reference to "if it is proved to the satisfaction of the court that" in section 123(1)(e) and 123(2)). 13.6 Payment of Debts Neither the Company nor any of the Seller's have stopped paying their debts as they fall due. 13.7 Distress etc. No distress, execution or other process has been levied on an asset of the Company or any of the Sellers. 13.8 Unsatisfied Judgments There is no unsatisfied judgment or court order outstanding against the Company or any of the Sellers. 13.9 Striking Out No action is being taken by the Registrar of Companies to strike the Company nor any of the Sellers off the register under section 652 of the Companies Act 1985. 13.10 Bankruptcy None of the Sellers has been made bankrupt or a petition presented to make any of the Sellers bankrupt. 14. LITIGATION AND COMPLIANCE WITH LAW 14.1 Litigation (a) Neither the Company nor a person for whose acts or defaults the Company may be vicariously liable is involved, or has during the five years ending on the date of this agreement been involved, in a civil, criminal, arbitration, administrative or other proceeding in any jurisdiction. No civil, criminal, arbitration, administrative or other proceeding in any jurisdiction is pending or threatened by or against the Company or a person for whose acts or defaults the Company may be vicariously liable. (b) So far as the Warrantor is aware, no matter exists which might give rise to a civil, criminal, arbitration, administrative or other proceeding in any jurisdiction involving the Company or a person for whose acts or defaults the Company may be vicariously liable. (c) There is no outstanding judgment, order, decree, arbitral award or decision of a court, tribunal, arbitrator or governmental agency in any jurisdiction against the Company or a person for whose acts or defaults the Company may be vicariously liable. 14.2 Compliance with Law The Company has conducted its business and dealt with its assets in all material respects in accordance with all applicable legal and administrative requirements in any jurisdiction. 14.3 Investigations The Company is not and has not been subject to any investigation, enquiry or disciplinary proceeding (whether judicial, quasi-judicial or otherwise) in any jurisdiction and none is pending or threatened, and neither has it received any request for information from, any court or governmental authority (including any national competition authority and the Commission of the European Communities and the EFTA Surveillance Authority) under any anti-trust or similar legislation in any jurisdiction. So far as the Warrantor is aware no matter exists which might give rise to such an investigation, enquiry, proceeding or request for information. 14.4 Competition Law (a) The Company is not nor has been a party to or concerned in any agreement or arrangement, or conducted itself (whether by omission or otherwise) in a manner, which: (i) constitutes a breach of any relevant undertaking, order, assurance or other measure made under the Fair Trading Act 1973, the Restrictive Trade Practices Acts 1976 and 1977, the Resale Prices Act 1976, the Trade Descriptions Acts 1968 and 1972, the Competition Act 1980 or the Competition Act 1998; (ii) so far as the Warrantor is aware, infringes the Chapter I prohibition and/or the Chapter II prohibition of the Competition Act 1998 or Articles 81 and/or 82 of the Treaty of Rome or their equivalent provisions under the European Economic Area Agreement or any other anti-trust or similar legislation in any jurisdiction; or (iii) so far as the Warrantor is aware, is registrable, unenforceable or void (whether in whole or in part) or renders it liable to civil, criminal or administrative proceedings by virtue of any anti-trust, anti-monopoly, anti-cartel, consumer law or any other similar legislation in any jurisdiction including (in relation to the UK) any legislation now repealed by the Competition Act 1998. (b) The Company is aware of the provisions of, and is taking all reasonably necessary steps to comply with, the Competition Act 1998. (c) The Company has not given an undertaking or written assurance (whether legally binding or not) to any court or governmental authority (including any national competition authority (including the UK Office of Fair Trading) and the European Commission and the EFTA Surveillance Authority) under any anti-trust or similar legislation in any jurisdiction. (d) The Company is not subject to any order, regulation or decision made by any court or governmental authority (including any national competition authority (including the UK Office of Fair Trading) and the European Commission and the EFTA Surveillance Authority) under any anti-trust or similar legislation in any jurisdiction. (e) The Company is not and has not been a party to or concerned in any agreement, arrangement or concerted practice in respect of which an application for negative clearance and/or an exemption has been made to the UK Office of Fair Trading, the European Commission or the EFTA Surveillance Authority. (f) The Company has not received a written communication or request for information in relation to any aspect of its business from or by the Director General of Fair Trading (or any officer of the Office of Fair Trading), the Competition Commission (or, formerly, the Monopolies and Mergers Commission), the Secretary of State for Trade and Industry, the European Commission or the EFTA Surveillance Authority or from any other authority under any anti-trust or similar legislation in any other jurisdiction and no such communication or request is currently expected. (g) The Company is not in a dominant position in a market in the UK (or any part of it), in the European Community or the European Economic Area, or a substantial part of a market in the European Community or European Economic Area, for the purposes of Chapter II of the Competition Act 1998, Article 82 of the Treaty of Rome and Article 54 of the European Economic Area Agreement. (h) The Company has never received, nor is expecting to receive any aid (in whatever form) from a Member State of the European Community or from State resources such as could be regarded as State aid for the purposes of Articles 87 to 89 of the Treaty of Rome. 14.5 Unlawful Payments Neither the Company nor a person for whose acts or defaults the Company may be vicariously liable has: (a) induced a person to enter into an agreement or arrangement with the Company by means of an unlawful or immoral payment, contribution, gift or other inducement; (b) offered or made an unlawful or immoral payment, contribution, gift or other inducement to a government official or employee; or (c) directly or indirectly made an unlawful contribution to a political activity. All references to the Company in this paragraph 14 should be deemed to include the Company's officers, agents and employees. 15. BROKERAGE OR COMMISSIONS No person is entitled to receive from the Company or any Seller or any connected person of the Sellers a finder's fee, brokerage or commission or other benefit in connection with this agreement or anything in it and, in particular, the Company is not liable to pay or give to any of its directors, officers, employees, agents and advisers any sum or benefit whatsoever in connection with the sale of the Shares and no such person has any interest in such sale. 16. DIRECTORS, WORKERS AND EMPLOYEES 16.1 Workers The List of Workers shows a complete true and up to date list of all the Workers. 16.2 Particulars of Workers The particulars of all Workers provided in List of Workers show the names, job title, date of commencement of employment and date of birth of every Worker of the Company. 16.3 Remuneration and Benefits The particulars of all Workers provided in List of Workers together with the information set out in the Disclosure Letter show all remuneration and other benefits: (a) actually provided; or (b) which the Company is bound to provide (whether now or in the future) to each Worker and are true and complete and include particulars of and details of participation in all profit sharing, incentive, bonus, commission, share option, medical, permanent health insurance, directors' and officers' insurance, travel, car, redundancy and other benefit schemes, arrangements and understandings (the "Schemes") operated for all or any Workers or former Workers of the Company or their dependants whether legally binding on the Company or not. 16.4 Terms and Conditions (a) The Disclosure Letter contains copies of all the terms and conditions, staff handbooks and policies which apply to the Workers. (b) There are no terms and conditions in any contract with any Worker pursuant to which such person will be entitled to receive any payment or benefit or such person's rights will change as a direct consequence of the transaction contemplated by this agreement. (c) There are no service agreements or contracts of employment between the Company and any of its Workers containing any provision in addition to the matters required to be contained therein under section 1 of the ERA. (d) All employees of the Company have received a written statement of particulars of their employment as required by section 1 of the ERA. 16.5 Operation of the Schemes (a) The Schemes have at all times been operated in accordance with their governing rules or terms and all applicable laws and all documents which are required to be filed with any regulatory authority have been so filed and all tax clearances and approvals necessary to obtain favourable tax treatment for the Company and/or the participants in the Schemes have been obtained and not withdrawn and no act or omission has occurred which has or could prejudice any such tax clearance and/or approval. (b) No past or present Worker or any dependant thereof or any other participant in any Scheme has made any claim against the Company in respect of any Scheme and no event has occurred which could or might give rise to any such claim. 16.6 Notice Periods The terms of employment or engagement of all Workers, agents and professional advisers of the Company are such that their employment or engagement may be terminated by not more than three months' notice given at any time without liability for any payment including by way of compensation or damages (except for unfair dismissal or a statutory redundancy payment). 16.7 Changes since the Accounts Date Since the Accounts Date the Company has not made, announced or proposed any changes to the emoluments or benefits of or any bonus to any Worker and the Company is under no express or implied obligation to make any such changes with or without retrospective operation. 16.8 Loans There are no amounts owing or agreed to be loaned or advanced by the Company to any Worker (other than amounts representing remuneration accrued due for the current pay period, accrued holiday pay for the current holiday year or for reimbursement of expenses). 16.9 Notice of Termination, Leave of Absence, Disciplinary Warning and Outstanding Offers (a) No Worker has given or received notice to terminate his employment or engagement. (b) There are no Workers who are on secondment, maternity leave or absent on grounds of disability or other leave of absence (other than normal holidays or absence of no more than one week due to illness). (c) No Worker is subject to a current disciplinary warning or other procedure. (d) There are no outstanding offers of employment or engagement by the Company and no person has accepted such an offer but not yet taken up the position accepted. 16.10 Payment up to Completion All salaries, fees and wages and other benefits of all Workers have, to the extent due, been paid or discharged in full together with all related payments to third party benefit providers and the relevant authorities. 16.11 Industrial Relations (a) No Workers are members of a trade union, staff association or any other body representing workers and no such union, association or body is recognised by the Company for the purposes of collective bargaining. (b) The Disclosure Letter contains copies of and full details of all rights and liabilities relating or pursuant to any collective agreements (whether with a trade union, staff association or any other body representing Workers and whether legally binding or not) concerning the Company. (c) Within the three years preceding the date hereof the Company has not been engaged or involved in any trade dispute (as defined in section 218 of the TULR(C)A) with any Worker, trade union, staff association or any other body representing workers and no event has occurred which could or might give rise to any such dispute and no industrial action involving Workers, official or unofficial, is now occurring or threatened nor has any industrial relations or employment matter been referred either by the Company or its Workers or by any trade union staff association or any other body representing Workers to ACAS for advice, conciliation or arbitration. 16.12 Claims by Workers So far as the Warrantor is aware, no past or present Worker or any workers of a predecessor in business has any claim or right of action against the Company including any claim: (a) in respect of any accident or injury which is not fully covered by insurance; or (b) for breach of any contract of services or for services; or (c) for loss of office or arising out of or connected with the termination of his office or employment and no event or inaction has occurred which could or might give rise to any such claim. 16.13 Enquiries and Discrimination (a) There are no enquiries or investigations existing, pending or threatened affecting the Company in relation to any Workers by the Equal Opportunities Commission, the Commission for Racial Equality, the Disability Rights Commission or the Health and Safety Executive or any other bodies with similar functions or powers in relation to workers. (b) There are no terms or conditions under which any Worker is employed or engaged, nor has anything occurred or not occurred prior to Completion that may give rise to any claim for sex discrimination, race discrimination, disability discrimination or equal pay either under domestic United Kingdom or European Law whether by such Worker or a prospective Worker or otherwise. 16.14 Redundancy Full and accurate details are disclosed in the Disclosure Letter of any redundancy payment (whether pursuant to a redundancy scheme or formula or policy or otherwise whether contractual or discretionary) the Company has made in excess of the statutory redundancy entitlement to any Worker or former Worker in the last 5 years, and there is no provision in any occupational pension scheme in which Workers participate which provides enhanced benefits on redundancy. 16.15 Health and Safety Full details of all health and safety policies and procedures, health and safety committees, health and safety representatives, and any complaints, recommendations, investigations or claims relating to health and safety issues made or carried out in the last 5 years and affecting the Company and its Workers have been disclosed in the Disclosure Letter. 16.16 Compliance with Laws There are no training schemes, arrangements or proposals, whether past or present, in respect of which a levy may henceforth become payable by the Company under the Industrial Training Act 1982 and pending Completion no such schemes, arrangements or proposals will be established or undertaken. 16.17 Transfer Regulations The Company has not within the three years preceding the date hereof entered into any agreement which involved or may involve the Company (and no event has occurred which may involve the Company in the future) acquiring or disposing of any undertaking or part of one such that the Transfer Regulations applied or may apply thereto. 16.18 Duty to Inform and Consult The Sellers and the Company have complied with their obligations to inform and consult with trade unions and other representatives of workers and to send notices to the Secretary of State pursuant to sections 188 to 194 of the TULR(C)A and regulations 10 and 11 of the Transfer Regulations. 16.19 Records The Company has maintained adequate and suitable records regarding the service of its Workers and, in particular, has maintained all records required under the Working Time Regulations 1998. All such records comply with the requirements of the Data Protection Act 1998. 16.20 Business is Conducted by Workers The Company has not entered into any agreement or arrangement for the management or operation of its business or any part thereof other than with its Workers. 17. PROPERTY 17.1 All Property The Property comprises all the freehold and leasehold land owned, used or occupied by and all the rights vested in the Company and all agreements whereby the Company has any financial entitlement relating to any land at the date hereof. 17.2 No Other Liabilities The Company has no actual or contingent obligations or liabilities (in any capacity including as principal contracting party or guarantor) in relation to any lease, licence or other interest in, or agreement relating to, land apart from the Property. 17.3 Title Deeds and Documents The Company has under its control all title deeds and documents necessary to prove its title to the Property and the same are original documents or properly examined abstracts. 17.4 No Overriding Interests The Property is not to the best of the Warrantor's knowledge and belief subject to any overriding interests within the meaning of section 70 of the Land Registration Act 1925. 17.5 No Default The Company has duly performed, observed and complied with all of the terms of any lease, underlease or tenancy agreement under which any part of the Property is held and (in the case of leasehold property) all rents and service charges have been paid to date and no notice of any alleged breach of any of the terms of any such lease or tenancy agreement as aforesaid has been served on the Company. 17.6 Leasehold Property The Property which is leasehold is held under the lease brief details of which are set out in schedule 6 and no licences or collateral arrangements or concessions have been entered into or granted each such lease being a head lease 17.7 Occupational Interests All such leases, tenancies, licences and agreements to which the Property are subject are correctly summarised in the particulars thereof set out in schedule 6 and subject thereto the Company is in exclusive occupation of each and every part of the Property. 17.8 Due Compliance by Occupational Tenants Each lessee, tenant, licensee or occupier of any such lease, underlease, tenancy, licence or agreement has in all material respects observed and performed all covenants, obligations, conditions and restrictions therein and no breach has been waived or acquiesced in and all rent has been paid promptly and has not been commuted, waived or paid in advance nor have any collateral assurances, undertakings or concessions been made or entered into in connection therewith. 17.9 Use The existing use of the Property is only that specified in schedule 6. 17.10 No Compulsory Acquisition or Enforcement Proceedings To the best of the Warrantor's knowledge and belief but on the basis that the Warrantor has made no enquiries relating thereto there are no outstanding enforcement or other notices or proceedings issued in respect of the Property and there is no resolution or proposal for compulsory acquisition by the local or any other authority nor any outstanding order, notice or other requirement of any such authority that affects such existing use as aforesaid or involves expenditure in complying with it nor any other circumstances known which may result in any such order or notice being made or served or which may otherwise affect the Property. 17.11 Replies to Enquiries All disclosures and replies to enquiries and requisitions relating to the Property made or given by or on behalf of the Sellers or the Company to the Buyer or its solicitors are now and will at Completion be complete and correct in all material respects. 17.12 No Litigation The Company is not engaged in any litigation or arbitration proceedings in connection with any of the Property. 17.13 No Disputes The Property is not affected by any outstanding disputes, notices or complaints which affect the use of the Property for the purposes for which it is now used or proposed to be used. 18. TAXATION COMPLIANCE 18.1 Returns The Company has made all returns and supplied all information and given all notices to the Inland Revenue or other Taxation Authority as reasonably requested or required by law within any requisite period and all such returns and information and notices are correct and accurate in all respects and are not the subject of any dispute and there are no facts or circumstances likely to give rise to or be the subject of any such dispute. 18.2 Disclosures All statements and disclosures made to any Taxation Authority in connection with any provision of the Taxation Statutes whatsoever were when made and remain complete and accurate in all material respects. 18.3 Clearances No action has been taken by the Company in respect of which any consent or clearance from the Inland Revenue or other Taxation Authority was required save in circumstances where such consent or clearance was validly obtained, and where any conditions attaching thereto were and will, immediately following completion, continue to be met. 18.4 Payment of Tax The Company has duly and punctually paid all Tax to the extent that the same ought to have been paid and is not liable nor has it within three years prior to the date hereof been liable to pay any penalty or interest in connection therewith. 18.5 Instalment Payments The Company is not required, under the Corporation Tax (Instalment Payments) Regulations 1998 (SI 1998/3175), to pay corporation tax by instalments. 18.6 Withholdings The Company has duly and punctually complied with its obligations to deduct, withhold or retain amounts of or on account of Tax from any payments made by it and to account for such amounts to the relevant Taxation Authority and has complied with all its reporting obligations to the relevant Taxation Authority in connection with any such payments made. 18.7 Pay As You Earn The Company has properly operated the PAYE system deducting Tax as required by law from all payments to or treated as made to or benefits provided for employees, ex-employees or independent contractors of the Company (including any such payments within section 134 of the TA) and duly accounted to the Inland Revenue for Tax so deducted and has complied with all its reporting obligations to the Inland Revenue in connection with any such payments made or benefits provided, and no PAYE audit in respect of the Company has been made by the Inland Revenue nor has the Company been notified that any such audit will be made. 18.8 Give As You Earn Details of any payroll deduction scheme pursuant to section 202 of the TA operated by the Company are set out in the Disclosure Letter and any such scheme has been operated in accordance with that section and regulations made thereunder. TAX IN THE ACCOUNTS AND SINCE THE ACCOUNTS DATE 18.9 General The Accounts make full provision or reserve in respect of any period ended on or before the Accounts Date for all Tax assessed or liable to be assessed on the Company or for which it is accountable at the Accounts Date whether or not the Company has or may have any right of reimbursement against any other person including in particular (but without prejudice to the generality of the foregoing) Tax in respect of property (of whatever nature) income, profits or gains held, earned, accrued or received by or to any person on or before the Accounts Date or by reference to any event occurring, act done or circumstances existing on or before that date including distributions made down to such date or provided for in the Accounts and proper provision has been made and shown in the Accounts for deferred taxation in accordance with generally accepted accounting principles. 18.10 Post-Accounts Date Events Since the Accounts Date: (a) the Company has not been involved in any transaction which has given, may give or would, but for the availability of any relief, give rise to any Tax other than in respect of actual income earned by the Company in the course of its trade; (b) the Company has not made any payment of a revenue nature (or incurred any liability to make any such payment) which could be disallowed as a deduction in computing the taxable profits of the Company or as a charge on the Company's income including (but without prejudice to the generality of the foregoing) any payment which could be disallowed under section 74 (general rules as to deductions not allowable), 125 (annual payments for non-taxable consideration), 338-340 (allowance of charges on income), 779-785 (leased assets) or 787 (restriction of relief for payments of interest) of the TA; (c) the Company has not been involved in any transaction other than on arm's length terms; (d) the Company has not paid any Tax after its due date for payment; (e) the Company has not declared or paid any dividend or made any other distribution or deemed distribution for Tax purposes; (f) no accounting period (as defined in section 12 of the TA) of the Company has ended as referred to in section 12(3) of the TA; (g) no disposal has taken place or other event occurred such that the Company would be required to bring a disposal value into account for the purposes of the CAA or such that a chargeable gain could or would accrue to the Company; (h) the Company has not ceased to be a member of a group (as defined in section 170 of the TCGA). CORPORATION TAX 18.11 Changes in Trade etc. (a) Within the period of three years ending with the date hereof there has been no major change in the nature or conduct of any trade or business carried on by the Company within the meaning of section 245 or 768 of the TA; (b) Within the period of three years ending with the date hereof there has been no cessation or discontinuance of any trade or business carried on by the Company nor has the scale of activities in any trade or business carried on by the Company within three years hereof become small or negligible. (c) Prior to the execution of this agreement no change of ownership of the Company has taken place such that either or both of sections 245 or 768 of the TA has or may be applied to deny relief in respect of a loss or losses of the Company or any set off of advance corporation tax. 18.12 Trading Assets In the event that any asset shown in the Accounts as a fixed asset is disposed of immediately following completion the proceeds derived from such asset will not be treated as a trading receipt for Tax purposes. 18.13 Sales at Undervalue/Overvalue All transactions entered into by the Company have been entered into on an arm's length basis and the consideration (if any) charged or received or paid by the Company on all transactions entered into by it has been equal to the consideration which might have been expected to be charged received or paid (as appropriate) between independent persons dealing at arm's length. No notice or enquiry pursuant to section 770 of the TA or the transfer pricing provisions of any arrangements made under section 788 of the TA (relief by agreement with other countries) has been made in connection with any of such transactions and the Company has retained sufficient records in connection with its transfer pricing arrangements to satisfy the conditions of Section 12B TMA 1970 and paragraph 21, Schedule 18 FA 1998. 18.14 Interest Rate Contracts etc. The Company is not and has not since the Accounts Date been a party to contract which is a qualifying contract for the purposes of section 147 of the Finance Act 1994 or a contract which may become a qualifying contract. 18.15 Exchange Gains and Losses The Company is not and has not since the Accounts Date been: (a) the holder of a qualifying asset; (b) subject to a qualifying liability; or (c) party to a currency contract, for the purposes of chapter II of the FA 1993. 18.16 Loan Relationships The Company is and has since the Accounts Date been taxed on an authorised accruals basis of accounting in relation to all loan relationships which are creditor relationships as defined in section 103 of the FA 1996 and in relation thereto: (a) the accruals on which the Company is taxable are computed only by reference to interest; (b) if any such debt were to be repaid at its face value the Company would not suffer any charge to Tax in excess of Tax on interest accrued; and (c) there is no connection between the Company and the debtor as mentioned in section 87 of the FA 1996. 18.17 (a) The Company obtains and has since the Accounts Date obtained Tax relief on an authorised accruals basis of accounting in relation to all loan relationships which are debtor relationships as mentioned in section 103 of the FA 1996 and in relation to each such relationship: (i) the deduction given in computing the taxable profits of the Company in consequence of that relationship is not less than the interest accruing for the period concerned; (ii) the Company would suffer no adverse Tax consequences were such debts to be repaid at face value save that the Tax deduction for interest accrued would cease. (b) The Company has not since the Accounts Date held or been the debtor under any deep discount securities as defined in paragraph 1 of schedule 4 of the TA or any deep gain securities as defined in paragraph 1 of schedule 11 of the FA 1989 or any relevant discounted security as mentioned in schedule 13 of the FA 1996. CAPITAL ASSETS/CHARGEABLE GAINS 18.18 Capital Allowances (a) No balancing charge in respect of any capital allowances claimed or given would arise if all the assets of the Company were to be realised for a consideration equal to the amount of the book value thereof as shown or included in the Accounts. (b) All necessary conditions for all capital allowances (as defined in section 832(1) of the TA) claimed by the Company were at all material times satisfied and remain satisfied. (c) The capital allowances computations for the period ending on the Accounts Date are complete, correct and annexed to the Disclosure Letter. (d) The Company does not own any asset which is a long life asset for the purposes of Chapter 10 of Part 2 of the Capital Allowances Act 2001. 18.19 Sales at Book Value No chargeable gain or profit (disregarding the effects of any indexation relief available) would arise if any asset of the Company (other than trading stock) were to be realised for a consideration equal to the amount of the book value thereof as shown or included in the Accounts. 18.20 Value Shifting The Company has not been involved in any scheme or affected by any arrangements whereby section 30 of the TCGA (tax-free benefits) might be applicable in relation to any disposal by the Company since the Accounts Date or on any asset of the Company being disposed of after the date hereof. 18.21 Valuation of Assets (a) The Company has not held at any time since the Accounts Date any asset where on the disposal of that asset the amounts deductible under section 38 TCGA fall or would fall to be determined by reference to the application of section 42 TCGA (part disposal of assets) to a previous transaction. (b) The Company has not since the Accounts Date held or had any interest in any asset where section 17 TCGA might apply to reduce the consideration deemed to be given on the acquisition of that asset. 18.22 Reconstructions The Company has not been involved in any share for share exchange or any scheme of reconstruction or amalgamation such as are mentioned in sections 135 and 136 of the TCGA or section 139 of the TCGA under which shares or debentures have been or will be issued or assets have been or will be transferred. 18.23 Depreciatory Transactions No loss which has arisen or which may hereafter arise on a disposal by the Company of shares in or securities of any company is liable to be reduced by virtue of the application of section 176 of the TCGA (transactions in a group) or section 177 of the TCGA (dividend stripping). 18.24 Receipt of Gift The Company has not received any assets by way of gift as mentioned in section 282 of the TCGA. DISTRIBUTIONS 18.25 Repayments of Share Capital (a) The Company has not at any time after 6 April 1965 repaid or agreed to repay or redeemed or agreed to redeem or purchased or agreed to purchase (or made any contingent purchase contract within the meaning of section 165 of the Companies Act 1985) in respect of any of its issued share capital or any class thereof. Further the Company has not after 6 April 1965 capitalised or agreed to capitalise in the form of shares, debentures or other securities or in paying up amounts unpaid on any shares, debentures or other securities any profits or reserves of any class or description or passed or agreed to be passed any resolution to do so. (b) The Company has not made (and will not be deemed to have made) any distribution within the meaning of sections 209 and 210 (bonus issue following repayment of capital) of the TA since 5 April 1965 except dividends properly authorised and shown in its Accounts nor is the Company bound to make any such distribution. (c) The Company has not been party to any transaction involving an exempt distribution within section 213 of the TA within the period commencing five years prior to the Accounts Date. 18.26 Payments to be treated as Distributions The Company has not since the Accounts Date been subject to any debt or security where the interest payable thereon fell or falls or could on its assignment fall to be treated as a distribution for Tax purposes. FOREIGN ELEMENT 18.27 Company Residence The Company has always been resident in the territory in which it was incorporated and has never been resident in any other territory or treated as so resident for the purposes of any double Tax agreement. 18.28 Treasury Consents Neither the Company nor any subsidiary of the Company has been party to any transaction or transactions within section 765 or 765A of the TA save in circumstances where either the Treasury General Consents 1988 applied or where the Company applied for and obtained consent of the Treasury to the transaction or transactions. 18.29 Company Migration Since 15 March 1988, no election has been made by the Company as the principal company as defined in section 187 of the TCGA (postponement of charge on deemed disposal of assets by company ceasing to be resident in the United Kingdom) nor has any company over which the Company had control or which was a member of the same group of companies as the Company ceased to be resident in the United Kingdom otherwise than in compliance with section 130 of the FA 1988. 18.30 Transfers to Non-Resident Company The Company has not made any such transfer as is mentioned in section 140 of the TCGA. 18.31 Double Taxation The Company has received or is entitled to receive credit against its UK Tax liability for all Tax charged (whether by Tax being withheld or through direct assessment) on the Company's income from any foreign jurisdiction and the Company holds all deduction certificates or other documents necessary to claim all relief due to it under part XVIII of the TA. 18.32 Controlled Foreign Companies The Company does not have and never has had an interest in a controlled foreign company within the meaning of section 747 of the TA such that all or any of the chargeable profits of the controlled foreign company have been or will or may be apportioned to the Company. 18.33 Gains of Non-Resident Companies The Company does not have and has never had any interest in any company, body of persons or unit trust scheme not resident in the UK where had that entity been a company resident in the UK it would have been a close company. 