-----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, SDdCOzzpTz2N8a+9LUR7oOC7kxEJUX6xR4uPIE+zKqZtZm2pv+5t4Fu17Hgqw3EK SVgiH/J41+AobPS7oPeOJw== 0000047035-99-000015.txt : 19991028 0000047035-99-000015.hdr.sgml : 19991028 ACCESSION NUMBER: 0000047035-99-000015 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990801 FILED AS OF DATE: 19991027 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-K405 SEC ACT: SEC FILE NUMBER: 000-05411 FILM NUMBER: 99734266 BUSINESS ADDRESS: STREET 1: 10 INDUSTRY DR CITY: LANCASTER STATE: PA ZIP: 17603 BUSINESS PHONE: 7173972777 MAIL ADDRESS: STREET 1: 10 INDUSTRY DRIVE CITY: LANCASTER STATE: PA ZIP: 17603 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY INDUSTRIES INC DATE OF NAME CHANGE: 19831103 10-K405 1 ANNUAL REPORT FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 1, 1999 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ...............to ............... Commission File No. 0-5411 Herley Industries, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 23-2413500 -------------------------------- -------------------- State or other jurisdiction (I.R.S. Employer of incorporation or organization Identification No.) 10 Industry Drive, Lancaster, Pennsylvania 17603 ------------------------------------------ ---------- (Address of Principal Executive Offices ) (Zip Code) Registrant's telephone number, including area code: (717) 397-2777 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Exchange on which registered ------------------- ------------------------------------ None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $ .10 par value ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] 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 $14.375 as of October 11, 1999 the aggregate market value of the voting stock held by non-affiliates of the registrant was $53,514,761. The number of shares outstanding of registrant's common stock, $ .10 par value as of October 11, 1999 was 4,571,661. 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 9 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A Quantitative and Qualitative Disclosures About Market Risk 16 Item 8 Financial Statements and Supplementary Data 17 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 PART III Item 10 Directors and Executive Officers of the Registrant 17 Item 11 Executive Compensation 17 Item 12 Security Ownership of Certain Beneficial Owners and Management 17 Item 13 Certain Relationships and Related Transactions 17 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8K 18 SIGNATURES 19 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES F-1 PART I Forward-Looking Statements All statements other than statements of historical fact included in this Annual Report, including without limitation statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations, are forward-looking statements. When used in this Annual Report, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, competitive factors and pricing pressures, changes in legal and regulatory requirements, technological change or difficulties, product development risks, commercialization and trade difficulties and general economic conditions. Such statements reflect the current views of the Company with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph. Item 1. Business Herley Industries, Inc., a Delaware corporation, ("Herley" or the "Company") is engaged in the design, development, and manufacture of flight instrumentation components and systems, and microwave products sold primarily to the U.S. government, foreign governments, and aerospace companies. Flight instrumentation products include command and control systems, transponders, flight termination receivers, telemetry transmitters and receivers, pulse code modulator ("PCM") encoders, and scoring systems. Flight instrumentation products are used to: (i) accurately track the flight of space launch vehicles, targets, and unmanned airborne vehicles ("UAVs"), (ii) communicate between ground systems and the airborne vehicle, (iii) if necessary, destroy the vehicle if it is veering from its planned trajectory, and (iv) train troops and test weapons. The Company's command and control systems are used on training and test ranges domestically and in foreign countries. The Company has an installed base of approximately 100 command and control systems around the world, which are either fixed installations, transportable units or portable units. Herley is also engaged in the design, development, manufacture and marketing of microwave devices and electronic systems, equipment and components. A substantial portion of the Company's microwave products are sold to manufacturers and users of microwave systems and equipment for applications in the defense electronics industry, including in connection with the radar and defense electronic systems on tactical fighter aircraft; as well as being used in the Company's flight instrumentation systems and products. The Company also sells these components and equipment for use in the industrial sector as well as in commercial telecommunications industries. Typical applications for the Company's microwave products include electronic warfare and countermeasures, airborne and shipboard navigation and communications, radar systems, missile guidance systems, automatic test equipment, and satellite communications. The Company has grown internally and through six strategic acquisitions. As a result, the Company has evolved from a components manufacturer to a systems and service provider and has leveraged its technical capabilities and expertise into domestic commercial and foreign defense markets. Since its inception in 1965, the Company has designed and manufactured microwave devices for use in various tactical military programs. In June 1986, the Company acquired a small engineering company, Mission Design, 1 Inc., engaged in the design and development of transponders. This acquisition enabled the Company to enter the flight instrumentation business beginning with the design and manufacture of range safety transponders. In September 1992, the Company acquired substantially all of the assets of Micro-Dynamics, Inc. ("MDI") of Woburn, Massachusetts, a microwave subsystem designer and manufacturer. In June 1993, the Company acquired Vega Precision Laboratories, Inc. of Vienna, Virginia, a manufacturer of flight instrumentation products. In March 1994, the Company entered into an exclusive license agreement for the manufacture, marketing and sale of the Multiple Aircraft GPS Integrated Command & Control (MAGIC2) systems. In July 1995, the Company acquired certain assets and the business of Stewart Warner Electronics Corp. of Chicago, Illinois, a manufacturer of high frequency radio and IFF interrogator systems. In August 1997, the Company acquired Metraplex Corporation ("Metraplex") of Frederick, Maryland, which has enabled the Company to enter the airborne PCM and FM telemetry and data acquisition systems market. As of January 4, 1999, the Company acquired all of the issued and outstanding common stock of General Microwave Corporation ("GMC") expanding its offering of microwave components and electronic systems, and its customer base in the industrial sector as well as in the commercial telecommunications industries. Products - Space and Communications Command and Control Systems (C2) For over thirty years, the Company has been manufacturing products in the radar enhancement field. The Company's command and control systems have been used to fly remotely a large variety of unmanned aerial vehicles, typically aircraft used as target drones or Remotely Piloted Vehicles ("RPVs") and some surface targets. Operations have been conducted by users on the open ocean, remote land masses, and instrumented test and training ranges. The Company's command and control systems are currently in service throughout the world. The Company's pulse-positioned-coded ("PPC") concept enables the use of standard radar technology to track and control unmanned vehicles. Using the radar beacon mode, PPC pulse groups are transmitted and received for transfer of command and telemetry data while employing the location precision and advantages of radar techniques. Command and control systems permit a ground operator to fly a target or a UAV through a pre-planned mission. That 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. With the 1994 licensing of the MAGIC2 system, the Company increased the selection of command and control systems. The 6104 TTCS (Target Tracking and Control System) unit is a line-of-sight command and control system with an installed base of equipment worldwide. The Company's engineers and marketers are now able to offer the MAGIC2 system as a supplement to, or replacement for, this installed base of equipment. The 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 increasing demand for enhanced performance by the U.S. Navy as well as foreign navies in littoral warfare scenarios can be satisfied by the use of the MAGIC2 system. The new Model 6104 TTCS 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 system is designed to operate with a large variety of vehicles. A basic TTCS configuration is normally supplied with a standard Company command panel and the software peculiar to one vehicle. Telemetry display software is embedded for the specified vehicle, and a magnetic hard drive is supplied with a mission map prepared in accordance with a customer supplied detailed map of the area. The TTCS is used in support of missile, aircraft 2 and other weapons systems development and testing. Herley continues to provide this system to customers to support their requirement. The MAGIC2 system provides control of multiple targets from a single ground control system, and utilizes GPS to provide accurate position information. The MAGIC2 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. Military surveillance operations typically use UAVs, RPVs, or drones to avoid the cost and risk of manned surveillance vehicles in the event of an accident or if the vehicle is shot down. These inexpensive drones are controlled in flight by a Company command and control system, which may be mounted in a trailer that may be moved from place to place by helicopter or truck. The Company also manufactures portable command and control systems that are mounted on tripods that can be easily transported by an operational team. The portable units permit ready deployment in rugged terrain and may also be used on ships during open ocean exercises. In recent years, teaming arrangements between prime military contractors and the Company have increased. Large companies bidding on major programs seek to align themselves with parts and systems manufacturers such as the Company for economic reasons as well as for the technical expertise afforded by such alliances. Teaming arrangements with Tracor Corporation and Northrop Grumman Corporation have resulted in awards to the Company for command and control systems in Australia and Singapore, and the Company is presently negotiating additional teaming arrangements. Telemetry Systems Missile, UAV, or target testing on domestic and international test ranges requires flight safety and performance data transmission to maximize flight safety during the test operation. Surveillance and intelligence gathering UAVs also require a data transmission downlink and a command and control systems uplink to accomplish their mission. The Company has developed a telemetry system capability that can be configured to meet individual customers' needs. Various components of the system include data encoders, transmitters and flight termination receivers. Each has a distinctive role and each is key to the success of the mission. In 1972, Metraplex began developing data encoding and acquisition, and signal conditioning equipment. Metraplex is now a leading manufacturer of PCM and FM telemetry and data acquisition systems for severe environment applications, whose 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. The Company's 1997 acquisition of Metraplex allows the Company to offer a complete airborne data link system. With the digital capability of Metraplex in data encoding and acquisition elements combined with the radio frequency capability of the Company in providing its telemetry transmitters and flight termination receivers, the Company offers a full line of narrow or wide band airborne telemetry systems to meet a wide variety of industrial needs, both domestically and internationally. Transponders The Company manufactures a variety of expendable transponders, including range safety, identification friend or foe ("IFF"), command and control, and scoring systems. Transponders are small, expendable, electronic systems consisting of a transmitter, sensitive receiver and internal signal processing equipment comprised of active and passive components, including microwave subassemblies such as amplifiers, oscillators and circulators. The transponder receives signals from radars, changes and amplifies the frequency of the signals, and sends back a reply on a different frequency and signal 3 level. This reply will be 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), the Herley 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 FAA 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 ("FTR") is installed in a test missile, a UAV, a target or a space launch vehicle as a safety device. The FTR has a built-in decoder that enables it to receive a complex series of audio tones which, when appropriate, will set off an explosive charge that will destroy the vehicle. A Range Safety Officer ("RSO") using the range safety transponder will track the vehicle in flight to determine if it is performing as required. If the RSO detects a malfunction in the test or launch vehicle that causes it to veer from a planned trajectory in a manner that may endanger personnel or facilities, the RSO will transmit a coded signal to the onboard FTR to explode the vehicle harmlessly. HF Communications and IFF Interrogators The Company also designs and manufactures high frequency radio and IFF interrogators. This high frequency communications equipment is used by the U.S. Navy and foreign navies that conduct joint military exercises with the U.S. Navy. The IFF interrogators are used as part of shipboard equipment and are also placed on coastlines, where they are employed as silent sentries. The Company has been a significant supplier to the Republic of Korea ("ROK") for over twenty years and has a large, established installed base of equipment. The Company has been, and continues to be, a supplier to the ROK KDX destroyer program. Products - Microwave Components Herley manufactures microwave devices at its facilities in Woburn, Massachusetts; in Farmingdale, New York; and in Jerusalem, Israel for existing long-term military programs, for new production units, as well as for spare parts and repair services. These microwave devices are used in a variety of radar, communications and missile applications, including airborne and shipboard navigation and missile guidance systems. The Company designs and manufactures complex microwave integrated circuits ("MICs"), which consist of sophisticated assemblies that perform many functions, primarily involving switching of microwave signals. MICs manufactured by the Company are employed in many defense electronics military systems as well as 4 missile programs. The Company also manufactures magnetrons, which are the power source utilized in the production of the Company's transponders. The Company's three facilities that manufacture microwave devices each have an area of specialization that tends to limit the competitive pricing pressures generally found in the commercial business area. Herley seeks the more limited production, higher unit cost microwave subsystem applications, where the Company's engineering experience is of primary advantage to its customers. In Woburn, Herley specializes in high power microwave devices, generally narrow band, that are used in radar system transmitters and in long range missiles. While there are many suppliers of low power microwave components, there are relatively few companies with the expertise, or facilities to design and test high power devices. High power devices frequently use small amounts of nuclear material to enhance breakdown of high energy pulses and Herley is one of very few companies with an active nuclear license that permits the handling of these trace amounts of nuclear materials. The Company has more recently become the 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 its engineering efforts in designing solid state receiver protectors for the F-16, the United States Air Force awarded the Company cash awards as part of the government's value engineering program. In Farmingdale, Herley produces lower power, broad band microwave integrated assemblies for the electronic defense business area. These costly, complex assemblies combine microwave functions such as amplification, attenuation, switching of multiple signals, and phase and amplitude control. Their applications include Rear Warning Receivers (RWR's), Electronics Countermeasure (ECM) systems, and highly sensitive receiver systems. In Farmingdale, the Company also produces components that are sold through its GMC catalog, which for almost forty years has been the microwave engineer's handbook for attenuating devices and IQ modulation and phase shifters. The Company sells its catalog products to engineering design facilities on a worldwide basis, and is considered the industry leader in attenuators and phase shifters. The Company's Israel division supplies microwave sources, which generate signals that are used in microwave oscillators. Herley's Israel operation sells approximately equally to various foreign governments and to the U.S. defense industry. The Company specializes in digitally tuned oscillators (DTO's), a critical component of many ECM systems. With its three facilities and their diverse specialties, Herley is able to offer its customers a more broadly based solution in the form of complex, integrated microwave assemblies. In the modular approach now common in the design of radar and ECM systems, the entire system may comprise only a handful of SR (Shop Replaceable) or LR (Line Replaceable) units. The Company's goal is to become a supplier of this magnitude to its existing customer base, through the combination of its microwave capabilities. New Product Development and Applications The Company believes that its growth depends, in part, on its ability to renew and expand its technology, products, and design and manufacturing processes with an emphasis on cost effectiveness. The Company's primary efforts are focused on engineering design and product development activities rather than pure research. A substantial portion of the Company's development activities have been funded by the Company's customers. 