18.34 Offshore Funds The Company has not on or after 1 January 1984 disposed of and does not now have a material interest in an offshore fund which at any material time was or is a non-qualifying offshore fund within the meaning of section 757 of the TA such that a disposal thereof by the Company has given rise or will or may give rise to an offshore income gain. 18.35 Withholding of Tax and Agency for Non-Residents The Company is not and has not been assessable to Tax by virtue of section 78 of the TMA or section 42A or 43 of the TA or section 126 of the FA 1995. GROUPS OF COMPANIES 18.36 General The Company is not, nor has it ever been, a member of a group of companies as defined by section 170 of the TCGA. 18.37 Advance Corporation Tax The Disclosure Letter contains particulars of all arrangements for the surrender under section 240 of the TA of any amount of advance corporation tax and in respect of receipts and surrenders disclosed: (a) the Company has not paid nor is liable to pay for the benefit of any advance corporation tax which is or may become incapable of set off against the Company's liability to corporation tax; (b) the Company has received all payments due to it for all surrenders or purported surrenders of advance corporation tax made by it; (c) no such payment exceeds or could exceed the amount permitted by section 240(8) of the TA; and (d) there exist or existed for any period in respect of which a claim under section 240 of the TA has been or is to be made no arrangements such as are specified in sub-section (11) of that section whereby any person could obtain control of the Company or of any subsidiary to which such surrender purports or is purported to be made. 18.38 Group Income Election The Company has not made nor been subject to any election pursuant to section 247 of the TA. 18.39 Group Payment Arrangements The Company has not made nor been party to any arrangements with the Inland Revenue with respect to payment of corporation tax pursuant to section 36 of the FA 1998. CLOSE COMPANY 18.40 Close Companies - Transfers of Value The Company has made no transfer of value such as is specified in section 94(1) (or section 99(2)) of the IHTA. 18.41 Close Companies - Loans to Participators The Company has not made any loan advance or payment or given any consideration falling within sections 419-420 or 422 of the TA. 18.42 Close Companies - Distributions The Company has made no payments and conferred no benefits falling to be treated as distributions under section 418 of the TA. 18.43 Close Investment Holding Company The Company is not and never has been a close investment-holding company as defined at section 13A of the TA. 18.44 Close Companies - Transfers at Undervalue The Company has not made a transfer at an undervalue so that section 125 of the TCGA could apply. INHERITANCE TAX 18.45 Inheritance Tax (a) The Company is not, and will not become, liable to be assessed to inheritance tax as donor or donee of any gift or transferor or transferee of value (actual or deemed) nor as a result of any disposition chargeable transfer or transfer of value (actual or deemed) made by or deemed to be made by any other person. (b) There is no unsatisfied liability to inheritance tax attached or attributable to the Shares or any asset of the Company and in consequence no person has the power to raise the amount of such Tax by sale or mortgage of or by a terminable charge on any of the Shares or assets of the Company as mentioned in section 212 of the IHTA and none of the Shares or assets of the Company are subject to an Inland Revenue charge within section 237 of the IHTA. SECONDARY LIABILITIES 18.46 Secondary Liability No transaction or event has occurred in consequence of which the Company is or may be held liable for any Tax or deprived of relief or allowances otherwise available to it in consequence of any Tax or may otherwise be held liable for or to indemnify any person in respect of any Tax, where some other company or person is or may become primarily liable for the Tax in question (whether by reason of any such other company being or having been a member of the same group of companies or otherwise). 18.47 Indemnities etc The Company has not entered into any indemnity, guarantee or covenant under which the Company has agreed to pay or discharge any amount equivalent to or by reference to any other person's liability to Tax. 18.48 Finance Leases (a) The Company is not and has not been the lessee under any leases of plant or machinery save for the leases specified in the Disclosure Letter (the "Leases"). (b) No assets subject to the Leases have at any time been leased by the Company or its lessees to a person who is not resident in the UK and does not use the machinery or plant for the purposes of a trade carried on there. (c) The Warrantor, after making due and reasonable enquiry, is not aware of any revenue investigation, revenue enquiry or other circumstance which indicates that any person who is or was a lessor or owner of equipment subject to any of the Leases will or may be denied the first year allowances and/or writing-down allowances by reference to which the initial rental under that Lease was calculated. ANTI-AVOIDANCE PROVISIONS 18.49 Tax Schemes The Company has not entered into nor been a party to nor otherwise involved in any scheme or arrangement in relation to which the Company may be liable to Tax under the principles set out in W.T. Ramsay Limited v IRC (1981 STC 174) or Furniss v Dawson (1984 STC 153) as developed in subsequent cases. 18.50 Transactions in Securities The Company has not: (a) become liable for Tax; or (b) received and will not receive or be the subject of or be adversely affected by any Claim for Tax arising under or imposed by or resulting from the operation of sections 703-709 of the TA (whether alone or in conjunction with any other provisions of any Taxation Statutes whatsoever) and which wholly or partly results or arises from or is computed by reference to circumstances existing or events occurring at any time on or before the date hereof whether alone or in conjunction with other circumstances arising before or after completion. 18.51 Transactions in Land The Company has not: (a) become liable for Tax; or (b) received and will not receive or be the subject of or be adversely affected by any claim for Tax arising under or imposed by or resulting from the operation of sections 776-778 of the TA (whether alone or in conjunction with any other provisions of any Taxation Statutes whatsoever) and which wholly or partly results or arises from or is computed by reference to circumstances existing or events occurring at any time on or before the date hereof whether alone or in conjunction with other circumstances arising before or after completion. 18.52 Sale and Leaseback of Land The Company has not entered into any transaction as is mentioned in sections 34-37 or section 780 of the TA. 18.53 Transactions between Dealing and Associated Company The Company has not entered into any transaction mentioned in section 774 of the TA. 18.54 Loans or Credit The Company has been involved in no transactions such that section 786 of the TA (transactions associated with loans or credit) might apply. TAX FRAUD 18.55 The Company has not been party to any transaction within section 144 of the FA 2000 (offence of fraudulent evasion of income tax). VALUE ADDED TAX 18.56 Value Added Tax (a) The Company is a registered taxable person for the purpose of the VATA and all regulations and orders made thereunder (the "VAT legislation") and has not at any time been treated as a member of a group of companies for such purpose and has not made any application to be so treated and no circumstances exist whereby the Company would or might become liable for value added tax as an agent or otherwise by virtue of section 47 of the VATA. (b) The Company has complied in all respects with the requirements and provisions of the VAT legislation and has made and maintained and will pending completion make and maintain accurate and up-to-date records, invoices, accounts and other documents required by or necessary for the purposes of the VAT legislation and the Company has at all times punctually paid and made all payments and returns required thereunder. (c) That (without prejudice to the generality of clause (b) of this clause) the Company has not: (i) taken part in conduct involving dishonesty as described in section 60 of the VATA; (ii) committed any serious misdeclaration or neglect as described in section 63 of the VATA; (iii)issued unauthorised invoices or failed to do anything contemplated by section 67 of the VATA; (iv) failed to comply with any regulatory requirements described in section 69 of the VATA; (v) been notified of any assessment within section 74 of the VATA or a surcharge notice under section 59 of the VATA; (vi) made any agreement with the Commissioners of Customs and Excise which agreement has not been put in writing as contemplated by section 85 of the VATA. (d) The Company has not made any exempt supplies in consequence of which it is or will be unable to obtain credit for all input tax paid by it during any VAT quarter ending after the Accounts Date. 18.57 Capital Goods Scheme There are set out in the Disclosure Letter with express reference to this Warranty full details of each of the assets of the Company of a kind described in part XV of the Value Added Tax Regulations 1995 (SI No 2518) (adjustments to the deduction of input tax on capital items) in relation to which that part could operate to adjust the amount of input tax deducted, including in particular: (a) a description (including, in the case of land, or a building or part of a building the nature of the tenure and the time that the tenure has to run), the date of acquisition (or, in the case of a lease, the date of grant) and the price paid and VAT upon the purchase or acquisition of the capital item in question; (b) the proportion of the VAT on the purchase price for which credit has been claimed, including any adjustments made under part XV, Value Added Tax Regulations 1995. 18.58 Leases The Company has not at any time after 10 March 1997 granted any lease or entered into any agreement for any lease where it was a developer of the land for the purposes of paragraph 2(3AA) of Schedule 10 of VATA 1994 and it was, at the time of the grant (or at the time the grant was treated as made under paragraph 2(3AAA)), the intention or expectation of the Company or any person within paragraph 2(3AA)(a)(ii) that the land would become exempt land for the purposes of that paragraph. STAMP DUTY 18.59 Stamp Duty All documents in the enforcement of which the Company is or may be interested have been duly stamped and since the Accounts Date the Company has not been a party to any transaction whereby the Company was or is or could become liable to stamp duty reserve tax. 18.60 Relief on Transfer of Land The Company does not at the date hereof hold any estate or interest in land in the United Kingdom, or any estate or interest which was derived from such an estate or interest, that was transferred to it by an instrument executed within two years prior to the date hereof, such instrument having been stamped on the basis that either group relief under section 42 of the Finance Act 1930, section 11 of the Finance Act (Northern Ireland) 1954 or section 151 of the Finance Act 1995 applied or that relief under section 76 of the Finance Act 1986 applied. 19. ENVIRONMENTAL MATTERS 19.1 Liability To the best of the Warrantor's knowledge and belief but on the basis that the Warrantor has made no enquiries relating thereto the Company and the Property comply and have at all times complied with all Environmental Laws and there are no facts or circumstances which interfere or prevent compliance with any Environmental Laws. 19.2 Notices and Complaints The Company has not received any notice of enforcement, prohibition, improvement, remediation or other notice of equivalent nature, or any judgment, order, decree, award, demand or decision in respect of the Environment from any court, tribunal, arbitrator or governmental or regulatory authority and there have been no complaints, investigations, enquiries, requests for information or other formal or informal indications of any possible claims or legal actions in respect of the Environment from any person including any neighbour, governmental or regulatory authority, current or former employee or third party. 19.3 Contaminated Land (a) To the best of the Warrantor's knowledge and belief but on the basis that the Warrantor has made no enquiries relating thereto there has not been and there is not present on, at or under the Property and there is and has been no release, migration, leakage, spill, discharge, entry, deposit or emission onto or from the Property of any Hazardous Substance or Waste. (b) To the best of the Warrantor's knowledge and belief there has not been any disposal, storage, release, leakage, migration, spill, discharge, entry, deposit or emission of any Hazardous Substance or Waste into the Environment caused by the Activities. 20. PENSIONS 20.1 Pensions arrangements disclosed Save under the EW Simulation Technology Limited Pension Scheme (the "Disclosed Scheme") the Company is not under obligation or commitment, nor is it a party to any custom or practice, to pay, provide or contribute towards any relevant benefits within the meaning of section 612 of the TA (ignoring the exception contained in that section), including the making of any payment of contributions to, or remuneration specifically referable to contributions to, any personal pension scheme, stakeholder pension scheme, retirement annuity contract or similar arrangement ("Relevant Benefits") to or in respect of any person and nothing has been done to create a reasonable expectation that any such payments, provision or contributions will be made. The Company has not at any time participated in or contributed towards any former scheme or arrangement ("Former Scheme") which has as its purpose or one of its purposes the provision of Relevant Benefits (other than schemes which have been fully wound up). 20.2 Money purchase scheme Other than lump sum death in service benefits, the Disclosed Scheme provides only money purchase benefits (as defined in section 181 of the Pension Schemes Act 1993) and no promise or assurance (oral or written) has been given to any person that his or her benefits under the Disclosed Scheme (other than lump sum death in service benefits) will be calculated by reference to any person's remuneration or equate (approximately or exactly) to any particular amount. 20.3 Ex gratia payments and undertakings The Company has not made or proposed any voluntary or ex gratia payments of Relevant Benefits to or in respect of any person and is not due to make any such payments in the future. No undertaking or assurance (whether legally binding or not) has been given by the Company to any person as to the introduction, continuance, increase or improvement of any Relevant Benefits. 20.4 Disclosure of documents Full details of the Disclosed Scheme have been supplied to the Buyer including copies of the current governing trust documentation, current booklet and any announcements made to members; all relevant approval letters from the Inland Revenue; all relevant contracting-out certificates; the most recent actuarial valuation and trustees' annual report and accounts; the payment schedule; all documents evidencing compliance with the Pensions Act 1995; all correspondence with the Occupational Pensions Regulatory Authority, OPAS and the Pensions Ombudsman; and full membership details. 20.5 Winding-up, termination or closure of the Disclosed Scheme No event has occurred and no action has been taken which would or could result in the winding-up, termination or closure of the Disclosed Scheme in whole or in part. 20.6 Regulatory matters The Disclosed Scheme is an exempt approved scheme within the meaning of section 592(1) of the TA and has been with effect from its date of commencement and there is no reason why such exempt approved status might be withdrawn or cease to apply. 20.7 Payment of contributions and fees and expenses All contributions and premiums which have become payable to or under the Disclosed Scheme by or in respect of any current and former employees and officers have been duly paid within any applicable prescribed period under the Pensions Act 1995 and the Disclosed Scheme's governing documentation. The aggregate of all actuarial, consultancy, legal and other fees and charges and all taxation and other expenses for which liability has arisen but which has not yet been discharged and the value of all services which have been provided but in respect of which an account has not yet been rendered in relation to the Disclosed Scheme does not exceed (pound)5,000. 20.8 Legal compliance The Disclosed Scheme has at all times been operated in accordance with the trusts, powers and provisions of its governing documentation, all applicable EC and domestic legislation, and the general requirements of law and regulatory practice and no report has been made to the Occupational Pensions Regulatory Authority in relation to any potential or actual non-compliance. The Company has fulfilled all of its obligations in relation to and under the Disclosed Scheme in respect of any current and former employees and officers. Prior to the date of this agreement all benefits which have been, or will be, transferred into the Disclosed Scheme (whether on an individual or bulk basis) have been, or will be, so transferred on a sex equal basis. 20.9 Access to membership Every employee and former employee who is or has been a part-time employee is not and has never been excluded from membership of any Disclosed Scheme. Every employee and officer and former employee and officer who is or has been entitled to, or eligible for, membership of the Disclosed Scheme, whether under a contract of employment or under the rules of the Disclosed Scheme, has joined or been invited to join as of the date on which he became so entitled or eligible. The Company has complied at all times with its obligation to designate and provide access to a stakeholder pension scheme for all its relevant employees. 20.10 Claims and litigation No claim or complaint has been made or threatened against any current or former trustee, manager or administrator of the Disclosed Scheme or any employer participating therein (including, without limitation, any complaint under the internal dispute resolution procedure, or to OPAS or the Pensions Ombudsman) in respect of any act, event, omission or other matter arising out of or in connection with the Disclosed Scheme (other than routine claims for benefits) or generally in respect of the provision of Relevant Benefits (whether payable under the Disclosed Scheme or otherwise) and there are no circumstances which may give rise to any such claim or complaint. 20.11 Records and assets of the scheme The records of the Disclosed Scheme (including all books of account and trustees' minutes) have been properly and accurately maintained and all such records are in the possession of, or under the control of, the trustees of the Disclosed Scheme. The trustees of the Disclosed Scheme have legal title to all of the assets of that scheme. None of the assets of the Disclosed Scheme constitute "employer-related investments" for the purpose of section 40 of the Pensions Act 1995. There are no charges or encumbrances over any of the assets of the Disclosed Scheme and all such assets are either held directly by the trustees of the Disclosed Scheme or by investment managers (or nominees properly appointed by the trustees) and are not subject to any stock lending arrangements. 20.12 Current trustees and scheme documentation The current trustees of the Disclosed Scheme are the Warrantor and Universal Pension Trustees Limited. They and the Disclosed Scheme are all resident in the United Kingdom for tax purposes and the trustees of the Disclosed Scheme are the administrators for the purposes of Chapter 1 of Part XIV of the TA. The trust deeds, rules and other documents which have at any time governed the Disclosed Scheme were all validly adopted and accurately record the benefits payable under them as referred to in all announcements, explanatory booklets and other literature or communications issued in relation to the Disclosed Scheme. 20.13 Insured death benefits All death benefits which may be payable (other than a refund of members' contributions with interest, where appropriate) are fully insured with an insurance company authorised under the Financial Services and Markets Act 2000 to carry on long-term insurance business. All policies and contracts under which such benefits are insured are enforceable and there is no ground on which the insurance company concerned might avoid liability under such policy or contract. Each member and beneficiary has been covered for such insurance by such insurance company at its normal rates and on its normal terms for persons in good health. 21. INFORMATION 21.1 General (a) So far as the Warrantor is aware, all written information given by, or on behalf of, the Sellers or the Company to the Buyer, its advisers or agents before or during the negotiations leading to this agreement is true, complete, accurate and not misleading; (b) In relation to the Business Plan, as at 19 March 2002: (i) all statements of fact contained in the Business Plan were true and accurate in all material respects and not misleading; (ii) all expressions of opinion or intention or expectation contained in the Business Plan were made on reasonable grounds and were truly and honestly held by the Warrantor and were fairly based; and (iii)there were no facts known or which could on reasonable enquiry have been known to the Warrantor and which are not stated in the Business Plan the omission of which would make any such statement or expression in such document misleading. (c) As at 19 March 2002, there were no facts known or which could on reasonable enquiry have been known to the Warrantor and which are not stated in the Business Plan which are, nor might be, material in the context of this agreement or the acquisition by the Buyer of the Shares. 21.2 This Agreement and the Disclosure Letter The information set out in schedules 1, 2 and 6 of this agreement and in the Disclosure Letter is true, complete, accurate in all material respects and not misleading. 21.3 Material Information So far as the Warrantor is aware, all information about the Shares and the Company's business which might be material to a buyer of the Shares has been disclosed to the Buyer in writing. SCHEDULE 4 Form of Resignation TO: The Directors EW Simulation Technology Limited (the "Company") and each of its directors, officers, agents and advisers Date: ------- September 2002 I hereby resign as secretary, and if applicable, as employee of the Company with effect from today. I confirm that I have no claims against the Company or any of you in respect of any cause, matter or thing whatsoever (including unpaid remuneration) but to the extent any such claims exists or may exist I (unless such claim is covered by insurance) hereby irrevocably waive such claim and release the Company and each of you from any liability or obligation whatsoever in respect thereof. EXECUTED as a DEED ) and DELIVERED by MRS ANN ) ANDREWS in the presence of : ) (Witness): Name: Address: Occupation: SCHEDULE 5 Sellers' Limitations on Liability 1. TIME LIMIT FOR CLAIMS Save in the case of any liability based upon fraud and including without limitation fraudulent concealment by the Warrantor, the Warrantor shall not be liable in respect of a claim under the Warranties unless written notice of such claim setting out reasonable details of the relevant claim is served upon the Warrantor: (a) in the case of a claim under the Warranties (other than the Warranties relating to Tax or Environment), by not later than 5.00 p.m. on the second anniversary of Completion; and (b) in the case of a claim under the Warranties relating to Tax or Environment by not later than 5.00 p.m. on the day one month after the seventh anniversary of Completion. 2. MONETARY LIMIT ON CLAIMS Save in the case of any liability based upon fraud and including without limitation fraudulent concealment by the Warrantor, the Warrantor shall not be liable in respect of a claim under the Warranties unless and until the aggregate amount of all such claims (when aggregated with all claims under the Tax Deed) against the Warrantor exceeds US$50,000 in which event the Warrantor's liability shall be for the total amount of such claims and shall not be limited to the excess provided that (save in the case of fraud or fraudulent concealment by the Warrantor) the aggregate liability of the Warrantor in respect of all claims under the Warranties and the Tax Deed shall not in any circumstances exceed US $4,500,000. 3. DISCLOSURE The Warrantor shall not be liable in respect of a claim under the Warranties to the extent that the same or circumstances giving rise thereto are fairly disclosed in the Disclosure Letter or are expressly provided for or noted in the Accounts. No letter, document or other communication shall be deemed to be disclosed except and to the extent that the same is referred to in, and a copy attached to, the Disclosure Letter. 4. NO LIABILITY FOR CERTAIN EVENTS No liability shall attach to the Warrantor in respect of a breach of any of the Warranties to the extent that: (a) such claim arises as a consequence of a change in the law by the English courts enacted after the date hereof; (b) such claim arises as a result of any provision or reserve made in respect thereof in the Accounts being insufficient by reason of any increase in rates of taxation made after the date hereof or arises as a result of the retrospective imposition of taxation as a consequence of a change in the law in England and Wales enacted after the date hereof; (c) the breach or the events giving rise to such breach would not have arisen but for an act omission or transaction of the Buyer or the Company which could reasonably have been avoided effected after Completion otherwise than in the ordinary and proper course of trade as presently carried on by the Company and which the Buyer knew or ought reasonably to have known would give rise to the breach in question; (d) it has been made good or compensated by payment made under the Tax Deed; (e) such claim arises as a result of a change of accounting policy or practice of or change of the date to which accounts are made up in each year by the Buyer or the Company introduced on or after the date hereof other than any change introduced in order to ensure that the Company complies with generally accepted accounting principles in the UK; and (f) the claim would not have arisen but for any act or omission prior to Completion by the Sellers or the Company carried out at the request of or with the written approval of the Buyer. 5. MISCELLANEOUS 5.1 Any of the Warranties to the extent remediable if breached shall not entitle the Buyer to compensation unless the Warrantor is given written notice of such breach and such breach is not remedied to the reasonable satisfaction of the Buyer within 30 days after the date such notice is received. 5.2 In the event of the Warrantor having paid to the Buyer an amount in respect of a claim for breach of any of the Warrantor and subsequent to the date of making such payment the Buyer or the Company recovers from a third party a sum which is referable to that payment then the Buyer shall forthwith repay or procure the repayment by the Buyer or the Company to the Warrantor of the lesser of: (a) the amount recovered (less costs and any tax thereon); and (b) the sum paid by the Warrantor to the Buyer. 5.3 The amount of any liability arising in respect of any claim or claims for breach of any of the Warranties or under the Tax Deed shall be treated as a reduction of the consideration for the Shares. 5.4 In addition to the duty of the Buyer under the general law to mitigate loss or damage the Warrantor shall be entitled to require the Company and the Buyer (or either of them) at the Warrantor's expense to take all such further reasonable steps or proceedings in order to mitigate any claim for breach of any of the Warranties and the Buyer shall procure that the Company shall, in so far as is reasonable to do so, act in accordance with any such written requirements of the Warrantor subject to the Company and the Buyer being fully indemnified by the Warrantor against all reasonable costs and expenses incurred in connection therewith. 5.5 For the purpose of enabling the Warrantor to remedy the breach or to mitigate or otherwise determine the amount of any claim in respect of the Warranties the Buyer shall notify the Warrantor within 40 days of the breach or circumstances giving rise to the breach coming to its notice and the Buyer shall make or procure to be made available to the Warrantor and his duly authorised agents on reasonable notice during normal business hours all relevant books of account records and correspondence for the purpose of enabling the Warrantor to ascertain or extract any information relevant to the claim. 5.6 The Buyer shall keep the Warrantor informed of all material developments in relation to any claim under the Warranties, and shall consult with the Warrantor regarding the conduct of any such claim. SCHEDULE 6 The Property Tenure Leasehold Description Unit 1 The Royston Centre Ash Vale Farnborough Mortgages or Charges Lloyds Bank plc debenture registered on 01/02/1997 Permitted uses/existing use Light Industrial with ancillary office and/or B1(c) of the Town and Country Planning (use Clauses) Order 1987 Sublettings Description Ground Floor Offices Unit 1 The Royston Centre Ash Vale Farnborough Executed as a deed by DR ROBERT ANDREWS in the ) presence of: ) ) Witness name: ) Witness address: ) ) Executed as a deed by MRS ANN ANDREWS in the ) presence of: ) Witness name: ) Witness address: ) ) Executed as a deed by EW SIMULATION TECHNOLOGY ) LIMITED acting by ) in the presence of: ) ) Witness name: ) Director Witness address: ) ) Director/Secretary Executed as a deed by ) HERLEY INDUSTRIES, INC. ) acting ) by in the presence of: ) Director Witness name: ) Witness address: ) Director/Secretary EX-10 7 ex1018trustindenture.txt EXHIBIT 10.18 TRUST INDENTURE Exhibit 10.18 - ------------- TRUST INDENTURE Dated as of October 19, 2001 Between EAST HEMPFIELD TOWNSHIP INDUSTRIAL DEVELOPMENT AUTHORITY and ALLFIRST BANK, as Trustee $3,000,000 Variable Rate Demand/Fixed Rate Revenue Bonds (Herley Industries, Inc. Project) Series of 2001 BOND COUNSEL Rhoads & Sinon LLP One South Market Square Harrisburg, Pennsylvania 17101 ISSUER SOLICITOR Blakinger, Byler & Thomas, P.C. 28 Penn Square Lancaster, Pennsylvania 17603 - v - TABLE OF CONTENTS Page ---- RECITALS....................................................................1 ARTICLE I - DEFINITIONS: CONTENT OF CERTIFICATES AND OPINIONS; TIME OF DAY.....................................................5 SECTION 1.01 Definitions............................................5 SECTION 1.02 Content of Certificates and Opinions..................19 SECTION 1.03 Time of Day...........................................20 SECTION 1.04 Interpretation........................................20 ARTICLE II - THE BONDS.....................................................21 SECTION 2.01 Authorization of Bonds; Bonds Equally and Ratably Secured.......................................21 SECTION 2.02 Terms of Bonds; Interest on the Bonds.................21 SECTION 2.03 Execution of Bonds....................................23 SECTION 2.04 Authentication........................................24 SECTION 2.05 Form of Bonds.........................................24 SECTION 2.06 Ownership of Bonds; Transfer of Ownership.............24 SECTION 2.07 Exchange of Bonds.....................................25 SECTION 2.08 Bond Registrar and Co-Bond Registrar..................25 SECTION 2.09 Temporary Bonds.......................................25 SECTION 2.10 Bond Mutilated, Lost, Destroyed or Stolen.............25 SECTION 2.11 Cancellation and Destruction of Surrendered Bonds.....26 SECTION 2.12 Acts of Bondholders; Evidence of Ownership............26 SECTION 2.13 CUSIP Number..........................................26 SECTION 2.14 Book-entry System for the Bonds.......................26 ARTICLE III - ISSUANCE OF BONDS; APPLICATION OF PROCEEDS...................29 SECTION 3.01 Issuance of the Bonds.................................29 SECTION 3.02 Validity of Bonds.....................................29 SECTION 3.03 Disposition of Proceeds of Bonds and Other Amounts....29 ARTICLE IV - REDEMPTION OF BONDS...........................................31 SECTION 4.01 Extraordinary and Mandatory Redemption................31 SECTION 4.02 Optional Redemption...................................31 SECTION 4.03 Notice of Redemption..................................32 SECTION 4.04 Interest on Bonds Called for Redemption...............32 SECTION 4.05 Cancellation..........................................32 SECTION 4.06 Partial Redemption of Bonds...........................32 SECTION 4.07 Payment of Redemption Price with Available Money; Bank Consent to Optional Redemption Required..........33 ARTICLE V - CONVERSION OPTION; PURCHASE AND REMARKETING OF BONDS...........34 SECTION 5.01 Conversion of Interest Rate on Conversion Date........34 SECTION 5.02 Delivery of Bonds After Conversion Date...............36 SECTION 5.03 Mandatory Tender upon Delivery and Acceptance of a Substitute Letter of Credit........................36 SECTION 5.04 Demand Purchase Option................................37 SECTION 5.05 Funds for Purchase of Bonds...........................38 SECTION 5.06 Delivery of Purchased Bonds...........................39 SECTION 5.07 Sale of Bonds by Remarketing Agent....................40 SECTION 5.08 Delivery of Proceeds of Sale of Purchased Bonds; Delivery of Remarketed Pledged Bonds.................40 SECTION 5.09 Duties of Trustee and Tender Agent with Respect to Purchase of Bonds..................................40 SECTION 5.10 No Purchases or Sales After Certain Defaults or After Issuance of a Notice of Redemption..........41 ARTICLE VI - REVENUES AND FUNDS............................................42 SECTION 6.01 Creation of the Bond Fund.............................42 SECTION 6.02 Payments into the Bond Fund...........................42 SECTION 6.03 Use of Money in the Bond Fund.........................42 SECTION 6.04 Deposit and Disbursement of Net Proceeds of Insurance or Condemnation.............................43 SECTION 6.05 Project Fund..........................................43 SECTION 6.06 Payments into the Project Fund; Disbursements.........43 SECTION 6.07 Use of Money in the Project Fund Upon Default.........44 SECTION 6.08 Use of Money in the Project Fund Upon Completion of the Project........................................44 SECTION 6.09 Nonpresentment of Bonds...............................44 SECTION 6.10 Money to be Held in Trust.............................45 SECTION 6.11 Repayment to the Bank and the Borrower from the Bond Fund, the Rebate Fund or the Project Fund..45 SECTION 6.12 Letters of Credit.....................................45 SECTION 6.13 Rebate Fund...........................................46 SECTION 6.14 Investment of Money in Funds..........................48 ARTICLE VII - PARTICULAR COVENANTS.........................................50 SECTION 7.01 Punctual Payment......................................50 SECTION 7.02 Extension of Payment of Bonds.........................50 SECTION 7.03 Against Encumbrances..................................50 SECTION 7.04 Power to Issue Bonds and Make Pledge and Assignment...50 SECTION 7.05 Accounting Records and Financial Statements...........51 SECTION 7.06 Tax Covenants.........................................51 SECTION 7.07 Enforcement of Loan Agreement; Amendments to Loan Agreement.............................................52 SECTION 7.08 Waiver of Laws........................................52 SECTION 7.09 Financing Statements and Other Action to Protect Security Interests....................................52 SECTION 7.10 Further Assurances....................................53 ARTICLE VIII - EVENTS OF DEFAULT; REMEDIES OF BONDHOLDERS..................54 SECTION 8.01 Events of Default.....................................54 SECTION 8.02 Acceleration..........................................55 SECTION 8.03 Other Remedies........................................56 SECTION 8.04 Legal Proceedings By Trustee..........................57 SECTION 8.05 Discontinuance of Proceedings by Trustee..............57 SECTION 8.06 Bondholders May Direct Proceedings by Trustee.........57 SECTION 8.07 Limitations on Actions By Bondholders.................58 SECTION 8.08 Trustee May Enforce Rights Without Possession of Bonds.................................................58 SECTION 8.09 Delays and Omissions Not to Impair Rights.............58 SECTION 8.10 Application of Money in Event of Default..............58 SECTION 8.11 Trustee and Bondholders Entitled to All Remedies Under Act; Remedies Not Exclusive....................59 SECTION 8.12 Trustee's Right to Receiver...........................59 SECTION 8.13 Subrogation Rights of Bank............................59 SECTION 8.14 Waiver of Default.....................................59 ARTICLE IX - THE TRUSTEE; THE TENDER AGENT; AND THE REMARKETING AGENT......60 SECTION 9.01 Duties, Immunities and Liabilities of Trustee.........60 SECTION 9.02 Merger or Consolidation...............................61 SECTION 9.03 Liability of Trustee..................................61 SECTION 9.04 Right of Trustee to Rely on Documents.................62 SECTION 9.05 Preservation and Inspection of Documents..............63 SECTION 9.06 Compensation..........................................63 SECTION 9.07 The Tender Agent......................................63 SECTION 9.08 Removal or Resignation of Tender Agent; Qualification of Successors...........................63 SECTION 9.09 Qualifications of Remarketing Agent; Resignation; Removal...............................................64 SECTION 9.10 Construction of Ambiguous Provisions..................65 ARTICLE X - MODIFICATION OR AMENDMENT OF THIS INDENTURE....................66 SECTION 10.01 Amendments Permitted..................................66 SECTION 10.02 Effect of Supplemental Indenture......................66 SECTION 10.03 Trustee Authorized to Join in Amendments and Supplements; Reliance on Counsel................67 ARTICLE XI - DEFEASANCE....................................................68 SECTION 11.01 Defeasance............................................68 SECTION 11.02 Provision for Payment.................................68 SECTION 11.03 Deposit of Funds for Payment of Bonds.................69 SECTION 11.04 Survival of Certain Provisions........................70 ARTICLE XII - MISCELLANEOUS................................................71 SECTION 12.01 Liability of Issuer Limited to Revenues...............71 SECTION 12.02 Limitation of Liability of Directors, Etc. of Issuer..71 SECTION 12.03 Covenant Not to Sue...................................71 SECTION 12.04 Successor is Deemed Included in All References to Predecessor........................................72 SECTION 12.05 Limitation of Rights to Parties, Bank, Borrower and Bondholders.......................................72 SECTION 12.06 Waiver of Notice......................................72 SECTION 12.07 Severability of Invalid Provisions....................72 SECTION 12.08 Notices...............................................72 SECTION 12.09 Evidence of Rights of Bondholders.....................74 SECTION 12.10 Disqualified Bonds....................................75 SECTION 12.11 Money Held