5 Certain of the Company's officers and engineers are involved at various times and in varying degrees in these activities. The Company's policy is to assign the required engineering and support people, on an ad hoc basis, to new product development as needs require and budgets permit. The cost of these development activities, including employees' time and prototype development, net of amounts paid by customers, were approximately $1,685,000, $1,562,000, and $1,828,000 in fiscal 1999, 1998, and 1997, respectively. Government Contracts A substantial part of the Company's sales are made to U.S. government agencies, prime contractors or subcontractors on military or aerospace programs. Government contracts are awarded either on a competitive bid basis or on a negotiated sole source procurement basis. Contracts awarded on a bid basis involve several competitors bidding on the same program with the contract being awarded based upon price and ability to perform. Negotiated sole source procurement is utilized if the Company is deemed by the customer to have developed proprietary equipment not available from other parties or where there is a very stringent delivery schedule. Substantially all of the Company's government contracts are fixed price contracts, some of which require delivery over time periods in excess of one year. With this type of contract, the Company agrees to deliver products at a fixed price except for costs incurred because of change orders issued by the customer. In accordance with Department of Defense procedures, all contracts involving government programs may be terminated by the government, in whole or in part, at the government's discretion. In the event of such a termination, prime contractors on such contracts are required to terminate their subcontracts on the program and the government or the prime contractor is obligated to pay the costs incurred by the Company under the contract to the date of termination plus a fee based on the work completed. Business Acquisition As of January 4, 1999, the Company completed the acquisition of all of the issued and outstanding common stock of GMC, a New York corporation, including outstanding stock options, for $18.00 per share and 966,675 three-year warrants to purchase one share of the Company's common stock, at an aggregate purchase price of approximately $24,556,000. The purchase price includes shares of common stock of GMC purchased in the open market, acquisition of the remaining shares of common stock outstanding, an estimate of the fair market value of the warrants based on the trading price of similar warrants currently on the market, and transaction expenses. The warrants are exercisable at $15.60 per share of common stock of the Company and expire in January 2002. GMC designs, manufactures and markets microwave components and subsystems, and related electronic test and measurement equipment. The company is headquartered in Farmingdale, New York, and operates two other facilities, one in Billerica, Massachusetts, and one in Israel. The transaction has been accounted for under the purchase method. Marketing and Distribution The Company's marketing approach is to determine customer requirements in the developmental stages of a program. Marketing and engineering personnel work directly with the customer's engineering group to develop product specifications. The Company receives its awards based upon an evaluation of a number of factors, including technical ranking, price, overall capability and past performance. Follow-up contracts (including options) on the same program are normally negotiated with customers rather than being subject to a competitive bidding process. 6 Backlog The Company's backlog of firm orders was approximately $49,230,000 on August 1, 1999 ($30,533,000 in domestic orders and $18,697,000 in foreign orders) as compared to approximately $38,724,000 on August 2, 1998 ($25,727,000 in domestic orders and $12,997,000 in foreign orders). Management anticipates that approximately $42,585,000 of the backlog will be shipped during the fiscal year ending July 30, 2000. There can be no assurance that the Company's backlog will result in sales in any particular period, or at all, or that the contracts included in backlog that result in sales will be profitable. Manufacturing, Assembly and Testing Flight instrumentation devices manufactured by the Company for military and space launch applications are subject to testing procedures based upon customer requests. All of such testing is performed by the Company at its facilities. All electronic parts are procured in controlled lots that are subjected to physical inspection and screening at Herley facilities before use in products. Physical inspection may require the use of high power microscopes and laser scanned optical comparators, which match the characteristics of the part under inspection to previously stored images. The testing of high reliability space equipment is performed by complex computer controlled consoles that continuously monitor, analyze and measure operating parameters. Flight instrumentation products are tested over their full operating temperature range, after which the equipment is evaluated under combined vibration and temperature cycling. For initial design qualification, this testing may extend for several months and include evaluation of electromagnetic interference behavior ("EMI"), ability to survive pyrotechnic shock (simulating explosive charge detonation for space vehicle stage separation) and the combined effects of external vacuum with heating and cooling. Electronic components and other raw materials used in the Company's products are purchased by the Company from a large number of suppliers and all of such materials are readily available from alternate sources, with the exception of one component part which, if unavailable, can be manufactured by the Company. The Company does not maintain any significant level of finished products inventory. Raw materials are generally purchased for specific contracts and common components are purchased for stock based on the Company's firm fixed backlog. There are no significant environmental control procedures required concerning the discharge of materials into the environment that would require the Company to invest in any significant capital equipment or that would have a material effect on the earnings of the Company or its competitive position. Competition The flight instrumentation and microwave products that the Company manufactures are subject to varied competition depending on the product and market served. Competition is generally based upon technology, design, price and past performance. The Company's ability to compete for defense contracts depends, in part, on its ability to offer better design and performance than its competitors and its readiness in facilities, equipment and personnel to undertake to complete the programs. In certain products or programs, the Company believes it is sole source, which means that all work is directed to a single manufacturer. In other cases, there may be other suppliers that have the capability to compete for the programs involved, but they can only enter or reenter the market if the government should choose to reopen the particular program to competition. Competition in follow-on procurements is generally limited after an initial award unless the original supplier has had performance problems. Many of Herley's competitors are larger and may have greater financial 7 resources than the Company. Competitors include Signal Technology, L-3 Communications Corporation, Microsystems, Inc., AMP, Inc. and Remec, Inc. Employees As of October 10, 1999, the Company employed 511 full-time persons. A total of 386 employees were engaged in manufacturing, 63 in engineering, 26 in marketing, contract administration and field services and the balance in general and administrative functions. None of the Company's employees are covered by collective bargaining agreements and the Company considers its employee relations to be satisfactory. The Company believes that its future success will depend, in part, on its continued ability to recruit and retain highly skilled technical, managerial and marketing personnel. To assist in recruiting and retaining such personnel, the Company has established competitive benefits programs, including a 401k employee savings plan and stock option plans. Intellectual Property The Company does not presently hold a significant number of patents applicable to its products. In order to protect its intellectual property rights, the Company relies on a combination of trade secret, copyright and trademark laws and certain employee and third-party nondisclosure agreements, as well as limiting access to and distribution of proprietary information. There can be no assurance that the steps taken by the Company to protect its intellectual property rights will be adequate to prevent misappropriation of the Company's technology or to preclude competitors from independently developing such technology. Trade secret and copyright laws afford the Company limited protection. 8 Item 2. Properties The Company's properties are as follows:
Owned or Location Purpose of Property Area Leased - ------------------------ ------------------------------------------ -------------- ------ Lancaster, PA (1) Production, engineering, administrative 71,200 sq. ft. Owned and executive offices Woburn, MA Production, engineering and administration 60,000 sq. ft. Owned Farmingdale, NY (2) Production, engineering and administration 46,000 sq. ft. Leased Jerusalem, Israel Production, engineering and administration 12,000 sq. ft. Owned Billerica, MA (3) Production, and engineering 8,000 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 a 10 year lease agreement with a partnership owned by the children of certain officers of the Company. The lease provides for initial minimum annual rent of $312,390, subject to escalation of approximately 4% annually throughout the 10 year term. (3) The Company intends to move all production and engineering activities from Billerica, MA to its facilities in Woburn, MA during the first quarter of fiscal 2000. The Company will look for a tenant to sublease the facility.
The Company believes that its facilities are adequate for its current and presently anticipated future needs. Item 3. Legal Proceedings The Company is not involved in any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 9 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholders Matters (a) The Company's Common Stock is traded in the NASDAQ National Market under the symbol HRLY. The following table sets forth the high and low sales price as reported by the NASDAQ National Market for the Company's Common Stock for the periods indicated and gives effect to the four-for-three stock split of the Common Stock on September 30, 1997. Common Stock -------------- High Low ----- ----- Fiscal Year 1998 First Quarter............................... 15.00 10.13 Second Quarter.............................. 14.75 10.50 Third Quarter............................... 14.69 10.88 Fourth Quarter.............................. 14.25 8.63 Fiscal Year 1999 First Quarter............................... 10.50 7.63 Second Quarter.............................. 15.31 9.56 Third Quarter............................... 15.13 11.13 Fourth Quarter.............................. 16.19 11.50 Fiscal Year 2000 First Quarter (through October 11, 1999).... 15.00 12.94 The closing price on October 11, 1999 was $14.375. (b) As of October 11, 1999, there were approximately 1,000 record holders of the Company's Common Stock. (c) There have been no cash dividends declared or paid by the Company on its Common Stock during the past two fiscal years. Item 6. Selected Financial Data
53 Weeks 52 Weeks ended Ended 52 Weeks ended August 1, August 2, August 3, July 28, July 30, 1999 (2) 1998 (3) 1997 1996 1995 (4) -------- -------- --------- -------- -------- Net sales $ 61,035,722 40,797,991 32,195,168 29,001,404 24,450,267 ========== ========== ========== ========== =========== Net income (loss) $ 7,734,877 5,496,608 4,803,659 3,668,956 (4,890,166) ========== ========== ========== ========== =========== Earnings (loss) per common share (1) Basic $ 1.48 1.11 1.18 .97 (.98) ==== ==== ==== === ===== Assuming Dilution $ 1.37 1.02 1.01 .86 (.98) ==== ==== ==== === ===== Total Assets $ 74,056,237 57,552,529 39,257,186 42,508,942 42,229,282 Total Current Liabilities $ 10,513,340 9,843,041 9,813,376 7,559,306 9,973,866 Long-Term Debt net of current portion $ 15,437,390 4,110,885 2,890,000 11,021,000 10,525,000 - ------------------ (1) As adjusted to give effect to a 4-for-3 stock split effective September 30, 1997. (2) On January 4, 1999, the Company acquired General Microwave Corporation. See Note B of the financial statements. (3) On August 4, 1997, the Company acquired Metraplex Corporation. See Note B of the financial statements. (4) Fiscal 1995 includes settlement costs, legal fees, and related expenses in the amount of approximately $5,447,000 in connection with the settlement of certain legal claims.
10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company is engaged in the design, manufacture and sale of flight instrumentation components and systems, and microwave products, primarily to the U.S. government, foreign governments, and aerospace companies. Flight instrumentation products include command and control systems, transponders, flight termination receivers, telemetry transmitters and receivers, PCM encoders, and scoring systems. Flight instrumentation products are used to: (i) accurately track the flight of space launch vehicles, targets, and UAVs, (ii) communicate between ground systems and the airborne vehicle, (iii) if necessary, destroy the vehicle if it is veering from its planned trajectory, and (iv) train troops and test weapons. The Company is also engaged in the design, development, manufacture and marketing of microwave devices and electronic systems, equipment and components. A substantial portion of the Company's microwave products are sold to manufacturers and users of microwave systems and equipment for applications in the defense electronics industry, including in connection with the radar and defense electronic systems on tactical fighter aircraft, as well as in the Company's flight instrumentation systems and products. The Company also sells these components and equipment for use in the industrial sector as well as in commercial telecommunications industries. Typical applications for the Company's microwave products include electronic warfare and countermeasures, airborne and shipboard navigation and communications, radar systems, missile guidance systems, automatic test equipment, and satellite communications. Of the Company's total backlog of $49,230,000 at August 1, 1999, $30,533,000 is attributable to domestic orders and $18,697,000 is attributable to foreign orders. Management anticipates that approximately $42,585,000 of its backlog will be shipped during the fiscal year ending July 30, 2000. The Company includes in its backlog only firm orders for which it has accepted a written purchase order. In accordance with Department of Defense procedures, all contracts involving government programs may be terminated by the government, in whole or in part, at the government's discretion. In the event of such a termination, prime contractors on such contracts are required to terminate their subcontracts on the program and the government or the prime contractor is obligated to pay the costs incurred by the Company under the contract to the date of termination plus a fee based upon work completed. Substantially all of the Company's contracts are fixed price contracts, wherein sales and related costs are generally recorded as deliveries are made. Many of these contracts include options exercisable by the customer for additional products or systems at a fixed price. Certain costs under long-term fixed price contracts, principally directly or indirectly with the U.S. Government, which include non-recurring engineering, are deferred until these costs are contractually billable. The failure to anticipate technical problems, estimate costs accurately or control costs during a fixed price contract, including with respect to any option for additional products or systems, may reduce the Company's profitability or cause a loss under the contract. Revenue under certain long-term, fixed price contracts, principally command and control shelters, is recognized using the percentage of completion method of accounting. Revenue recognized on these contracts is based on estimated completion to date, which is the total contract amount multiplied by percent of performance, based on total costs incurred in relation to total estimated cost at completion. As of August 2, 1998, costs incurred and income recognized in excess of billings on uncompleted contracts was $1,665,008. There were no long-term contracts of this nature as of August 1, 1999. Losses, if any, on contracts are recorded when first reasonably determined. The Company believes that its growth depends on its ability to renew and expand its technology, products, and design and manufacturing processes with an emphasis on cost effectiveness. The Company's primary efforts are focused on engineering design and product development activities, rather than pure research. The cost of 11 these development activities, including employees' time and prototype development, net of amounts paid by customers, was approximately $1,685,000,$1,562,000, and $1,828,000 in fiscal years 1999, 1998 and 1997, respectively. Costs of the Company's internally funded product development efforts are included in the Company's operating expenses as cost of products sold. Revenue from customer funded product development is included in net sales and the related product development costs also are included in cost of products sold. The Company's effective tax rate for fiscal 1999 and 1998 was 34.3% and 34.8%, respectively. The lower effective rate of 9.1% in 1997 reflects the utilization of prior year net operating loss carryforwards and the reversal of a valuation allowance established in 1995. The valuation allowance was established based on management's uncertainty that past performance would be indicative of future earnings. In August 1997, the Company established a foreign sales corporation as part of an overall domestic tax strategy to reduce its effective income tax rate. 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.
53 weeks 52 weeks ended ended August 1, August 2, August 3, 1999 1998 1997 ---- ---- ---- Net sales 100.0 % 100.0 % 100.0 % Cost of products sold 60.2 % 59.2 % 64.5 % ------ ------ ------ Gross profit 39.8 % 40.8 % 35.5 % Selling and administrative expenses 19.5 % 20.4 % 19.5 % ------ ------ ------ Operating income 20.3 % 20.3 % 16.0 % ------ ------ ------ Other income, net: Investment income 0.5 % 1.4 % 2.1 % Interest expense (1.2)% (1.1)% (1.7)% (0.7)% 0.3 % 0.4 % ------ ------ ------ Income before income taxes and extraordinary item 19.6 % 20.7 % 16.4 % Provision for income taxes 6.7 % 7.2 % 1.5 % ------ ------ ------ Income before extraordinary item 12.9 % 13.5 % 14.9 % Extraordinary item (0.2)% - - ------ ------ ------ Net income 12.7 % 13.5 % 14.9 % ------ ------ ------
12 Fiscal 1999 Compared to Fiscal 1998 Net sales for the 52 weeks ended August 1, 1999 were approximately $61,036,000 compared to $40,798,000 for fiscal 1998. The sales increase of $20,238,000 (49.6%) is primarily attributable to the acquisition of GMC as of January 4, 1999 which contributed $14,374,000 in revenues in fiscal 1999,as well as an increase in net sales of approximately $3,508,000 in flight instrumentation products, and approximately $2,356,000 in microwave components. Gross profit of 39.8% for the 52 weeks ended August 1, 1999 is less than the prior year of 40.8%. The decline in margin of 1% is due primarily to lower margins on microwave components, as well as the lower margins generated from the added GMC revenues. Selling and administrative expenses for the 52 weeks ended August 1, 1999 were $11,877,000 compared to $8,339,000 for fiscal 1998, an increase of $3,538,000. The acquisition of GMC added $3,222,000 in selling and administrative expenses in fiscal 1999. As a percentage of revenues, expenses declined from 20.4% in 1998 to 19.5% in 1999. Investment income declined $288,000 from the prior year due to a decrease in investments, the proceeds of which were used to partially fund the acquisition of GMC. In addition, bank borrowings of approximately $11,400,000 used to fund the balance of the acquisition price resulted in additional interest expense of approximately $302,000. In February 1999, the Company refinanced the existing mortgage on its property located in Lancaster, Pa. The proceeds of the new mortgage loan were used to prepay the existing mortgage note having an outstanding principal balance of $2,890,000 plus a prepayment premium of $115,600. Unamortized debt expenses of $79,226 and the $115,600 prepayment premium related to the early extinguishment of the existing mortgage debt were charged to expense as an extraordinary loss, net of an income tax benefit of $68,000. Fiscal 1998 Compared to Fiscal 1997 Net sales for the 52 weeks ended August 2, 1998 were approximately $40,798,000 compared to $32,195,000 for fiscal 1997. The sales increase of $8,603,000 (26.7%) is primarily attributable to the acquisition of Metraplex Corporation as of August 4, 1997 which contributed $4,015,000 in revenues in fiscal 1998, an increase of approximately $3,542,000 in flight instrumentation products, and an increase of approximately $1,046,000 in microwave components. Gross profit of 40.8% for the 52 weeks ended August 2, 1998 exceeded the prior year of 35.5% due to an increase of $2,545,000 in higher margin foreign sales from $9,398,000 in 1997 to $11,943,000 in 1998, and improved margins in microwave components, as well as an increase in absorption of fixed costs due to the higher sales volume. Selling and administrative expenses for the 52 weeks ended August 2, 1998 were $8,339,000 compared to $6,293,000 for fiscal 1997, an increase of $2,046,000. The addition of Metraplex Corporation added $1,195,000 in selling and administrative expenses in fiscal 1998. In addition, $304,000 of the change is attributable to increased representative fees on foreign sales, $415,000 is due to increased personnel and related expenses, including additional travel expenses, and $350,000 relates to increased consulting fees primarily for software changes addressing the year 2000 computer software issues. Such increases were offset by cost savings of $243,000 related to the transfer of substantially all of the production from the Stewart Warner facilities in Chicago to the Company's facilities in Lancaster, Pennsylvania. As a percentage of net sales, selling and administrative expenses increased from 19.5% in 1997 to 20.4% in 1998. Other income, net, for the 52 weeks ended August 2, 1998 was consistent with the prior year. 13 The effective tax rate in 1998 was 34.8% as compared to 9.1% in fiscal 1997. The 1997 tax provision reflects the utilization of prior year net operating loss carryforwards. In 1995 a valuation allowance had been provided to reduce deferred tax assets to their net realizable value primarily based on management's uncertainty that past performance would be indicative of future earnings. In 1997 the valuation allowance was reversed through the deferred tax provision. A determining factor in assessing the change was the cumulative income in recent years. Liquidity and Capital Resources As of August 1, 1999 and August 2, 1998, working capital was approximately $25,703,000 and $26,593,000, respectively, and the ratio of current assets to current liabilities was 3.44 to 1 and 3.70 to 1, respectively. At August 1, 1999, the Company had cash and cash equivalents of approximately $2,741,000. As of January 4, 1999, the Company completed the acquisition of all of the issued and outstanding common stock of GMC, a New York corporation, including outstanding stock options, for $18.00 per share and 966,675 three-year warrants to purchase one share of the Company's common stock, at an aggregate purchase price of approximately $24,556,000. The purchase price includes shares of common stock of General Microwave purchased in the open market, acquisition of the remaining shares of common stock outstanding, an estimate of the fair market value of the warrants based on the trading price of similar warrants currently on the market, and transaction expenses. The warrants are exercisable at $15.60 per share of common stock of the Company and expire in January 2002. On August 4, 1997, the Company completed the acquisition of Metraplex Corporation, a Maryland corporation for 313,139 (as adjusted) shares of common stock of the Company, with a fair market value of $3,170,471, in exchange for all of the issued and outstanding common stock of Metraplex. As is customary in the defense industry, inventory is partially financed by advance payments. The unliquidated balance of these advance payments was approximately $439,000 in 1999, and $1,825,000 in 1998. The decrease in the current fiscal year is directly attributable to shipments under the related contracts. Net cash provided by operations was approximately $12,723,000, and $4,571,000, in 1999, and 1998 respectively. Net cash used in investing activities in 1999 of approximately $21,757,000 relates primarily to the acquisition of GMC, net of cash acquired, which was funded by available cash balances and borrowings under the bank line of credit. Net cash flows from financing activities in fiscal 1999 included: (1) net borrowings under the bank line of credit of $11,000,000 the proceeds of which were used to partially fund the acquisition of GMC; (2) refinancing of the existing mortgage on the property in Lancaster, Pa., which reduced the interest rate from 10.4% to 7.43% and extended the repayment schedule to 10 years; and (3) the acquisition of treasury stock in the aggregate amount of $7,688,000 (which was funded through operations). Net cash provided by financing activities in fiscal 1998 consists of net proceeds of $7,452,000 from the sale of 700,000 shares of common stock, and 1,265,000 Common Stock Purchase Warrants to the public. Net borrowings under a bank line of credit provided $1,500,000 in financing. The Company received a partial distribution of $592,824 from its M.D. Sass Municipal Finance Partners-I limited partnership investment. Cash was used in financing activities for payments of long-term debt of $2,257,000 and the purchase of treasury stock of $1,084,000. Cash provided by investing activities in 1997 resulted primarily from the liquidation of all the available-for-sale securities, and the sale of the Company's interest in the M.D. Sass Re/Enterprise-II, L.P., limited partnership. The Company used approximately $9,715,000 of these funds in financing activities 14 primarily for the net payment of outstanding bank debt of $7,250,000, and the purchase of treasury stock for $2,783,000. The Company maintains a revolving credit facility with a bank for an aggregate of $20,000,000, which expires January 31, 2001. As of August 1, 1999 and August 2, 1998, the Company had borrowings outstanding under this facility of $12,500,000 and $1,500,000, respectively. During the fiscal year ended August 1, 1999 the Company acquired 561,050 shares of its outstanding common stock for $7,688,134 through open market purchases, pursuant to a stock repurchase plan to acquire up to 1,250,000 shares of Common Stock. In January 1998, the Company purchased 89,888 shares of its outstanding common stock for $1,084,326 from certain officers of the Company based on the fair market value of the stock on the date acquired. During the fiscal year ended August 3, 1997 the Company acquired 244,519 shares of its outstanding common stock for $2,782,686 through open market purchases, pursuant to a stock purchase plan to acquire up to 300,000 pre-split shares of Common Stock, which was terminated in June 1997. The Company also acquired 410,593, 42,016 and 463,639 shares of common stock in fiscal 1999, 1998 and 1997, respectively, valued at $5,989,335, $538,376 and $6,429,124, respectively, in connection with certain "stock-for-stock" exercises of stock options by which certain employees elected to surrender "mature" shares owned in settlement of the option price. Such exercises are treated as an exercise of a stock option and the acquisition of treasury shares by the Company. See "Management - Stock Plans." The Company believes that presently anticipated future cash requirements will be provided by internally generated funds and existing credit facilities. Subsequent Event On September 23, 1999 the Company closed on the sale of GMC's property in Amityville, New York and relocated the plant to a leased facility in Farmingdale, New York. The Company used the net proceeds from the sale of approximately $4,159,000, which approximates the net carrying value of the property, to partially fund the buy back of its common stock through open market purchases in September 1999. Year 2000 Readiness The "Year 2000" problem relates to computer systems that have time and date-sensitive programs that were designed to read years beginning with "19", but may not properly recognize the year 2000. If a computer system or software application used by the Company or a third party dealing with the Company fails because of the inability of the system or application to properly read the year 2000 the results could have a material adverse effect on the Company. A substantial part of the Company's revenues are derived from firm fixed price contracts with U.S. government agencies, prime contractors or subcontractors on military or aerospace programs, and many foreign governments. If the Company is unable to perform under these contracts due to a Year 2000 problem, the customer could terminate the contract for default. While lost revenues from such an event are a concern for the Company, the greater risks are the consequential damages for which the Company could be liable for failure to perform under the contracts. Such damages could have a material adverse impact on the Company's results of operations and financial position. The most likely reason for a customer to terminate a contract for default would be due to the Company's inability to manufacture and deliver product under the contract. Breakdowns in any number of the Company's computer systems and applications could prevent the Company from being able to manufacture and ship its products. Examples are failures in the Company's manufacturing application software, computer chips embedded in engineering test equipment, lack of supply of materials from its suppliers, or lack of power, heat, 15 or water from utilities servicing its facilities. The Company's products do not contain computer devices that require remediation to meet Year 2000 requirements. A review of the Company's status with respect to remediating its computer systems for Year 2000 compliance is presented below. For its information technology requirements at its facilities in Lancaster, PA and Woburn, MA, the Company currently utilizes a Hewlett Packard HP3000-based computing environment. The HP3000 hardware is in compliance with Year 2000 requirements. The Company's financial, manufacturing, and other software applications related to the HP3000 were updated to comply with Year 2000 requirements during the fiscal year ended August 2, 1998 at a cost of approximately $350,000. All modules have been fully tested and are compliant. In addition, the Company utilizes a wide area network ("WAN") to connect its operating facilities to the HP3000. The WAN has been updated to comply with Year 2000 requirements. A local area network ("LAN") is used to supplement the HP3000 environment and has also been upgraded and is fully Year 2000 compliant. The financial and operational systems of GMC in Farmingdale, NY have also been reviewed and tested and are in compliance with Year 2000 requirements. The Company has also reviewed its utility systems (heat, light, phones, liquid nitrogen, etc.) for the impact of Year 2000, as well as determining the state of readiness of its material suppliers and test equipment manufacturers. The Company has received responses to its questionnaire from its major suppliers and test equipment manufacturers regarding their compliance and attempts to identify any problem areas with respect to their systems and equipment. No major problems have been identified. However, the Company cannot control the conduct of its suppliers. Therefore, there can be no guarantee that Year 2000 problems originating with a supplier will not occur. The Company has developed multiple sources for a substantial portion of its raw material requirements and has obtained Year 2000 compliance statements from its critical suppliers, and therefore, does not believe there would be a significant disruption in supply. The information set forth above identifies the key steps taken by the Company to address the Year 2000 problem. There can be no absolute assurance that third parties will convert their systems in a timely manner. The Company believes that its actions will minimize these risks and that any additional cost of Year 2000 compliance for its information and production systems will not be material to its consolidated results of operations and financial position. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with changes in interest rates and stock prices. The Company has not entered into any derivative financial instruments to manage the above risks and the Company has not entered into any market risk sensitive instruments for trading purposes. The Company's debt consists of a working capital line of credit with a bank having an interest rate that is set biweekly at 1.65% over the FOMC Target Rate (an aggregate of 6.65% as of August 1, 1999), and a mortgage on its facilities in Lancaster, Pa. at a fixed rate of 7.43% The credit line is reviewed on an annual basis. Since the acquisition of GMC, the Company is subject to movements in foreign currency rate changes related to GMC's Israel operations. The Company does not anticipate any other material changes in its primary market risk exposures in fiscal 2000. As of August 1, 1999, the Company holds an investment in the common stock of a public company that is exposed to price risk with a cost basis and a fair market value basis of $143,330. 16 The table below provides information about the Company's debt that is sensitive to changes in interest rates. The table presents principal cash flows by maturity date. Future principal payment cash flows by maturity date required under the mortgage and line of credit, and corresponding fair values are as follows: Fiscal year ending during: Mortgage Line of Credit -------------------------- -------- -------------- 2000 $ 68,000 $ 2001 73,000 12,500,000 2002 78,000 2003 84,000 2004 91,000 2005 and later 2,509,000 --------- ---------- $2,903,000 $12,500,000 ========= ========== Fair value $2,903,000 $12,500,000 ========= ========== 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 2000, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year ended August 1, 1999. 17 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Exhibits 3.1 Certificate of Incorporation, as amended (Exhibit 3(a) of Form S-1 Registration Statement No. 2- 87160). 3.2 By-Laws, as amended (Exhibit 3(b) of Form S-1 Registration Statement No. 2-87160). 10.1 1996 Stock Option Plan (Exhibit 10.1 of Annual Report on Form 10-K for the fiscal year ended July 28, 1996). 10.2 1997 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 10, 1997). 10.3 1998 Stock Option Plan. 10.4 Amendments dated January 26, 1999 and July 30, 1999to Employment Agreement between Herley Industries, Inc. and Lee N. Blatt dated as of October 1, 1998. 10.5 Amendments dated January 26, 1999 and July 30, 1999 to Employment Agreement between Herley Industries, Inc. and Myron Levy dated as of October 1, 1998. 10.6 Agreement and Plan of Reorganization dated as of July 8, 1997 among the Company, Metraplex Acquisition Corporation and Metraplex Corporation (Exhibit 2.1 of Registration Statement Form S-3 dated September 4, 1997). 10.7 Agreement and Plan of Merger dated as of August 21, 1998 among General Microwave Corp., Eleven General Microwave Corp., Shareholders, GMC Acquisition Corporation and Registrant (Exhibit 1 of Schedule 13D dated August 28, 1998). 10.8 Lease Agreement dated September 1, 1999 between Registrant and RSK Realty LTD. 10.9 Loan Agreement dated February 16, 1999 between Registrant and The First National Bank of Maryland, a division of FMB Bank. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Brightman, BarLeva, Friedman & Co. 27. Financial Data Schedule (for electronic submission only). (b) Financial Statements See Index to Consolidated Financial Statements at Page F-1. (c) Reports on Form 8-K None 18 SIGNATURES: Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 26th day of October, 1999. 