for Particular Bonds.......................75 SECTION 12.12 Funds.................................................75 SECTION 12.13 Payments Due on Days other than Business Days.........76 SECTION 12.14 Execution in Several Counterparts.....................76 SECTION 12.15 Notices to Rating Agency..............................76 SECTION 12.16 Governing Law.........................................76 EXHIBIT A Form of Variable Rate Bond EXHIBIT B Form of Fixed Rate Bond EXHIBIT C Requisition Form THIS TRUST INDENTURE, dated as of October 19, 2001, by and between the East Hempfield Township Industrial Development Authority (the "Issuer"), a body corporate and politic and a public instrumentality of the Commonwealth of Pennsylvania organized and existing under the Act (which capitalized term and all other capitalized terms and phrases used in this Indenture, including the following recitals and granting clauses, shall have the meanings set forth in Section 1.01 of this Trust Indenture), and Allfirst Bank (the "Trustee"), a bank duly organized and existing under the laws of the State of Maryland and authorized to accept and execute trusts of the character herein set out, with a corporate trust office located in the City of Harrisburg, Dauphin County, Pennsylvania, as trustee. WITNESSETH: WHEREAS, the Issuer is authorized under the Act to acquire, hold, construct, improve, maintain, own, finance, lease in the capacity of lessor or lessee, or sell industrial, commercial and other projects for the public purpose of alleviating unemployment, maintaining employment at a high level and creating and developing business opportunities, by the construction, improvement, rehabilitation, revitalization and financing of industrial, commercial and specialized facilities in the Commonwealth; and WHEREAS, the Issuer, to accomplish the purposes of the Act, is empowered to extend credit to such employment promoting enterprises in the name of the Issuer and in such manner as it may deem proper, for such consideration and upon such terms and conditions as the Issuer shall deem reasonable; and WHEREAS, the Borrower has requested that the Issuer provide a portion of the funds to finance the Project; and WHEREAS, the Issuer has determined that it shall undertake the financing of the Project pursuant to the provisions and requirements of the Act; and WHEREAS, the Issuer has, by resolution of its Board duly adopted on July 23, 2001, authorized the issuance of the Bonds for the purpose of financing a portion of the costs of the Project; and WHEREAS, the Borrower has caused Allfirst Bank, to deliver an irrevocable direct pay Letter of Credit to the Trustee, under which the Trustee shall draw funds with which to pay the principal, interest, purchase price and redemption price of the Bonds as the same become due and payable upon maturity, optional redemption, sinking fund redemption, tender for purchase or acceleration upon an event of default, all as more fully set forth herein and in the Bonds; and WHEREAS, the Borrower shall reimburse the Bank for all amounts drawn under the Letter of Credit pursuant to the Letter of Credit Agreement; and WHEREAS, the Issuer has entered into the Loan Agreement with the Borrower, wherein the Issuer will loan the proceeds of the Bonds to the Borrower and wherein the Borrower agrees, among other things, to make certain loan payments to the Issuer, all as set forth in the Loan Agreement; and WHEREAS, the Issuer has determined to assign, transfer, and pledge unto the Trustee, as trustee under this Indenture, all right, title, and interest of the Issuer in and to the Loan Agreement and sums payable thereunder, except the Unassigned Issuer's Rights; and WHEREAS, the Issuer is authorized by the Act to borrow money, and the Issuer deems it necessary to borrow money under and pursuant to provisions of this Indenture for the purposes of, among other things, financing the costs and expenses of the Project (all in accordance with applicable law) and of carrying out its obligations under the terms of the Loan Agreement, and, for that end, the Issuer has duly authorized and directed the issuance, sale and delivery of the Bonds to be issued as fully registered bonds; and to secure payment of the principal thereof and the interest and premium, if any, thereon and the performance and observance of the covenants and conditions herein contained, the Issuer has authorized the execution and delivery of this Indenture; and WHEREAS, execution and delivery of this Indenture and the issuance of the Bonds hereunder and under the Act have been duly and validly authorized by resolution of the Board of the Issuer duly adopted prior to such execution and delivery; and WHEREAS, all acts and things necessary to make the Bonds, when authenticated by the Trustee and issued as in this Indenture provided, the valid, binding, and legal obligations of the Issuer in accordance with their terms, and to constitute this Indenture the valid and binding agreement for the security of the Bonds, have been done and performed. GRANTING CLAUSES AND AGREEMENTS NOW, THEREFORE, in consideration of the premises and the acceptance by the Trustee of the trusts hereby created and of the purchase and acceptance of the Bonds issued and sold by the Issuer under this Indenture by those who shall own the same from time to time, and of the sum of one dollar, lawful money of the United States of America, duly paid to the Issuer by the Trustee at or before the execution and delivery of this Indenture, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and for the purpose of fixing and declaring the terms and conditions upon which the Bonds are to be executed, authenticated, issued, delivered and accepted by all Persons who shall from time to time be or become owners thereof, and in order to secure the payment of the principal of, premium (if any) and interest on, and purchase price of, the Bonds according to their tenor and effect and the performance and observance by the Issuer of all the covenants expressed or implied herein and in the Bonds and the payment and performance of all other of the Issuer's obligations, the Issuer does hereby grant, bargain, sell, convey, pledge and assign, without recourse, unto the Trustee and unto its successors in the trust forever, and grants to the Trustee and to its successors in the trust, a security interest in all of the following: GRANTING CLAUSE FIRST All right, title and interest of the Issuer in and to the Loan Agreement and the security granted thereunder and under the Collateral Documents and the Bond Documents, other than the Unassigned Issuer's Rights, including, but not limited to (i) the obligation of the Borrower under Section 3.03 of the Loan Agreement to make payments at such times and in such amounts as are necessary to pay the principal of, interest on, and redemption premium, if any, with respect to the Bonds and the purchase price thereof when due and payable upon tender of the Bonds for purchase in accordance with their terms, (ii) the present and continuing right to make claim for, collect, receive and receipt for any of the sums, amounts, income, revenues, issues and profits and any other sums of money payable or receivable under the Loan Agreement, the Collateral Documents and the other Bond Documents (except for amounts payable in respect of the Unassigned Issuer's Rights), (iii) the present and continuing right to bring actions and proceedings thereunder or for the enforcement thereof, and (iv) the present and continuing right to do any and all things which the Issuer is or may become entitled to do under the Loan Agreement, the Collateral Documents and the other Bond Documents. GRANTING CLAUSE SECOND All right, title and interest of the Issuer in and to all money and securities from time to time held by the Trustee under the terms of this Indenture; provided, however, that in consideration of the issuance of the Letter of Credit by the Bank, the Issuer hereby grants a security interest in the Project Fund to the Bank in order to secure payment of the obligations of the Borrower under the Letter of Credit Agreement, the rights of the Bank therein being subject and subordinate to the rights of the Trustee so long as any amount due in respect of the Bonds remains unpaid. GRANTING CLAUSE THIRD Any and all other property rights and interests of every kind and nature from time to time hereafter by delivery or by writing of any kind granted, bargained, sold, alienated, demised, released, conveyed, assigned, transferred, mortgaged, pledged, hypothecated or otherwise subjected hereto, as and for additional security herewith, by the Borrower or any other Person on its behalf or with its written consent or by the Issuer or any other Person on its behalf or with its written consent, and the Trustee is hereby authorized to receive any and all such property at any and all times and to hold and apply the same subject to the terms of this Indenture. THE BONDS AND THE ISSUER'S COVENANTS UNDER THIS INDENTURE ARE SPECIAL, LIMITED OBLIGATIONS OF THE ISSUER, PAYABLE SOLELY FROM THE REVENUES AND OTHER MONEY PLEDGED THEREFOR DESCRIBED HEREIN AND IN THE LOAN AGREEMENT, AND ARE NOT IN ANY MANNER GENERAL OBLIGATIONS OF THE ISSUER OR OBLIGATIONS OF ANY KIND OF THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION THEREOF, AND NEITHER THE GENERAL CREDIT OF THE ISSUER NOR THE GENERAL CREDIT OR THE TAXING POWER OF THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED FOR THE PAYMENT OF THE BONDS OR THE PERFORMANCE OF THE ISSUER'S COVENANTS UNDER THIS INDENTURE. NEITHER THE BONDS NOR THIS INDENTURE SHALL BE OR BE DEEMED AN OBLIGATION OF THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION THEREOF. THE OBLIGATIONS TO REIMBURSE THE BANK FOR DRAWS MADE UNDER THE LETTER OF CREDIT AND OTHER OBLIGATIONS UNDER THE LETTER OF CREDIT AGREEMENT ARE SOLELY OBLIGATIONS OF THE BORROWER. TO HAVE AND TO HOLD all and singular the Trust Estate with all privileges and appurtenances hereby conveyed and assigned, or agreed or intended so to be, to the Trustee and its successors in trust, forever. IN TRUST NEVERTHELESS, under and subject to the terms and conditions hereinafter set forth, (a) for the equal benefit, protection and security of the owners of any and all of the Bonds, all of which regardless of the time or times of their issuance or maturity shall be of equal rank, without preference, priority or distinction of any of the Bonds over any other thereof, except as otherwise provided in or pursuant to this Indenture, (b) for securing the observance and performance of the Issuer's obligations and all other conditions, promises, stipulations, agreements, terms and provisions of this Indenture and the uses and purposes herein expressed and declared, and (c) for the benefit of the Bank. PROVIDED, HOWEVER, that if the Issuer, its successors or assigns, well and truly pays, or causes to be paid, the principal of the Bonds issued hereunder and the premium (if any) and interest due or to become due thereon, and the purchase price due and payable upon tender thereof, at the times and in the manner mentioned in the Bonds and as provided herein, according to the true intent and meaning thereof, and shall cause the payments to be made into the Bond Fund as required under Article VI of this Indenture, or shall provide, as permitted hereby, for payment thereof in accordance with Article XI of this Indenture, and shall well and truly keep, perform and observe all of the covenants and conditions pursuant to the terms of this Indenture and all other of the Issuer's obligations to be kept, performed and observed, and shall pay or cause to be paid to the Trustee all sums of money due or to become due in accordance with the terms and provisions of this Indenture, then upon such final payments or deposits as provided in Article XI of this Indenture, and upon the termination of the Loan Agreement, the right, title and interest of the Trustee in and to the Trust Estate shall cease, terminate and be void, and the Trustee shall thereupon assign, transfer, and turn over the Trust Estate to the Bank; provided, that if the Trustee shall have received written evidence from the Bank that all obligations of the Borrower under the Letter of Credit Agreement have been satisfied and that the Letter of Credit Agreement has been terminated, or if no Bank shall then exist, the Trust Estate shall be assigned, transferred and turned over to the Borrower; and the Trustee shall execute and deliver to the Issuer, the Bank and the Borrower, as appropriate, such instruments in writing as shall be requisite to evidence such transfer of the Trust Estate. Upon the Trustee's assignment, transfer and turning over to the Bank or the Borrower, as appropriate, of the Trust Estate pursuant to the provisions of Article XI of this Indenture, the Trustee shall have no further duties, responsibilities or obligations under and pursuant to this Indenture, except as may be provided in said Article. AND IT IS EXPRESSLY DECLARED that all Bonds issued and secured hereunder are to be issued, authenticated and delivered and all of the Trust Estate hereby pledged is to be dealt with and disposed of under, upon and subject to the terms, conditions, stipulations, covenants, agreements, trusts, uses and purposes hereinafter expressed, and the Issuer has agreed and covenanted and intending to be legally bound does hereby agree and covenant with the Trustee and with the respective Owners from time to time of the Bonds, or any part thereof as follows: ARTICLE I DEFINITIONS: CONTENT OF CERTIFICATES AND OPINIONS; TIME OF DAY SECTION 1.01 Definitions. Unless the context otherwise requires, the terms and phrases defined in this Section shall, for all purposes of this Indenture, the recitals to, this Indenture, any indenture supplemental to this Indenture and any certificate, opinion or other document herein mentioned, have the meanings specified in this Article. "Accountant" means any firm of independent certified public accountants (not an individual) selected by the Borrower and acceptable to the Bank. "Act" means the Economic Development Financing Law of the Commonwealth, the Act of August 23, 1967, P.L. 251, as amended and supplemented, 73 P.S.ss.ss.371 et seq. "Additional Payments" means any payments required to be made by the Borrower pursuant to the Loan Agreement which are not required to be (i) applied to the payment of scheduled debt service on the Bonds or (ii) reimbursed to the Bank for money drawn on the Letter of Credit to pay debt service on the Bonds. "Administrative Expenses" means those expenses of the Issuer and the Bank which are properly chargeable to the Borrower on account of the Bonds and the Bond Documents as administrative expenses under Generally Accepted Accounting Principles and include, without limiting the generality of the foregoing, the following: (a) fees and expenses of the Trustee, the Tender Agent, the Issuer, the Bank and the Placement Agent; and (b) fees and expenses of professional advisors to the Issuer, the Bank, the Trustee, the Tender Agent and the Placement Agent reasonably necessary and fairly attributable to the Project, the Facility or the Bonds, including without limiting the generality of the foregoing, fees and expenses of counsel to the Issuer, the Trustee, the Tender Agent, the Bank or the Placement Agent. "Authorized Borrower Representative" an authorized officer of the Borrower, or any other Person designated as an authorized representative of the Borrower by a Certificate of the Borrower signed by an authorized officer of the Borrower and filed with the Trustee. "Available Money" means (i) money derived from drawings under the Letter of Credit, (ii) money held by the Trustee in funds and accounts established under this Indenture for a period of at least 91 days and not commingled with any money so held for less than said 91 day period, provided that during and prior to such period no petition in bankruptcy was filed by or against the Borrower or the Issuer under the Bankruptcy Code or any applicable state bankruptcy or insolvency law, unless such petition was dismissed and all applicable appeal periods have expired without an appeal having been filed, (iii) investment income derived from the investment of money described in clauses (i) or (ii) of this definition, or (iv) any other money, if the Trustee and the Bank have received an opinion of Bankruptcy Counsel to the effect that payment of the principal, interest, purchase price or redemption price of the Bonds, as applicable, with such money would not, in the event of bankruptcy of the Issuer, the Borrower, any affiliate of the Borrower or other payor, constitute a voidable preference under the Bankruptcy Code or any applicable state bankruptcy or insolvency law. "Bank" means, initially, Allfirst Bank, a banking corporation duly organized and existing under the laws of the State of Maryland and duly authorized to do business in the Commonwealth of Pennsylvania, as issuer of the Letter of Credit, and its lawful successors and assigns in that capacity, and, if a Substitute Letter of Credit is issued and outstanding, the issuer of such Substitute Letter of Credit and its lawful successors and assigns in that capacity. "Bankruptcy Code" means the Federal Bankruptcy Code, 11 U.S.C.ss.101 et seq., as amended and supplemented from time to time. "Bankruptcy Counsel" means Counsel experienced in matters relating to the Bankruptcy Code who is not unacceptable to the Trustee or S&P. "Bond" shall mean a Bond of a particular series of the Bonds authorized for issuance hereunder. "Bond Counsel" means Rhoads & Sinon LLP, Harrisburg, Pennsylvania, or such other attorney at law or firm of attorneys at law of nationally recognized standing in matters pertaining to bonds issued by states and their political subdivisions (including the status of the interest paid thereon for federal income tax purposes), duly admitted to the practice of law before the highest court of any state, district or territory of the United States of America. "Bond Documents" means any or all of the Loan Agreement, this Indenture, the Tender Agent Agreement, the Remarketing Agreement and all documents, certificates and instruments executed in connection therewith. "Bond Fund" means the fund created in Section 6.01 of this Indenture. "Bond Register" means the books and records, whether in printed or electronic form, maintained by the Bond Registrar for the purpose of recording ownership, transfer of ownership, and exchange of Bonds. "Bond Registrar" means, initially, the Trustee or the Tender Agent, acting in the capacity of bond registrar or co-bond registrar for the Bonds, and, if at any time another bank, bank and trust company, trust company or national banking association shall be appointed by the Issuer to succeed the Trustee or the Tender Agent in such capacity, such successor bond registrar for the Bonds. "Bonds" means the Variable Rate Demand/Fixed Rate Revenue Bonds, Series of 2001 (Herley Industries, Inc. Project) authorized for issuance hereunder in the maximum aggregate principal amount of $3,000,000 and shall refer to all of them unless otherwise expressly stated or unless the context clearly otherwise requires. "Borrower" means Herley Industries, Inc., a business corporation organized and existing under laws of the State of Delaware, with its principal office at 3061 Industry Drive, Lancaster, Pennsylvania 17603. "Building" shall mean the 71,200 square foot existing building located at 3061 Industry Drive, Lancaster, Pennsylvania, to be improved by the Project Facilities with the proceeds of the Bonds as part of the Project. "Business Day" shall mean any day other than (i) a Saturday or Sunday, or (ii) a legal holiday on which banking institutions in the city in which the Principal Corporate Trust Office of the Trustee or the Tender Agent is located, or the city in which the principal office of the Bank is located are authorized or required by law to close, or (iii) a day on which the New York Stock Exchange is closed; provided, however, that on or prior to the Conversion Date, any day on which banking institutions in the city in which the Delivery Office of the Tender Agent is located are authorized or required by law to close shall also not be a "Business Day." "Certificate," "Statement," "Request," "Requisition" and "Order" means (a) with respect to the Issuer, a written certificate, statement, request, requisition or order signed in the name of the Issuer by an Issuer Officer, or (b) with respect to the Borrower, a written certificate, statement, request, requisition or order signed by an Authorized Borrower Representative of the Borrower. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. If and to the extent required by Section 1.02 of this Indenture, each such instrument shall include the statements provided for in such Section 1.02. "Certified Resolution of the Issuer" means a copy of a resolution of the Issuer Board certified by the Secretary or the Assistant Secretary of the Issuer, or other officer serving in a similar capacity, under its corporate seal, to have been duly adopted by the Issuer Board and to be in full force and effect as of the date of such certification. "Certified Resolution of the Borrower" means a copy of the resolution or other appropriate action of the Borrower certified by an Authorized Borrower Representative of the Borrower, to have been duly adopted by the governing body of the Borrower or an appropriate committee thereof and to be in full force and effect as of the date of such certification. "Clearing Fund" means the fund established by that name pursuant to Section 3.03 of this Indenture. "Closing Date" means the date on or after execution and delivery of the Loan Agreement and the other Bond Documents upon which a series of the Bonds is issued and delivered. "Code" means the Internal Revenue Code of 1986, as amended, and all regulations promulgated thereunder. "Collateral" means all of the rights and assets of the Borrower or any other Person in which the Issuer or the Trustee is now or hereafter granted a lien or security interest to secure the performance of (i) the Borrower's obligations under the Loan Agreement or any of the Bond Documents or (ii) the obligations of the Issuer hereunder or under the Bonds. "Collateral Documents" means all documents (if any) executed and delivered or to be executed and delivered under which the Issuer or the Trustee is granted a lien or security interest in any of the rights and assets of the Borrower or any other Person in order to secure the performance of the Borrower's obligations under the Loan Agreement or any other Bond Documents or the obligations of the Issuer hereunder or under the Bonds. "Commonwealth" means the Commonwealth of Pennsylvania. "Completion Date" means the date of completion of the Project, as that date shall be certified as provided in Section 2.03 of the Loan Agreement. "Conversion Date" means the Business Day, on or after October 19, 2001, selected as the day on which the interest rate on the Bonds shall be converted from the Variable Rate to the Fixed Rate pursuant to the exercise of the Conversion Option. "Conversion Option" means the option granted to the Borrower in Section 5.01 of this Indenture, pursuant to which the interest rate on Bonds may be converted from the Variable Rate to the Fixed Rate as of the Conversion Date. "Cost" or "Costs" means any cost in respect of the Project permitted to be financed with proceeds of the Bonds under the Act and the Code. "Counsel" means an attorney-at-law or law firm (who may be counsel for the Borrower or for the Issuer) not unsatisfactory to the Trustee. "Debt Service Requirements," means, with respect to the Bonds and with reference to a particular, specified period: (a) amounts required to be paid into any mandatory sinking fund account for Bonds during such period; and (b) amounts needed to pay the principal of Bonds maturing during such period and not to be redeemed prior to maturity from amounts on deposit in any mandatory sinking fund or similar bond redemption or retirement account (including redemptions required under the terms of the Letter of Credit Agreement); and (c) interest payable on Bonds during such period, excluding capitalized interest and interest payable from amounts on deposit with the Trustee and available for payment thereof. "Delivery Office" means the office of the Tender Agent designated by it in the Tender Agent Agreement as the place where Bonds shall be tendered for purchase or such other office of the Tender Agent as it may from time to time designate for such purpose by written notice to the Owners of Bonds, the Trustee, the Bank, the Remarketing Agent and the Issuer. "Demand Purchase Notice" means a notice delivered pursuant to subparagraph (i) of Section 5.04 of this Indenture. "Demand Purchase Option" means the option granted to Owners of Bonds to require that Bonds be purchased prior to the Conversion Date in accordance with the terms and conditions set forth in Section 5.04 of this Indenture. "Determination Date" means, with respect to any Variable Rate Bonds, each Friday or, if such Friday is not a Business Day, the next succeeding Business Day. "Determination of Taxability" means a determination that interest on the Bonds is includible in the gross income of the Holder thereof (if such Holder is other than a "substantial user" of the Facility or a "related person" to such a "substantial user," within the meaning of Section 147(a) of the Code); a "Determination of Taxability" shall be deemed to have been made upon the earliest of any of the following dates: (i) the date on which the Borrower files with the Trustee a statement to the effect that an Event of Taxability has occurred, if such statement is supported by one or more tax schedules, returns or documents that disclose that such an Event of Taxability has occurred; (ii) the date on which the Borrower or the Trustee is advised by private ruling, technical advice or any other written communication from any authorized official of the Internal Revenue Service that, based upon any filing of the Borrower or any other person or entity, or upon any review or audit of the Borrower or any other person or entity, or upon any other grounds whatsoever, an Event of Taxability has occurred; (iii) the date on which the Trustee or the Borrower is advised that a court of competent jurisdiction has issued a final order, declaration, ruling or judgment to the effect that an Event of Taxability has occurred; (iv) the date on which the Trustee receives written notice from any Owner of Bonds that such Owner has received a written assertion or claim by any authorized official of the Internal Revenue Service that an Event of Taxability has occurred; or (v) the date on which the Trustee is notified that the Internal Revenue Service has issued any private ruling, technical advice or any other written communication, with or to the effect that an Event of Taxability has occurred with respect to the Bonds; provided, however, that (a) no Determination of Taxability described in either clause (i) or clause (v) of this definition shall be deemed to have occurred unless the Trustee shall have received a written opinion of Bond Counsel who is satisfactory to the Bank and the Borrower and not unsatisfactory to the Trustee, in form and substance satisfactory to the Bank and the Borrower and not unsatisfactory to the Trustee, to the effect that an Event of Taxability has occurred; and (b) no Determination of Taxability described in any of clauses (i), (ii), (iii), (iv) or (v) of this definition shall be deemed to have occurred until 180 days shall have elapsed from the date described in such clause above without such Determination of Taxability having been rescinded or canceled. "DTC" means The Depository Trust Company. "Event of Default" means any of the events specified in Section 8.01 of this Indenture. "Event of Taxability" means, with respect to any Bond, a change of law or regulation, or the interpretation thereof, or the occurrence of any other event or the existence of any other circumstances (including without limitation the fact that any representations or warranties of the Borrower or the Issuer made in connection with the issuance of the Bonds is or was untrue or that a covenant of the Borrower has been breached) that has the effect of causing interest payable on any Bond to be includable in gross income for federal income tax purposes under Section 103 of the Code other than by reason that such interest (i) is includable in the gross income of an owner or former owner of any Bond while such owner or former owner is or was a "substantial user" or a "related person" to a "substantial user" (as such terms are used in Section 147(a)(1) of the Code) of the Facility or (ii) is deemed an item of tax preference, including without limitation an item subject to any alternative minimum tax. "Fiscal Year" means the period of twelve (12) consecutive months beginning January 1 of each year, or such other period of twelve consecutive months established by the Borrower as its fiscal year. "Facility" means, collectively, the Property, the building, fixtures, equipment, machinery and other facilities located or to be located on the Property, including the Project Facilities acquired, constructed, installed, purchased or refinanced, in whole or in part, with the proceeds of the Bonds as part of the Project. "Fixed Rate" means the interest rate in effect on any Bonds from and after the Conversion Date, as said rate is determined in accordance with Section 2.02(D) of this Indenture. "Fixed Rate Bonds" means Bonds that bear interest at the Fixed Rate. "Fixed Rate Period" means the period during which Bonds bear interest at the Fixed Rate. "Generally Accepted Accounting Principles" means those accounting principles applicable in the preparation of financial statements of business corporations or governmental authorities, as appropriate, as promulgated by the Financial Accounting Standards Board or such other body recognized as authoritative by the American Institute of Certified Public Accountants or any successor thereto. "Government Obligations" means direct obligations of (including obligations issued or held in book entry form), or obligations the principal of and interest on which are unconditionally guaranteed as to full and timely payment by, the United States of America. "Indenture" means this Indenture, as originally executed or as it may be supplemented, modified or amended from time to time by any Supplemental Indenture or Supplemental Indentures. "Interest Payment Date" means, with respect to the Bonds, (a) prior to the Conversion Date, the first Business Day of every calendar month, commencing November 1, 2001, and (b) from and after the Conversion Date, the first day of the sixth month following the Conversion Date and each anniversary thereof and the first date of the twelfth month following the Conversion Date and each anniversary thereof. "Investment Securities" means any of the following which at the time are legal investments under the laws of the Commonwealth for the money held under this Indenture then proposed to be invested: (i) Government Obligations; (ii) bonds, debentures, notes or other evidences of indebtedness issued by any agency or other governmental or other government-sponsored agencies which may be hereafter created by the United States of America, provided, however, that the full and timely payment of the securities issued by each such agency or government sponsored agency is secured by the full faith and credit of the United States of America; (iii) certificates of deposit of, or time deposits in the Trustee, and in any bank or savings and loan association having securities rated at the time of purchase or acquisition in one of the three highest rating categories of Moody's or S&P ; (iv) certificates which evidence ownership of the right to the payment of the principal of and interest on obligations described in clauses (i) or (ii) of this definition, provided that such obligations are held in the custody of a bank or trust company acceptable to the Trustee in a special account separate from the general assets of such custodian; (v) state and municipal obligations which are rated at the time of purchase in one of the two highest rating categories of Moody's or S&P and the interest on which is not includable in gross income for federal income tax purposes; (vi) guaranteed investment contracts or other similar financial instruments with a commercial bank, insurance company or other financial institution whose long term debt obligations are rated at the time of purchase in one of the three highest rating categories by Moody's; (vii) any investment approved in writing by the Bank and S&P ; (viii) securities of the type described in clauses (i) or (ii) of this definition purchased under or otherwise subject to an agreement by a registered broker/dealer subject to the Securities Investors Protection Corporation jurisdiction or a financial institution insured by the Federal Deposit Insurance Corporation to purchase the same from the Trustee on a future date or dates at a determinable price, if such broker/dealer or financial institution has an uninsured, unsecured and unguaranteed obligation rating at the time of purchase of "P1" or "A-3" or better by Moody's and "A-1" or "A-" or better by S&P, provided: (1) a master repurchase agreement or specific written repurchase agreement governs the transaction; (2) the obligations are held by the Trustee (or an independent third party acting solely as agent for the Trustee, provided that such third party agent (A) is a Federal Reserve Bank or a bank that is a member of the Federal Deposit Insurance Corporation and has combined capital, surplus, and undivided profits of not less than $50,000,000 and (b) has provided written confirmation to the Trustee that it holds such securities solely as agent for the Trustee and free of any lien or claims of any third party) free and clear of any lien or claims by a third party; (3) a perfected security interest under the Uniform Commercial Code or the book-entry procedures prescribed at 31 CFR 306.1 et seq. or 31 CFR 350.0 et seq. is created in such securities for the benefit of the Trustee (or for the benefit of such independent third party as agent for the Trustee); and (4) the applicable repurchase agreement provides that the underlying securities shall be valued at least monthly and that the fair market value of the underlying securities in relation to the amount of the repurchase obligation, including principal and interest, shall at all times of valuation be equal to at least 103%, failing which the Trustee shall be authorized to sell the underlying securities; (ix) money market funds investing in Investment Securities of the kind specified in clauses (i), (ii) or (v) of this definition; (x) commercial paper that is rated at the time of purchase in the single highest classification, "A-1+" by S&P and "P-1" by Moody's, and that matures not more that 270 days after the date of purchase; and (xi) any other investment, security or obligation constituting a permitted investment under applicable law for the particular funds involved, provided that such investment, security or obligation is rated in one of the three highest rating categories of Moody's or S&P or the Bank consents to the investment of such funds in such security or obligation. "Issuance Costs" means costs of issuing or carrying Bonds, including underwriter's spread or placement agent's placement fee; fees of bond counsel, underwriter's or placement agent's counsel, Issuer's counsel, Borrower's counsel and other specialized counsel incurred in connection with the issuance of Bonds or the borrowing of the proceeds thereof by the Borrower; financial advisor fees incurred in connection with the borrowing; rating agency fees, trustee fees, paying agent and certifying and authenticating agent fees related to issuance of Bonds; accountant fees related to issuance of Bonds; printing costs (for Bonds and of preliminary and final offering or disclosure materials); costs incurred in connection with the required public approval process (including costs for advertising public hearings and meetings and conducting the same); and costs of engineering and feasibility studies necessary to the issuance of Bonds (as opposed to such studies related solely to completion of the Project, and not to the financing), but not bond insurance premiums or credit enhancement fees (including qualified fees of Bank counsel) to the extent that the same are qualified to be treated as interest expense under federal tax regulations relating to the Bonds. "Issuer" means the East Hempfield Township Industrial Development Authority, an industrial and commercial development authority organized and existing under the Act, and its successors and assigns. "Issuer Board" means the governing body of the Issuer at any given time. "Issuer Officer" means the Chairman, Vice Chairman, Secretary or Assistant Secretary and, when used with reference to an act or document, also means any other Person authorized by resolution of the Issuer to perform such act or sign such document. "Leases" means any and all leases and subleases which are in effect on the Closing Date and which may be hereafter executed in connection with, or for, the use and occupancy of the Facility (or any part thereof), together with any and all supplements thereto . "Letter of Credit" means the irrevocable direct pay letter of credit issued by the Bank relating to the Bonds pursuant to the provisions of the Letter of Credit Agreement, or, in the event of delivery of a Substitute Letter of Credit, such applicable Substitute Letter of Credit. "Letter of Credit Agreement" means the Letter of Credit Agreement, dated for convenience as of October 19, 2001, between the Borrower and Allfirst Bank, as issuer of the initial