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 26, 1999 by the following persons in the capacities indicated: By: /S/ Lee N. Blatt Chairman of the Board ------------------ (Principal Executive Officer) Lee N. Blatt By: /S/ Myron Levy President and Director ---------------- Myron Levy By: /S/ Anello C. Garefino Vice President Finance, CFO, Treasurer ------------------------ (Principal Financial Officer) Anello C. Garefino By: /S/ David H. Lieberman Secretary and Director ------------------------ David H. Lieberman By: /S/ Thomas J. Allshouse Director ------------------------- Thomas J. Allshouse By: /S/ John A. Thonet Director -------------------- John A. Thonet By: /S/ Alvin M. Silver Director -------------------- Alvin M. Silver By: /S/ Edward K. Walker, Jr. Director -------------------------- Edward K. Walker, Jr. 19 Item 8. Financial Statements and Supplementary Data HERLEY INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................ F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets, August 1, 1999 and August 2, 1998..... F-3 Consolidated Statements of Income for the 52 weeks ended August 1, 1999, and August 2, 1998, and the 53 weeks ended August 3, 1997............................................. F-4 Consolidated Statements of Shareholders' Equity for the 52 weeks ended August 1, 1999, and August 2, 1998, and the 53 weeks ended August 3, 1997............................................. F-5 Consolidated Statements of Cash Flows for the 52 Weeks Ended August 1, 1999, and August 2, 1998, and the 53 weeks ended August 3, 1997............................................. F-6 Notes to Consolidated Financial Statements.......................... F-7 Schedules have been omitted as not applicable. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Herley Industries, Inc.: We have audited the accompanying consolidated balance sheets of Herley Industries, Inc. and Subsidiaries as of August 1, 1999 and August 2, 1998, and the related consolidated statements of income, shareholders' equity and cash flows for the 52 weeks ended August 1, 1999 and August 2, 1998, and the 53 weeks ended August 3, 1997. 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 did not audit the financial statements of General Microwave (Israel) Corporation and Subsidiary, which statements represent total assets and total revenues of 7% and 4%, respectively, in 1999 of the related consolidated totals. Those statements were audited by other auditors whose report was furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Herley Industries, Inc. and Subsidiaries as of August 1, 1999 and August 2, 1998, and the consolidated results of their operations and their cash flows for the 52 weeks ended August 1, 1999 and August 2, 1998, and the 53 weeks ended August 3, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Lancaster, PA September 17, 1999 F-2 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS August 1, August 2, 1999 1998 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 2,741,163 $ 10,689,193 Accounts receivable 10,678,638 6,193,947 Costs incurred and income recognized in excess of billings on uncompleted contracts - 1,665,008 Other receivables 212,515 248,298 Prepaid income taxes - 377,448 Inventories 19,880,370 15,068,618 Deferred taxes and other 2,703,179 2,194,004 ---------- ---------- Total Current Assets 36,215,865 36,436,516 Property, Plant and Equipment, net 21,888,553 12,549,343 Intangibles, net of amortization of $2,137,459 in 1999 and $1,524,393 in 1998 13,573,653 6,080,218 Available-for-sale Securities 148,105 143,330 Other Investments 947,983 849,324 Other Assets 1,282,078 1,493,798 ========== ========== $ 74,056,237 $ 57,552,529 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 258,383 $ 404,984 Accounts payable and accrued expenses 8,035,211 6,468,183 Income taxes payable 276,160 - Reserve for contract losses 1,505,048 1,145,128 Advance payments on contracts 438,538 1,824,746 ---------- ---------- Total Current Liabilities 10,513,340 9,843,041 Long-term Debt 15,437,390 4,110,885 Deferred Income Taxes 5,143,837 3,158,353 Minority Interest 62,062 - ---------- ---------- 31,156,629 17,112,279 ---------- ---------- Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 5,030,283 in 1999 and 5,266,159 in 1998 503,028 526,616 Additional paid-in capital 15,071,964 20,323,895 Retained earnings 27,324,616 19,589,739 ---------- ---------- Total Shareholders' Equity 42,899,608 40,440,250 ========== ========== $ 74,056,237 $ 57,552,529 ========== ========== The accompanying notes are an integral part of these financial statements. F-3 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
53 weeks 52 weeks ended ended August 1, August 2, August 3, 1999 1998 1997 ----------- ----------- ----------- Net sales $ 61,035,722 $ 40,797,991 $ 32,195,168 ----------- ----------- ----------- Cost and expenses: Cost of products sold 36,748,901 24,169,034 20,753,707 Selling and administrative expenses 11,877,371 8,338,789 6,293,199 ----------- ----------- ----------- 48,626,272 32,507,823 27,046,906 ----------- ----------- ----------- Operating income 12,409,450 8,290,168 5,148,262 ----------- ----------- ----------- Other income (expense), net: Investment income 298,099 586,549 667,075 Interest expense (747,846) (446,109) (531,678) ----------- ----------- ----------- (449,747) 140,440 135,397 ----------- ----------- ----------- Income before income taxes and extraordinary item 11,959,703 8,430,608 5,283,659 Provision for income taxes 4,098,000 2,934,000 480,000 ----------- ----------- ----------- Income before extraordinary item 7,861,703 5,496,608 4,803,659 Extraordinary item - loss on extinguishment of debt (net of income tax benefit of $ 68,000) 126,826 - - ----------- ----------- ----------- Net income $ 7,734,877 $ 5,496,608 $ 4,803,659 =========== =========== =========== Earnings per common share - Basic Earnings before extraordinary item $ 1.50 $ 1.11 $ 1.18 Extraordinary loss on extinguishment of debt .02 - - ---- ---- ---- Net earnings per common share - Basic $ 1.48 $ 1.11 $ 1.18 ==== ==== ==== Basic weighted average shares 5,232,807 4,969,248 4,063,505 ========= ========= ========= Earnings per common share - Diluted Earnings before extraordinary item 1.39 $ 1.02 $ 1.01 Extraordinary loss on extinguishment of debt .02 - - ---- ---- ---- Net earnings per common share - Diluted $ 1.37 $ 1.02 $ 1.01 ==== ==== ==== Diluted weighted average shares 5,660,096 5,407,283 4,733,682 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 52 weeks ended August 1, 1999 and August 2, 1998, and 53 weeks ended August 3, 1997 Additional Common Stock Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total --------- ------------ ---------- --------- ---------- ---------- Balance at July 28, 1996 2,936,122 $ 293,612 11,448,827 9,289,472 -- $21,031,911 Net income 4,803,659 4,803,659 Exercise of stock options and warrants 929,060 92,906 6,653,917 (6,429,124) 317,699 Four-for-three stock split 1,052,341 105,234 (105,234) Purchase of 244,519 shares of treasury stock (2,782,686) (2,782,686) Retirement of treasury shares (708,158) (70,816) (9,140,994) 9,211,810 ----------- ----------- ----------- ----------- ----------- ----------- Balance at August 3, 1997 4,209,365 $ 420,936 8,856,516 14,093,131 -- $23,370,583 Net income 5,496,608 5,496,608 Net proceeds from public offering of 700,000 shares of common stock and 1,265,000 warrants 700,000 70,000 7,381,579 7,451,579 Issuance of common stock in connection with business acquired 313,139 31,314 3,139,157 3,170,471 Exercise of stock options and warrants 175,559 17,556 885,289 (538,376) 364,469 Tax benefit upon exercise of stock options 1,670,866 1,670,866 Purchase of 89,888 shares of treasury stock (1,084,326) (1,084,326) Retirement of treasury shares (131,904) (13,190) (1,609,512) 1,622,702 ----------- ----------- ----------- ----------- ----------- ----------- Balance at August 2, 1998 5,266,159 $ 526,616 20,323,895 19,589,739 -- $40,440,250 Net income 7,734,877 7,734,877 Issuance of warrants in connection with business acquired 1,450,000 1,450,000 Exercise of stock options and warrants 735,767 73,576 4,751,301 (5,989,335) (1,164,458) Tax benefit upon exercise of stock options 2,127,073 2,127,073 Purchase of 561,050 shares of treasury stock (7,688,134) (7,688,134) Retirement of treasury shares (971,643) (97,164) (13,580,305) 13,677,469 ----------- ----------- ----------- ----------- ----------- ----------- Balance at August 1, 1999 5,030,283 $ 503,028 15,071,964 27,324,616 -- $42,899,608 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
53 weeks 52 weeks ended ended August 1, August 2, August 3, 1999 1998 1997 -------------- ------------- ------------- Cash flows from operating activities: Net Income $ 7,734,877 $ 5,496,608 $ 4,803,659 -------------- ------------- ------------- Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 3,289,303 1,869,459 1,538,283 Gain on sale of available-for-sale securities and other investments - - (409,572) Extraordinary loss on extinguishment of debt, net of income taxes 126,826 - - Equity in income of limited partnership (98,659) (128,646) - Decrease in deferred tax assets 483,117 1,207,090 - (Decrease) increase in deferred tax liabilities (141,082) 173,245 773,336 Changes in operating assets and liabilities: (Increase) in accounts receivable (361,117) (767,997) (1,927,298) Decrease (increase) in notes receivable-officers - 2,100,913 (17,370) Decrease (increase) in costs incurred and income recognized in excess of billings on uncompleted contracts 1,665,008 (1,665,008) - Decrease (increase) in other receivables 35,783 (23,132) (27,156) Decrease (increase) in prepaid income taxes 377,448 (377,448) - Decrease (increase) in inventories 729,327 (3,757,660) (1,779,695) Decrease (increase) in prepaid expenses and other 198,729 (55,200) (371,078) (Decrease) increase in accounts payable and accrued expenses (2,119,359) 773,399 (137,128) Increase (decrease) in income taxes payable 2,019,126 468,847 (89,660) Increase (decrease) in reserve for contract losses 359,920 667,128 (11,110) (Decrease) increase in advance payments on contracts (1,620,106) (1,363,870) 1,610,968 Other, net 44,149 (46,509) (309,500) -------------- ------------- ------------- Total adjustments 4,988,413 (925,389) (1,156,980) -------------- ------------- ------------- Net cash provided by operations 12,723,290 4,571,219 3,646,679 -------------- ------------- ------------- Cash flows from investing activities: Acquisition of business, net of cash acquired (20,101,475) - - Purchase of available-for-sale securities and other investments - - (159,364) Proceeds from sale of fixed assets 6,700 1,100 15,468 Partial distribution from limited partnership - 592,824 - Proceeds from sale of available-for-sale securities and other investments - - 7,164,538 Capital expenditures (1,662,246) (1,645,204) (862,129) -------------- ------------- ------------- Net cash (used in) provided by investing activities (21,757,021) (1,051,280) 6,158,513 -------------- ------------- ------------- Cash flows from financing activities: Net proceeds from public offering of common stock - 7,451,579 - Borrowings under bank line of credit 29,500,000 4,050,000 2,825,000 Proceeds from refinance of mortgage note 2,915,000 - - Proceeds from exercise of stock options and warrants, net (1,164,248) 364,469 317,699 Payments under bank line of credit (18,500,000) (2,550,000) (9,775,000) Payments of long-term debt (971,107) (2,257,118) (300,000) Extinguishment of debt (3,005,600) - - Purchase of treasury stock (7,688,344) (1,084,326) (2,782,686) -------------- ------------- ------------- Net cash provided by (used in) financing activities 1,085,701 5,974,604 (9,714,987) -------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents (7,948,030) 9,494,543 90,205 Cash and cash equivalents at beginning of period 10,689,193 1,194,650 1,104,445 -------------- ------------- ------------- Cash and cash equivalents at end of period $ 2,741,163 $ 10,689,193 $ 1,194,650 ============== ============= ============= Supplemental cash flow information: Cashless exercise of stock options $ 5,989,335 $ 538,376 $ 6,429,124 ============== ============= ============= Stock issued for business acquired $ - 3,170,471 - ============== ============= ============= Warrants issued for business acquired $ 1,450,000 - - ============== ============= ============= Tax benefit related to stock options $ 2,127,073 1,670,866 - ============== ============= =============
The accompanying notes are an integral part of these financial statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Nature of Operations The Company, a Delaware corporation, is engaged in the design, development, manufacture and sale of flight instrumentation components and systems, and microwave products, primarily to aerospace companies, the U.S. government, and several foreign governments. The Company's main products include a variety of transponders which are used to enhance radar signals to accurately track the flight of space launch vehicles and aircraft, as well as microwave devices and command and control systems. 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. Fiscal years 1999 and 1998 consisted of 52 weeks, and fiscal year 1997 consisted of 53 weeks. 3. Basis of Financial Statement Presentation The consolidated financial statements include the accounts of Herley Industries, Inc. and its subsidiaries, all of which are wholly-owned. All significant inter-company accounts and transactions have been eliminated in consolidation. The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. 4. Cash and Cash Equivalents The Company considers all liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. Short-term investments are recorded at the amortized cost plus accrued interest which approximates market value. The Company limits its credit risk to an acceptable level by evaluating the financial strength of institutions at which significant investments are made and based upon credit ratings. 5. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of trade accounts receivable. Accounts receivable are principally from the U.S. Government, major U.S. Government contractors, several foreign governments, and domestic customers in the aerospace and defense industries. Credit is extended based on an evaluation of the customer's financial condition and generally collateral is not required. In many cases irrevocable letters of credit accompanied by advanced payments are received from foreign customers, and progress payments are received from domestic customers. The Company performs periodic credit evaluations of its customers and maintains reserves for potential credit losses. 6. Inventories Inventories, other than inventory costs relating to long-term contracts and programs, are stated at lower of cost (principally first-in, first-out) or market. Inventory costs relating to long-term contracts and programs are stated at the actual production costs, including factory overhead, reduced by amounts identified with revenue recognized on units delivered or progress completed. F-7 Inventory costs relating to long-term contracts and programs are reduced by any amounts in excess of estimated realizable value. The costs attributed to units delivered under long-term contracts and programs are based on the average costs of all units produced. 7. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are provided principally by the straight-line method over the estimated useful lives of the related assets. Gains and losses arising from the sale or disposition of property, plant and equipment are recorded in income. 8. Intangibles Intangibles are comprised of customer lists, installed products base, drawings, patents, licenses, certain government qualifications and technology and goodwill in connection with the acquisitions of General Microwave Corporation in 1999, Metraplex Corporation in 1997, and Vega Precision Laboratories, Inc. in 1993. Intangibles are being amortized over twenty years. Amortization charges totaled $754,358, ($70,795), and ($182,667) in fiscal 1999, 1998, and 1997, respectively. The negative amortization in 1998 and 1997 is attributable to the negative goodwill in connection with the acquisition of Stewart Warner Electronics in 1995. The carrying amount of intangibles is evaluated on a recurring basis. Current and future profitability as well as current and future undiscounted cash flows of the acquired businesses are primary indicators of recoverability. For the three fiscal years ended August 1, 1999, there were no adjustments to the carrying amount of the cost in excess of net assets acquired resulting from these evaluations. 9. Marketable Securities The Company accounts for its investments in marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value. Realized gains and losses and declines in value judged to be other-than-temporary are included in other income , net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities are included in other income, net. 10. Other Investments The Company is a limited partner in a nonmarketable limited partnership in which it owns approximately a 10% interest. This investment is accounted for under the equity method. 11. Revenue and Cost Recognition Under fixed-price contracts, revenue and related costs are recorded primarily as deliveries are made. Certain costs under long-term, fixed-price contracts (principally either directly or indirectly with the U.S. Government), which include non-recurring billable engineering, are deferred until these costs are F-8 contractually billable. Revenue under certain long-term, fixed price contracts, principally command and control shelters, is recognized using the percentage of completion method of accounting. Revenue recognized on these contracts is based on estimated completion to date (the total contract amount multiplied by percent of performance, based on total costs incurred in relation to total estimated cost at completion). Prospective losses on long-term contracts are based upon the anticipated excess of inventoriable manufacturing costs over the selling price of the remaining units to be delivered and are recorded when first reasonably determinable. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs and contract terms. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. 12. Income Taxes Income taxes are accounted for by the asset/liability approach in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred taxes represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. They arise from temporary differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates when those changes are enacted. The provision for income taxes represents the total of income taxes paid or payable for the current year, plus the change in deferred taxes during the year. 13. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 14. Earnings Per Common Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which replaced APB No. 15 to conform earnings per share with international standards as well as to simplify the complexity of the computation under APB No. 15. The previous primary earnings per share ("EPS") calculation is replaced with a basic EPS calculation. The basic EPS differs from the primary EPS calculation in that the basic EPS does not include any potentially dilutive securities. Fully dilutive EPS is replaced with diluted EPS and should be disclosed regardless of dilutive impact to basic EPS. In accordance with SFAS 128, all earnings per share amounts for all periods presented have been restated (reflective of a 4-for-3 stock split on September 30, 1997). 15. Product Development The Company's primary efforts are focused on engineering design and product development activities rather than pure research. The cost of these development activities, including employees' time and prototype development, net of amounts paid by customers, was approximately $1,685,000, $1,562,000, and $1,828,000 in fiscal 1999, 1998, and 1997, respectively. F-9 16. New Accounting Standards In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," ("SFAS 132"), which was effective for fiscal years beginning after December 15, 1997. This statement revises financial statement disclosure requirements for pension and other postretirement benefit plans, but does not change the measurement or recognition of those plans. Adoption of SFAS 132 did not impact the financial results of the Company and the required disclosures have been provided in Note K - Employee Benefit Plans. The Company has adopted SFAS 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting information about operating segments in annual financial statements and requires that segments be determined based on how management measures performance and makes decisions about allocating resources. The required new disclosures have been provided in Note O to the Consolidated Financial Statements. NOTE B - ACQUISITIONS As of January 4, 1999, the Company completed the acquisition of all of the issued and outstanding common stock of General Microwave Corporation ("GMC"), a New York corporation, including outstanding stock options, for $18.00 per share and 966,675 three-year warrants to purchase one share of the Company's common stock, at an aggregate purchase price of approximately $24,556,000. This transaction was accounted for under the purchase method. The purchase price includes shares of common stock of GMC purchased in the open market, acquisition of the remaining shares of common stock outstanding, an estimate of the fair market value of the warrants based on the trading price of similar warrants currently on the market, and transaction expenses. The warrants are exercisable at $15.60 per share of common stock of the Company and expire in January 2002. The aggregate purchase price is calculated as follows (in thousands, except share and per share data): 365,600 shares previously acquired in the open market $ 6,273 848,675 shares at $18.00 per share 15,276 118,000 stock options at $18.00 per share, net of exercise price 1,279 966,675 warrants at $1.50 1,450 Transaction expenses 278 ------ Purchase price $ 24,556 ====== The cash portions of the acquisition were financed through available cash equivalents and borrowings under the Company's line of credit. GMC designs, manufactures and markets microwave components and subsystems, and related electronic test and measurement equipment. The company is headquartered in Amityville, New York, and operates two other facilities, one in Billerica, Massachusetts, and one in Israel. The transaction has been accounted for under the purchase method. Accordingly, the consolidated balance sheet includes the assets and liabilities of GMC at August 1, 1999, and the consolidated statements of income include the results of General Microwave operations from January 4, 1999. The acquisition resulted in excess cost over fair value of net assets acquired of $7,538,501 which is being amortized over 20 years. As part of the Company's GMC acquisition plans, the Company is moving GMC's Billerica, MA operations into the Company's existing Woburn, MA location. The Company had also decided to terminate GMC's defined benefit pension plan. Both of these actions are to be completed in fiscal 2000. In connection with these actions, the Company accrued, as part of purchase accounting, $180,000 of F-10 lease termination costs related to the Billerica facility, $250,000 of severance costs, and $463, 834 related to the termination of the GMC pension plan. Through August 1, 1999, no amounts were paid under the lease termination or pension termination and approximately $150,000 of severance was paid. On the basis of a pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of fiscal 1998, unaudited consolidated net sales, net income, basic earnings per share, and diluted earnings per share for the fifty-two weeks ended August 2, 1998 would have been approximately $63,477,000, $6,606,000, $1.33, and $1.22, and for the fifty-two weeks ended August 1, 1999 would have been approximately $70,349,000, $7,481,000, $1.43, and $1.32, respectively. The pro forma information includes adjustments for additional depreciation based on the estimated fair market value of the property, plant, and equipment acquired, and the amortization of intangibles arising from the transaction. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected at the beginning of fiscal 1998. On August 4, 1997, the Company completed the acquisition of Metraplex Corporation, a Delaware corporation, for 313,139 (as adjusted) shares of common stock of the Company, with a fair market value of $3,170,471, in exchange for all of the issued and outstanding common stock of Metraplex. Metraplex is a leading manufacturer of pulse code modulation and frequency modulation, telemetry and data acquisition systems for severe environment applications. The transaction has been accounted for by the purchase method. Accordingly, the consolidated balance sheet includes the assets and liabilities of Metraplex at August 2, 1998, and the consolidated statements of income include the results of Metraplex operations from August 4, 1997. The acquisition resulted in excess of cost over fair value of net assets acquired of $2,162,725 which is being amortized over twenty years. On the basis of a pro forma consolidation of the results of operations as if the Metraplex acquisition had taken place at the beginning of fiscal 1997, unaudited consolidated net sales, net income, basic earnings per share, and diluted earnings per share for the year ended August 3, 1997 would have been approximately $36,589,333, $4,686,236, $1.07, and $.93, respectively. The pro forma information includes adjustments for additional depreciation based on the fair market value of the property and equipment acquired, and the amortization of intangibles arising from the transaction. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected at the beginning of fiscal 1997. NOTE C - NOTES RECEIVABLE-OFFICERS In fiscal 1996 the Company loaned an aggregate of $2,000,000 to certain officers, as authorized by the Board of Directors, pursuant to the terms of nonnegotiable promissory notes. The loans were paid in full with accrued interest as of December 19, 1997. NOTE D - INVENTORIES The major components of inventories are as follows: August 1 August 2, 1999 1998 ---- ---- Purchased parts and raw materials $ 9,862,727 $ 7,377,882 Work in process 8,780,767 7,303,533 Finished products 1,236,876 387,203 ---------- ---------- $19,880,370 $15,068,618 ========== ========== F-11 NOTE E - OTHER INVESTMENTS In April 1996, the Company acquired a limited partnership interest in M.D. Sass Re/Enterprise-II, L.P., a Delaware limited partnership for $2,000,000. The objective of the partnership is to achieve superior long-term capital appreciation through investments consisting primarily of securities of companies that are experiencing significant financial or business difficulties. In April 1997, the Company sold its investment and terminated its limited partnership interest for $2,080,630 realizing a gain of $80,630. 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 August 1, 1999 and August 2, 1998 the percentage of ownership was approximately 10%. The Company's interest in the partnership may be transferred to a substitute limited partner, upon written notice to the managing general partners, only with the unanimous consent of both general partners at their sole discretion. In July 1998, the Company received a partial distribution of $592,824 from the Partnership. As of August 1, 1999 the Company's limited partnership interest had an estimated fair value of $947,983. NOTE F - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are comprised of the following: August 1, August 2, Estimated 1999 1998 Useful Life ---- ---- ----------- Land $ 1,160,895 $ 880,270 Building and building improvements 11,731,575 5,486,900 10-40 years Machinery and equipment 24,994,829 20,104,794 5- 8 years Furniture and fixtures 788,919 624,576 5-10 years Automobiles 131,000 - 3 years Tools 34,495 34,495 5 years Leasehold improvements 454,706 292,894 5-10 years ---------- ---------- 39,296,419 27,423,929 Less accumulated depreciation 17,407,866 14,874,586 ---------- ---------- $ 21,888,553 $ 12,549,343 ========== ========== Depreciation charges totaled $2,534,945, $1,940,254, and $1,720,950 in fiscal 1999, 1998, and 1997, respectively. NOTE G - COMMITMENTS AND CONTINGENCIES Leases The Company leases office, production and warehouse space as well as computer equipment and automobiles under noncancellable operating leases. Rent expense for the 52 weeks ended August 1, 1999, and August 2, 1998, and the 53 weeks ended August 3, 1997 was approximately $519,000, $546,000, and $230,000, respectively. F-12 Minimum annual rentals under noncancellable operating leases are as follows: Amount ------ Year ending fiscal 2000 $ 760,000 2001 638,000 2002 612,000 2003 567,000 2004 429,000 Future 2,356,000 Employment Agreements The Company has employment agreements with various executives and employees of the Company, which, as amended, expire at various dates through December 31, 2002, subject to extension each January 1 for three years, commencing January 1, 2000. These agreements provide for aggregate annual salaries for fiscal 2000 of $1,022,000. Certain agreements provide for an annual cost of living adjustment based on the consumer price index, and also provide for incentive compensation based on pretax income of the Company in excess of $2,000,000. Incentive compensation in the amount of $968,627, $727,659, and $665,352 was expensed in fiscal years 1999, 1998, and 1997, respectively. Certain agreements also provide that, in the event there is a change in control of the Company, as defined, the executives have the option to terminate the agreements and receive a lump-sum payment of approximately three times their annual salary. As of August 1, 1999, the amount payable in the event of such termination would be approximately $3,066,000. One of the employment contracts provides for a consulting agreement commencing at the end of the employment period which became effective October 1, 1998, and terminating December 31, 2010 at the annual rate of $100,000. Another one of the employment contracts, as amended October 1, 1998, provides for a consulting period commencing at the end of the period of active employment and continuing for a period of five years at the annual rate of $100,000. Two officers of the Company have severance agreements providing for a lump-sum payment of $345,000 through fiscal 2000, adjusted to $240,000 through fiscal 2002, and $105,000 in fiscal 2003. Litigation The Company is involved in various legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. Stand-by Letters of Credit The Company maintains a letter of credit facility with a bank that provides for the issuance of stand-by letters of credit and requires the payment of a fee of 1.0% per annum of the amounts outstanding under the facility. The facility expires January 31, 2001. At August 1, 1999 stand-by letters of credit aggregating $996,965 were outstanding under this facility. F-13 NOTE H - INCOME TAXES Income tax provision consisted of the following: 52 Weeks ended -------------- 53 Weeks ended August 1, August 2, August 3, 1999 1998 1997 ---- ---- ---- Current Federal $ 3,328,378(1) $ 1,468,665 $ (52,000) State 399,070 85,000 89,000 Foreign 28,517 - - --------- --------- ------- 3,755,965 1,553,665 37,000 --------- --------- ------- Deferred Federal 540,288 1,307,970 (142,000) State (198,253) 72,365 585,000 --------- --------- ------- 342,035 1,380,335 443,000 --------- --------- ------- $ 4,098,000 $ 2,934,000 $ 480,000 ========= ========= ======= (1) Excludes benefit of $68,000 from extraordinary loss incurred as a result of early extinguishment of long term debt (See Note I). The Company paid income taxes of approximately $1,324,000, $1,486,000, and $178,000 in fiscal 1999, 1998, and 1997, respectively. The following is a reconciliation of the U. S. statutory income tax rate and the effective tax rate on pretax income: 52 Weeks ended -------------- 53 Weeks ended August 1, August 2, August 3, 1999 1998 1997 ---- ---- ---- U.S. Federal statutory rate 34.0 % 34.0 % 34.0 % State taxes, net of federal tax benefit 1.4 1.5 12.2 Benefit of foreign sales corporation (3.2) (1.8) - Benefit of net operating loss carryforward - - (30.8) Non-deductible expenses 1.4 .8 .3 Decrease in valuation allowance - - (9.4) Benefit of foreign and foreign-source income (1.2) - - Other, net 1.9 .3 2.8 ---- ---- ---- Effective tax rate 34.3 % 34.8 % 9.1 % ==== ==== ==== The 1997 tax provision reflects the utilization of prior year net operating loss carryforwards. In 1995 a valuation allowance had been provided to reduce deferred tax assets to their net realizable value primarily based on management's uncertainty that past performance would be indicative of future earnings. In 1997 the valuation allowance was reversed through the deferred tax provision. A determining factor in assessing the change was the cumulative income in recent years. Income taxes have not been provided on undistributed earnings of foreign subsidiaries. If remitted as dividends, these earnings could become subject to additional tax. The Company's intention is to reinvest unremitted earnings of subsidiaries outside the United States permanently. F-14 Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Components of deferred tax assets and liabilities are as follows:
August 1, 1999 August 2, 1998 -------------- -------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Intangibles $ - $ 1,789,834 $ - $ 1,775,858 Alternative minimum tax 642,485 - 952,426 - Accrued vacation pay 242,305 - 133,962 - Accrued bonus 414,565 - 438,976 - Accrued pension 199,211 - - - Warranty costs 122,631 - 88,000 - Inventory 1,176,384 - 971,825 - Depreciation - 4,415,090 - 2,334,917 Contract losses 389,861 - 503,856 - Net operating loss carryforwards 219,392 - - - Other 266,141 209,648 60,689 202,364 --------- --------- --------- --------- $ 3,672,975 $ 6,414,572 $ 3,149,734 $ 4,313,139 ========= ========= ========= =========
As of August 1, 1999 the Company has available a $642,485 alternative minimum tax credit to carry forward for an indefinite period of time, and net operating loss carryforwards for state income tax purposes of approximately $219,392 which expire from fiscal 2000 through 2009. NOTE I- LONG-TERM DEBT Long-term debt is summarized as follows:
August 1, August 2, Rate 1999 1998 --------------- ---- ---- Revolving loan facility (a) 6.65% and 7.15% $ 12,500,000 $ 1,500,000 Note payable bank (b) 5.00% 114,722 - Mortgage note (c) 7.43% and 10.4% 2,902,726 2,890,000 Capital lease obligations (d) - 90,868 125,869 Other - 87,457 - ---------- --------- 15,695,773 4,515,869 Less current portion 258,383 404,984 ---------- --------- $ 15,437,390 $ 4,110,885 ========== ========= (a) In February 1999, the Company entered into a new revolving loan agreement with a bank that provides for the extension of credit in the aggregate principal amount of $20,000,000 and may be used for general corporate purposes, including business acquisitions. The facility requires the payment of interest only on a monthly basis and payment of the outstanding principal balance on January 31, 2001. Interest is set biweekly at 1.65% over the FOMC Target Rate. The agreement contains various financial covenants, including, among other matters, minimum tangible net worth, debt to tangible net worth, debt service coverage, and restrictions on other borrowings. F-15 (b) The note payable to a bank relates to certain equipment financing having an original term of five years with monthly installments of $2,642, including interest at a fixed rate of 5.00%. The note was paid in full subsequent to August 1, 1999 in connection with the sale of the Amityville property of GMC (See Note Q - Subsequent Events). (c) The mortgage loan is for a term of ten years with fixed monthly principal and interest installments of $23,359, including interest at a fixed rate of 7.43%, and is based upon a twenty year amortization. The loan is secured by a mortgage on the Company's land and building in Lancaster, Pennsylvania having a net book value of $1,899,000. 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. In connection with this loan, the Company paid approximately $45,000 in financing costs. Such costs are included in Other Assets in the accompanying consolidated balance sheet at August 1, 1999 and are being amortized over the term of the loan (10 years). Unamortized debt expenses of $79,226 related to the prior mortgage and the $115,600 prepayment premium were charged to expense as an extraordinary loss in connection with the prepayment of this mortgage note. (d) Certain noncancellable leases are classified as capital leases and the leased assets are included as part of "Property, Plant, and Equipment" at $119,172, net of depreciation of $47,669.