Letter of Credit, as the same may be amended or supplemented, and any other, similar agreement subsequently entered into by the Borrower and the Bank in connection with the issuance of any Substitute Letter of Credit, and all amendments and supplements thereto, whichever shall at the time be in effect. "Letter of Credit Termination Date" means the later of (i) the date upon which the Letter of Credit shall expire or terminate pursuant to its terms, or (ii) the date to which the expiration or termination of such Letter of Credit may be extended, from time to time, either by extension or renewal of the existing Letter of Credit or the issuance and delivery of a Substitute Letter of Credit to the Trustee. "Letter of Credit" shall mean all letters of credit at any time issued with respect to Bonds and outstanding pursuant to the Letter of Credit Agreement. "Loan Agreement" means the Loan Agreement, dated as of October 19, 2001, between the Issuer and the Borrower, together with all supplements thereto made and delivered in accordance with the terms and provisions thereof and of this Indenture. "Maturity Date" means October 1, 2021. "Maximum Rate" means the lesser of twelve percent (12%) per annum or the highest rate permitted by applicable law. "Mandatory Tender Date" means a date upon which Bonds are subject to mandatory tender in accordance with terms of Section 5.03 hereof. "Mandatory Tender Notice" means the notice required to be given in connection with a mandatory tender of Bonds in accordance with provisions of Section 5.03 hereof. "Moody's" means Moody's Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Issuer with the approval of the Borrower. "Net Proceeds", when used with respect to any insurance proceeds or any condemnation award (including any amount received as consideration for a deed in lieu of condemnation), means the amount remaining after deducting all expenses (including attorneys' fees and disbursements) incurred in the collection of such proceeds or award from the gross amount of such insurance proceeds or condemnation award. "Obligation Termination Date" means the date on which the Bank delivers to the Trustee a certificate to the effect that all obligations owing to the Bank under the Letter of Credit Agreement have been paid in full. "Officers' Certificate" means, with respect to the Issuer, a certificate duly executed by its Chairman, Vice Chairman, Secretary, Assistant Secretary, Treasurer, Assistant Treasurer or Authorized Officer under its corporate seal and, with respect to the Borrower, a certificate duly executed by an Authorized Borrower Representative of the Borrower, whether or not under its corporate seal. "Opinion of Counsel" means a written opinion of Counsel selected by the Issuer, the Borrower or the Trustee, as the context shall indicate. If and to the extent required by the provisions of Section 1.02 of this Indenture, each Opinion of Counsel shall include in substance the statements provided for in such Section 1.02. "Optional Tender Date" means a date upon which Bonds are subject to tender for purchase at the option of the Holders thereof in accordance with provisions of Section 5.04 hereof. "Outstanding" means, when used as of any particular time with reference to Bonds and subject to the provisions of Section 12.10, all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under this Indenture, except (1) Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds with respect to which all liability of the Issuer shall have been discharged in accordance with Section 11.02, including Bonds (or portions of Bonds) referred to in Section 12.10; and (3) Bonds for the transfer or exchange of which, or in lieu of or in substitution for which, other Bonds shall have been authenticated and delivered by the Trustee pursuant to this Indenture. "Owner," "Holder" or "Bondholder" means, with respect to any Bond, the Person in whose name ownership of such Bond is registered on the Bond Register. "Person" means an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. "Placement Agent" means Allfirst Bank acting through its Capital Markets Division. "Pledge Agreement" means (i) the Pledge and Security Agreement, dated October 19, 2001, by and between the Bank and the Borrower, as the same may be amended or supplemented, or (ii) any similar agreement subsequently entered into by the Borrower and the issuer of a Substitute Letter of Credit, and all amendments and supplements thereto, whichever shall at the time be in effect. "Pledged Bonds" means any Bonds which shall, at the time, be held in pledge for the benefit of the Bank by the Pledged Bonds Custodian pursuant to the Pledge Agreement. "Pledged Bonds Custodian" means the Tender Agent, acting as custodian for the Pledged Bonds under the terms and conditions of the Pledge Agreement, or such other bank or bank and trust company at the time serving as successor to the Tender Agent in such capacity. "Principal Corporate Trust Office" means the corporate trust office of the Trustee located at 213 Market Street, Harrisburg, Pennsylvania, 17101 Attention: Corporate Trust Department, or such other office of the Trustee as the Trustee may from time to time designate by written notice to the Owners of Bonds, the Tender Agent, the Bank, the Remarketing Agent and the Issuer as the place where Bonds shall be presented or surrendered to the Trustee for payment, exchange or transfer. "Project" means the acquisition, construction and installation of the Project Facilities; and the payment of related costs and expenses, including a portion of the costs of issuance of the Bonds, together with any additional undertakings to be financed in whole or in part with the proceeds of the Bonds under the terms and conditions set forth in Section 5.03 of the Loan Agreement or any amendment or supplement to the Loan Agreement duly executed in accordance with the terms hereof and of the Loan Agreement. "Project Facilities" means the acquisition of approximately one-half (1/2) acre of land located at 3061 Industry Drive, Lancaster, Pennsylvania and the construction of a 15,000 foot addition to the Building and fixtures, equipment and other facilities and the purchase of new Equipment to be installed therein by or on behalf of the Borrower for use by (i) the Borrower in its microwave components and systems manufacturing operations, and (ii) by any of the Affiliated Companies in its manufacturing operations, to be used as a Manufacturing Facility, acquired, constructed, installed, purchased or refinanced in part with the proceeds of the Bonds, as part of the Project. "Project Fund" means the fund established by that name pursuant to Article VI of this Indenture. "Property" means land located at 3061 Industry Drive, in the Township of East Hempfield, Lancaster County, Pennsylvania, and building improvements thereon suitable for the manufacture of products by the Borrower, to be improved further by the Project Facilities, as more fully described in the Loan Agreement, the Letter of Credit Agreement, and the Collateral Documents. "Purchase Date" means (a) with respect to the mandatory tender of Bonds for purchase in connection with an exercise of a Conversion Option, the date established as the Conversion Date in accordance with the provisions of Section 5.01, (b) with respect to any mandatory tender for purchase pursuant to Section 5.03 in connection with the delivery of a Substitute Letter of Credit, the Substitution Date, and (c) with respect to an optional tender for purchase of a Variable Rate Bond by the Owner thereof, the Business Day designated by such Owner as the date for purchase of such Bond (or the designated portion thereof) in the Demand Purchase Notice delivered in accordance with Section 5.04. "Purchase Price" means an amount equal to 100% of the principal amount of any Bond tendered or deemed tendered for purchase pursuant to Sections 5.01, 5.03 or 5.04 of this Indenture, plus accrued and unpaid interest thereon to the applicable Purchase Date. "Rating Agency" means Moody's, when the Bonds are rated by Moody's, and S&P, when the Bonds are rated by S&P. "Rebate Consultant" shall mean a firm of investment bankers, a financial advisory firm, a law firm, a certified public accountant, or a firm of certified public accountants which is not unsatisfactory to the Borrower, the Issuer or the Trustee and which is experienced in the calculation of amounts required to be rebated to the United States under Section 148(f) of the Code. "Rebate Fund" means the fund by that name established pursuant to the provisions of Section 6.13 of this Indenture. "Record Date" means, as to each series of Bonds, with respect to any Interest Payment Date on or prior to the Conversion Date for such series, the Business Day next preceding such Interest Payment Date and, with respect to any Interest Payment Date after a Conversion Date, the fifteenth (15th) calendar day next preceding such Interest Payment Date. "Remarketing Agent" means, initially, Allfirst Bank, in its capacity as remarketing agent for the Bonds under the terms of the Indenture, and from time to time such other Person or Persons, singly or collectively, as may have been duly appointed by the Borrower and approved in writing by the Issuer to serve as remarketing agent or successor remarketing agent for the Bonds and at the time serving in such capacity. "Remarketing Agreement" means the Bond Placement and Remarketing Agreement, dated as of October 19, 2001, by and between the Allfirst Bank, with respect to the remarketing of Bonds tendered for purchase in accordance with this Indenture, as the same may be amended or supplemented, and any other, similar agreement subsequently entered into between the Borrower and the Remarketing Agent, and all amendments and supplements thereto, whichever shall at the time be in effect. "Revenues" means all amounts received by the Issuer, or by the Trustee for the account of the Issuer, pursuant or with respect to the Loan Agreement, and all amounts received by the Issuer or by the Trustee with respect to the Letter of Credit, including without limiting the generality of the foregoing, payments under the Loan Agreement (including both timely and delinquent payments and late charges, irrespective of the source from which paid), prepayments, insurance proceeds, condemnation proceeds, and all interest, profits or other income derived from the investment of amounts in any fund or account established pursuant to this Indenture (exclusive of the Rebate Fund). "Series Issue Date" means the date on which the Bonds are issued and delivered to the original purchaser(s) in exchange for the purchase price thereof. "S&P" means Standard & Poor's Corporation, a division of The McGraw-Hill Companies, its successors and assigns, or, if such organization shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, such securities rating agency as shall be designated by the Issuer with the approval of the Borrower. "Special Interest Payment Date" means, with respect to the payment of any overdue interest on Bonds, the date established by the Trustee for the payment of such overdue interest. "Special Record Date" means the record date for the payment of overdue interest on Bonds established by notice mailed by the Trustee on behalf of the Issuer not less than fifteen (15) days preceding such Special Record Date and not less than twenty (20) days, but not more than thirty (30) days, prior to the Special Interest Payment Date. Such notice shall be mailed to the Persons in whose name the Bonds are registered at the close of business of the Trustee on the fifth (5th) day preceding the date of mailing. "Substitute Bank" means a commercial bank, bank and trust company, national bank, savings and loan association or savings bank organized and doing business in the United States or a branch or agency of a foreign commercial bank located and doing business in the United States and subject to regulation by state or federal banking regulatory authorities. "Substitute Letter of Credit" means a letter of credit delivered to the Trustee in accordance with Section 4.07 of the Loan Agreement in substitution for any Letter of Credit then outstanding with respect to any series of Bonds that (i) is issued by the Bank or a Substitute Bank the long-term unsecured debt of which shall then have been assigned a credit rating by Moody's of not lower than the lower of the then current rating on the Bonds and "Aa3," (ii) replaces any existing Letter of Credit, (iii) is dated no later than the date of the expiration or replacement of the Letter of Credit for which the same is to be substituted, (iv) expires on a date which is at least ten (10) days after an Interest Payment Date for the Bonds, (v) has a term of at least one year; and (vi) is issued with substantially identical terms and conditions as the then existing Letter of Credit, except that the stated amount of the Substitute Letter of Credit shall equal the sum of (A) the aggregate principal amount of Bonds of the series to which it relates at the time Outstanding, plus (B) an amount equal to (i) prior to the Conversion Date for such series, interest computed at the Maximum Rate on all Bonds of that series at the time Outstanding for the minimum number of days required by Moody's to maintain the then-current rating on such Bonds; and (ii) from and after the Conversion Date, interest for the minimum number of days required by the Rating Agency to maintain the then-current rating on such Bonds (or if the then current rating is a short-term rating, the comparable long-term rating) computed at the Fixed Rate on all Bonds at the time Outstanding. "Substitution Date" shall mean the date on which the Borrower delivers a Substitute Letter of Credit to the Trustee in accordance with the terms and conditions of Section 4.07 of the Loan Agreement. "Supplemental Indenture" means any indenture hereafter duly authorized and entered into between the Issuer and the Trustee supplementing, modifying or amending this Indenture, but only if and to the extent that such Supplemental Indenture is specifically authorized hereunder. "Surety" or "Sureties" means, collectively, HMS Investments, Inc., Herley Wireless Technologies, Inc., Terrasat, Inc., General Microwave Corporation, General Microwave Israel, Ltd., and General Microwave Israel Corporation, each a business corporation affiliated with the Borrower. "Tax Compliance Agreement" means the Tax Compliance Agreement and Certificate, dated as of October 19, 2001, by and among the Issuer, the Borrower, the Sureties and the Trustee, with respect to the Bonds. "Tender Agent" means Allfirst Bank and its successors and any corporation resulting from or surviving any consolidation or merger to which it or its successors may be a party and any successor Tender Agent at the time serving as successor Tender Agent hereunder and under the Tender Agent Agreement. "Tender Agent Agreement" means the Tender Agent Agreement, dated for convenience as of October 19, 2001, among the Borrower and the Trustee, as tender agent for the Bonds, as the same may be amended or supplemented, and any other, similar agreement subsequently entered into between the Borrower and the Tender Agent, and all amendments and supplements thereto which shall at the time be in effect. "Tender Date" means a Mandatory Tender Date or an Optional Tender Date, as applicable. "Trust Estate" means all property rights and interests transferred, assigned, or otherwise pledged to the Trustee and the Bank pursuant to the Granting Clauses of this Indenture, excluding, however, the money on deposit from time to time in the Rebate Fund pursuant to Section 6.13 of this Indenture. "Trustee" means Allfirst Bank, a bank duly organized and existing under the laws of the State of Maryland and authorized to accept and execute trusts of the character herein set out, with a corporate trust office located in the City of Harrisburg, Dauphin County, Pennsylvania, as trustee, and its successors in the trust hereunder. "Unassigned Issuer's Rights" means the Issuer's rights to receive payment of its Administrative Expenses and Additional Payments (to the extent payable directly to the Issuer) and the Issuer's rights to indemnification. "Undelivered Bonds" means any Bonds subject to purchase pursuant to Sections 5.01, 5.03 or 5.04 of this Indenture which the Owners have failed to deliver for purchase on the applicable Purchase Date in accordance with the terms and provisions of such Sections. "United States" means the United States of America. "Unremarketed Bonds" means Bonds which have been purchased pursuant to Sections 5.01, 5.03 or 5.04 of this Indenture but which have not been remarketed. "Variable Rate" means a variable rate of interest equal to the minimum interest rate necessary, in the sole judgment of the Remarketing Agent, to sell the Variable Rate Bonds on the applicable Determination Date at a price equal to the principal amount thereof, exclusive of any accrued interest, as such rate of interest is determined for each Weekly Period, beginning with the Weekly Period commencing on the Series Issue Date and ending with the Weekly Period ending on the day preceding the Conversion Date for the Bonds, in accordance with Section 2.02(C) of this Indenture. "Variable Rate Bonds" means Bonds which bear interest at the Variable Rate. "Weekly Period" means the seven-day period commencing on Friday and ending on, and including, Thursday of the following calendar week, except that the first Weekly Period with respect to each series of the Bonds shall commence on the Series Issue Date and end on and include the following Thursday, and (ii) the last Weekly Period preceding a Conversion shall end on, and include, the last day prior to the Conversion Date. SECTION 1.02 Content of Certificates and Opinions. The Trustee may, but shall not be obligated to, require that every certificate or opinion provided for in this Indenture with respect to compliance with any provision of this Indenture shall include (1) a statement to the effect that the Person making or giving such certificate or opinion has read such provision and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the certificate or opinion is based; (3) a statement to the effect that such Person has made or caused to be made such examination or investigation as is necessary, in such Person's opinion, to enable such Person to express an informed opinion with respect to the subject matter referred to in the instrument to which such Person's signature is affixed; (4) a statement of the assumptions upon which such certificate or opinion is based, and that such assumptions are reasonable; and (5) a statement as to whether, in the opinion of such Person, such provision has been complied with. Any such certificate or opinion made or given by an officer of the Issuer or the Borrower may be based, insofar as it relates to legal or accounting matters, upon a certificate or opinion of or representation by Counsel or an Accountant, unless such officer knows, or in the exercise of reasonable care should have known, that the certificate, opinion or representation with respect to the matters upon which such certificate or statement may be based, as aforesaid, is erroneous. Any such certificate or opinion made or given by Counsel or an Accountant may be based, insofar as it relates to factual matters (with respect to which information is in the possession of the Issuer or the Borrower as the case may be) upon a certificate or opinion of or representation by an officer of the Issuer or the Borrower, unless such Counsel or Accountant knows, or in the exercise of reasonable care should have known, that the certificate or opinion or representation with respect to the matters upon which such Person's certificate or opinion or representation may be based, as aforesaid, is erroneous. The same officer of the Issuer or the Borrower, or the same Counsel or Accountant, as the case may be, need not certify to all of the matters required to be certified under any provision of this Indenture, but different officers, Counsel or Accountants may certify to different matters, respectively. SECTION 1.03 Time of Day. In this Indenture and in the Bonds, all references to any time of the day shall refer to Eastern Standard Time or Eastern Daylight Saving Time, as in effect in the City of Baltimore, Maryland, on such day, unless otherwise specified. SECTION 1.04 Interpretation. (a) Unless the context otherwise indicates, words expressed in the singular shall include the plural and vice versa and the use of the neuter, masculine, or feminine gender is for convenience only and shall be deemed to mean and include the neuter, masculine or feminine gender, as appropriate. (b) Headings of Articles and Sections and the table of contents of this Indenture are solely for convenience of reference, do not constitute a part of this Indenture and shall not affect the meaning, construction or effect of this Indenture. (c) All references herein to "Articles," "Sections" and other subdivisions are to the corresponding Articles, Sections or subdivisions of this Indenture; the words "herein," "hereof," "hereby," "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or subdivision of this Indenture. (d) Whenever in this Indenture it is required that notice be provided to the Bank or that consent of the Bank be obtained, such provisions shall be effective only when (i) the Letter of Credit is in effect or (ii) the Bank, in its capacity as provider of the Letter of Credit, is the Owner of any Bonds. ARTICLE II THE BONDS SECTION 2.01 Authorization of Bonds; Bonds Equally and Ratably Secured. There is authorized for issuance under this Indenture, for the purpose of financing a portion of the costs of the Project, a series of bonds, in the maximum aggregate principal amount of $3,000,000, comprised of the Bonds. No additional bonds may be issued under this Indenture. Subject to the terms of this Indenture with respect to any sinking, purchase, redemption or analogous fund or account, and to the specific terms of the Letter of Credit, all Bonds issued and Outstanding shall in all respects be equally and ratably secured by this Indenture and the Trust Estate, without preference, priority or distinction on account of the date or dates thereof, the date or dates of registration or authentication thereof, the actual time or times of issuance thereof, or the maturity thereof, so that all Bonds at any time issued and Outstanding hereunder shall have the same right, lien and preference under and by virtue of this Indenture and shall be equally and ratably secured hereby. SECTION 2.02 Terms of Bonds; Interest on the Bonds. (A) Denominations; Numbers; Dates; Certain Terms. The Bonds shall be issued only in fully registered form. Prior to a Conversion Date, Bonds in a series may be issued only in denominations of $100,000 principal amount or any integral multiple of $5,000 principal amount in excess of $100,000. From and after a Conversion Date, the Bonds of such series may be issued in denominations of $5,000 principal amount or any integral multiple of $5,000. Unless the Issuer shall otherwise direct, the Bonds shall be lettered "VR," shall be numbered consecutively from 1 upward, without regard to denominations or maturity dates, and shall set forth on the face thereof, in the place provided for inserting the interest rate, the words "Weekly Variable Rate" or words to like effect, and the Fixed Rate Bonds shall be lettered "FR," shall be numbered consecutively from 1 upward, without regard to denominations or maturity dates, and shall set forth on the face thereof, in the place provided for inserting the interest rate, the applicable Fixed Rate determined in accordance with the provisions of this Indenture. The Bonds shall be dated as of the Series Issue Date, shall be stated to mature on the Maturity Date and shall be subject to redemption prior to maturity upon the terms and conditions set forth in the Bonds and in this Indenture. The Variable Rate Bonds shall also be subject to tender for purchase upon the terms and conditions set forth in the Variable Rate Bonds and in this Indenture. (B) Payment of Interest. (i) Interest on each of the Bonds shall be payable from the Interest Payment Date next preceding the date of registration and authentication of such Bond, unless: (a) such Bond is registered and authenticated as of an Interest Payment Date, in which event such Bond shall bear interest from such Interest Payment Date; or (b) such Bond is registered and authenticated after a Record Date (hereinafter defined) and before the next succeeding Interest Payment Date, in which event such Bond shall bear interest from such Interest Payment Date; or (c) such Bond is registered and authenticated on or prior to the Record Date next preceding the first Interest Payment Date following the Series Issue Date, in which event such Bond shall bear interest from the Series Issue Date, if such Bond is a Variable Rate Bond, or from the Conversion Date, if such Bond is a Fixed Rate Bond; or (d) as shown by the records of the Trustee (hereinafter defined), interest on such Bond shall be in default, in which event such Bond shall bear interest from the date to which interest was last paid on such Bond. (ii) Interest on each of the Bonds shall be payable on each Interest Payment Date to the Person who is the Owner of such Bond as of the close of business of the Bond Registrar on the Record Date preceding the applicable Interest Payment Date, by check mailed to the address of such Owner as shown on the Bond Register; provided, however, that interest shall be paid on such Bond by wire transfer to an account of the Owner in the United States, if such Owner is the Bank, Depository Trust Company or its nominee or a successor securities depository or if such Owner is the registered owner of Bonds in an aggregate principal amount of $1,000,000 or more and shall have made a written request for wire payment of interest to the Trustee at least fifteen (15) calendar days prior to the Interest Payment Date. Such a request may state that it will remain in effect for subsequent interest payments until amended or revoked by written notice to the Trustee; provided, however, that no such request shall remain valid following a transfer of ownership of the Bond or Bonds to which it relates. Any interest that is not timely paid or duly provided for shall cease to be payable to the Person in whose name such Bond is registered as of the regular Record Date for the payment of such interest, and shall be payable, on the Special Interest Payment Date established for payment of such interest, to the Person in whose name such Bond (or any Bond issued in exchange therefor or upon transfer thereof) is registered at the close of business of the Bond Registrar on the Special Record Date. (C) Variable Rate. (i) All Bonds shall bear interest initially at the Variable Rate, subject to conversion on a Conversion Date to a Fixed Rate in accordance with the terms of Section 5.01. The Variable Rate shall be determined for each Weekly Period as follows: No later than 9:30 a.m. on each Determination Date, the Remarketing Agent shall determine the Variable Rate for the Weekly Period commencing on such Determination Date as the minimum interest rate necessary, in its sole judgment, to sell the Bonds on the Determination Date at a price equal to the principal amount thereof, exclusive of any accrued interest. The Variable Rate shall be determined by the Remarketing Agent weekly and shall be effective on each Friday for the Weekly Period beginning on such day. Anything herein to the contrary notwithstanding, the Variable Rate shall in no event exceed the Maximum Rate. (ii) The Remarketing Agent shall advise the Trustee of the Variable Rate by telephone (confirmed by telecopy to the Trustee) at or before 10:00 a.m. on each Determination Date. Upon request of any Bondholder, the Remarketing Agent shall also notify such Bondholder of the Variable Rate so determined. (iii) If for any reason the interest rate on the Bonds for any Weekly Period is not determined by the Remarketing Agent in accordance with (C)(i) above, or a court holds that the Variable Rate established in accordance with (C)(i) above is invalid or unenforceable, the Variable Rate for the Bonds shall be (a) for the first Weekly Period in which the Variable Rate is not so determined by the Remarketing Agent or is so held invalid or unenforceable, a rate per annum equal to the Variable Rate that was applicable to the Bonds for the immediately preceding Weekly Period and (b) for each Weekly Period thereafter, a rate per annum equal to 85% of the interest rate per annum for 30-day commercial paper having a rating of A-2/P-2 as reported in The Wall Street Journal on each Determination Date. (iv) The determination of the Variable Rate shall be conclusive and binding upon the Owners of the Bonds, the Issuer, the Trustee, the Remarketing Agent, the Borrower and the Bank, and no Owner of Bonds shall be given notice thereof, unless such Owner shall file with the Trustee a written request to receive notice of the Variable Rate so determined from time to time. (D) Fixed Rate. Bonds shall bear interest at the Fixed Rate from and after the Conversion Date until the applicable maturity date of such Bonds. The Fixed Rate shall be the fixed annual interest rate on such Bonds established by the Remarketing Agent as the minimum rate of interest at which the Remarketing Agent has received commitments on or prior to the fifth (5th) Business Day preceding the Conversion Date to purchase all the Outstanding Bonds of such series on the Conversion Date at a price of par, without discount or premium (or, if the Borrower does not elect to rescind its election to exercise the Conversion Option after receiving notice from the Remarketing Agent that it has not obtained firm commitments to purchase all of the Bonds of such series, as provided in Section 5.01, the fixed annual rate of interest at which the Remarketing Agent has obtained firm commitments to purchase such Bonds at par). (E) Computation of Interest. All computations of interest at a Variable Rate shall be based on the actual number of days elapsed and a year of 365 or 366 days, as appropriate; and all computations of interest at the Fixed Rate shall be based on a 360-day year of twelve 30-day months. (F) Place of Payment of Principal. The principal of the Bonds, when due for payment upon maturity, upon any call for redemption, or upon a declaration of acceleration following an Event of Default, shall be payable upon surrender of the Bonds to the Trustee at its Principal Corporate Trust Office. (G) Place of Payment of Purchase Price. The Purchase Price of Bonds, when due upon tender for purchase in accordance with the terms thereof and of this Indenture, shall be payable upon tender of the applicable Bonds to the Tender Agent at its Delivery Office. (H) Payment in Lawful Money. All payments of principal, interest, redemption price and purchase price with respect to the Bonds shall be payable in lawful money of the United States of America. SECTION 2.03 Execution of Bonds. The Bonds shall be executed in the name and on behalf of the Issuer with the manual or facsimile signature of its Chairman or Vice Chairman and attested by the manual or facsimile signature of its Secretary or Assistant Secretary, and the seal of the Issuer shall be impressed or imprinted on the Bonds by facsimile or otherwise. If any officer of the Issuer who shall have signed or attested any of the Bonds shall cease to be such officer before the Bonds so signed or attested shall have been authenticated or delivered by the Trustee or issued by the Issuer, such Bonds may nevertheless be authenticated, delivered and issued and, upon such authentication, delivery and issue, shall be as binding upon the Issuer as though such officer had continued to be such officer. Also, any Bond may be signed and attested on behalf of the Issuer by any such individual who shall be the proper officer of the Issuer on the actual date of execution or attestation of such Bond, although such individual was not or is not such officer of the Issuer as of the date of the Bond. SECTION 2.04 Authentication. (a) The Issuer hereby appoints the Trustee and the Tender Agent as co-authenticating agents for the Bonds. (b) No Bond shall be valid or obligatory for any purpose or entitled to any security or benefit under this Indenture unless and until a certificate of authentication on such Bond, substantially in the form set forth in Exhibit A or B to this Indenture, as appropriate, shall have been duly executed by the Trustee or by the Tender Agent, acting as authenticating agent, and such executed certificate of authentication upon any such Bond shall be conclusive evidence that such Bond has been authenticated and delivered under this Indenture. The certificate of authentication on any Bond shall be deemed to have been executed by the Trustee or the Tender Agent if signed by an authorized signatory of the Trustee or the Tender Agent, as the case may be, but it shall not be necessary that the same signatory execute the certificate of authentication on all of the Bonds. (c) If any Bond is deemed tendered to the Tender Agent as provided in Sections 5.01, 5.03 or 5.04 of this Indenture but is not physically delivered to the Tender Agent, the Issuer shall execute and the Trustee or the Tender Agent shall authenticate a new Bond of like tenor as that deemed tendered. SECTION 2.05 Form of Bonds. The Variable Rate Bonds and the certificate of authentication to be endorsed thereon shall be substantially in the forms set forth in Exhibit A attached hereto, with appropriate variations, omissions and insertions as permitted or required by this Indenture and applicable law. The Fixed Rate Bonds and the certificate of authentication to be endorsed thereon shall be in substantially the forms set forth in Exhibit B attached hereto, with appropriate variations, omissions and insertions as permitted or required by this Indenture and applicable law. SECTION 2.06 Ownership of Bonds; Transfer of Ownership. The Issuer, the Trustee and the Tender Agent shall deem and treat the Person in whose name ownership of a Bond is registered upon the Bond Register as the owner of such Bond for all purposes and shall not be bound by any notice to the contrary. A transfer of ownership of a Bond shall be recorded upon the Bond Register upon surrender of such Bond for transfer to the Trustee at its Principal Corporate Trust Office, accompanied by a written instrument of transfer, in form and with guaranty of signature satisfactory to the Trustee or the Tender Agent, as appropriate, duly executed by the Owner of such Bond or such Owner's duly authorized attorney or legal representative. Whenever any Bond shall be surrendered for transfer, the Issuer shall execute and the Bond Registrar shall authenticate and deliver a new Bond or Bonds of the same tenor for a like aggregate principal amount. The Bond Registrar shall require the Person requesting such transfer to pay any tax or other governmental charge required to be paid with respect to such transfer, and may in addition require the payment of a reasonable sum to cover expenses incurred by the Issuer or the Bond Registrar in connection with such transfer. During the Fixed Rate Period for a series of Bonds, the Bond Registrar shall not be required to transfer ownership of any Bond of that series during the period beginning fifteen (15) calendar days before the mailing of notice of redemption calling such Bond or any portion of such Bond for redemption and ending on the redemption date. SECTION 2.07 Exchange of Bonds. Bonds may be exchanged at the Principal Corporate Trust Office of the Trustee for a like aggregate principal amount of Bonds of the same tenor of other authorized denominations. The Trustee shall require the Bondholder requesting such exchange to pay any tax or other governmental charge required to be paid with respect to such exchange, and may in addition require the payment of a reasonable sum to cover expenses incurred by the Issuer or the Trustee in connection with such exchange. During the Fixed Rate Period for a series of Bonds, the Bond Registrar shall not be required to transfer ownership of any Bond of that series during the period beginning fifteen (15) calendar days before the mailing of notice of redemption calling such Bond or any portion of such Bond for redemption and ending on the redemption date. SECTION 2.08 Bond Registrar and Co-Bond Registrar. The Trustee is hereby appointed the Bond Registrar of the Issuer and the Tender Agent is hereby appointed the Co-Bond Registrar of the Issuer. The Trustee or the Tender Agent, as the case may be, will keep or cause to be kept sufficient books for the registration of ownership and transfer of ownership of the Bonds. The Bond Registrar and any Co-Bond Registrar may establish reasonable regulations for the registration of transfer of the ownership of Bonds. SECTION 2.09 Temporary Bonds. The Bonds may be issued in temporary form exchangeable for definitive Bonds when ready for delivery. Any temporary Bond may be printed, lithographed or typewritten, shall be of such denomination as may be determined by the Issuer, shall be in fully registered form without coupons and may contain such reference to any of the provisions of this Indenture as may be appropriate. Every temporary Bond shall be executed by the Issuer and be authenticated by the Trustee or the Tender Agent, as the case may be, upon the same conditions and in substantially the same manner as the definitive Bonds. If the Issuer issues temporary Bonds it will execute and deliver definitive Bonds as promptly thereafter as practicable, and thereupon the temporary Bonds may be surrendered for cancellation, in exchange therefor at the Principal Corporate Trust Office of the Trustee, and the Trustee shall authenticate