The Company paid interest of approximately $730,000 in 1999, $441,000 in 1998, and $567,000 in 1997. Future payments required on long-term debt are as follows: Fiscal year ending during: Amount ------ 2000 $ 258,383 2001 12,650,867 2002 102,523 2003 84,396 2004 90,885 Future 2,508,719 ---------- $ 15,695,773 F-16 NOTE J - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses include the following: August 1, August 2, 1999 1998 ---- ---- Accounts payable $ 2,668,285 $ 3,064,596 Accrued payroll and bonuses 2,635,816 1,865,426 Accrued commissions 488,249 615,022 Accrued interest 83,939 56,491 Accrued legal expenses 122,873 37,487 Accrued warranty costs 284,573 200,000 Accrued pension cost 498,775 - Accrued severance 537,845 - Lease termination cost 180,000 - Accrued expenses 534,856 629,161 --------- --------- $ 8,035,211 $ 6,468,183 ========= ========= NOTE K - EMPLOYEE BENEFIT PLANS In August 1985, the Board of Directors approved an Employee Savings Plan which qualified as a thrift plan under Section 401(k) of the Internal Revenue Code. This Plan, as amended and restated, allows employees to contribute between 2% and 15% of their salaries to the Plan. The Company, at its discretion can contribute 100% of the first 2% of the employees' contribution and 25% of the next 4%. Additional Company contributions can be made depending on profits. The aggregate benefit payable to an employee is dependent upon his rate of contribution, the earnings of the fund, and the length of time such employee continues as a participant. Employees of GMC became eligible to participate in the Plan as of May 1, 1999. The existing savings and investing plan of GMC did not provide for company matching contributions and has been frozen. The Company has recognized expenses of approximately $266,000 for the 52 weeks ended August 1, 1999, and $197,000, and $181,000 for the 52 weeks ended August 2, 1998 and the 53 weeks ended August 3, 1997, respectively. At the time of the acquisition, GMC also had a noncontributory defined benefit pension plan covering all eligible employees of the company. As part of the acquisition plan, the Company froze all benefits under the plan effective April 30, 1999 and elected to terminate the plan. As part of the allocation of the purchase price, the Company recorded a liability at the date of acquisition of $463,834. Net pension expense from the date of acquisition to April 30, 1999, the date benefits were frozen, includes the following components: Service cost - benefits earned during the period $ 21,550 Interest cost 136,651 Actual return on assets (123,260) ------- Net pension expense $ 34,941 ======= F-17 The following table sets forth the plan's funded status and amount recognized in the consolidated balance sheet at August 1, 1999: Projected benefit obligation at date of acquisition $ 4,793,104 Service costs 21,550 Interest cost 136,651 Benefit payments (110,376) --------- Projected benefit obligation, end of year $ 4,840,929 --------- Change in fair value of plan assets: Fair value at date of acquisition $ 4,329,270 Return on assets 123,260 Benefit payments (110,376) --------- Fair value at end of year 4,342,154 --------- Funded status and accrued pension cost $ 498,775 ========= Assumptions used were: Discount rate 5.00% Expected return on plan assets 5.00% Assets held by the trust are comprised primarily of marketable equity securities. NOTE L - RELATED PARTY TRANSACTIONS In connection with the move of the Amityville facilities of GMC, (See Note Q - Subsequent Events), the Company entered into a 10 year lease agreement with a partnership owned by the children of certain officers of the Company. The lease provides for initial minimum annual rent of $312,390, subject to escalation of approximately 4% annually throughout the 10 year term. NOTE M - COMPUTATION OF PER SHARE EARNINGS The following table shows the calculation of basic earnings per share and earnings per share assuming dilution:
52 Weeks ended ------------------------------ 53 Weeks ended August 1, 1999 August 2, 1998 August 3, 1997 -------------- -------------- -------------- Numerator: Income before extraordinary item $ 7,861,703 $ 5,496,608 $ 4,803,659 Extraordinary loss 126,826 - - ---------- --------- --------- Net Income $ 7,734,877 $ 5,496,608 $ 4,803,659 ========= ========= ========= Denominator: Basic weighted-average shares 5,232,807 4,969,248 4,063,505 Effect of dilutive securities: Employee stock options and warrants 427,289 438,035 670,177 ---------- --------- --------- Diluted weighted-average shares 5,660,096 5,407,283 4,733,682 ========= ========= =========
Options and warrants to purchase 3,047,133 shares of common stock, with exercise prices ranging from $12.00 to $16.46 were outstanding during fiscal year 1999 but were not included in the computation of diluted EPS because the exercise prices are greater than the average market price of the common shares during the period. The options and warrants, which expire at various dates through June 17, 2009, were still outstanding as of August 1, 1999. Options and warrants to purchase 1,423,958 shares of common stock, with exercise prices ranging from $13.69 to $14.40 were outstanding during fiscal year 1998 but were not included in the computation of diluted EPS because the exercise prices are greater than the average market price of the common shares during the period. F-18 NOTE N - SHAREHOLDERS' EQUITY At the annual meeting of stockholders held on February 18, 1998, the stockholders of the Company approved a proposal to amend the Certificate of Incorporation to increase the authorized shares of Common Stock from 10,000,000 to 20,000,000 shares. In December 1997, the Company completed the sale of 1,100,000 shares of common stock to the public, of which 700,000 shares were sold by the Company and 400,000 shares were sold by certain selling stockholders. In addition , the Company also sold 1,265,000 Common Stock Purchase Warrants ("Warrant(s)"). The Company received net proceeds of $7,451,579 after underwriting discounts and commissions and other expenses of the offering. Each Warrant entitles the holder to purchase one share of common stock at $15.60 per share (subject to adjustment under certain conditions) until they expire in January 2000. The Company has also issued to the underwriters, for their own accounts, Managing Underwriters' Warrants which entitle the holder to purchase 110,000 shares of common stock of the Company (subject to adjustment under certain circumstances), at a price of $14.40 per share through December 2002, and the right to purchase 110,000 Warrants (as described above) at a price of $.12 per Warrant through January 2000. On September 4, 1997 the Board of Directors declared a 4-for-3 stock split effected as a stock dividend payable September 30, 1997 to holders of record on September 15, 1997. The amount of $105,234 was transferred from additional paid-in capital to the common stock account to record this distribution. All share and per share data, including stock options and warrants, included in the financial statements have been restated to reflect the stock split. The Company has various fixed option plans which reserve shares of common stock for issuance to executives, key employees and directors. The Company applies APB Opinion No. 25 and related Interpretations in accounting for these plans. Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and , if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has been recognized for the stock option plans. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 5.1%; volatility factor of the expected market price of the Company's common stock of .58; and a weighted-average expected life of the option, after the vesting period, of .65 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management' s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-19 Had compensation cost for stock options granted in fiscal years 1999, 1998 and 1997 been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below using the statutory income tax rate of 34%:
1999 1998 1997 ---------- ---------- ---------- Net earnings - as reported $7,734,877 $5,496,608 $4,803,659 Net earnings - pro forma $5,939,519 $4,925,488 $3,911,486 Earnings per share - as reported Basic $1.48 $1.11 $1.18 Diluted 1.37 1.02 1.01 Earnings per share - pro forma Basic $1.14 $.99 $.96 Diluted 1.05 .91 .83
The effects of applying the pro forma disclosures of SFAS 123 are not likely to be representative of the effects on reported net earnings for future years due to the various vesting schedules. In April 1998, the Board of Directors approved the 1998 Stock Option Plan which covers 1,500,000 shares of the Company's common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986 or non-qualified stock options. Under the terms of the Plan, the exercise price for options granted under the plan will be the fair market value at the date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. The nature and terms of the options to be granted is determined at the time of grant by the Board of Directors. The options expire ten years from the date of grant, subject to certain restrictions. Options for 375,000 shares were granted during the fiscal year ended August 1, 1999. In May 1997, the Board of Directors approved the 1997 Stock Option Plan which covers 1,666,666 shares of the Company's common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986 or non-qualified stock options. Under the terms of the Plan, the exercise price for options granted under the plan will be the fair market value at the date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. The nature and terms of the options to be granted is determined at the time of grant by the Board of Directors. The options expire ten years from the date of grant, subject to certain restrictions. Options for 875,500, 88,333 and 801,660 shares were granted during the fiscal years ended August 1, 1999, August 2, 1998, and August 3, 1997, respectively. In October 1995, the Board of Directors approved the 1996 Stock Option Plan which covers 666,666 shares of the Company's common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986 or non-qualified stock options. Under the terms of the Plan, the exercise price for options granted under the plan will be the fair market value at the date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. The nature and terms of the options to be granted is determined at the time of grant by the Board of Directors. If not specified, 100% of the shares can be exercised one year after the date of grant. The options expire ten years from the date of grant. Options for 663,989 shares were granted during the fiscal year ended August 3, 1997. In December 1992, the Board of Directors approved the 1992 Non-Qualified Stock Option Plan which covers 1,333,333 shares, as amended, of the Company's common stock. Under the terms of the Plan, the purchase price of the shares, subject to each option granted, is 100% of the fair market value at the F-20 date of grant. The date of exercise is determined at the time of grant by the Board of Directors; however, if not specified, 50% of the shares can be exercised each year beginning one year after the date of grant. The options expire ten years from the date of grant. Options for 339,986 shares were granted during the fiscal year ended July 30, 1995. These options may be exercised cumulatively at the rate of 25% per year beginning one year after the date of grant. This plan was terminated in December 1995, except for outstanding options thereunder. In October 1987, the Board of Directors approved the 1988 Non-Qualified Stock Option Plan which covers 666,666 shares of the Company's common stock. Under the terms of the Plan, the purchase price of the shares, subject to each option granted, will not be less than 85% of the fair market value at the date of grant. The date of exercise may be determined at the time of grant by the Board of Directors; however, if not specified, 20% of the shares can be exercised each year beginning one year after the date of grant and generally expire five years from the date of grant. This plan was terminated in December 1995, except for outstanding options thereunder. A summary of stock option activity under all plans for the 52 weeks ended August 1, 1999 and August 2, 1998, and the 53 weeks ended August 3, 1997 follows:
Non-Qualified Stock Options --------------------------- Weighted Warrant Agreements Average ------------------ Number Price Range Exercise Number Price Range of shares per share Price of shares per share --------- --------- ----- --------- --------- Outstanding July 28, 1996............ 683,394 $ 2.54 - 9.01 $ 3.89 333,333 $ 4.64 - 5.35 Granted .......................... 1,465,649 6.10 - 10.41 6.48 Exercised......................... (1,225,384) 2.54 - 6.94 5.46 (13,333) 4.64 Canceled.......................... (7,332) 5.25 - 9.01 8.67 --------- ------------- ------ ------- ----------- Outstanding August 3, 1997........... 916,327 $ 2.54 - 10.41 $ 5.87 320,000 $ 4.64 - 5.35 Granted .......................... 88,333 10.31 - 13.88 12.04 Exercised......................... (135,594) 2.54 - 6.94 5.08 (40,000) 5.35 Canceled.......................... (8,222) 2.54 - 6.47 5.31 --------- ------------- ------ ------- ----------- Outstanding August 2, 1998........... 860,844 $ 2.54 - 13.88 $ 6.65 280,000 $ 4.64 Granted .......................... 1,250,500 9.25 - 16.46 11.44 Exercised......................... (669,100) 2.54 - 9.94 6.56 (66,667) 4.64 Canceled.......................... (47,631) 6.47 - 16.46 11.16 --------- ------------- ------ ------- ----------- Outstanding August 1, 1999........... 1,394,613 $ 2.54 - 16.46 $10.74 213,333 $ 4.64 ========= =======
Options to purchase 783,889 shares of common stock were exercisable under all plans at August 1, 1999 at a weighted average exercise price of $11.15 with a weighted average remaining contractual life of 8.8 years as follows: Options Outstanding and Exercisable by Price Range as of August 1, 1999
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 ----------------- ----------- ---------------- -------------- ----------- -------------- $ 2.54 - $ 9.25 602,613 8.2 $ 7.92 211,489 $ 6.21 10.41 - 12.13 389,250 9.3 11.86 285,150 12.03 12.19 - 13.94 364,750 9.3 13.71 280,250 13.87 14.31 - 16.46 38,000 9.5 15.34 7,000 15.39 --------- --- ------ ------- ------ $2.54 - $16.46 1,394,613 8.8 $10.74 783,889 $11.15 ========= =======
In April 1993, common stock warrants were issued to certain officers and directors for the right to acquire 573,333 shares of common stock of the Company at the fair market value of $5.35 per share at F-21 date of issue. In December 1995 warrants for 533,333 shares were canceled, and the remaining 40,000 warrants were exercised in fiscal 1998. In December 1995, common stock warrants were issued to certain officers for the right to acquire 293,333 shares of common stock of the Company at the fair market value of $4.64 per share at date of issue. The warrants vest immediately and expire December 13, 2005. Warrants for 66,667 and 13,333 shares were exercised in fiscal 1999 and 1997, respectively. NOTE O - SIGNIFICANT SEGMENTS, MAJOR CUSTOMERS, AND EXPORT SALES The Company's chief operating decision maker is considered to be the Chairman and Chief Executive Officer (CEO). The Company's CEO evaluates both consolidated and disaggregated financial information consisting of revenue information in deciding how to allocate resources and assess performance. The CEO uses certain disaggregated financial information for the Company's two product groups: Space and Communications and Microwave Components. The Company does not determine a measure of operating income or loss by product group. The Company's two product groups have similar long-term economic characteristics, such as application, and are similar in regards to (a) nature of products and production processes, (b) type of customers, and (c) method used to distribute products. Accordingly, the Company is in a single reportable segment as a provider of flight instrumentation components and systems and microwave products for the U.S. government, foreign governments, and aerospace companies. All of the Company's revenues result from sales of its products. Revenues by product group (as defined by the Company) for fiscal years 1999, 1998 and 1997 were as follows: Space and Communications, $33,846,000, $30,338,000 and $22,781,000, respectively; Microwave Components, $27,190,000,$10,460,000 and $9,414,000, respectively. Net sales to the U.S. Government in 1999, 1998, and 1997 accounted for approximately 17%, 26%, and 34% of net sales, respectively. One other customer accounted for 12% of net sales in 1999. Foreign sales amounted to approximately $17,680,000, $11,943,000, and $9,398000 in fiscal 1999, 1998, and 1997, respectively. Included in accounts receivable as of August 1, 1999 and August 2, 1998 are amounts due from the U.S. Government of approximately $2,470,000 and $933,000, respectively. NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximated its fair value. Available-for-sale securities: The fair value of available-for-sale securities was based on quoted market prices. Long-term debt: The fair value of the mortgage note was estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. Off balance sheet financial instruments: Stand-by letters of credit: These letters of credit primarily collateralize the Company's obligations to customers for advanced payments received under contracts. The contract amounts of the letters of credit approximate their fair value. F-22 The carrying amounts and fair values of the Company's financial instruments are presented below: August 1, 1999 -------------- Carrying Amount Fair Value --------------- ---------- Cash and cash equivalents $ 2,741,163 $ 2,741,163 Long-term debt 15,437,390 15,437,390 Stand-by letters of credit - 996,965 NOTE Q - SUBSEQUENT EVENTS On September 23, 1999, the Company closed on the sale of GMC's property in Amityville, New York and relocated the plant to a leased facility in Farmingdale, New York. The Company used the net proceeds from the sale of approximately $4,159,000, which approximates the net carrying value of the property, to partially fund the buy back of its common stock through open market purchases in September 1999. F-23 EX-10.3 2 1998 STOCK OPTION PLAN Exhibit 10.3 ------------ HERLEY INDUSTRIES, INC. 1998 Stock Option Plan SECTION 1. GENERAL PROVISIONS 1.1. Name and General Purpose The name of this plan is the Herley Industries, Inc. 1998 Stock Option Plan (hereinafter called the "Plan"). The purpose of the Plan is to enable Herley Industries, Inc. (the "Company") and its subsidiaries and affiliates to foster and promote the interests of the Company by attracting and retaining officers and employees of the Company who contribute to the Company's success by their ability, ingenuity and industry, to enable such officers and employees of the Company to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company and to provide incentive compensation opportunities competitive with those of competing corporations. 1.2 Definitions a. "Affiliate" means any person or entity controlled by or under common control with the Company, by virtue of the ownership of voting securities, by contract or otherwise. b. "Board" means the Board of Directors of the Company. c. "Change in Control" means a change of control of the Company, or in any person directly or indirectly controlling the Company, which shall mean: (a) a change in control as such term is presently defined in Regulation 240.12b-(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (b) if any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than the Company or any "person" who on the date of this Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act) directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the voting power of the Company's then outstanding securities; or (c) if during any period of two (2) consecutive years during the term of this Plan, individuals who at the beginning of such period constitute the Board of Directors, cease for any reason to constitute at least a majority thereof. d. "Code" means the Internal Revenue Code of 1986, as amended. e. "Committee" means the Committee referred to in Section 1.3 of the Plan. f. "Common Stock" means shares of the Common Stock, par value $.10 per share, of the Company. g. "Company" means Herley Industries, Inc., a corporation organized under the laws of the State of Delaware (or any successor corporation). h. "Fair Market Value" means the market price of the Common Stock on the National Association of Securities Dealers Automated Quotation ("NASDAQ") system on the date of the grant or on any other date on which the Common Stock is to be valued hereunder. If no sale shall have been reported on NASDAQ on such date, Fair Market Value shall be determined by the Committee in accordance with the Treasury Regulations applicable to incentive stock options under Section 422 of the Code. i. "Incentive Stock Option" means an Incentive Stock Option as described in Section 2.1 of the Plan. j. "Non-Employee Director" shall have the meaning set forth in Rule 16(b) promulgated by the Securities and Exchange Commission ("Commission"). k. "Non-Qualified Stock Option" means a Non-Qualified Stock Option as described in Section 2.1 of the Plan. l. "Option" means any option to purchase Common Stock under Section 2 of the Plan. m. "Participant" means any officer or employee of the Company, a Subsidiary or an Affiliate who is selected by the Committee to participate in the Plan. n. "Subsidiary" means any corporation in which the Company possesses directly or indirectly 50% or more of the combined voting power of all classes of stock of such corporation. o. "Total Disability" means accidental bodily injury or sickness which wholly and continuously disabled an optionee. The Committee, whose decisions shall be final, shall make a determination of Total Disability. 1.3 Administration of the Plan The Plan shall be administered by the Committee appointed by the Board consisting of two or more members of the Board all of who shall be Non-Employee Directors. The Committee shall serve at the pleasure of the Board and shall have such powers as the Board may, from time to time, confer upon it. Subject to this Section 1.3, the Committee shall have sole and complete authority to adopt, alter, amend or revoke such administrative rules, guidelines and practices governing the operation of the Plan as it shall, from time to time, deem advisable, and to interpret the terms and provisions of the Plan. The Committee shall keep minutes of its meetings and of action taken by it without a meeting. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all of the members of the Committee without a meeting, shall constitute the acts of the Committee. -2- 1.4 Eligibility Stock options may be granted only to officers or employees of the Company or a Subsidiary or Affiliate. Subject to Section 2.3, any person who has been granted any Option may, if he is otherwise eligible, be granted an additional Option or Options. 1.5 Shares The aggregate number of shares reserved for issuance pursuant to the Plan shall be 1,500,000 shares of Common Stock, or the number and kind of shares of stock or other securities which shall be substituted for such shares or to which such shares shall be adjusted as provided in Section 1.6. Such number of shares may be set aside out of the authorized but unissued shares of Common Stock or out of issued shares of Common Stock acquired for and held in the Treasury of the Company, not reserved for any other purpose. Shares subject to, but not sold or issued under, any Option terminating or expiring for any reason prior to its exercise in full will again be available for Options thereafter granted during the balance of the term of the Plan. 1.6 Adjustments Due to Stock Splits, Mergers, Consolidation, Etc. If, at any time, the Company shall take any action, whether by stock dividend, stock split, combination of shares or otherwise, which results in a proportionate increase or decrease in the number of shares of Common Stock theretofore issued and outstanding, the number of shares which are reserved for issuance under the Plan and the number of shares which, at such time, are subject to Options shall, to the extent deemed appropriate by the Committee, be increased or decreased in the same proportion, provided, however, that the Company shall not be obligated to issue fractional shares. Likewise, in the event of any change in the outstanding shares of Common Stock by reason of any recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other corporate change, the Committee shall make such substitution or adjustments, if any, as it deems to be appropriate, as to the number or kind of shares of Common Stock or other securities which are reserved for issuance under the Plan and the number of shares or other securities which, at such time are subject to Options. In the event of a Change in Control, at the option of the Board or Committee, (a) all options outstanding on the date of such Change in Control shall, for a period of sixty (60) days following such Change in Control, become immediately and fully exercisable, and (b) an optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control any option or portion of an option which was granted more than six (6) months prior to the date of such surrender, to the extent not yet exercised, and to receive a cash payment in an amount equal to the excess, if any, of the Fair Market Value (on the date of surrender) of the shares of Common Stock subject to the option or portion thereof surrendered, over the aggregate purchase price for such Shares under the option. 1.7 Non-Alienation of Benefits Except as herein specifically provided, no right or unpaid benefit under the Plan shall be subject to alienation, assignment, pledge or charge and any attempt to alienate, assign, pledge or charge the same shall -3- be void. If any Participant or other person entitled to benefits hereunder should attempt to alienate, assign, pledge or charge any benefit hereunder, then such benefit shall, in the discretion of the Committee, cease. 1.8 Withholding or Deduction for Taxes If, at any time, the Company or any Subsidiary or Affiliate is required, under applicable laws and regulations, to withhold, or to make any deduction for any taxes, or take any other action in connection with any Option exercise, the Participant shall be required to pay to the Company or such Subsidiary or Affiliate, the amount of any taxes required to be withheld, or, in lieu thereof, at the option of the Company, the Company or such Subsidiary or Affiliate may accept a sufficient number of shares of Common Stock to cover the amount required to be withheld. 1.9 Administrative Expenses The entire expense of administering the Plan shall be borne by the Company. 1.10 General Conditions a. The Board or the Committee may, from time to time, amend, suspend or terminate any or all of the provisions of the Plan, provided that, without the Participant's approval, no change may be made which would prevent an Incentive Stock Option granted under the Plan from qualifying as an Incentive Stock Option under Section 422 of the Code or result in a "modification" of the Incentive Stock Option under Section 424(h) of the Code or otherwise alter or impair any right theretofore granted to any Participant ; and further provided that, without the consent and approval of the holders of a majority of the outstanding shares of Common Stock of the Company present at a meeting at which a quorum exists, neither the Board nor the Committee may make any amendment which (i) changes the class of persons eligible for options; (ii) increases (except as provided under Section 1.6 above) the total number of shares or other securities reserved for issuance under the Plan; (iii) decreases the minimum option prices stated in Section 2.2 hereof (other than to change the manner of determining Fair Market Value to conform to any then applicable provision of the Code or any regulation thereunder); (iv) extends the expiration date of the Plan, or the limit on the maximum term of Options; or (v) withdraws the administration of the Plan from a committee consisting of two or more members, each of whom is a non-employee director. b. With the consent of the Participant affected thereby, the Committee may amend or modify any outstanding Option in any manner not inconsistent with the terms of the Plan, including, without limitation, and irrespective of the provisions of Sections 2.3(c) and 2.4(b) below, to accelerate the date or dates as of which an installment of an Option becomes exercisable. c. Nothing contained in the Plan shall prohibit the Company or any Subsidiary or Affiliate from establishing other additional incentive compensation arrangements for employees of the Company or such Subsidiary or Affiliate. d. Nothing in the Plan shall be deemed to limit, in any way, the right of the Company or any Subsidiary or Affiliate to terminate a Participant's employment with the Company (or such Subsidiary or Affiliate) at any time. -4- e. Any decision or action taken by the Board or the Committee arising out of or in connection with the construction, administration, interpretation and effect of the Plan shall be conclusive and binding upon all Participants and any person claiming under or through any Participant. f. No member of the Board or of the Committee shall be liable for any act or action, whether of commission or omission, (i) by such member except in circumstances involving actual bad faith, nor (ii) by any other member or by any officer, agent or employee. 1.11 Compliance with Applicable Law Notwithstanding any other provision of the Plan, the Company shall not be obligated to issue any shares of Common Stock, or grant any Option with respect thereto, unless it is advised by counsel of its selection that it may do so without violation of the applicable Federal and State laws pertaining to the issuance of securities and the Company may require any stock certificate so issued to bear a legend, may give its transfer agent instructions limiting the transfer thereof, and may take such other steps, as in its judgment are reasonably required to prevent any such violation. 1.12 Effective Dates The Plan was adopted by the Board on May 1, 1997. The Plan shall terminate on April 30, 2007. Section 2. OPTION GRANTS 2.1 Authority of Committee Subject to the provisions of the Plan, the Committee shall have the sole and complete authority to determine (i) the Participants to whom Options shall be granted; (ii) the number of shares to be covered by each Option; and (iii) the conditions and limitations, if any, in addition to those set forth in Sections 2 and 3 hereof, applicable to the exercise of an Option, including without limitation, the nature and duration of the restrictions, if any, to be imposed upon the sale or other disposition of shares acquired upon exercise of an Option. Stock options granted under the Plan may be of two types: an incentive stock option ("Incentive Stock Option"); and a non-qualified stock option ("Non-Qualified Stock Option"). It is intended that the Incentive Stock Options granted hereunder shall constitute incentive stock options within the meaning of Section 422 of the Code and shall be subject to the tax treatment described in Section 422 of the Code. Anything in the Plan to the contrary notwithstanding, no provision of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or, without the consent of the optionee, any Incentive Stock Option under Section 422 of the Code. -5- The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of Options. To the extent that any Option does not qualify as an Incentive Stock Option, in whole or in part, it shall constitute a separate Non-Qualified Stock Option to the extent of such disqualification. 2.2 Option Exercise Price The price of stock purchased upon the exercise of Options granted pursuant to the Plan shall be the Fair Market Value thereof at the time that the Option is granted. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of the stock of the Company or any parent corporation of the Company or Subsidiary and an Option granted to such employee is intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code, the exercise price shall be no less than 110% of the Fair Market Value of the Common Stock on the date the Option is granted. The purchase price is to be paid in full in cash, certified or bank cashier's check or, at the option of the Company, Common Stock valued at its Fair Market Value on the date of exercise, or a combination thereof, when the Option is exercised and stock certificates will be delivered only against such payment. 