and deliver, in exchange for such temporary Bonds, an equal aggregate principal amount of definitive Bonds of like tenor in authorized denominations. Until so exchanged, the temporary Bonds shall be entitled to the same benefits under this Indenture as definitive Bonds authenticated and delivered hereunder. SECTION 2.10 Bond Mutilated, Lost, Destroyed or Stolen. If any Bond shall become mutilated, the Issuer, at the expense of the Holder of said Bond, shall execute and the Trustee shall thereupon authenticate and deliver, a new Bond of like tenor in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. Every mutilated Bond so surrendered to the Trustee shall be canceled by it and delivered to, or upon the order of, the Issuer. If any Bond shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Issuer and the Trustee and, if such evidence be satisfactory to both and indemnity satisfactory to them both shall be given, the Issuer, at the expense of the Holder, shall execute, and the Trustee shall thereupon authenticate and deliver, a new Bond of like tenor in lieu of and in substitution for the Bond so lost, destroyed or stolen (or if any such Bond shall have matured or shall be about to mature, instead of issuing a substitute Bond, the Trustee may pay the same without surrender thereof). The Issuer may require payment by the Holder of a sum not exceeding the actual cost of preparing each new Bond issued under this Section and of the expenses which may be incurred by the Issuer and the Trustee in connection therewith. Any Bond issued under the provisions of this Section in lieu of any Bond alleged to be lost, destroyed or stolen shall constitute an original, additional contractual obligation on the part of the Issuer whether or not the Bond so alleged to be lost, destroyed or stolen be at any time enforceable by anyone, and shall be entitled to the benefits of this Indenture with all other Bonds secured by this Indenture. SECTION 2.11 Cancellation and Destruction of Surrendered Bonds. All Bonds surrendered for payment or redemption and all Bonds purchased with money available for that purpose in any funds established under this Indenture, shall, at the time of such payment or redemption, be canceled and destroyed by the Trustee. The Trustee shall deliver to the Issuer certificates of destruction with respect to all Bonds destroyed in accordance with this Section. SECTION 2.12 Acts of Bondholders; Evidence of Ownership. Any action to be taken by Bondholders may be evidenced by one or more concurrent written instruments of similar tenor signed or executed by such Bondholders or their legal representatives duly appointed in writing. The fact and date of the execution by any Person of any such instrument may be proved by acknowledgment before a notary public or other officer empowered to take acknowledgements or by an affidavit of a witness to such execution. Any action by the Holder of any Bond shall bind all future Holders of the same Bond in respect of any thing done or suffered by the Issuer or the Trustee in pursuance thereof. SECTION 2.13 CUSIP Number. The Issuer, for the convenience of the Owners of Bonds, may cause CUSIP (Committee on Uniform Security Identification Procedures) numbers to be printed on the Bonds. No representation shall be made as to the correctness or accuracy of such numbers, either as printed on such Bonds or as contained in any notice of redemption, and the Issuer shall have no liability of any sort with respect thereto. No reliance with respect to any redemption notices with respect to any Bond may be placed on the CUSIP identification number printed in such notices or on the Bond. SECTION 2.14 Book-entry System for the Bonds. ------------------------------- (a) Notwithstanding the foregoing provisions of this Article, each series of the Bonds shall initially be issued in the form of one fully-registered bond for the aggregate principal amount of the Bonds of each series and maturity, which Bonds shall be registered in the name of Cede & Co., as nominee of DTC. Except as provided in paragraph (g) below, all of the Bonds shall be registered in the Bond Register in the name of Cede & Co., as nominee of DTC; provided that if DTC shall request that the Bonds be registered in the name of a different nominee, the Trustee shall exchange all or any portion of the Bonds for an equal aggregate principal amount of Bonds registered in the name of such nominee or nominees of DTC. No person other than DTC or its nominee shall be entitled to receive from the Issuer or the Trustee either a Bond or any other evidence of ownership of the Bonds, or any right to receive any payment in respect thereof, unless DTC or its nominee shall transfer record ownership of all or any portion of the Bonds on the Register in connection with discontinuing the book-entry system as provided in paragraph (g) below or otherwise. (b) So long as any Bonds are registered in the name of DTC or any nominee thereof, all payments of the principal or redemption price of or interest on such Bonds shall be made to DTC or its nominee in accordance with the Letter of Representation on the dates provided for such payments under this Indenture. Each such payment to DTC or its nominee shall be valid and effective to fully discharge all liability of the Issuer or the Trustee with respect to the principal or redemption price of or interest on the Bonds to the extent of the sum or sums so paid. In the event of the redemption of less than all of the Bonds outstanding of any maturity, the Trustee shall not require surrender by DTC or its nominee of the Bonds so redeemed, but DTC (or its nominee) may retain such Bonds and make an appropriate notation on the Bond certificate as to the amount of such partial redemption; provided that DTC shall deliver to the Trustee, upon request, a written confirmation of such partial redemption and thereafter the records maintained by the Trustee shall be conclusive as to the amount of the Bonds of such maturity which have been redeemed. (c) The Issuer and the Trustee may treat DTC (or its nominee) as the sole and exclusive owner of the Bonds registered in its name for the purposes of payment of the principal or redemption price of or interest on the Bonds, selecting the Bonds or portions thereof to be redeemed, giving any notice permitted or required to be given to Holders under this Indenture, registering the transfer of Bonds, obtaining any consent or other action to be taken by Holders and for all other purposes whatsoever; and neither the Issuer nor the Trustee shall be affected by any notice to the contrary. Neither the Issuer nor the Trustee shall have any responsibility or obligation to any participant in DTC, any person claiming a beneficial ownership interest in the Bonds under or through DTC or any such participant, or any other person which is not shown on the Register as being a Holder, with respect to (1) the Bonds, (2) the accuracy of any records maintained by DTC or any such participant, (3) the payment by DTC or any such participant of any amount in respect of the principal or redemption price of or interest on the Bonds, (4) any notice which is permitted or required to be given to Holders under this Indenture, (5) the selection by DTC or any such participant of any person to receive payment in the event of a partial redemption of the Bonds, and (6) any consent given or other action taken by DTC as Holder. (d) So long as the Bonds or any portion thereof are registered in the name of DTC or any nominee thereof, all notices required or permitted to be given to the Holders of such Bonds under this Indenture shall be given to DTC as provided in the Letter of Representation. (e) In connection with any notice or other communication to be provided to Holders pursuant to this Indenture by the Issuer or the Trustee with respect to any consent or other action to be taken by Holders, DTC shall consider the date of receipt of notice requesting such consent or other action as the record date for such consent or other action, provided that the Issuer or the Trustee may establish a special record date for such consent or other action. The Issuer or the Trustee shall give DTC notice of such special record date not less than fifteen (15) calendar days in advance of such special record date to the extent possible. (f) At or prior to settlement for each series of the Bonds, the Issuer and the Trustee shall execute, or signify their approval of, a Letter of Representation applicable to such series of Bonds. Any successor Trustee shall, in its written acceptance of its duties under this Indenture, agree to take any actions necessary from time to time to comply with the requirements of the Letter of Representation. (g) The book-entry system for registration of the ownership of Bonds may be discontinued at any time if either (1) after notice to the Issuer and the Trustee, DTC determines to resign as securities depository for the Bonds, or (2) after notice to DTC and the Trustee, the Issuer determines that continuation of the system of book-entry transfers through DTC (or through a successor securities depository) is not in the best interests of the Issuer. In either of such events (unless in the case described in clause (2) above, the Issuer appoints a successor securities depository), the Bonds shall be delivered in registered certificate form to such persons, and in such maturities and principal amounts, as may be designated by DTC, but without any liability on the part of the Issuer or the Trustee for the accuracy of such designation. Whenever DTC requests the Issuer and the Trustee to do so, the Issuer and the Trustee shall cooperate with DTC in taking appropriate action after reasonable notice to arrange for another securities depository to maintain custody of certificates evidencing the Bonds. (h) Anything herein to the contrary notwithstanding, so long as any Bonds are registered in the name of DTC or any nominee thereof, (i) in connection with any optional tender of such Bonds bearing interest at a Variable Rate, the beneficial owners of such Bonds are responsible for submitting the Demand Purchase Notice to the Remarketing Agent only, and (ii) in the definitions of "Determination of Taxability" and "Event of Taxability" in Article I, the terms "Holder," "Owner," or "owner" (when used with reference to ownership of Bonds) shall be deemed to refer to the beneficial owners of such Bonds. (i) Upon remarketing of Bonds in accordance with Section 5.07, payment of the purchase price thereof shall be made to DTC and no surrender of certificates is expected to be required. Such sales shall be made through DTC participants (which may include the Remarketing Agent) and the new beneficial owners of such Bonds shall not receive delivery of Bond certificates. DTC shall transmit payment to DTC participants, and DTC participants shall transmit payment to beneficial owners whose Bonds were purchased pursuant to a remarketing. Neither the Issuer, the Trustee nor the Remarketing Agent is responsible for transfers of payment to DTC participants or beneficial owners. (j) The provisions of this Section are nevertheless subject to the provisions of this Indenture relating to Pledged Bonds. ARTICLE III ISSUANCE OF BONDS; APPLICATION OF PROCEEDS SECTION 3.01 Issuance of the Bonds. At any time after the execution of this Indenture, the Issuer may execute and the Trustee or the Tender Agent shall authenticate and, upon request of the Issuer, deliver the Bonds; provided, however, that the Trustee shall have received a duly executed Letter of Credit applicable to the Bonds satisfying the terms and conditions of Section 4.06 of the Loan Agreement and such other instruments, documents and certificates as shall be required to be delivered to the Trustee as a condition of closing under the terms of the Remarketing Agreement. SECTION 3.02 Validity of Bonds. The validity of the authorization and issuance of the Bonds is not dependent upon, and shall not be affected in any way by, any proceedings taken by the Issuer or the Trustee with respect to, or in connection with, the Loan Agreement. The recital contained in the Bonds that the same are issued pursuant to the Act and the Constitution and laws of the Commonwealth shall be conclusive evidence of their validity and of compliance with all provisions of law in their issuance. SECTION 3.03 Disposition of Proceeds of Bonds and Other Amounts. The Issuer shall deposit or cause to be deposited with the Trustee, immediately upon receipt thereof, all proceeds derived from the sale of the Bonds, together with any money deposited by the Borrower as an equity contribution to the Project on the applicable Closing Date. The Trustee shall deposit all such amounts in a special fund which the Trustee is hereby directed to establish, to be known as the Clearing Fund, and within the Clearing Fund, in separate, segregated accounts designated "Tax-exempt Proceeds Account," or "Equity Contribution Account," as applicable and in the following order the Trustee shall: (a) Pay all Issuance Costs and fees for qualified guarantees of the respective series of Bonds (including, without limitation, the Issuer's fee and Administrative Expenses), from the appropriate subaccount of the Clearing Fund to the Persons, for the purposes and in the amounts stated in the Closing Statement delivered to the Trustee on the applicable Closing Date; provided, however, that the total Issuance Costs paid from the proceeds of the Bonds (including any underwriting discount and any amounts paid from money in the Tax-exempt Proceeds Account in the Clearing Fund) shall not exceed an amount equal to two percent (2%) of the initial reoffering price of the Bonds (exclusive of accrued interest), all other Costs of Issuance to be paid from the amounts deposited by the Borrower to the Clearing Fund from the Equity Contribution Account created under Section 6.05 as an equity contribution to the Project. (b) Reimburse the Borrower for Costs of the Project incurred and paid by the Borrower prior to the applicable Closing Date, as set forth in the Closing Statement; provided, however, that reimbursement shall be made from the Tax-exempt Proceeds Account only for such costs as are Qualified Project Costs of the Project (as such term is defined in the Tax Compliance Agreement); and (c) Deposit in the appropriate accounts in the Project Fund the balance of the money in the respective accounts in the Clearing Fund, after reserving amounts required to make the payments described in the immediately preceding subparagraphs. ARTICLE IV REDEMPTION OF BONDS SECTION 4.01 Extraordinary and Mandatory Redemption. The Bonds shall be subject to extraordinary and mandatory redemption prior to maturity as follows: (a) Extraordinary Redemption. The Bonds shall be subject to redemption by the Issuer upon written direction of the Borrower in the event (1) the Facility, or any portion thereof, are damaged or destroyed or taken in a condemnation proceeding or a deed of all or any part thereof as given in lieu of condemnation, as provided in Section 6.03 of the Loan Agreement, or (2) the Borrower shall exercise its option to cause the Bonds to be redeemed for any reason as provided in Section 9.02 of the Loan Agreement. If called for redemption at any time pursuant to (1) or (2) above, the Bonds shall be subject to redemption by the Issuer on any Interest Payment Date, in whole or in part, at a redemption price of one hundred percent (100%) of the principal amount thereof plus accrued interest to the redemption date. (b) Mandatory Redemption. Bonds shall be subject to mandatory redemption as follows: (1) in whole, on the Interest Payment Date immediately preceding the applicable Letter of Credit Termination Date, at a redemption price equal to one hundred percent (100%) of the principal amount thereof plus accrued interest to the redemption date, if the Trustee shall not have received on or before the fifteenth (15th) Business Day prior to such Interest Payment Date a written commitment from the Bank or a Substitute Bank to issue a Substitute Letter of Credit to be effective on or before the Interest Payment Date immediately preceding the Letter of Credit Termination Date; (2) in whole or in part, on any Interest Payment Date, at a redemption price equal to one hundred percent (100%) of the principal amount thereof being redeemed plus accrued interest to the redemption date, if any proceeds of the sale of the Bonds remain on deposit in the Project Fund established under the Indenture upon completion of the Project, under the conditions specified in this Indenture; and (3) in whole, on the earliest practicable date selected by the Trustee, after consultation with the Borrower, following the occurrence of a Determination of Taxability, but in no event later than one hundred eighty (180) days following the occurrence of such Determination of Taxability, at a redemption price equal to one hundred percent (100%) of the principal amount thereof plus accrued interest to the redemption date. SECTION 4.02 Optional Redemption. Bonds shall be subject to redemption by the Issuer, at the option of the Borrower, on any Interest Payment Date, in whole or in part (but in part only if the aggregate principal amount of the Outstanding Bonds immediately following such redemption will be at least $100,000), at the redemption price of 100% of the principal amount thereof being redeemed plus accrued interest to the redemption date; provided, however, that in connection with the remarketing of Bonds on a Conversion Date, there may be established such redemption restrictions (including a no-call period and an optional redemption premium or premiums) as may be acceptable to the Borrower with respect to Bonds bearing interest at a Fixed Rate and such restrictions shall be evidenced by an appropriate Supplemental Indenture. Notwithstanding the foregoing, no such optional redemption shall occur for Bonds in a series after the Conversion Date for such series unless there shall be available in the Bond Fund sufficient Available Money to pay all amounts due with respect to such a redemption. SECTION 4.03 Notice of Redemption. Notice of the call for redemption, identifying the Bonds or portions thereof to be redeemed and the redemption price (including the premium, if any), shall be given by the Trustee by mailing a copy of the redemption notice by first class mail at least thirty (30) days (ten (10) days in the case of a mandatory redemption of Bonds in connection with a termination of the Letter of Credit) but not more than sixty (60) days prior to the date fixed for redemption to the Owner of each Bond to be redeemed in whole or in part at the address of such Owner as shown on the Bond Register. Such notice shall contain such matters specified in the Bonds for the redemption thereof and shall state that such redemption is conditional upon the receipt of Available Money by the Trustee for such purpose on or prior to the redemption date. Any notice mailed as provided in this Section shall be conclusively presumed to have been duly given, whether or not the Owner receives the notice. The Trustee shall deliver a copy of any such redemption notice to the Tender Agent, to the Borrower and to the Remarketing Agent. Any other provision of this Indenture to the contrary notwithstanding, the Issuer or the Borrower may redeem Bonds tendered for purchase on the Conversion Date or a Substitution Date without necessity of notice of redemption being given to any Bondholder, so long as proper notice of mandatory tender of Bonds has been duly given. SECTION 4.04 Interest on Bonds Called for Redemption. Upon the giving of notice of redemption as required by Section 4.03 and the deposit of Available Money with the Trustee, in an amount sufficient to redeem all Bonds so called for redemption, on or prior to the date fixed for redemption, as provided in this Article, interest on the Bonds or portions thereof so called for redemption shall no longer accrue after the date fixed for redemption. SECTION 4.05 Cancellation. All Bonds which have been redeemed shall not be reissued but shall be canceled and destroyed by the Trustee in accordance with Section 2.11 of this Indenture. SECTION 4.06 Partial Redemption of Bonds. (a) If less than all Bonds are to be redeemed, the particular Bonds or portions thereof to be redeemed shall be selected by the Trustee by lot or in such other manner as the Trustee shall deem fair and appropriate, subject, however, to the further provisions of this Section. (b) Upon surrender of any Bond for redemption in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to the Owner thereof a new Bond or Bonds of like tenor of authorized denominations, in an aggregate principal amount equal to the unredeemed portion of the Bond surrendered. If all or a portion of any Bond tendered for purchase pursuant to Section 5.04 of this Indenture has been selected by the Trustee for redemption, the Tender Agent, upon receipt of such tendered Bond, shall authenticate and redeliver only such portion of the tendered Bond as is not to be redeemed and shall deliver to the tendering Bondholder a copy of the applicable notice of redemption, indicating the portion of the Bond to be redeemed, and upon receipt of funds as provided herein, an amount representing the principal of and interest on the Bonds not called for redemption. The principal of and interest accrued on the Bonds called for redemption shall be paid to such Bondholder on the redemption date. The Tender Agent shall cancel the Bond or such portion thereof tendered for purchase and subject to redemption, and shall deliver a certificate evidencing such cancellation and the canceled Bond to the Trustee. (c) (i) If a Variable Rate Bond is of a denomination larger than $100,000, a portion of such Bond (in any integral multiple of $5,000) may be redeemed, but a portion of a Bond shall be redeemed only if the remaining, unredeemed portion of such Bond is in the principal amount of $100,000 or any integral multiple of $5,000 in excess of $100,000. (ii) If a Fixed Rate Bond is of a denomination larger than $5,000, a portion of such Bond, in any integral multiple of $5,000, may be redeemed. (d) Notwithstanding anything to the contrary contained in this Indenture, whenever less than all Bonds are to be redeemed, those Bonds which are Pledged Bonds at the time of selection of Bonds for redemption shall be selected for redemption prior to the selection of any other Bonds. If the aggregate principal amount of Pledged Bonds is less than the total amount of Bonds to be redeemed, the Trustee shall select Bonds, other than Pledged Bonds, for redemption in an aggregate principal amount equal to such excess in such manner as the Trustee in its discretion shall deem fair and appropriate. SECTION 4.07 Payment of Redemption Price with Available Money; Bank Consent to Optional Redemption Required. Notwithstanding any provision to the contrary contained in this Indenture, the payment of the principal of, interest on and redemption premium, if any, with respect to the Bonds payable upon redemption thereof shall be made only from Available Money from the sources and in the order provided in Section 6.03 of this Indenture. On the Business Day prior to each date fixed for redemption of Bonds, the Trustee shall draw on the Letter of Credit in an amount sufficient to pay the full redemption price of the Bonds then to be redeemed. So long as the Bank is not in default under the Letter of Credit, no Bonds shall be called for optional redemption without the prior, written consent of the Bank. ARTICLE V CONVERSION OPTION; PURCHASE AND REMARKETING OF BONDS SECTION 5.01 Conversion of Interest Rate on Conversion Date. (a) The interest rate on the Bonds shall be converted from the Variable Rate to the Fixed Rate upon the Borrower's exercise of the Conversion Option for such series of Bonds in accordance with the provisions of this Section, and such Bonds shall be subject to mandatory tender for purchase by the Owners thereof on such Conversion Date. To exercise the Conversion Option, the Borrower shall notify the Trustee, the Tender Agent, the Bank, the Issuer and the Remarketing Agent at least thirty-five (35) days prior to such Conversion Date of its election to have the interest rate on the Bonds converted to the Fixed Rate, shall direct the Remarketing Agent to fix the proposed Conversion Date and notify the Trustee thereof, and shall direct the Trustee to deliver or mail, by first class mail, at least twenty (20) days but not more than thirty (30) days prior to the Conversion Date, to the Owner of each Bond at the address of such Owner as shown on the Bond Register, a notice stating, in substance, the following: (1) the proposed Conversion Date; (2) the existing Letter of Credit will expire five (5) Business Days after the Conversion Date; (3) unless firm commitments for the purchase of all Outstanding Bonds have been received or a firm agreement to underwrite the sale of all Outstanding Bonds has been entered into, in either case on or prior to the fifth (5th) Business Day prior to the proposed Conversion Date, the Borrower has the option to rescind its election to convert the interest rate on the Bonds; and (4) unless the Borrower elects to rescind its election to convert the interest rate on the Bonds, all Bonds that have not been remarketed on or prior to the Conversion Date are subject to mandatory purchase on the Conversion Date. No such notice may be given unless the Trustee first receives (i) an opinion of Bond Counsel to the effect that the proposed conversion of the interest rate on the Bonds will not cause the interest on the Bonds to be includable in gross income of the Bondholders for federal income tax purposes, (ii) an executed, written commitment from the Bank or a Substitute Bank to issue a Substitute Letter of Credit to take effect on the Conversion Date in an amount not less than the aggregate principal amount of the Bonds of such series to remain Outstanding following the Conversion Date plus interest thereon computed at the Fixed Rate for the minimum number of days required by the Rating Agency to maintain the then-current rating on the Bonds, together with the substantial form of such Substitute Letter of Credit, and (iii) a certificate of an Authorized Borrower Representative to the effect that each of the Borrower's representations and warranties made in the Loan Agreement and in any other agreements or certificates given by the Borrower in connection with the issuance of the Bonds remain true and correct in all material respects as of the proposed Conversion Date. Any notice given as provided in this Section shall be conclusively presumed to have been duly given, whether or not the Owner receives the notice. (b) On or prior to the Conversion Date, Owners of Bonds shall be required to deliver their Bonds to the Tender Agent for purchase at the Purchase Price on the Conversion Date, and any Undelivered Bonds for the payment of the Purchase Price of which there has been irrevocably deposited in trust with the Trustee or the Tender Agent a sufficient amount of Available Money shall be deemed to have been purchased pursuant to this Section 5.01 and shall be deemed to be no longer Outstanding with respect to such prior Owners. IN THE EVENT OF A FAILURE BY AN OWNER OF BONDS TO DELIVER ITS BONDS ON OR PRIOR TO THE CONVERSION DATE, SAID OWNER SHALL NOT BE ENTITLED TO ANY PAYMENT (INCLUDING ANY INTEREST TO ACCRUE ON OR SUBSEQUENT TO THE OPTIONAL CONVERSION DATE) OTHER THAN THE PURCHASE PRICE FOR SUCH UNDELIVERED BONDS, AND ANY UNDELIVERED BONDS SHALL NO LONGER BE ENTITLED TO THE BENEFITS OF THIS INDENTURE, EXCEPT FOR THE PURPOSE OF PAYMENT OF THE PURCHASE PRICE THEREFOR. (c) Notwithstanding the foregoing provisions, if the Remarketing Agent has not obtained firm commitments for the purchase of all of the Outstanding Bonds of such series on the Conversion Date or entered into or arranged a firm agreement to underwrite or place all of such Outstanding Bonds on the Conversion Date, in either case by the close of business on the fifth (5th) Business Day prior to the proposed Conversion Date, the Remarketing Agent shall give notice of that fact to the Borrower promptly and not later than 12:00 p.m. on the following Business Day (the fourth Business Day prior to the proposed Conversion Date) and the Borrower, in that event and at its option, may rescind its election to exercise the Conversion Option by giving written notice of rescission to the Remarketing Agent, the Trustee and the Tender Agent by the close of business on the fourth (4th) Business Day prior to the proposed Conversion Date. A copy of such notice of rescission promptly shall be given by the Borrower to the Bank, the Borrower shall direct the Trustee to notify the Owners of such Bonds of such rescission immediately, and the Bonds shall continue to bear interest at the Variable Rate until any subsequent Conversion Date selected in accordance with this Indenture. (d) If the Borrower rescinds its election to exercise the Conversion Option in accordance with the terms of the foregoing paragraph, the Letter of Credit then in effect will remain in effect in accordance with its terms. (e) Bonds are subject to mandatory purchase in whole on the Conversion Date at a purchase price equal to 100% of the principal amount thereof being purchased, plus accrued interest to the Conversion Date; provided, however, that (i) all Pledged Bonds for which a commitment to purchase has not been received in connection with a conversion of Bonds to the Fixed Rate shall be redeemed or otherwise paid by the Borrower on or before the Conversion Date; and (ii) no such mandatory purchase shall take place in the event the Borrower exercises its right to rescind the Conversion Option. SECTION 5.02 Delivery of Bonds After Conversion Date. At any time prior to the Record Date preceding the first Interest Payment Date following the Conversion Date, the Trustee or the Tender Agent, as the case may be, shall deliver Fixed Rate Bonds in the form of Exhibit B hereto. Prior to the delivery by the Trustee of such Fixed Rate Bonds, there shall be filed with the Trustee a request and authorization to the Trustee, signed on behalf of the Issuer by its Chairman, Vice Chairman, Secretary, Assistant Secretary or another officer duly authorized by resolution of the Issuer, to authenticate and deliver the Fixed Rate Bonds, as executed by the Issuer, to the purchasers thereof. Such delivery shall be made by the Trustee or the Tender Agent, as the case may be, without making any charge therefor to the purchasers of such Bonds. SECTION 5.03 Mandatory Tender upon Delivery and Acceptance of a Substitute Letter of Credit. Prior to the Conversion Date for each series of Bonds, Bonds are subject to mandatory purchase in whole on the Substitution Date, at a purchase price equal to 100% of the principal amount thereof being purchased, plus accrued interest to the purchase date. The Trustee shall deliver or mail by first class mail, at least ten (10) days but not more than thirty (30) days prior to the Substitution Date, a notice to the Owner of each Bond at the address of such Owner as shown on the Bond Register, stating, in substance, the following: (1) the Substitution Date; (2) an existing Letter of Credit securing the Bonds will expire five (5) Business Days after the Substitution Date; and (3) if the Borrower satisfies the conditions precedent to delivery of a Substitute Letter of Credit, all Bonds shall be subject to mandatory purchase on the Substitution Date pursuant to this Section 5.03. No such notice may be given unless the Borrower shall have satisfied the provisions of Section 4.07 of the Loan Agreement. Any notice given as provided in this Section 5.03 shall be conclusively presumed to have been given, whether or not the Owner receives the notice. On or prior to the Substitution Date, the Owners of the Bonds shall be required to deliver their Bonds to the Tender Agent for purchase at the Purchase Price, and any Undelivered Bond for which there has been irrevocably deposited in trust with the Trustee or the Tender Agent an amount of Available Money sufficient to pay the Purchase Price shall be deemed to have been purchased pursuant to this Section 5.03 and no longer Outstanding. IN THE EVENT OF A FAILURE BY AN OWNER OF BONDS TO DELIVER ITS BONDS ON OR PRIOR TO THE SUBSTITUTION DATE, SAID OWNER SHALL NOT BE ENTITLED TO ANY PAYMENT (INCLUDING ANY INTEREST TO ACCRUE ON OR SUBSEQUENT TO THE SUBSTITUTION DATE) OTHER THAN THE PURCHASE PRICE FOR SUCH UNDELIVERED BONDS, AND ANY UNDELIVERED BONDS SHALL NO LONGER BE ENTITLED TO THE BENEFITS OF THIS INDENTURE, EXCEPT FOR THE PURPOSE OF PAYMENT OF THE PURCHASE PRICE THEREFOR. Notwithstanding the foregoing provisions, if by the close of business of the Trustee on the fifth Business Day prior to the proposed Substitution Date, the Borrower has not delivered to the Issuer, the Trustee and the Remarketing Agent the items set forth in Section 4.07(i) through (iii) of the Loan Agreement, or if the Substitute Letter of Credit has not been issued and delivered to the Trustee by 10:00 a.m. on the Substitution Date, the mandatory purchase of Bonds shall be rescinded and the Trustee shall notify the Owners of such rescission immediately and thereafter the Bonds shall continue to be secured by the existing Letter of Credit until its expiration or termination. SECTION 5.04 Demand Purchase Option. Prior to the Conversion Date, any Bond shall be purchased at the Purchase Price from the Owner thereof upon: (i) delivery by such Owner to the Tender Agent at its Delivery Office, and to the Remarketing Agent at its principal office, and to the Trustee at its Principal Corporate Trust Office, of a notice (the "Demand Purchase Notice") (said notice to be irrevocable and effective upon receipt) which states (1) the aggregate principal amount and bond numbers of the Bonds to be purchased; and (2) the date on which such Bonds are to be purchased, which date shall be a Business Day not prior to the seventh (7th) day next succeeding the date of receipt of such notice and which date shall be prior to the Conversion Date; and (ii) delivery to the Tender Agent at its Delivery Office at or prior to 10:00 a.m. on the date designated for purchase in the applicable Demand Purchase Notice of such Bonds to be purchased, with an appropriate endorsement for transfer or accompanied by a bond power endorsed in blank. Any Bond, as to which a Demand Purchase Notice has been delivered pursuant to subparagraph (i) of the first paragraph of this Section, must be delivered to the Tender Agent, as provided in subparagraph (ii) of the first paragraph of this Section, and any such Bond not so delivered (an "Undelivered Bond"), for which there has been irrevocably deposited in trust with the Trustee or the Tender Agent an amount of Available Money sufficient to pay the Purchase Price thereof, shall be deemed to have been purchased at the Purchase Price pursuant to this Section 5.04 and is deemed to be no longer Outstanding with respect to such tendering Owner. IN THE EVENT OF A FAILURE BY AN OWNER OF BONDS TO DELIVER ITS BONDS AS SPECIFIED ABOVE, SAID OWNER SHALL NOT BE ENTITLED TO ANY PAYMENT (INCLUDING INTEREST TO ACCRUE ON OR SUBSEQUENT TO THE DATE DESIGNATED FOR PURCHASE IN THE APPLICABLE DEMAND PURCHASE NOTICE) OTHER THAN THE PURCHASE PRICE FOR SUCH UNDELIVERED BONDS, AND ANY UNDELIVERED BONDS SHALL NO LONGER BE ENTITLED TO THE BENEFITS OF THIS INDENTURE, EXCEPT FOR THE PAYMENT OF THE PURCHASE PRICE THEREFOR. Notwithstanding the foregoing provisions, in the event any Bonds as to which the Owner thereof has exercised the Demand Purchase Option is remarketed to such Owner pursuant to the Remarketing Agreement, such Owner need not deliver such Bond to the Tender Agent as provided in subparagraph (ii) of the first paragraph of this Section, although such Bonds shall be deemed to have been delivered to the Tender Agent, redelivered to such Owner, and remarketed for purposes of this Indenture, including, without limitation, for purposes of adjusting the Variable Rate applicable to such Bond as provided in Section 2.02(C) of this Indenture. SECTION 5.05 Funds for Purchase of Bonds. (a) On the date Bonds are to be purchased pursuant to Section 5.01, 5.03 or Section 5.04 of this Indenture, such Bonds shall be purchased at the Purchase Price only from the funds listed below. Subject to the provisions of Section 6.12(b), funds for the payment of the Purchase Price shall be derived from the following sources in the order of priority indicated: (i) money drawn by the Trustee under the Letter of Credit (in the event of a drawing on such Letter of Credit to fund payment of the Purchase Price of Bonds tendered pursuant to Section 5.03 of this Indenture, the Trustee shall draw on the existing Letter of Credit and not the Substitute Letter of Credit therefor to fund such payment); (ii) proceeds of the remarketing of the Bonds; and (iii) any other money furnished to the Trustee or the Tender Agent and available for such purposes. (b) Payment for the Bonds purchased pursuant to Section 5.01, 5.03 or 5.04 shall be made as follows: (i) On the Business Day immediately preceding the applicable Purchase Date, the Trustee shall make a drawing pursuant to the Letter of Credit in respect of the Purchase Price of such Bonds. In connection therewith, the Trustee shall prepare and present to the Bank the appropriate certificates required under the Letter of Credit by 11:00 a.m. at least one Business Day prior to the Purchase Date, so that payment of the draw shall be made by the Bank by Noon on the Purchase Date. (ii) By not later than 10:00 a.m. on the Purchase Date, the Remarketing Agent shall give notice in writing to the Bank, the Trustee and the Tender Agent, specifying: (1) The total principal amount of Bonds, if any, remarketed by it; and (2) The names of the Persons to whom such Bonds were sold and are to be registered, each such Person's address and social security number or taxpayer identification number, the denominations in which replacement Bonds are to be prepared, and any other appropriate registration and transfer instructions. (iii) There is hereby established with the Tender Agent a special fund to be designated the "Purchase Account" and therein two separate and segregated accounts to be designated the "Remarketing Account" and the "Bank Account." An amount equal to the proceeds received by the Trustee pursuant to a draw under the Letter of Credit shall be transferred by the Trustee in immediately available funds to the Tender Agent for deposit in the Bank Account no later than 12:30 p.m. on the applicable Purchase Date. By not later than 1:00 p.m. on each Purchase Date, the Tender Agent shall give notice in writing to the Remarketing Agent of the amount deposited in the Bank Account on such date. (iv) By not later than 10:00 a.m. on each Purchase Date, the Remarketing Agent shall do the following: (A) transfer to the Bank an amount equal to the lesser of (1) the proceeds of the remarketing of Bonds tendered or deemed tendered on such Purchase Date or (2) the amount deposited in the Bank Account on such Purchase Date; (B) transfer to the Tender Agent for deposit in the Remarketing Account the remainder (if any) of the proceeds of such remarketing of Bonds; (C) give notice in writing to the Tender Agent of the amount of remarketing proceeds transferred to the Bank; and (D) give notice in writing to the Borrower of the total principal amount of Unremarketed Bonds, if any. (v) The Tender Agent shall pay the Purchase Price to the tendering Bondholders from the amounts on deposit in the Bank Account to the extent available. If amounts on deposit in the Bank Account are insufficient, the Tender Agent shall make up any such deficiency from amounts on deposit in the Remarketing Account. (vi) The Bank shall give written confirmation to the Tender Agent and the Trustee by 4:00 p.m. on the applicable Purchase Date of its receipt of the remarketing proceeds described in Section 5.05(b)(iv) of this Indenture. SECTION 5.06 Delivery of Purchased Bonds. (a) Remarketed Bonds shall be delivered by the Tender Agent, at its Delivery Office, to or upon the order of the purchasers thereof. (b) Unremarketed Bonds purchased with funds drawn under the Letter of Credit shall be delivered by the Tender Agent to the Pledged Bonds Custodian or otherwise upon the order of the Bank pursuant to the Pledge Agreement. (c) Unremarketed Bonds purchased with money described in Section 5.05(a)(iii) of this Indenture (if any) shall, at the direction of the Borrower, be (i) delivered as instructed by the Borrower, or (ii) delivered to the Trustee for cancellation; provided, however, that any Bonds so purchased after the selection thereof by the Trustee for redemption shall be delivered to the Trustee for cancellation. Bonds delivered as provided in this Section shall be registered in the manner directed by the recipient thereof. SECTION 5.07 Sale of Bonds by Remarketing Agent. (a) The Remarketing Agent shall offer for sale and use its best efforts to sell, as agent of the Borrower, all Bonds tendered or deemed tendered for purchase on each Purchase Date at the Purchase Price thereof and, if such Bonds are not sold on or before the Purchase Date, the Remarketing Agent shall continue, for a period not in excess of thirty (30) days thereafter, to use its best efforts to sell such Bonds. Notwithstanding the foregoing, the Remarketing Agent shall not sell the Bonds to the Issuer or the Borrower. (b) Notwithstanding anything to the contrary herein, the Remarketing Agent shall use its best efforts to remarket any Bonds tendered or deemed tendered for purchase in such a manner that, immediately following the remarketing of any Bonds, at least one (1) Holder will own at least $200,000 in aggregate principal amount of Bonds. (c) Nothing herein shall prohibit the Remarketing Agent from purchasing Bonds for its own account. SECTION 5.08 Delivery of Proceeds of Sale of Purchased Bonds; Delivery of Remarketed Pledged Bonds. (a) Except in the case of the sale of any Pledged Bonds, the proceeds of the sale of any Bonds tendered or deemed tendered to the Tender Agent pursuant to Section 5.01, 5.03 or 5.04 of this Indenture, to the extent not required to reimburse the Bank under the Letter of Credit Agreement, shall be paid to or upon the order of the Trustee. (b) In the event the Remarketing Agent shall have remarketed any Pledged Bonds, the Remarketing Agent shall pay the proceeds of sale of such Bonds to the Tender Agent, or shall cause the same to be paid to the Tender Agent, who shall then pay such proceeds to or upon the order of the Bank as reimbursement in respect of drawings under the applicable Letter of Credit; provided, however, that any amounts so paid in excess of amounts then due to the Bank in respect of drawings under such Letter of Credit shall be paid by the Bank to or upon the order of the Borrower. Upon receipt of such proceeds as reimbursement in respect of drawings under the Letter of Credit, the Bank shall give written notice to the Trustee of reinstatement of the Letter of Credit. (c) Upon payment to the Bank of amounts received as proceeds of remarketing of Pledged Bonds, the Pledged Bonds Custodian, at the request and direction of the Borrower or the Remarketing Agent, shall deliver the remarketed Pledged Bonds to the Tender Agent, at its Delivery Office, for registration of transfer and delivery to the purchasers thereof in accordance with instructions from the Remarketing Agent; provided, however, that the Pledged Bonds Custodian shall not deliver such Pledged Bonds to the Tender Agent until it shall receive confirmation in writing from the Trustee or the Bank that the applicable Letter of Credit has been reinstated in respect of the reimbursement made pursuant to subsection (b) above. SECTION 5.09 Duties of Trustee and Tender Agent with Respect to Purchase of Bonds. (a) The Tender Agent shall hold all Bonds delivered to it pursuant to Sections 5.01, 5.03 or 5.04 of this Indenture in trust for the benefit of the respective Owners of Bonds which shall have so delivered such Bonds until money representing the Purchase Price of such Bonds shall have been delivered to or for the account of, or to the order of, such Owners of Bonds. Upon delivery of money representing the Purchase Price of such Bonds to or for the account of, or to the order of, such Owners of Bonds, the Tender Agent shall deliver all such Unremarketed Bonds, the funds for which shall have been obtained by a drawing under the Letter of Credit, to the Pledged Bonds Custodian pursuant to Section 5.06(b) of this Indenture for the purpose of perfecting the Bank's security interest therein under the Pledge Agreement, unless the Bank shall direct the Tender Agent to deliver such Bonds to or upon the order of the Bank in accordance with Section 5.06 of this Indenture. (b) The Trustee and the Tender Agent shall hold all money delivered to them pursuant to this Indenture for the purchase of Bonds in a separate account, in trust for the benefit of the Bank or, in the case of Remarketed Bonds, the purchasers of such Bonds, until the Bonds purchased with such money shall have been delivered to or for the account of the Pledged Bonds Custodian, to the Bank or to such other purchasers, as appropriate. (c) The Tender Agent shall deliver to the Trustee, the Borrower and the Bank a copy of each notice delivered to it in accordance with Section 5.04 within two (2) Business Days following the receipt thereof. (d) As soon as possible, but not later than the close of business on any date designated for purchase of Bonds in accordance with Section 5.04, the Tender Agent shall give written notice to the Remarketing Agent and the Trustee specifying the principal amount of Bonds delivered or deemed delivered for purchase on such date. (e) The Trustee shall draw money under the applicable Letter of Credit in accordance with the terms thereof to the extent required by Sections 5.05 and 6.12 of this Indenture to provide for timely payment of the Purchase Price of Bonds. SECTION 5.10 No Purchases or Sales After Certain Defaults or After Issuance of a Notice of Redemption. Anything in this Indenture to the contrary notwithstanding, (i) there shall be no purchases or sales of Bonds pursuant to Section 5.04 if there shall have occurred any Event of Default in respect of which the principal of all Bonds outstanding shall have been declared immediately due and payable pursuant to Section 8.02 and such declaration shall not have been annulled, and (ii) there shall be no purchases or sales pursuant to Section 5.04 of Bonds as to which the Trustee shall have given notice of a call for redemption pursuant to Section 4.03 of this Indenture if such notice shall not have been rescinded. Nothing in this Section is intended to limit secondary trading or transfer of the Bonds. ARTICLE VI REVENUES AND FUNDS SECTION 6.01 Creation of the Bond Fund. There is hereby created and established with the Trustee a trust fund to be designated as the "Bond Fund". Upon receipt of money pursuant to Section 6.02 of this Indenture, the Trustee shall deposit such money into the Bond Fund, which amounts shall be used to pay when due the principal of, interest on, and redemption premium, if any, with respect to the Bonds and the purchase price thereof, when due. SECTION 6.02 Payments into the Bond Fund. There shall be deposited into the Bond Fund from time to time the following: (a) any amount in the Project Fund directed to be paid into the Bond Fund in accordance with the provisions of Section 6.07 of this Indenture; (b) any amount to be deposited into the Bond Fund pursuant to the provisions of Section 6.04 of this Indenture; (c) all payments specified in Sections 3.03 and 3.05 of the Loan Agreement; (d) any money received pursuant to the Collateral Documents; (e) any money drawn under the Letter of Credit, which shall be deposited or credited (in the case of a draw to pay the Purchase Price) in a separate subaccount of the Bond Fund and shall not be commingled with any other money held by the Trustee; (f) amounts, if any, held by the Trustee pursuant to Section 5.09 of this Indenture; and (g) all other money received by the Trustee under and pursuant to any of the provisions of the Loan Agreement which is required to be paid into the Bond Fund or is accompanied by directions that such money be paid into the Bond Fund. SECTION 6.03 Use of Money in the Bond Fund. Except as provided in Sections 5.05, 5.09 and 6.11 of this Indenture, money in each account of the Bond Fund shall be used solely for the payment of the principal of, premium, if any, and interest on the Bonds, for the redemption of such Bonds prior to maturity and for payment of the Acceleration Price for such Bonds, as defined in Section 8.02 of this Indenture. Subject to the provisions of Section 6.12(b) of this Indenture, funds for payment of the principal of, redemption premium, if any, and interest on the Bonds shall be derived from the following sources, in the order of priority indicated: (i) first, money drawn by the Trustee under the Letter of Credit; (ii) second, money deposited into the Bond Fund which constitutes Available Money (other than money drawn by the Trustee under the Letter of Credit for the Bonds); and (iii) third, any other money furnished to the Trustee and available for such purpose. SECTION 6.04 Deposit and Disbursement of Net Proceeds of Insurance or Condemnation. The Trustee is authorized and directed to hold all Net Proceeds of insurance or condemnation awards (including any amount received as consideration for a deed in lieu of condemnation) with respect to the Facility and to disburse such Net Proceeds in accordance with Article VI of the Loan Agreement. If the Borrower directs that any portion of such Net Proceeds be applied to redeem Bonds, the Trustee shall deposit such Net Proceeds in a separate subaccount of the Bond Fund, and the Issuer covenants and agrees to take and to authorize such action as may be requested by the Borrower to effect the redemption of Bonds in the amount specified by the Borrower on the earliest possible redemption date. Appropriate evidence of the insurance coverage with respect to the Facility required by the Loan Agreement shall be deposited with the Trustee as more fully set forth in Article VI of the Loan Agreement. SECTION 6.05 Project Fund. There is hereby created and established with the Trustee a trust fund to be designated as the "Project Fund," and therein two separate and segregated accounts to be designated the "Tax-exempt Proceeds Account," and the "Equity Contribution Account," each of which shall be expended in accordance with the provisions of this Indenture and of the Loan Agreement. The Project Fund shall consist of funds deposited therein, from time to time, pursuant to the provisions of this Indenture and applicable provisions of the Loan Agreement, for purposes of paying Costs (as such phrase is defined in the Tax Compliance Agreement) of the Project. Funds in the Tax-exempt Proceeds Account shall be applied only to Qualified Project Costs, as such phrase is defined in the Tax Compliance Agreement. Funds in the Equity Contribution Account may be expended as directed by the Borrower for any Cost of the Project. SECTION 6.06 Payments into the Project Fund; Disbursements. The Project Fund shall initially consist of the money deposited therein pursuant to Section 3.03 of this Indenture, which shall be applied to pay Costs of the Project in the manner specified herein. There shall also be deposited in the Project Fund from time to time the amounts (if any) required to be paid by the Borrower as and for an equity contribution to the Project under the terms of the Loan Agreement. The Trustee is hereby authorized and directed to make disbursements from the designated Account in the Project Fund upon the receipt of requisitions substantially in the form of Exhibit C hereto, each signed by the Borrower and approved by the Bank. The Trustee shall keep and maintain adequate records pertaining to the Project Fund and all disbursements therefrom, including a record of all requisitions. Upon request of the Borrower, the Trustee shall furnish the Borrower with statements of account with respect to the Project Fund in such form as is customarily prepared by the Trustee. All money and investments from time to time on deposit in the Project Fund shall be held by the Trustee in trust until withdrawn and disbursed in accordance with the provisions of this Section or until transferred to other funds and accounts created under this Indenture in accordance with the provisions hereof. SECTION 6.07 Use of Money in the Project Fund Upon Default. Each such Requisition shall direct the Trustee to draw from a specific account within the Project Fund. If the principal of the Bonds shall have become due and payable pursuant to Article VIII of this Indenture, any balance remaining in the Project Fund shall, without further authorization, (i) prior to the Obligation Termination Date, if any amounts are due and owing under the Letter of Credit Agreement, be transferred immediately to the Bank, as long as the Bank is not in default of its obligations under the Letter of Credit, or (ii) after the Obligation Termination Date, be transferred to the Bond Fund. SECTION 6.08 Use of Money in the Project Fund Upon Completion of the Project. The completion of the Project and the payment or provision for payment of all Costs of the Project shall be evidenced by the filing of the certificate required by Section 2.03 of the Loan Agreement with the Trustee. As soon as practicable and in any event not more than sixty (60) days following the date of receipt by the Trustee of the certificate referred to in the preceding sentence, any balance remaining in the Project Fund (except amounts the Borrower shall have directed the Trustee to retain for any Cost of the Project not then due and payable and amounts, if any, representing the unspent balance of the Borrower's equity contribution to the Project) shall, without further authorization, be transferred by the Trustee into a separate subaccount or subaccounts within the Bond Fund. Thereafter, the Trustee shall cause a mandatory redemption of the Bonds in accordance with the terms of Section 4.01(b)(2) of this Indenture. The principal amount of Bonds to be so redeemed shall be such that the redemption price thereof shall not exceed the balance remaining in the Project Fund which has been so transferred to the Bond Fund. On the date fixed for redemption of such Bonds, the Trustee (i) shall draw on the Letter of Credit in an amount sufficient to pay the full redemption price of the Bonds being redeemed, and (ii) reimburse the Bank for such drawing from the money on deposit in such separate subaccount within the Bond Fund. If the sum transferred to the Bond Fund pursuant to this Section 6.08 is not sufficient to effect a mandatory redemption of the Bonds in accordance with the terms of Section 4.01(b)(2) of this Indenture, or if there are any excess funds remaining in the Bond Fund after such mandatory redemption, such funds shall be paid by the Trustee to the Bank on the next Interest Payment Date to reimburse the Bank for a drawing on the Letter of Credit effected pursuant to Section 6.12 of this Indenture. SECTION 6.09 Nonpresentment of Bonds. If any Bond shall not be presented for payment when the principal shall become due upon maturity, upon the date fixed for redemption or otherwise, and if Available Money shall have been deposited with the Trustee or set aside by the Trustee for that purpose in an amount sufficient to pay the principal of such Bond and the premium, if any, payable upon redemption, together with all interest due thereon to the date of maturity or the date fixed for redemption, as the case may be, for benefit of the Owner of such Bond, all liability of the Issuer to the Owner of such Bond for payment of such principal and interest and all liability of the Issuer to the Owner of such Bond for payment of such premium, if any, forthwith shall cease, shall determine and shall be discharged completely. Thereupon it shall be the duty of the Trustee to hold such fund or funds, without liability for interest, for benefit of the Owner of such Bond, who thereafter shall be restricted exclusively to such fund or funds for any claim of whatsoever nature hereunder or upon or with respect to such Bond. SECTION 6.10 Money to be Held in Trust. Except as otherwise provided in Section 6.13 with respect to the Rebate Fund, all money required to be deposited with or paid to the Trustee for the account of any fund or account referred to in any provision of this Indenture or the Loan Agreement shall be held by the Trustee in trust, and (except for the money from time to time required to be deposited and maintained in the Rebate Fund) shall, while held by the Trustee, constitute part of the Trust Estate and be subject to the lien and security interest created hereby. SECTION 6.11 Repayment to the Bank and the Borrower from the Bond Fund, the Rebate Fund or the Project Fund. Any amounts remaining in the Bond Fund, the Project Fund, the Rebate Fund or any other fund or account created hereunder after payment in full of the principal of, premium, if any, and interest on the Bonds, the fees, charges and expenses of the Trustee, unpaid Administrative Expenses and all other amounts required to be paid hereunder, including payment to the United States of America of the final installment of the Rebate Amount, if any, pursuant to Section 6.13 of this Indenture, shall be paid as soon as possible to the Bank, unless the Bank notifies the Trustee to the contrary in writing, in which case such amounts shall be paid directly to the Borrower. SECTION 6.12 The Letter of Credit. (a) The Issuer shall cause the Borrower to deliver the Letter of Credit, applicable to the Bonds, to the Trustee upon the date of issuance and delivery of the Bonds, in accordance with Section 4.06 of the Loan Agreement. During the term of the Letter of Credit, the Trustee shall draw money under the Letter of Credit in accordance with the terms thereof (i) to pay the principal of the related series of Bonds when due (whether by reason of maturity, redemption or acceleration) and to pay the interest on, and, to the extent the Letter of Credit covers same, redemption premium, if any, with respect to such Bonds when due, and (ii) to pay the Purchase Price of the Bonds tendered for purchase in accordance with the terms hereof and of such Bonds when due. Within two (2) Business Days after the last Determination Date of each month, the Trustee shall give written notice (which notice shall be transmitted via facsimile) to the Borrower of the amount that the Trustee will draw under the Letter of Credit on the next Interest Payment Date. (b) Notwithstanding any provision to the contrary which may be contained in this Indenture, including, without limitation, Section 6.12(a), (i) in computing the amount to be drawn under the Letter of Credit on account of the payment of the principal of, interest on, and, to the extent the Letter of Credit covers same, redemption premium, if any, on Bonds, or the Purchase Price of Bonds tendered for payment in accordance with the terms hereof and of the Bonds, the Trustee shall exclude any such amounts in respect of any Bonds which are Pledged Bonds immediately prior to the date such payment is due, and (ii) amounts drawn by the Trustee under the Letter of Credit shall not be applied to the payment of the Purchase Price of any Bonds that are Pledged Bonds. (c) The Letter of Credit shall terminate in accordance with its terms on the Letter of Credit Termination Date. Upon such termination, the Trustee shall deliver the terminated Letter of Credit to the Bank, together with such certificates as may be required by the terms of that Letter of Credit. SECTION 6.13 Rebate Fund. (a) The Trustee shall establish, hold and maintain a segregated fund or account designated as the "Rebate Fund" into which money shall be deposited from time to time in such amounts as shall be required by this Indenture for the purpose of providing for payment to the United States of any arbitrage rebate required to be paid with respect to the Bonds pursuant to Section 148(f) of the Code. The Rebate Fund shall be held by the Trustee in trust, but separate and apart from all other funds and accounts established under this Indenture and from all other moneys of the Trustee, and all amounts in the Rebate Fund, including income earned from investment of amounts in the Rebate Fund, shall be held by the Trustee in trust, but free and clear of the lien of this Indenture. The Rebate Fund shall be maintained until such time as the Trustee shall receive a written opinion of Bond Counsel or a certificate of a Rebate Consultant stating, in effect, that all required payments of arbitrage rebate with respect to the Bonds have been made to the United States. Any money remaining on deposit in the Rebate Fund after all such required rebate payments have been made, as evidenced by such opinion or certificate, shall be paid over to the Borrower upon written request of an Authorized Borrower Representative or as such Authorized Borrower Representative may direct. (b) Any money on deposit in the Rebate Fund may be invested by the Trustee at the written direction of the Borrower exclusively in Government Obligations. The Trustee shall maintain records of the date and amount of each deposit and of each investment made in the Rebate Fund. (c) The Issuer shall, or shall cause the Borrower to, engage a Rebate Consultant to furnish to the Trustee from time to time, as hereinafter set forth, written reports setting forth: (i) the total amount required to be rebated to the United States with respect to the Bonds that are part of the same issue pursuant to Section 148(f) of the Code (herein referred to as the "Total Required Rebate Amount"), as calculated from the applicable Closing Date to the current computation date used in each such report (which computation date shall be selected in accordance with applicable tax regulations); (ii) the date upon which the next required rebate installment payment with respect to the Bonds is due and payable to the United States (the "Installment Payment Date"); and (iii) the amount of such next required rebate installment payment (the "Required Rebate Installment Amount"). Such a report shall be furnished to the Trustee not later than thirty (30) days following the fifth anniversary of the Closing Date, not later than every five (5) years thereafter, and not later than thirty (30) days following the final maturity date with respect to the Bonds or any earlier date upon which all Bonds shall have become due and payable; provided, however, that if the Issuer and the Borrower shall elect (if permitted by, and in accordance with, the Code and applicable tax regulations) to treat any date earlier than the fifth (5th) anniversary of the Closing Date as the first "computation date" (as that term is used in Section 148(f) of the Code), as evidenced by a Rebate Consultant's report, succeeding reports required by this paragraph shall be furnished within thirty (30) days following the fifth (5th) anniversary of such computation date and every five (5) years thereafter, so long as any Bonds remain outstanding; provided, further, however, that if the Issuer and the Borrower shall elect (if permitted by, and in accordance with, the Code and applicable tax regulations) to treat the end of each "bond year" (as that phrase is used in Treasury Regulation ss.1.148.3) as a computation date, as evidenced by a Rebate Consultant's Report, succeeding reports shall be furnished within thirty (30) days following the end of each such "bond year." The foregoing notwithstanding, there shall be no obligation to engage a Rebate Consultant or to provide such reports if the Borrower shall furnish the Trustee and the Issuer with a letter from Bond Counsel to the effect that the Bonds are exempt from the arbitrage rebate requirement of Section 148(f) of the Code by reason of any exemption provided in the Code or applicable federal income tax regulations. (d) The Total Required Rebate Amount, less any amounts previously rebated to the United States as arbitrage rebate with respect to the Bonds, is herein referred to as the "Required Rebate Fund Balance." To the extent that the amount on deposit in the Rebate Fund at the time of receipt by the Trustee of any Rebate Consultant's report furnished in accordance with subsection (c) above is in excess of the Required Rebate Fund Balance, such excess shall, upon the written request of the Borrower, be disbursed to the Borrower. To the extent that the amount on deposit in the Rebate Fund at such time is less than the Required Rebate Fund Balance, the Borrower shall pay to the Trustee, for deposit to the Rebate Fund, an amount equal to such deficiency within thirty (30) days, but in no event later than two (2) Business Days prior to the Installment Payment Date set forth in the Rebate Consultant's report. (e) The Trustee is authorized and directed to withdraw and pay to the United States, on or before each Installment Payment Date, or if such date is a Saturday, a Sunday or a federal holiday, the next day that is not a Saturday, a Sunday or a federal holiday, the amount of each Required Rebate Installment Amount in accordance with the Rebate Consultant's report furnished to it in accordance with subsection (c) above; Provided, however, that each such payment of a Required Rebate Installment Payment must be accompanied by an appropriate federal tax (or arbitrage rebate) return duly executed by an Authorized Officer of the Issuer, which the Issuer hereby covenants and agrees to furnish to the Trustee not later than the Business Day preceding the respective Installment Payment Date. (f) If for any reason, including the late delivery of a required federal tax (or arbitrage rebate) return to the Trustee, a late payment penalty or interest shall be due and payable to the United States with respect to any required rebate payment, as set forth in a report of a Rebate Consultant or an invoice or notice of deficiency from the Internal Revenue Service, such penalty or interest shall be paid by the Trustee out of money in the Rebate Fund or, if no such money is on deposit, the Trustee shall make written demand upon the Borrower for payment of the same. (g) The Trustee shall retain records of the determinations of the amounts required to be deposited in the Rebate Fund, of the proceeds of any investments of moneys in the Rebate Fund, and of the amounts paid to the United States, until the date six (6) years after the retirement of the last of the Bonds. (h) Notwithstanding the provisions of Article X, any or all of the provisions of this Section may be amended by a Supplemental Indenture without consent of any Holders of Bonds, provided that the Trustee shall receive a written opinion of Bond Counsel not unsatisfactory to the Trustee that such amendment, and compliance with the terms of this Section as so amended, will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes under the Code. (i) The Trustee shall not be responsible for undertaking any calculation of arbitrage rebate and shall have no responsibility for the accuracy of the calculations performed by any Rebate Consultant. SECTION 6.14 Investment of Money in Funds. All money in any of the Funds established pursuant to this Indenture (except money obtained from a draw on the Letter of Credit) shall be invested by the Trustee, as directed in writing by the Borrower, solely in Investment Securities except (i) Available Money held by the Trustee for the payment of Undelivered Bonds, which shall not be invested, and (ii) money in the Rebate Fund, which shall be invested only in Government Obligations, as provided in Section 6.13. Absent written direction from the Borrower, available cash balances in the various funds established under this Indenture (with the exceptions set forth in the preceding sentence) shall be invested in a United States government money market fund, provided that such investment at the time complies with paragraph (ix) of the definition of "Investment Securities" herein. Money obtained by the Trustee from a draw on the Letter of Credit shall be held by the Trustee in the Bond Fund uninvested, and without liability for interest, until applied to payment of the principal of, interest on or redemption premium, if any, with respect to Bonds in accordance with the terms hereof. Investment Securities may be purchased as may be directed to the Trustee by the Borrower. All Investment Securities shall be acquired subject to the limitations set forth in Section 7.06, the limitations as to maturities hereinafter in this Section set forth and such additional limitations or requirements consistent with the foregoing as may be established by request of the Borrower. To the extent the Bank has not been reimbursed under the Letter of Credit Agreement and has notified the Trustee of same in writing, all interest, profits and other income received from the investment of money in any fund established pursuant to this Indenture shall be transferred to the Bank in the amounts necessary to reimburse the Bank. Otherwise, such amounts shall be deposited to the appropriate fund or account in which such investments were made. Notwithstanding anything to the contrary contained in this paragraph, an amount of interest received with respect to any Investment Security equal to the amount of accrued interest, or premium, if any, paid as part of the purchase price of such Investment Security shall be credited to the fund from which such accrued interest or premium was paid. Investment Securities acquired as an investment of money in any fund established under this Indenture shall be credited to such fund. For the purpose of determining the amount in any fund, all Investment Securities credited to such fund shall be valued at the lesser of cost or market value plus, prior to the first payment of interest following purchase, the amount of accrued interest, if any, paid as a part of the purchase price. The Trustee may act as principal or agent in the making or disposing of any investment. The Trustee may sell at the best price obtainable, or present for redemption, any Investment Securities so purchased whenever it shall be necessary to provide money to meet any required payment, transfer, withdrawal or disbursement from the fund to which such Investment Security is credited, and the Trustee shall not be liable or responsible for any loss resulting from such investment. ARTICLE VII PARTICULAR COVENANTS SECTION 7.01 Punctual Payment. The Issuer shall punctually pay the principal, premium, if any, and interest to become due in respect of the Bonds, or shall cause the same to be paid punctually, in strict conformity with the terms of the Bonds and of this Indenture, according to the true intent and meaning thereof and hereof, but only out of the Revenues as provided in this Indenture, and not otherwise. SECTION 7.02 Extension of Payment of Bonds. The Issuer shall not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time for payment of any claims for interest, by the purchase or funding of such Bonds or claims for interest or otherwise. If the maturity of any of the Bonds or the time for payment of any such claims for interest shall be extended, such Bonds or claims for interest shall not be entitled, in case of any default hereunder, to the benefits of this Indenture, except subject to the prior payment in full of the principal of all of the Bonds then outstanding and of all claims for interest thereon which shall not have been so extended. Nothing in this Section shall be deemed to limit the right of the Issuer to issue bonds for the purpose of refunding any Outstanding Bonds, and such issuance shall not be deemed to constitute an extension of maturity of the Bonds. SECTION 7.03 Against Encumbrances. The Issuer shall not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Revenues while any of the Bonds are Outstanding, except the pledge and assignment created by this Indenture, and will assist the Trustee in contesting any such pledge, lien, charge or other encumbrance which may be created or arise. SECTION 7.04 Power to Issue Bonds and Make Pledge and Assignment. The Issuer represents and covenants that it is duly authorized by law to issue the Bonds, to enter into this Indenture and to pledge and assign the Revenues and other assets pledged and assigned under this Indenture in the manner and to the extent provided in this Indenture. The Bonds and the provisions of this Indenture are and will be the legal, valid and binding limited obligations of the Issuer in accordance with their terms, and the Issuer and Trustee shall, at all times and to the extent permitted by law, defend, preserve and protect the pledge and assignment of the Revenues and other assets made hereunder and the rights of the Bondholders under this Indenture against all claims and demands of all Persons whomsoever. The Issuer expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, including other projects undertaken in accordance with the Act, and reserves the right to issue other obligations for such purposes, provided that no such other obligations shall have any lien or claim upon the Revenues or any of the funds pledged, assigned or deposited under this Indenture. SECTION 7.05 Accounting Records and Financial Statements. (a) The Trustee shall keep proper books of record and account with respect to this Indenture and the Bonds and the funds and accounts maintained hereunder, all in accordance with prudent industry practice, and shall make complete and accurate entries of all transactions relating to the proceeds of Bonds, the Revenues, the Loan Agreement and all funds and accounts established pursuant to this Indenture. Such books of record and account shall be available for inspection by the Issuer, the Borrower, the Bank and any Bondholder, or their respective agents or representatives duly authorized in writing, at reasonable hours and under reasonable circumstances. (b) The Trustee shall furnish the Borrower monthly with statements (which need not be audited) covering the receipts, disbursements, allocation and application of Revenues and other money (including proceeds of Bonds) in the funds and accounts established pursuant to this Indenture during the preceding monthly period; each such statement shall be furnished within thirty (30) days following the end of the period covered by such statement. SECTION 7.06 Tax Covenants. The Issuer covenants that it shall not take any action or suffer or permit any action to be taken by any party (inclusive of the Borrower) or condition to exist (inclusive of the application, use or investment of the proceeds of the sale of the Bonds or revenues held for payment of debt service on the Bonds) which causes or may cause the interest payable on the Bonds to be subject to Federal income taxes, and the Issuer covenants to take all action, to do all things and to cause all things to be done which may be necessary so that the interest payable on the Bonds shall be and continue to be exempt from Federal income taxes, to the same extent as on the date of original issuance thereof. The Issuer covenants to include in the Loan Agreement, and to enforce, appropriate covenants of the Borrower to preserve the tax-exempt status of interest on the Bonds under the Code. Without limiting the generality of the foregoing paragraph, the Issuer covenants with the Owners, from time to time, of the Bonds that the Issuer will make no use of the proceeds of the Bonds or revenues held for payment of debt service on the Bonds that will cause any of the Bonds to be or become an "arbitrage bond" within the meaning of Section 103(b)(2) of the Code, and the Issuer also covenants to comply with the requirements of Section 103(b)(2) and Section 148 of the Code and with Sections 1.148-1 through 1.148-11 of the Treasury Regulations published in the Federal Register as of the date hereof, as applicable, or with other such regulations implementing said Section 103(b)(2) and Section 148, if and to the extent applicable, throughout the term of the Bonds. If the Issuer or the Borrower at any time is of the opinion that it is necessary to restrict or limit the yield on the investment of any money held by the Trustee under this Indenture for purposes of complying with the Code and applicable tax regulations, the Issuer or the Borrower shall so instruct the Trustee in writing, and the Trustee shall take such action as shall be set forth in such instructions. The Issuer covenants to pay, or to cause the Borrower to pay, all arbitrage rebate payments that may be required with respect to the Bonds under Section 148(f) of the Code, as and when the same become due and payable. This covenant shall survive payment of the Bonds and defeasance of the lien of this Indenture. The Issuer represents that it has included (or will include) in the Loan Agreement or in a related loan document, and will enforce, a covenant of the Borrower to pay over to the Trustee, for payment to the United States in the name of the Issuer, any amounts in excess of amounts then available in the Rebate Fund required to make payments of arbitrage rebate to the United States when due and payable. Notwithstanding any provision of this Section and Section 6.13 of this Indenture, if the Borrower shall provide to the Issuer and the Trustee an Opinion of Bond Counsel to the effect that any action required under this Section or Section 6.13 of this Indenture is no longer required, or to the effect that some further action is required, to maintain the exclusion from gross income of interest on the Bonds, the Issuer, the Trustee and the Borrower may rely conclusively on such opinion and the terms and provisions of this Section and Section 6.13 of this Indenture shall be deemed amended accordingly and without necessity of any prior or subsequent consent of any Holder of Bonds. SECTION 7.07 Enforcement of Loan Agreement; Amendments to Loan Agreement. (a) The Trustee, as assignee of the Issuer with respect to the Loan Agreement, shall promptly collect all amounts due from the Borrower pursuant to Sections 3.01 and 3.03 of the Loan Agreement, shall perform all duties (if any) imposed upon the Trustee by the Loan Agreement and shall diligently enforce, and take all steps, actions and proceedings reasonably necessary for the enforcement of, all of the obligations of the Borrower under the Loan Agreement. (b) The Issuer shall not amend, modify or terminate any provisions of the Loan Agreement, or consent to any such amendment, modification or termination, without the written consent of the Trustee. The Trustee shall give such written consent only if (1) notification of such amendment, modification or termination has been given to each Rating Agency and to the Owners, (2) the Trustee receives the written consent of the Bank, (3)(i) such amendment, modification or termination will not materially adversely affect the interests of the Owners or result in any material impairment of the security hereby given for the payment of the Bonds or (ii) the Trustee first obtains the written consent of the Bank and the Owners of a majority in principal amount of the Bonds then Outstanding to such amendment, modification or termination and provides notice of such amendment, modification or termination and of such written consent to the Owners, and (4) there shall have been delivered to the Trustee an Opinion of Counsel to the Issuer, in form and substance satisfactory to the Trustee, that all of the provisions and conditions set forth in this subsection (b) have been satisfied. The foregoing notwithstanding, no amendment, modification or termination of the Loan Agreement shall reduce the amount of Loan Payments in respect of the principal, interest, redemption price or purchase price of the Bonds to be made by the Borrower to the Issuer or the Trustee, or extend the time for making any such payment, without the written consent of all of the Owners of the Bonds then Outstanding. SECTION 7.08 Waiver of Laws. The Issuer shall not at any time insist upon, plead in any manner whatsoever, or claim or take the benefit or advantage of, any stay or extension provided by law now or at any time hereafter in force that may affect the covenants and agreements contained in this Indenture or in the Bonds, and all benefit or advantage of any such law or laws is hereby expressly waived by the Issuer to the extent permitted by law. SECTION 7.09 Financing Statements and Other Action to Protect Security Interests. This Indenture shall constitute a security agreement within the meaning of the Pennsylvania Uniform Commercial Code. The Issuer, at the expense of the Borrower, shall cause this Indenture or an appropriate financing statement or memorandum to be filed, registered and recorded in such manner and at such places as may be required by law fully to protect the security of the holders of the Bonds and the right, title and interest of the Trustee in and to the Trust Estate or any part thereof, and the Issuer shall cooperate with the Trustee in connection with any such filing, registration or recording. Concurrently with the execution and delivery hereof and thereafter from time to time as required to maintain perfection of the security interest created hereby, the Issuer shall cause the Borrower to obtain an opinion of Counsel and furnish a signed copy thereof to the Trustee, setting forth what, if any, actions by the Issuer or Trustee should be taken to preserve such security. The Issuer shall perform or shall cause to be performed any such acts, and execute and cause to be executed any and all further instruments as may be required by law or as shall reasonably be requested by the Trustee for such protection of the interests of the Trustee and the Bondholders, and shall furnish or cause to be furnished satisfactory evidence to the Trustee of recording, registering, filing and refiling of such instrument and of every additional instrument which shall be necessary to preserve the lien of this Indenture upon the Trust Estate or any part thereof until the principal of and interest on the Bonds secured hereby shall have been paid. The Trustee shall execute or join in the execution of any such further or additional instrument and file or join in the filing thereof at such time or times and in such place or places as it may be advised by an opinion of Counsel will preserve the lien of this Indenture upon the Trust Estate or any part thereof until the aforesaid principal and interest shall have been paid. SECTION 7.10 Further Assurances. The Issuer will make, execute and deliver any and all such further indentures, instruments and assurances as may be reasonably necessary or proper to carry out the intention of this Indenture or to facilitate its performance and for the better assuring and confirming unto the Owners of the Bonds the rights and benefits provided in this Indenture. All such action shall be at the expense of the Borrower, and the reasonable fees of the Issuer and its Counsel in connection therewith shall constitute Administrative Expenses. ARTICLE VIII EVENTS OF DEFAULT; REMEDIES OF BONDHOLDERS SECTION 8.01 Events of Default. Any of the following events shall be an Event of Default: (a) failure to make due and punctual payment of the principal of any Bond on the date as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by acceleration, or otherwise; or (b) failure to make due and punctual payment of any installment of interest on any Bond on the date as the same shall become due and payable; or (c) failure to pay the purchase price on any Bond tendered pursuant to Article V when such payment is due; or (d) failure by the Issuer to observe any other covenants, agreements or conditions on its part contained in this Indenture or in the Bonds, if such failure shall have continued for a period of sixty (60) days after written notice specifying such default and requiring the same to be remedied has been given to the Issuer and the Borrower by the Trustee, or to the Issuer, the Borrower and the Trustee by the Owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds at the time Outstanding; or (e) the occurrence of any "Event of Default" as defined in Sections 8.01(a) through (d) or Section 8.01(f) of the Loan Agreement; or (f) receipt by the Trustee of written notice from the Bank advising the Trustee that the Bank has declared an event of default under the provisions of the Letter of Credit Agreement and instructing the Trustee to declare the principal amount of the Outstanding Bonds to be immediately due and payable; or (g) receipt of notice by the Trustee from the Bank, within the time limit stipulated in the terms of the Letter of Credit following a draw on such Letter of Credit for payment of interest on Bonds that will remain Outstanding after the application of the proceeds of such drawing, stating that the Letter of Credit will not be reinstated with respect to such interest; or (h) failure by the Borrower to cause a Substitute Letter of Credit to be issued and delivered to the Trustee on or prior to the Interest Payment Date immediately preceding the Letter of Credit Termination Date, unless the Outstanding Bonds covered by the Letter of Credit have been called for mandatory redemption in accordance with Section 4.01(b)(1). The terms "default" or "failure" as used in this Section mean a default or failure by the Issuer in the observance or performance of any of the covenants, agreements or obligations on its part to be observed or performed and contained in this Indenture or in the Bonds or a default or failure by the Borrower in the observance or performance of any of the covenants, agreements or obligations on its part to be observed or performed and contained in the Loan Agreement or related loan documents, exclusive of any period of grace or notice required to constitute an Event of Default as provided above or in the Loan Agreement. As soon as practicable after it gains actual knowledge of any Event of Default, the Trustee shall notify the Bank, the Borrower, the Issuer, the Tender Agent and the Remarketing Agent. Anything contained in this Indenture to the contrary notwithstanding, so long as the Bank is not in default under the terms of the Letter of Credit, (i) no failure or default described in subsections (d) or (e) above shall constitute an Event of Default without the prior written consent of the Bank, and (ii) no notice of an Event of Default shall be given by the Trustee to the Bondholders without the prior written consent of the Bank, except notice of an Event of Default described in subsection (f), (g) or (h) above. SECTION 8.02 Acceleration. If any Event of Default described in Sections 8.01(a), (b), (c), (d) or (e) of this Indenture occurs, the Trustee, by written notice to the Issuer, the Bank and the Borrower and with the written consent of the Bank, may declare, and shall declare, upon written request of the Owners of twenty-five percent (25%) in aggregate principal amount of the Bonds then Outstanding, the principal amount of all Bonds then Outstanding, together with the interest accrued thereon, to be immediately due and payable. If any Event of Default described in Section 8.01(f), (g) or (h) occurs, the Trustee, by written notice to the Issuer, the Bank and the Borrower, shall declare the principal amount of all Bonds then Outstanding, together with the interest accrued thereon, to be immediately due and payable, and no consent of the Bank shall be required. The date as of which the Trustee declares the principal of the Outstanding Bonds to be due and payable is herein referred to as the "Acceleration Date." The Bonds shall become immediately due and payable, at a price equal to 100% of the aggregate principal amount thereof plus interest accrued to the Acceleration Date (the "Acceleration Price"), on the first (1st) Business Day following the Acceleration Date (the "Payment Date"). Upon declaring the Bonds immediately due and payable in accordance with the foregoing paragraph, the Trustee shall immediately exercise such rights as it may have under the Loan Agreement to declare all payments thereunder to be immediately due and payable and shall immediately make a draw upon the Letter of Credit for the amount that is required to pay the Acceleration Price on the Payment Date. Upon receipt by the Trustee of the full amount drawn on the Letter of Credit pursuant to the foregoing provisions and provided that sufficient Available Money is in the Bond Fund to pay all sums due and payable to the Bondholders, (i) interest on the Bonds shall cease to accrue on the Acceleration Date, and (ii) the Bank shall be subrogated to all right, title and interest of the Trustee and the Bondholders in and to the Loan Agreement, the Facility and any other security held for the payment of the Bonds (except any funds held in the Bond Fund or any account with respect to Undelivered Bonds which are identified for the payment of the Bonds or the Purchase Price of Undelivered Bonds and any funds in the Rebate Fund) all of which, upon payment of any fees and expenses due and payable to the Trustee pursuant to the Loan Agreement or this Indenture, shall be assigned by the Trustee to the Bank. As soon as possible, the Trustee shall give written notice of any acceleration of the Bonds to the Bondholders. Such notice of acceleration (i) shall be given in the name of the Issuer; (ii) shall identify the accelerated Bonds (by name, series, date of issue, interest rate and maturity date); (iii) shall specify the Acceleration Date; (iv) shall specify the Payment Date and the Acceleration Price; (v) shall state that the interest on such Bonds ceased to accrue on the Acceleration Date; (vi) shall state the reason for the acceleration; and (vii) shall state that on the Payment Date the Acceleration Price will be payable at the Principal Corporate Trust Office of the Trustee. The Trustee shall use "CUSIP" numbers on such notice as a convenience to Bondholders and such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Bonds or as contained in any notice of acceleration and that reliance may be placed only on the registration number and description printed on the Bonds. A copy of such notice of acceleration shall be mailed, by registered, certified or overnight mail, to the Rating Agency, but failure to mail any such notice or any defect in the mailing thereof shall not affect the validity of such acceleration. If, after the principal of and interest on the Bonds has been so declared to be due and payable immediately and before any judgment or decree for the payment of the money due shall have been obtained or entered, all arrears of principal and interest on Bonds are paid, the Letter of Credit is reinstated (in an aggregate amount not less than the principal amount of the Outstanding Bonds plus (i) if Bonds are Variable Rate Bonds, 45 days' interest on such Outstanding Bonds calculated at the Maximum Rate, or (ii) if Outstanding Bonds are Fixed Rate Bonds, interest on such Outstanding Bonds at the Fixed Rate for the number of days required by Section 5.01), the reasonable charges and expenses of the Trustee are paid or duly provided for to the satisfaction of the Trustee, and any and all other defaults known to the Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, the Owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then Outstanding, by written notice to the Issuer, the Bank, the Borrower and the Trustee, or the Trustee, if such declaration was made by the Trustee, may, on behalf of the Owners of all Bonds, rescind and annul such declaration and its consequences and waive such default. No such rescission and annulment shall extend to or affect any subsequent default or impair or exhaust any right or power in consequence thereof. Any of the foregoing provisions to the contrary notwithstanding, except upon the occurrence of an Event of Default described in Section 8.01(f), (g) or (h), no Owners of Bonds shall have any right to require the Trustee to accelerate the Bonds, and the Trustee shall not be obligated to give any Bondholder notice of a default under the Indenture, the Loan Agreement or any other documents executed and delivered in connection with the Bonds, unless the Bank shall be in default of its obligations under any Letter of Credit or a voluntary or involuntary case has been commenced by or against the Bank by the filing of a petition under the United States Bankruptcy Code or any other law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts. SECTION 8.03 Other Remedies. If any Event of Default occurs and is continuing, the Trustee, before or after declaring the principal of the Bonds immediately due and payable, may enforce each and every right granted to the Issuer or the Trustee under the Loan Agreement, the Letter of Credit or any other security instrument, or under any supplements or amendments thereto, and shall, at all times complying with the provisions of Section 8.02 of this Indenture, apply any Revenues or Available Money in the Bond Fund held by the Trustee to the payment of principal of or interest on the Bonds. In exercising such rights and the rights given the Trustee under this Article VIII, the Trustee shall take such action as, in the judgment of the Trustee, applying the standards described in Section 9.01 of this Indenture, would best serve the interests of the Bondholders. SECTION 8.04 Legal Proceedings By Trustee. If any Event of Default has occurred and is continuing, the Trustee in its discretion may and, upon the written request of the Bank or the Owners of twenty-five percent (25%) in aggregate principal amount of the Bonds then Outstanding (subject to the consent of the Bank, if the Bank is not then in default of its obligations under the Letter of Credit and no voluntary or involuntary case has been commenced by or against the Bank under the United States Bankruptcy Code or any other law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts) and receipt of indemnity to its satisfaction shall, in its own name: (a) By mandamus, other suit, action or proceeding at law or in equity, enforce all rights of the Bondholders, including the right to require the Issuer to collect the amounts payable under the Loan Agreement and to require the Issuer to carry out any other provisions of this Indenture for the benefit of the Bondholders and to perform its duties under the Act; (b) Bring suit upon the Bonds; (c) By action or suit in equity require the Issuer to account as if it were the trustee of an express trust for the Bondholders; or (d) By action or suit in equity enjoin any acts or things that may be unlawful or in violation of the rights of the Bondholders. SECTION 8.05 Discontinuance of Proceedings by Trustee. If any proceeding taken by the Trustee on account of any Event of Default is discontinued or is determined adversely to the Trustee, then the Issuer, the Trustee, the Bondholders and the Bank shall be restored to their former positions and rights hereunder as though no such proceeding had been taken, but subject to the limitations of any such adverse determination. SECTION 8.06 Bondholders May Direct Proceedings by Trustee. The Owners of a majority in aggregate principal amount of all Bonds Outstanding hereunder shall have the right to direct the method and place of conducting all remedial proceedings by the Trustee hereunder, provided that such direction shall not be otherwise than in accordance with law or the provisions of this Indenture, and that the Trustee shall not be required to comply with any such direction which it deems to be unlawful or unjustly prejudicial to Bondholders not parties to such direction. The foregoing provisions of this Section 8.06 to the contrary notwithstanding, the Bank shall have the right to direct the method and the place of conducting all remedial proceedings by the Trustee hereunder, provided that such direction shall not be otherwise than in accordance with law or the provisions of this Indenture, so long as the Bank shall not be in default with respect to its obligations under the Letter of Credit. SECTION 8.07 Limitations on Actions By Bondholders. Anything in this Indenture to the contrary notwithstanding, no Bondholder shall have any right to pursue any remedy hereunder or under the Loan Agreement unless: (a) The Trustee shall have been given written notice of an Event of Default; (b) The Owners of at least twenty-five percent (25%) in aggregate principal amount of all Bonds Outstanding shall have made a written request to the Trustee to exercise the powers herein granted or to pursue such remedy in its or their name or names; (c) The Trustee shall have been offered indemnity satisfactory to it against costs, expenses and liabilities; (d) The Trustee shall have failed to comply with such request within a reasonable time; and (e) The Bank shall be in default of its obligations under the Letter of Credit or a voluntary or involuntary case has been commenced by or against the Bank by the filing of a petition under the United States Bankruptcy Code or any other law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts; provided, however, that nothing herein shall affect or impair the right of any Owner of any Bond to enforce payment of the principal of such Bond and interest thereon at and after the maturity thereof, or the obligation of the Issuer to pay such principal and interest to the respective Owners of the Bonds at the time and place, from the source and in the manner expressed herein and in the Bonds; and provided further that such action shall not disturb or prejudice the lien of this Indenture. SECTION 8.08 Trustee May Enforce Rights Without Possession of Bonds. All rights under the Indenture and the Bonds may be enforced by the Trustee without the possession of any Bonds or the production thereof at the trial or other proceedings relative thereto, and any proceedings instituted by the Trustee shall be brought in its name for the ratable benefit of the Owners of the Bonds. SECTION 8.09 Delays and Omissions Not to Impair Rights. No delay or omission in respect of exercising any right or power accruing upon any Event of Default shall impair such right or power or be a waiver of such Event of Default and every remedy given by this Article VIII may be exercised, from time to time, and as often as may be deemed expedient. SECTION 8.10 Application of Money in Event of Default. Any money received by the Trustee under this Article VIII shall be applied in the order listed below (provided that any money received by the Trustee upon drawing under Letter of Credit, together with Available Money on deposit in the Bond Fund and available for payment of principal and interest on all Outstanding Bonds, any money held by the Trustee upon the nonpresentment of Bonds and any money held by the Trustee for the defeasance of Bonds pursuant to Article XI shall be applied only as provided in clause (b) below and only to pay outstanding principal and accrued interest, as provided in the Letter of Credit, with respect to Bonds of the series to which it relates): (a) To the payment of the fees and expenses of the Trustee and the Issuer including reasonable counsel fees and expenses, and any disbursements of the Trustee with interest thereon and its reasonable compensation; (b) To the payment of principal and interest then owing on the Bonds, including any interest on overdue interest, and in case such money shall be insufficient to pay the same in full, then to the payment of principal and interest ratably, without preference or priority of one over another or of any installment of interest over any other installment of interest; and (c) To reimbursement of the Bank for any unreimbursed drawing under any Letter of Credit or other obligations owing by the Borrower to the Bank under the Letter of Credit Agreement. The surplus, if any, remaining after application of money as set forth above shall be paid to the Borrower or to the person lawfully entitled to receive the same as a court of competent jurisdiction may direct. SECTION 8.11 Trustee and Bondholders Entitled to All Remedies Under Act; Remedies Not Exclusive. It is the purpose of this Article VIII to provide to the Trustee and the Bondholders all rights and remedies as may be lawfully granted under the provisions of the Act; but should any remedy herein granted be held unlawful, the Trustee and the Bondholders shall nevertheless be entitled to every remedy permitted by the Act. It is further intended that, insofar as lawfully possible, the provisions of this Article VIII shall apply to and be binding upon any trustee or receiver appointed under the Act. No remedy herein conferred is intended to be exclusive of any other remedy or remedies, and each remedy is in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. SECTION 8.12 Trustee's Right to Receiver. As provided by the Act, the Trustee shall be entitled as of right to the appointment of a receiver; and the Trustee, the Bondholders and any receiver so appointed shall have such rights and powers and be subject to such limitations and restrictions as may be contained in or permitted by the Act. SECTION 8.13 Subrogation Rights of Bank. The Trustee agrees that the Bank shall be subrogated to all rights, remedies and collateral of the Trustee under the Indenture, the Loan Agreement or any other document or instrument, to the extent the Bank has honored a draw under the Letter of Credit and has not been reimbursed or paid therefor. SECTION 8.14 Waiver of Default. So long as the Bank is not in default of its obligations under the Letter of Credit and the Letter of Credit are in full force and effect, the Bank may waive an Event of Default, except an Event of Default described in Section 8.01(h) hereof, and if the Bank does so, the Trustee must also waive such Event of Default. The Trustee may not waive an Event of Default under this Indenture if any Letter of Credit has not been reinstated to cover principal and interest on Bonds in accordance with the terms of the Letter of Credit. Any such wavier by the Bank and reinstatement must made in writing by the Bank and delivered to the Trustee. ARTICLE IX THE TRUSTEE; THE TENDER AGENT; AND THE REMARKETING AGENT SECTION 9.01 Duties, Immunities and Liabilities of Trustee. (a) Prior to an Event of Default of which the Trustee has been notified, is deemed to have notice or has actual knowledge and after the curing of all Events of Default which may have occurred, the Trustee undertakes to perform such duties, and only such duties, as are specifically set forth in this Indenture. Following the occurrence of an Event of Default and until such Event of Default has been cured, the Trustee shall exercise those rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) The Issuer shall remove the Trustee if at any time the Issuer is requested to do so by an instrument or concurrent instruments in writing signed by the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing), or if the Trustee shall become incapable of acting or shall be adjudged bankrupt or insolvent, or if a receiver of the Trustee or its property shall be appointed, or if any public officer shall take control or charge of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Trustee. Thereupon the Issuer shall appoint, at the direction of the Borrower or with the consent of the Borrower and, in either case, with the consent of the Bank, a successor Trustee by an instrument in writing. (c) The Trustee may at any time resign by giving written notice of resignation to the Issuer and the Bank and by giving the Bondholders notice of such resignation by mail at the addresses shown on the Bond Register. Upon receiving notice of resignation from the Trustee, the Issuer shall promptly appoint, with the consent of the Bank and the Borrower, a successor Trustee by an instrument in writing. (d) Any removal or resignation of the Trustee shall become effective only upon appointment and acceptance of appointment by a successor trustee and transfer of the Letter of Credit to such successor trustee. If no successor Trustee shall have been appointed and accepted appointment within forty-five (45) days following notice of resignation or removal of the Trustee as aforesaid, the Trustee (in the case of its resignation), or the Issuer (in the case of the Trustee's removal), or any Bondholder (on behalf of himself and all other Bondholders) may petition any court of competent jurisdiction for the appointment of a successor Trustee. Any successor Trustee appointed under this Indenture shall signify its acceptance of such appointment by executing and delivering to the Issuer and to the predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the money, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee herein. Nevertheless, at the request of the Issuer or of the successor Trustee, the Trustee that has resigned or been removed shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under this Indenture and effecting a transfer of the Letter of Credit to such successor Trustee and shall pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions herein set forth. Upon request of the successor Trustee, the Issuer shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such money, estates, properties, rights, powers, trusts, duties and obligations, including a transfer of the Letter of Credit to such successor Trustee. Notice of the appointment of a successor Trustee and of such successor Trustee's acceptance of appointment shall be given by the Issuer to the Rating Agency and to the Bondholders by first class mail. If the Issuer fails to mail such notice within fifteen (15) days following the successor Trustee's acceptance of appointment and the transfer of the Letter of Credit to the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Borrower. (e) Any successor Trustee (i) shall be a trust company or bank having corporate trust powers duly authorized to accept trusts of the character herein described, (ii) shall have a corporate trust office in the Commonwealth or shall otherwise be authorized by laws of the Commonwealth to accept and perform trusts of the character herein described, (iii) shall have combined capital and surplus of at least Fifty Million Dollars ($50,000,000), and (iv) shall be subject to supervision or examination by federal or state authorities. If such bank or trust company publishes a report of condition at least annually, pursuant to law or the requirements of any federal or state supervising or examining Issuer, then for the purpose of this subsection the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. SECTION 9.02 Merger or Consolidation. Any corporation or national banking association into which the Trustee may be merged or converted or with which it may be consolidated or any corporation or national banking association resulting from any merger, conversion or consolidation to which it shall be a party or any corporation or national banking association to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided such corporation or national banking association shall be eligible under Section 9.01(e), shall be the successor to such Trustee without the execution or filing of any paper or any further act, anything herein to the contrary notwithstanding. SECTION 9.03 Liability of Trustee. (a) The recitals of facts herein and in the Bonds contained shall be taken as statements of the Issuer, and the Trustee shall assume no responsibility for the correctness of the same, or make any representations as to the validity or sufficiency of this Indenture or of the Bonds or shall incur any responsibility in respect thereof, other than in connection with the duties or obligations herein or in the Bonds assigned to or imposed upon it. The Trustee shall, however, be responsible for its representations contained in its certificate of authentication on the Bonds. The Trustee shall not be liable in connection with the performance of its duties hereunder, except for its own gross negligence or willful misconduct. The Trustee may become the owner of Bonds with the same rights it would have if it were not Trustee and, to the extent permitted by law, may act as depositary for and permit any of their officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Bondholders, whether or not such committee shall represent the Owners of a majority in principal amount of the Bonds then Outstanding. (b) The Trustee shall not be liable for any error of judgment made in good faith by a responsible officer, unless it shall be proved that the Trustee was grossly negligent in ascertaining the pertinent facts. (c) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture. (d) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture (other than the making of draws under the Letter of Credit in accordance with their terms and the terms of this Indenture, declaring the principal of the Bonds to be immediately due and payable when required hereunder or making payments on the Bonds when due) at the request, order or direction of any of the Bondholders pursuant to the provisions of this Indenture unless such Bondholders shall have offered to the Trustee indemnification to its satisfaction for indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. (e) The Trustee shall not be liable for any action taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. SECTION 9.04 Right of Trustee to Rely on Documents. The Trustee may conclusively rely upon, and shall be protected in acting upon, any notice, resolution, request, consent, order, certificate, report, opinion, bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee may consult with counsel, who may be counsel of or to the Issuer, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it hereunder in good faith and in accordance therewith. The Trustee shall not be bound to recognize any person as the Owner of a Bond unless and until such Bond is submitted for inspection, if required, and his title thereto is satisfactorily established, if disputed. Whenever in the administration of the trusts imposed upon it by this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a Certificate of the Issuer, and such Certificate shall be full warrant to the Trustee for any action taken or suffered in good faith under the provisions of this Indenture in reliance upon such Certificate, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it may deem reasonable. SECTION 9.05 Preservation and Inspection of Documents. ---------------------------------------- (A) All documents received by the Trustee under the provisions of this Indenture shall be retained in its possession and shall be subject during normal business hours of the Trustee to the inspection of the Issuer and any Bondholder, and their agents and representatives duly authorized in writing, at reasonable hours and under reasonable conditions. (B) The Trustee covenants and agrees that it shall maintain a current list of the names and addresses of all the Bondholders. SECTION 9.06 Compensation. The Trustee shall be paid (solely from Additional Payments) from time to time reasonable compensation for all services rendered under this Indenture, and also all reasonable expenses, charges, legal and consulting fees and other disbursements and those of its attorneys, agents and employees, incurred in and about the performance of its powers and duties under this Indenture. SECTION 9.07 The Tender Agent. Allfirst Bank, the initial Tender Agent appointed by the Borrower, and each successor tender agent appointed in accordance herewith, shall designate its office and signify its acceptance of the duties and obligations imposed upon it as described herein by a written instrument of acceptance delivered to the Trustee and the Borrower under which the Tender Agent shall, among other things: (a) hold all Bonds delivered to it hereunder in trust for the benefit of the respective owners of Bonds which shall have so delivered such Bonds until money representing the Purchase Price of such Bond shall have been delivered to or for the account of or to the order of such Owners of Bonds. Upon delivery of money representing the Purchase Price of such Bonds to or for the account of or to the order of such Owners of Bonds, the Tender Agent shall hold all such Bonds which are required to be delivered to the Pledged Bonds Custodian pursuant to Section 5.06(b) of this Indenture, as the agent of the Bank for the purpose of perfecting the Bank's security interest therein under the Pledge Agreement (which agency shall terminate upon delivery of such Bonds by the Tender Agent to or upon the order of the Bank in accordance with such Section 5.06(b)); and (b) hold all money delivered to it hereunder and under the Tender Agent Agreement for the purchase of such Bonds in a separate account in trust for the benefit of the person or entity which shall have so delivered such money until required to transfer such funds as provided herein. SECTION 9.08 Removal or Resignation of Tender Agent; Qualification of Successors. The Tender Agent may at any time resign and be discharged of its duties and obligations by giving at least sixty (60) days' written notice to the Issuer, the Trustee, the Remarketing Agent, the Bank and the Borrower; provided that such resignation shall not take effect until the appointment of a successor Tender Agent and such successor's acceptance of such appointment in accordance with the provisions of this Indenture. With the prior written approval of the Bank, the Tender Agent may be removed by the Borrower at any time, upon written notice to the Issuer, the Trustee and the Remarketing Agent. The Borrower, with the prior written consent of the Bank, may appoint a successor Tender Agent. Any successor Tender Agent (i) shall be a bank or trust company, duly organized under the laws of the United States of America or any state or territory thereof, having a combined capital stock, surplus and undivided profits of at least Fifty Million Dollars ($50,000,000) or a wholly-owned subsidiary of such a bank or trust company, and (ii) shall be authorized by law to perform all duties imposed upon it by this Indenture, and Any removal or resignation of the Tender Agent shall become effective only upon appointment and acceptance of appointment by a successor Tender Agent. If no successor Tender Agent shall have been appointed and accepted appointment within forty-five (45) days following notice of resignation or removal of the Tender Agent as aforesaid, the Tender Agent (in the case of its resignation), or the Issuer (in the case of the Tender Agent's removal), or any Bondholder (on behalf of himself and all other Bondholders) may petition any court of competent jurisdiction for the appointment of a successor Tender Agent. Any successor Tender Agent appointed under this Indenture shall signify its acceptance of such appointment by executing and delivering to the Issuer and to the predecessor Tender Agent a written acceptance thereof, and thereupon such successor Tender Agent, without any further act, deed or conveyance, shall become vested with all the money, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Tender Agent, with like effect as if originally named Tender Agent herein. Nevertheless, at the request of the Issuer or of the successor Tender Agent, the Tender Agent that has resigned or been removed shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Tender Agent all the right, title and interest of such predecessor Tender Agent in and to any property held by it under this Indenture and effecting a transfer of the Letter of Credit to such successor Tender Agent and shall pay over, transfer, assign and deliver to the successor Tender Agent any money or other property subject to the trusts and conditions herein set forth. Upon request of the successor Tender Agent, the Issuer shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Tender Agent all such money, estates, properties, rights, powers, trusts, duties and obligations.. Notice of the appointment of a successor Tender Agent and of such successor Tender Agent's acceptance of appointment shall be given by the Borrower to the Rating Agency and to the Bondholders by first class mail. If the Borrower fails to mail such notice within fifteen (15) days following the successor Tender Agent's acceptance of appointment, the successor Tender Agent shall cause such notice to be mailed at the expense of the Borrower. Upon the effectiveness of any resignation or removal of the Tender Agent, the Tender Agent resigning or being removed shall deliver any Bonds and money held by it in such capacity to the successor Tender Agent. SECTION 9.09 Qualifications of Remarketing Agent; Resignation; Removal. The Remarketing Agent shall be a financial institution or registered broker/dealer authorized by law to perform all of the duties imposed upon it by this Indenture. The Remarketing Agent may at any time resign and be discharged of its duties and obligations created by this Indenture by giving at least thirty (30) days' notice to the Issuer, the Borrower and the Trustee. The Remarketing Agent may be removed by the Borrower at any time, upon not less than thirty (30) days' written notice filed with the Remarketing Agent, the Issuer and the Trustee. Upon the resignation or removal of the Remarketing Agent, the Borrower shall appoint a successor Remarketing Agent and shall provide written notice thereof to the Issuer and the Trustee. No resignation or removal of the Remarketing Agent shall become effective until a successor Remarketing Agent is appointed and accepts such appointment. . SECTION 9.10 Construction of Ambiguous Provisions. The Trustee may construe any provision of this Indenture insofar as such may appear to be ambiguous or inconsistent with any other provision of this Indenture; and any construction of any such provision by the Trustee in good faith shall be binding upon the Owners of the Bonds. ARTICLE X MODIFICATION OR AMENDMENT OF THIS INDENTURE SECTION 10.01 Amendments Permitted. This Indenture and the rights and obligations of the Issuer, the Trustee and the Owners of the Bonds hereunder may be modified or amended from time to time and at any time for any lawful purpose, by an indenture or indentures supplemental hereto, which the Issuer and the Trustee may enter into without the consent of any Bondholder but with the prior written consent of the Borrower and the Bank (as long as the Bank is not in default under the Letter of Credit); provided, however, that the consent of the Bank shall not be required in connection with the execution and delivery of any Supplemental Indenture to become effective only upon delivery and acceptance by the Trustee of a Substitute Letter of Credit. The foregoing to the contrary notwithstanding, no such modification or amendment shall, without the consent of the Borrower and the Owners of all Bonds then Outstanding, (i) extend the maturity date of any Bond, (ii) reduce the amount of principal thereof, (iii) extend the time of payment or change the method of computing the rate of interest thereon, without the consent of the Owner of each Bond so affected, or eliminate the Owners' rights to tender Bonds, (iv) extend the due date for the purchase of Bonds tendered by the Owners thereof, or (v) reduce the Purchase Price of such Bonds; provided, however, that no consent of the Holders of the Bonds then Outstanding shall be required for any modification or amendment to this Indenture which is to become effective only following a mandatory tender of all Bonds for purchase in connection with the exercise of the Conversion Option. It shall not be necessary for the consent of the Bondholders to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuer and the Trustee of any Supplemental Indenture pursuant to this Section 10.01, the Trustee shall mail a notice, setting forth in general terms the substance of such Supplemental Indenture, to each Rating Agency and to the Owners of the Bonds at the addresses of such Owners shown on the Bond Register. Any failure to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Indenture. The foregoing to the contrary notwithstanding, the Trustee may not accept any amendment to the Letter of Credit resulting from a decrease in the Maximum Rate or a decrease in the number of days of accrued interest covered by such Letter of Credit, unless the Trustee shall have received (a) a written response to a notice of such amendment from Moody's (if the Bonds are then rated by Moody's) and S&P (if the Bonds are then rated by S&P) indicating that such decrease will not result in the ratings of the Bonds being reduced or withdrawn, or (b) the consent of the Owners of all of the Bonds paid from such Letter of Credit in the manner described above. SECTION 10.02 Effect of Supplemental Indenture. Upon the execution of any Supplemental Indenture pursuant to this Article, this Indenture shall be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under this Indenture of the Issuer, the Trustee and all Owners of Bonds Outstanding shall thereafter be determined, exercised and enforced subject in all respects to such modification and amendment, and all the terms and conditions of any such Supplemental Indenture shall be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 10.03 Trustee Authorized to Join in Amendments and Supplements; Reliance on Counsel. The Trustee is authorized to join with the Issuer in the execution and delivery of any supplemental indenture or amendment permitted by this Article X and in so doing shall be fully protected by an Opinion of Counsel that such supplemental indenture or amendment is so permitted and has been duly authorized by the Issuer and that all things necessary to make it a valid and binding agreement have been done. ARTICLE XI DEFEASANCE SECTION 11.01 Defeasance. When the principal of, and premium (if any) and interest on, all Bonds issued hereunder have been paid, or provision has been made for payment of the same and any Purchase Price which may become payable pursuant to Article V, together with the compensation and expenses of the Trustee and all other sums payable hereunder by the Issuer or the Borrower, the right, title and interest of the Trustee in and to the Trust Estate shall thereupon cease and the Trustee, on demand of the Issuer or the Borrower, shall release this Indenture and shall execute such documents to evidence such release as may be reasonably required by the Issuer or the Borrower and shall turn over to the Borrower or to such person, body or Issuer as may be entitled to receive the same all balances then held by it hereunder not required for the payment of the Bonds and such other sums and shall surrender the Letter of Credit to the Bank; provided that (a) any proceeds of the Letter of Credit not required for payment of the Bonds shall be turned over to the Bank and (b) in the event there has been a drawing under the Letter of Credit for which the Bank has not been fully reimbursed pursuant to the Letter of Credit Agreement or any other obligations are then due and owing to the Bank under the Letter of Credit Agreement, the Trustee shall assign and turn over to the Bank, as successor, subrogee or otherwise, all of the Trustee's right, title and interest under this Indenture, all balances held hereunder (excluding the Rebate Fund) not required for the payment of the Bonds and such other sums and the Trustee's right, title and interest in, to and under the Loan Agreement and any other property comprising the Trust Estate. If payment or provision therefor is made with respect to less than all of the Bonds, the particular Bonds (or portions thereof) for which provision for payment shall have been considered made shall be selected by lot or by such other method as the Trustee deems fair and appropriate, and thereupon the Trustee shall take similar action for the release of this Indenture with respect to such Bonds. SECTION 11.02 Provision for Payment. --------------------- (a) Provision for the payment of Bonds shall be deemed to have been made when the Trustee holds in the Bond Fund (1) cash in an amount sufficient to make all payments (including principal, premium, if any, interest and Purchase Price payments, if any) specified in Section 11.01 with respect to such Bonds, or (2) Government Obligations maturing on or before the date or dates when the payments specified above shall become due, the principal amount of which and the interest thereon, when due, is or will be, in the aggregate, sufficient without reinvestment to make all such payments, or (3) any combination of cash and Government Obligations the amounts of which and interest thereon, when due, are or will be, in the aggregate, sufficient without reinvestment to make all such payments; provided that (i) such amount on deposit shall be deemed sufficient only if (A) while Bonds bear interest at a Variable Rate, it provides for payment of interest at the Maximum Rate and the Issuer shall have surrendered any power hereunder to thereafter change the Maximum Rate, or (B) while Bonds bear interest at a Fixed Rate, it provides for payment of interest at such Fixed Rate, (ii) the Bond Trustee shall have received an Opinion of Bond Counsel to the effect that a deposit of obligations described in clause (2) or (3) above will not adversely affect the exclusion from gross income for federal income tax purposes of the interest on any of the Bonds or cause any of the Bonds to be classified as "arbitrage bonds" within the meaning of Section 148 of the Code, (iii) the Trustee shall have received written notice from each Rating Agency that such provision for payment of the Bonds will result in a rating on the Bonds equal to or higher than the then current rating; and (iv) provision for payment of Bonds shall be deemed to be made only if (A) the Trustee holds in the Bond Fund cash constituting Available Money or such obligations purchased with Available Money for payment of such Bonds in amounts sufficient to make all payments specified above with respect to such Bonds, as verified by an accountant's certification in form and by an accountant acceptable to the Trustee and the Rating Agency, and (B) in the case of Variable Rate Bonds, the Bonds have been called for redemption on a date not more than 90 days from the date provision for payment is being made pursuant to this Section and, in determining the sufficiency of amounts held to make payments with respect to the Bonds, there shall be excluded any and all interest expected to be earned on obligations held by the Trustee. (b) Neither the money nor the obligations deposited with the Trustee pursuant to this Article shall be withdrawn or used for any purpose other than, and such obligations and money shall be segregated and held in trust for, the payment of the principal or redemption price of, premium, if any, on and interest on, the Bonds (or portions thereof), or for the payment of the Purchase Price of such Bonds in accordance with Article V. While Bonds are Variable Rate Bonds, such money, if not then needed for such purpose, shall, but only to the extent practicable, be invested and reinvested in Government Obligations maturing on or prior to the earlier of (i) the date moneys may be required for the purchase of Bonds pursuant to Article V and (ii) the Interest Payment Date next succeeding the date of investment or reinvestment. (c) Whenever money or obligations shall be deposited with the Trustee for the payment or redemption of Bonds more than 60 days prior to the date that such Bonds are to mature or be redeemed, the Trustee shall mail a notice to the Holders of Bonds for the payment of which such money or obligations are being held at their registered addresses stating that such money or obligations have been deposited. Such notice shall also be sent by the Trustee to the Rating Agency. Notwithstanding the foregoing, no delivery to the Trustee under this Section shall be deemed a payment of any Bonds which are to be redeemed prior to their stated maturity until such Bonds shall have been irrevocably called or designated for redemption on a date thereafter on which such Bonds may be redeemed in accordance with the provisions of this Indenture and proper notice of such redemption shall have been given in accordance with Article IV or the Issuer shall have given the Bond Trustee, in form satisfactory to the Bond Trustee, irrevocable instructions to give, in the manner and at the times prescribed by Article IV, notice of redemption. SECTION 11.03 Deposit of Funds for Payment of Bonds. If the principal or Purchase Price of any Bonds becoming due, either at maturity or by call for redemption or tender or otherwise, together with the premium (if any) thereon and all interest accruing thereon to the due date, has been paid or provision therefor made in accordance with Section 11.02, all interest on such Bonds shall cease to accrue on the due date and all liability of the Issuer with respect to such Bonds shall likewise cease, except as hereinafter provided. Thereafter, (a) any surplus balance held by the Trustee with respect to such Bonds over the principal of, premium (if any) on and actual interest accrued on such Bonds shall be paid to the Bank as a return of excess funds drawn under the Letter of Credit and (b) the Holders of such Bonds shall be restricted exclusively to the funds so deposited for any claim of whatsoever nature with respect to such Bonds, and the Trustee shall hold such funds in trust for such Holders uninvested and without liability for interest thereon. Money so deposited with the Trustee which remain unclaimed five years after the date payment thereof becomes due shall, at the request of the Borrower (or the Bank) and if neither the Issuer nor the Borrower is at the time to the knowledge of the Trustee in default with respect to any covenant contained in the Indenture, the Bonds or the Loan Agreement, be paid to the Borrower (or to the Bank, as provided in Section 11.01 with respect to surplus balances), and the Holders of the Bonds for which the deposit was made shall thereafter be limited to a claim against the Borrower; provided that the Trustee, before making payment to the Borrower, may, at the expense of the Borrower, cause a notice to be given to the Holders at their registered addresses, stating that the moneys remaining unclaimed will be returned to the Borrower after a specified date. SECTION 11.04 Survival of Certain Provisions. Notwithstanding the foregoing, any provisions of this Indenture which relate to the maturity of Bonds, interest payments and dates thereof, optional and mandatory redemption provisions, credit against mandatory sinking fund requirements, exchange, transfer and registration of Bonds, replacement of mutilated, lost, wrongfully taken or destroyed Bonds, safekeeping and cancellation of Bonds, nonpresentment of Bonds, holding of money in trust, payment of money to the Borrower and the Bank, the rebate of moneys to the United States in accordance with Section 148(f) of the Code, and the duties of the Trustee in connection with all of the foregoing, shall remain in effect and be binding upon the Trustee and the Holders notwithstanding the release and discharge of this Indenture. The provisions of this Article shall survive the release, discharge and satisfaction of this Indenture. ARTICLE XII MISCELLANEOUS SECTION 12.01 Liability of Issuer Limited to Revenues. Notwithstanding anything to the contrary contained in this Indenture or in the Bonds, the Issuer shall not be required to advance or pay any money derived from any source other than the Revenues and other assets pledged under this Indenture for any of the purposes in this Indenture mentioned, whether for the payment of the principal of or interest on the Bonds or for any other purpose of this Indenture. Notwithstanding any provisions of this Indenture to the contrary, no recourse under or upon any obligation, covenant or agreement contained herein or in any Bond shall be had against the Issuer, it being expressly agreed and understood that the obligations of the Issuer hereunder, and under the Bonds and elsewhere, are solely corporate obligations of the Issuer and shall be enforceable only out of the Issuer's interest in this Indenture and the Loan Agreement and there shall be no other recourse against the Issuer or any property now or hereafter owned by it and after entry of judgment against the Issuer by virtue of the power herein contained, the Trustee shall mark the judgment index to the effect that the judgment is limited as aforesaid. SECTION 12.02 Limitation of Liability of Directors, Etc. of Issuer. No covenant, agreement, provision or obligation contained herein shall be deemed to be a covenant, agreement or obligation of any present or future director, commissioner, officer, employee, member or agent of the Issuer in his individual capacity, and neither the members of the Issuer nor any officer thereof shall be liable personally on this Indenture or any of the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof or this Indenture. No director, commissioner, officer, employee, member or agent of the Issuer shall incur any personal liability with respect to any other action taken by him pursuant to this Indenture or the Act. Notwithstanding anything herein to the contrary, no provision, covenant or agreement contained in this Indenture or in the Bonds or any obligations herein or therein imposed upon the Issuer or the breach thereof, shall constitute or give rise to or impose upon the Issuer a pecuniary liability or a charge upon its general credit. In making the agreements, provisions and covenants set forth in this Indenture, the Issuer has not obligated itself except with respect to its rights and interest in the Loan Agreement, as hereinabove provided. The issuance of the Bonds under this Indenture shall not be considered a misfeasance in office. The liability of the Issuer, including its officers, members and employees under any and all of the documentation executed in connection with the issuance of the Bonds shall not constitute its general obligation and recourse against the Issuer on the documentation executed in connection with the issuance of the Bonds shall be had only against the property specifically pledged as security therefor and any rents, issues and profits thereof. It is expressly understood that the Issuer shall not otherwise be obligated and that none of its members, officers or employees shall be in any way obligated for any costs, expenses, fees or other obligations or liabilities incurred or imposed in connection with the issuance of the Bonds, whether incurred prior to or after closing, and that recourse against the Issuer and its members, officers or employees, shall be limited as set forth herein. SECTION 12.03 Covenant Not to Sue. The forms of Bonds provide that the Owners of the Bonds agree not to sue the Issuer or any of its board members, officers, agents or employees, past, present or future except as provided herein and in the Loan Agreement as a condition of, and in consideration for, the issuance of the Bonds; accordingly, the Trustee shall not be permitted to sue the Issuer on behalf of the Owners of the Bonds other than as provided herein. SECTION 12.04 Successor is Deemed Included in All References to Predecessor. Whenever in this Indenture either the Issuer or the Trustee is named or referred to, such reference shall be deemed to include the successors or assigns thereof, and all the covenants and agreements in this Indenture contained by or on behalf of the Issuer or the Trustee shall bind and inure to the benefit of the respective successors and assigns thereof, whether so expressed or not. SECTION 12.05 Limitation of Rights to Parties, Bank, Borrower and Bondholders. Nothing in this Indenture or in the Bonds, express or implied, is intended or shall be construed to give to any person other than the Issuer, the Trustee, the Bank, the Borrower and the Owners of the Bonds any legal or equitable right, remedy or claim under or in respect of this Indenture or any covenant, condition or provision therein or herein contained; and all such covenants, conditions and provisions are and shall be held to be for the sole and exclusive benefit of the Issuer, the Trustee, the Bank, the Borrower and the Owners of the Bonds. SECTION 12.06 Waiver of Notice. Whenever in this Indenture the giving of notice by mail or otherwise is required, the giving of such notice may be waived in writing by the person entitled to receive such notice and in any case the giving or receipt of such notice shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. SECTION 12.07 Severability of Invalid Provisions. If any one or more of the provisions contained in this Indenture or in the Bonds shall for any reason be held to be invalid, illegal or unenforceable in any respect, then such provision or provisions shall be deemed several from the remaining provisions contained in this Indenture and such invalidity, illegality or unenforceability shall not affect any other provision of this Indenture, and this Indenture shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. The Issuer hereby declares that it would have entered into this Indenture and each and every other Section, paragraph, sentence, clause or phrase of this Indenture and authorized the issuance of the Bonds pursuant thereto irrespective of the fact that any one or more Sections, paragraphs, sentences, clauses or phrases of this Indenture may be held illegal, invalid or unenforceable. SECTION 12.08 Notices. Unless otherwise specified, all notices to Bondholders may be given by certified or registered United States mail, commercial overnight delivery service, telex or telegram sent to the addresses of such Bondholders as shown on the Bond Register, or may be given by telephone, telecopier or other telecommunication device and subsequently confirmed promptly in writing. Unless otherwise specified in this Indenture or in the Bonds, all Bonds to be presented or surrendered to the Trustee for purposes of payment, exchange or transfer of ownership, and all documents required by this Indenture to accompany the Bonds so presented or surrendered, shall be delivered to the Trustee at its Principal Corporate Trust Office, which is located at the following address: Allfirst Bank 213 Market Street Mail Code: 001-02-11 Harrisburg, Pennsylvania 17101 Attention: Corporate Trust Services Unless otherwise specified in this Indenture or in the Bonds, all Bonds to be tendered to the Tender Agent for purposes of purchase, and all documents required by this Indenture to accompany the Bonds so tendered, shall be delivered to the Tender Agent at its Delivery Office, which is located at the following address: Allfirst Bank 213 Market Street Mail Code: 001-02-11 Harrisburg, Pennsylvania 17101 Attention: Corporate Trust Services Unless otherwise specified in this Indenture or in the Bonds, all notices, demands, requests and other documents or instruments required to be given or sent to the following parties (other than Bonds to be presented, surrendered or tendered for payment, exchange, transfer of ownership or purchase) shall be sent by United States first class mail, postage prepaid, or by commercial overnight delivery service, telex or telegram, addressed as follows (and shall be deemed sufficiently given upon the deposit thereof, postage prepaid, in the United States mail, if sent by mail): To the Trustee: Allfirst Bank 213 Market Street Mail Code: 001-02-11 Harrisburg, Pennsylvania 17101 Attention: Corporate Trust Services To the Issuer: East Hempfield Township Industrial Development Authority c/o Blakinger, Byler & Thomas, P.C. 28 Penn Square Lancaster, Pennsylvania 17603 Attention: Dan A. Blakinger, Esquire (or such other address as may have been filed in writing by the Issuer with the Trustee), To the Borrower: Herley Industries, Inc. 3061 Industry Drive Lancaster, Pennsylvania 17603 Attention: Anello C. Garefino with a copy to: Blakinger, Byler & Thomas, P.C. 28 Penn Square Lancaster, Pennsylvania 17603 Attention: Dan Blakinger, Esquire (or such other address as may have been filed in writing by the Borrower with the Trustee), To the Remarketing Agent and Placement Agent: Allfirst Bank 25 South Charles Street MC 101-346 Baltimore, Maryland 21201 Attention: Capital Markets Division (or such other address as may have been filed in writing by the Remarketing Agent with the Trustee), To the Tender Agent: Allfirst Bank 213 Market Street Mail Code: 001-02-11 Harrisburg, Pennsylvania 17101 Attention: Corporate Trust Services (or such other address as may have been filed in writing by the Tender Agent with the Trustee), To the Bank: Allfirst Bank 25 South Charles Street MC 101-346 Baltimore, Maryland 21201 (or such other address as may have been filed in writing by the Bank with the Trustee). SECTION 12.09 Evidence of Rights of Bondholders. Any request, consent or other instrument required or permitted by this Indenture to be signed and executed by Bondholders may be in any number of concurrent instruments of substantially similar tenor and shall be signed or executed by such Bondholders in person or by an agent or agents duly appointed in writing. Proof of the execution of any such request, consent or other instrument or of a writing appointing any such agent, or of the holding by any person of Bonds transferable by delivery, shall be sufficient for any purpose of this Indenture and shall be conclusive in favor of the Trustee and of the Issuer if made in the manner provided in this Section. The fact and date of the execution by any person of any such request, consent or other instrument or writing may be proved by the certificate of any notary public or other officer of any jurisdiction, authorized by the laws thereof to take acknowledgments of deeds, certifying that the person signing such request, consent or other instrument acknowledged to him the execution thereof, or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer. The ownership of Bonds shall be proved by the Bond Register. Any request, consent or other instrument or writing of the Owner of any Bond shall bind every future Owner of the same Bond and the Owner of every Bond issued in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or the Issuer in accordance therewith or in reliance thereon. SECTION 12.10 Disqualified Bonds. In determining whether the Owners of the requisite aggregate principal amount of Bonds have concurred in any demand, request, direction, consent or waiver under this Indenture, Bonds which are owned or held by or for the account of the Issuer or the Borrower, or by any other obligor on the Bonds, or by any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Issuer, the Borrower, or any other obligor on the Bonds, shall be disregarded and deemed not to be Outstanding for the purposes of this Indenture. Bonds which are held by any pledgee (other than the Bank or the Pledged Bonds Custodian) shall also be disregarded and deemed not to be Outstanding for purposes of this Indenture, unless the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Bonds and that the pledgee is not a person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Issuer, the Borrower or any other obligor on the Bonds. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 12.11 Money Held for Particular Bonds. The money held by the Trustee for the payment of the interest, principal or premium due on any date with respect to particular Bonds (or portions of Bonds in the case of registered Bonds redeemed in part only) shall, on and after such date and pending such payment, be set aside on its books and held uninvested in trust by it for the Owners of the Bonds entitled thereto, subject, however, to the provisions of Section 11.04 of this Indenture. SECTION 12.12 Funds. Any fund required by this Indenture to be established and maintained by the Trustee may be established and maintained in the accounting records of the Trustee either as a fund or an account, and may, for the purposes of such records, any audits thereof and any reports or statements with respect thereto, be treated either as a fund or as an account, but all such records with respect to all such funds shall at all times be maintained in accordance with current industry standards, to the extent practicable, and with due regard for the requirements of Section 7.05 of this Indenture and for the protection of the security of the Bonds and the rights of every holder thereof. SECTION 12.13 Payments Due on Days other than Business Days. If a payment under this Indenture or with respect to Bonds is due on a date that is not a Business Day, then payment may be made on the next day that is a Business Day and no interest shall accrue for the intervening period. SECTION 12.14 Execution in Several Counterparts. This Indenture may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts, or as many of them as the Issuer and the Trustee shall preserve undestroyed, shall together constitute but one and the same instrument. SECTION 12.15 Notices to Rating Agency. Written notice shall be provided by the Trustee to each Rating Agency of (i) the appointment of any successor Trustee, Tender Agent, or Remarketing Agent, (ii) any Supplemental Indenture or any amendment to the Loan Agreement or any Letter of Credit, (iii) the expiration, termination, substitution or extension of any Letter of Credit, (iv) the payment of all Outstanding Bonds, (v) the conversion of Bonds to the Fixed Rate, and (vi) any acceleration of the Bonds. SECTION 12.16 Governing Law. This Indenture shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to any conflict of laws provision thereof. IN WITNESS WHEREOF, EAST HEMPFIELD TOWNSHIP INDUSTRIAL DEVELOPMENT AUTHORITY has caused this Indenture to be signed in its name by its Vice Chairman and its seal to be hereunto affixed and attested by its Secretary, and ALLFIRST BANK has caused this Indenture to be signed in its name by its Authorized Officer, all as of the day and year first above written. ATTEST: EAST HEMPFIELD TOWNSHIP INDUSTRIAL DEVELOPMENT AUTHORITY By: - ---------------------------- -------------------------------- Secretary Vice Chairman (SEAL) ALLFIRST BANK By: -------------------------- Vice President EXHIBIT C Page 1 of 2 EXHIBIT C PROJECT FUND REQUISITION TO: Allfirst Bank 213 Market Street Harrisburg, Pennsylvania 17101 Attention: Corporate Trust Services The undersigned hereby requisitions funds from the Project Fund established pursuant to Section 6.06 of the Trust Indenture, dated as of October 19, 2001 (the "Indenture"), between East Hempfield Township Industrial Development Authority (the "Issuer") and Allfirst Bank, as trustee, for payment of the amount(s) set forth below to the identified payee(s) and for the purpose(s) shown: Project Fund Amount(s) Account Name(s) and Address(es) of Payee(s) Purpose(s) - --------- --------------- ----------------------------------- ---------- $ The undersigned hereby certifies that (a) each of the above obligation(s) for which funds are requisitioned has been incurred by Herley Industries, Inc. (the "Borrower") and is due and payable to the named Payee(s) in connection with the Project, as that term is defined in the Indenture, (b) each such obligation is a proper charge against the Tax-exempt Proceeds/ Equity Contribution Account, indicated above, of the Project Fund, and in the case of the Bonds a Qualified Project Cost, as that phrase is defined in the Indenture, (c) no such obligation has been the basis of a prior requisition for which payment was made or is pending, (d) no written notice of any lien, right to lien or attachment upon, or claim affecting the right to receive payment of, any of the moneys payable under this Requisition has been received, (e) the payment of this Requisition will not violate the prohibitions or requirements relating to the use of proceeds set forth in the Loan Agreement, (f) no Event of Default, as defined in the Indenture or the Loan Agreement, and no event which after notice or lapse of time or both would constitute such an Event of Default has occurred, that has not been waived or cured. Exhibit C Page 2 of 2 NOTE: THIS REQUISITION IS NOT COMPLETE AND IS NOT TO BE PAID UNTIL THE APPROVAL OF ALLFIRST BANK (OR ITS SUCCESSOR, AS ISSUER OF THE LETTER OF CREDIT REFERRED TO IN THE INDENTURE) HAS BEEN RECEIVED. HERLEY INDUSTRIES, INC. Date: ------------------------------ By: (SEAL) ---------------------------- Name: Title: APPROVAL OF ALLFIRST BANK Allfirst Bank, issuer of the Letter of Credit, hereby approves the attached Project Fund Requisition of Herley Industries, Inc. submitted for payment in accordance with the provisions of the Trust Indenture, dated as of October 19, 2001, between East Hempfield Township Industrial Development Authority and Allfirst Bank, as trustee, relating to said Issuer's Variable Rate Demand/Fixed Rate Revenue Bonds (Herley Industries, Inc. Project), Series of 2001. Dated: ALLFIRST BANK -------------------------------- By: ----------------------------- Title: ACKNOWLEDGMENT COMMONWEALTH OF PENNSYLVANIA : : COUNTY OF LANCASTER : On October , 2001, before me, the undersigned notary public, personally appeared Ronald C. Fink, Jr., who acknowledged himself to be the Vice Chairman of the EAST HEMPFIELD TOWNSHIP INDUSTRIAL DEVELOPMENT AUTHORITY, and that he as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of said Issuer by herself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My Commission Expires: (SEAL) ACKNOWLEDGMENT COMMONWEALTH OF PENNSYLVANIA : : COUNTY OF LANCASTER : On October , 2001, before me, the undersigned notary public, personally appeared Daryl S. Peck, who acknowledged himself to be a Vice President of ALLFIRST BANK, and that he as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of said institution by himself as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My Commission Expires: (SEAL) EX-23 8 ex231dtconsent.txt CONSENT OF DELOITTE & TOUCHE Exhibit 23.1 - ------------ INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-85104 of Herley Industries, Inc. on Form S-3 of our report dated October 15, 2002, appearing in this Annual Report on Form 10-K of Herley Industries, Inc. for the year ended July 28, 2002. /s/ DELOITTE & TOUCHE LLP Baltimore, Maryland October 25, 2002 EX-99 9 ex991certifications.txt EX- 99.1 SARBANES- OXLEY SEC 906 CERT EXHIBIT 99.1 - ------------ Certification of Chief Executive Officer pursuant to 18 U.S.C. SECTION 1350, as adopted pursuant to Section 906 of the SARBANES-OXLEY ACT OF 2002 I, Myron Levy, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SARBANES-OXLEY ACT OF 2002, that the Annual Report of Herley Industries, Inc. on Form 10-K for the fiscal year ended July 28, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Herley Industries, Inc. Dated: October 21, 2002 By: /s/ Myron Levy ----------------------- Myron Levy Chief Executive Officer Certification of Chief Executive Officer pursuant to 18 U.S.C. SECTION 1350, as adopted pursuant to Section 906 of the SARBANES-OXLEY ACT OF 2002 I, Anello C. Garefino, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SARBANES-OXLEY ACT OF 2002, that the Annual Report of Herley Industries, Inc. on Form 10-K for the fiscal year ended July 28, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Herley Industries, Inc. Dated: October 21, 2002 By: /s/ Anello C. Garefino ------------------------- Anello C. Garefino Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----