2.3 Incentive Stock Option Grants Each Incentive Stock Option will be subject to the following provisions: a. Term of Option An Incentive Stock Option will be for a term of not more than ten years from the date of grant, except in the case of an employee described in the second paragraph of Section 2.2 above in which case an Incentive Stock Option will be for a term of not more than five years from the date of the grant. b. Annual Limit To the extent the aggregate Fair Market Value of the Common Stock (determined as of the date of grant) with respect to which any options granted hereunder are intended to be designated as Incentive Stock Options under the Plan (or any other incentive stock option plan of the Company or any Subsidiary) which may be exercisable for the first time by the optionee in any calendar year exceeds $100,000, such options shall not be considered incentive stock options. c. Exercise Subject to the power of the Committee under Section 1.10(b) above and except in the manner described below upon the death of the optionee, an Incentive Stock Option may be exercised only in installments as follows: up to one-half of the subject shares on and after the first anniversary of the date of grant, up to all of the subject shares on and after the second such anniversary of the date of the grant of such Option but in no event later than the expiration of the term of the Option. -6- An Incentive Stock Option shall be exercisable during the optionee's lifetime only by the optionee and shall not be exercisable by the optionee unless, at all times since the date of grant and at the time of exercise, such optionee is an employee of the Company, any parent corporation of the Company or any Subsidiary, except that, upon termination of all employment (other than by death, Total Disability, or by Total Disability followed by death in the circumstances provided below) with the Company, any parent corporation of the Company and any Subsidiary or Affiliate, the optionee may exercise an Incentive Stock Option at any time within three months thereafter but only to the extent such Option is exercisable on the date of such termination. Upon termination of all employment by Total Disability, the Optionee may exercise such options at any time within one year thereafter, but only to the extent such option is exercisable on the date of such termination. In the event of the death of an optionee (i) while an employee of the Company, any parent corporation of the Company or any Subsidiary or Affiliate, or (ii) within three months after termination of all employment with the Company, any parent corporation of the Company and any Subsidiary or Affiliate (other than for Total Disability) or (iii) within one year after termination on account of Total Disability of all employment with the Company, any parent corporation of the Company and any Subsidiary or Affiliate, such optionee's estate or any person who acquires the right to exercise such option by bequest or inheritance or by reason of the death of the optionee may exercise such optionee's Option at any time within the period of three years from the date of death. In the case of clauses (i) and (iii) above, such Option shall be exercisable in full for all the remaining shares covered thereby, but in the case of clause (ii) such Option shall be exercisable only to the extent it was exercisable on the date of such termination. Notwithstanding the foregoing provisions regarding the exercise of an Option in the event of death, Total Disability or other termination of employment, in no event shall an Option be exercisable in whole or in part after the termination date provided in the Option. d. Transferability An Incentive Stock Option granted under the Plan shall not be transferable otherwise than by will or by the laws of descent and distribution. 2.4 Non-Qualified Stock Option Grants Each Non-Qualified Stock Option will be subject to the following provisions: a. Term of Option A Non-Qualified Stock Option will be for a term of not more than ten years from the date of grant. -7- b. Exercise The exercise of a Non-Qualified Stock Option shall be subject to the same terms and conditions as provided under Section 2.3(c) above except that (i) upon termination of all employment by Total Disability, the Optionee may exercise such options at any time within three years thereafter and (ii) in the event of the death of an Optionee within three years after termination on account of Total Disability of all employment with the Company, or any subsidiary or affiliate, such Optionee's estate or any person who acquires the right to exercise such option by bequest or inheritance or by reason of the death of the Optionee may exercise such Optionee's option at any time within a period of three years from the date of death. c. Transferability A Non-Qualified Stock Option granted under the Plan shall not be transferable otherwise than by will or by the laws of descent and distribution, except as may be permitted by the Board or the Committee. 2.5 Agreements In consideration of any Options granted to a Participant under the Plan, each such Participant shall enter into an Option Agreement with the Company providing, consistent with the Plan, such terms as the Committee may deem advisable. -8- EX-10.4 3 AMENDMENTS TO EMPLOYMENT AGREEMENT OF LEE N. BLATT Exhibit 10.4 ------------ MODIFICATION AGREEMENT MODIFICATION AGREEMENT made this 26th day of January, 1999 and between HERLEY INDUSTRIES, INC., a Delaware corporation (hereinafter the "Company") and LEE N. BLATT, an individual residing at 471 North Arrowhead Trail, Vero Beach, Florida 32963 (hereinafter "the Employee"). W I T N E S S E T H: WHEREAS, the Company and Employee entered into an Employment Agreement dated October 1, 1998 (hereinafter the "Employment Agreement"); and WHEREAS, the Company and Employee desire to amend said Employment Agreement. NOW, THEREFORE, the parties agree as follows: 1. Paragraph "5 (iii)" of the Employment Agreement is hereby deleted in its entirety, and in its place and stead shall be the following: "(iii) 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 period of employment, the Company shall pay to Employee, as incentive compensation an amount equal to five (5%) percent of the Consolidated Pretax Earnings of the Company in excess of the Company's Minimum Consolidated Pretax Earnings, as defined below in this clause (iii). 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. For the purposes hereof the term "Minimum Consolidated Pretax Earnings" of the Company shall mean with respect to any fiscal year, the consolidated Pretax Earnings of the Company equal to $2,000,000." 2. Paragraph "12" of the Employment Agreement is hereby deleted in its entirety, and in its place and stead shall be the following: "12. CHANGE OF CONTROL. In the event there shall be a change in the present control of the Company as hereinafter defined, or in any person directly or indirectly presently controlling the Company, as hereinafter defined, Employee shall have the right, exercisable within six months of his becoming aware of such event, to terminate his employment. Upon such termination, Employee shall immediately receive as a lump sum payment an amount equal to (i) three (3) times his "base amount", within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (hereinafter "the Code"), reduced by (ii) $100.00. For purposes of this Agreement, a change in control of the Company, or in any person directly or indirectly controlling the Company, shall mean: a) a change in control as such term is presently defined in Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act"); or b) if any "person" (as such term is used in Section 13(d) and 14 (d) of the Exchange Act) other than the Company or any "person" who on the date of this Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five (25%) of the voting power of the Company's then outstanding securities; or c) if during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director who is not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period. 3. Paragraph "12-A" shall be added to the Employment Agreement as following: -2- "12-A. PARACHUTES. If all, or any portion, of the payments provided under this Agreement, and/or any other payments and benefits that Employee receives or is entitled to receive from the Company, 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 Employee of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which Employee is entitled under this Agreement, the Company 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 Employment Agreement, as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up")." 4. The aforesaid Employment Agreement in all other respects is hereby ratified and confirmed. IN WITNESS WHEREOF, the undersigned have executed this Modification Agreement as of the day and year first above written. HERLEY INDUSTRIES, INC. By: /s/ Myron Levy --------------------- Myron Levy, President /s/ Lee N. Blatt ---------------------- Lee N. Blatt, Employee -3- July 30, 1999 Mr. Lee N. Blatt 471 North Arrowhead Trail Vero Beach, Fl 32963 Re: Employment Agreement dated October 1, 1998, as modified January 26, 1999, between Herley Industries, Inc. and Lee N. Blatt (the "Employment Agreement") Dear Mr. Blatt: The following will set forth our mutual agreement as to the modification of the Employment Agreement effective June 17, 1999: 1. Paragrapah 5(i) is amended to provide for an annual salary of $587,972 reflecting an increase of $100,000 annually, plus the cumulative cost of living adjustment through June 30, 1999 as provided in Paragraph 5(ii), 2. Paragraph 5 (ii) of the Employment Agreement shall be amended to change the base period for computation of the cost of living adjustment to July 1, 1999. 3. You shall receive an allowance for life insurance in the annual amount of $56,000, which shall be payable semi-annually by the Company on August 1, and February 1, as presently provided for in the Employment Agreement. In all other respects, the Employment Agreement is hereby ratified and confirmed. If you agree with all of the above, would you please sign and return a coy of this letter whereupon the same shall constitute a binding agreement between us. HERLEY INDUSTRIES, INC. By: /s/ Myron Levy -------------------- Myron Levy President ACCEPTED AND AGREED: --------------------------- Lee N. Blatt EX-10.5 4 AMENDMENTS TO EMPLOYMENT AGREEMENT OF MYRON LEVY Exhibit 10.5 ------------ MODIFICATION AGREEMENT MODIFICATION AGREEMENT made this 26th day of January, 1999 and between HERLEY INDUSTRIES, INC., a Delaware corporation (hereinafter the "Company") and MYRON LEVY, an individual residing at 147 Deer Ford Drive, Lancaster, Pennsylvania 17603 (hereinafter "the Employee"). W I T N E S S E T H: WHEREAS, the Company and Employee entered into an Employment Agreement dated October 1, 1998 (hereinafter the "Employment Agreement"); and WHEREAS, the Company and Employee desire to amend said Employment Agreement. NOW, THEREFORE, the parties agree as follows: 1. Paragraph "5 (iii)" of the Employment Agreement is hereby deleted in its entirety, and in its place and stead shall be the following: (iii)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 four year and three month period of employment, the Company shall pay to Employee, as incentive compensation an amount equal to four (4%) percent of the Consolidated Pretax Earnings of the Company in excess of the Company's Minimum Consolidated Pretax Earnings, as defined below. 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 below in this clause (iii). For purposes hereof the term "Minimum Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the Consolidated Pretax Earnings of the Company equal to $2,000,000." 2. Paragraph "12" of the Employment Agreement is hereby deleted in its entirety, and in its place and stead shall be the following: "12. CHANGE OF CONTROL. In the event there shall be a change in the present control of the Company as hereinafter defined, or in any person directly or indirectly presently controlling the Company, as hereinafter defined, Employee shall have the right, exercisable within six months of his becoming aware of such event, to terminate his employment. Upon such termination, Employee shall immediately receive as a lump sum payment an amount equal to (i) three (3) times his "base amount", within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (hereinafter "the Code"), reduced by (ii) $100.00. For purposes of this Agreement, a change in control of the Company, or in any person directly or indirectly controlling the Company, shall mean: a) a change in control as such term is presently defined in Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act"); or b) if any "person" (as such term is used in Section 13(d) and 14 (d) of the Exchange Act) other than the Company or any "person" who on the date of this Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five (25%) of the voting power of the Company's then outstanding securities; or c) if during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director who is not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period." 3. Paragraph "12-A" shall be added to the Employment Agreement as following: -2- "12-A. PARACHUTES. If all, or any portion, of the payments provided under this Agreement, and/or any other payments and benefits that Employee receives or is entitled to receive from the Company, 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 Employee of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which Employee is entitled under this Agreement, the Company 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 Employment Agreement, as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up")." 4. The aforesaid Employment Agreement in all other respects is hereby ratified and confirmed. IN WITNESS WHEREOF, the undersigned have executed this Modification Agreement as of the day and year first above written. HERLEY INDUSTRIES, INC. By: /s/ Lee N. Blatt ---------------------- Lee N. Blatt, Chairman /s/ Myron Levy ---------------------- Myron Levy, Employee -3- July 30, 1999 Mr. Myron Levy 807 Bent Creek Drive Lititz, Pennsylvania 17543 Re: Employment Agreement dated October 1, 1998, as modified January 26, 1999, between Herley Industries, Inc. and Myron Levy (the "Employment Agreement") Dear Mr. Levy: The following will set forth our mutual agreement as to the modification of the Employment Agreement effective June 17, 1999: 1. Paragraph 5(i) is amended to provide for an annual salary of $433,876 reflecting an increase of $100,000 annually, plus the cumulative cost of living adjustment through June 30, 1999 as provided in Paragraph 5(ii), 2. Paragraph 5 (ii) of the Employment Agreement shall be amended to change the base period for computation of the cost of living adjustment to July 1, 1999. In all other respects, the Employment Agreement is hereby ratified and confirmed. If you agree with all of the above, would you please sign and return a copy of this letter whereupon the same shall constitute a binding agreement between us. HERLEY INDUSTRIES, INC. By: /s/ Lee N. Blatt ----------------------- Lee N. Blatt Chairman of the Board ACCEPTED AND AGREED: --------------------------- Myron Levy EX-10.8 5 LEASE AGREEMENT Exhibit 10.8 ------------ AGREEMENT OF LEASE BETWEEN RSK REALTY LTD AND HERLEY INDUSTRIES, INC. TABLE OF CONTENTS SPACE ...................................................................1 TERM.....................................................................1 RENT.....................................................................3 USE OF PREMISES..........................................................6 TAXES....................................................................7 CONDITION OF PREMISES AND DELIVERY OF POSSESSION.........................8 INITIAL CONSTRUCTION.....................................................8 REPAIRS, MAINTENANCE, FLOOR LOADS AND PARKING RESTRUCTION................9 TENANT'S ALTERATION.....................................................12 UTILITIES...............................................................14 REQUIREMENTS OF LAW, SPRINKLERS.........................................14 INSURANCE...............................................................17 DAMAGE OR DESTRUCTION...................................................19 SUBORDINATION...........................................................21 INDEMNIFICATION.........................................................23 EMINENT DOMAIN..........................................................23 RIGHT TO SUBLET OR ASSIGN...............................................25 RIGHT TO INSPECT; POSTING SIGNS.........................................28 DEFAULT.................................................................30 i REMEDIES OF LANDLORD....................................................31 ATTORNEY'S FEES.........................................................33 WAIVER OF REDEMPTION, COUNTERCLAIM, TRIAL BY JURY.......................33 NO WAIVER...............................................................34 END OF TERM.............................................................35 BROKER..................................................................36 QUIET ENJOYMENT.........................................................37 NONLIABIITY OF LANDLORD.................................................37 NO ABATEMENT............................................................38 APPLICABLE LAW AND CONSTRUCTION.........................................38 CONSTRUCTION ON ADJACENT PREMISES OR BUILDINGS..........................39 UTILITY EASEMENT........................................................40 NOTICES.................................................................40 BINDING EFFECT OF LEASE.................................................40 UNAVOIDABLE DELAYS......................................................41 SANITARY SYSTEMS........................................................41 COMMON AREA MAINTENANCE CHARGE..........................................41 PARKING.................................................................42 CLEANING, RUBBISH REMOVAL...............................................42 EXHIBIT "A".............................................................45 ii AGREEMENT OF LEASE AGREEMENT OF LEASE made as of the 1st day of September, 1999 between RSK Realty LTD a limited partnership having its principal office at 44 Midwood Road, Rockville Centre, New York 11570 (hereinafter referred to as "Landlord"), and HERLEY INDUSTRIES, INC., a corporation having its principal office at 10 Industry Drive, Lancaster, Pennsylvania 17603 (hereinafter referred to as "Tenant"). SPACE 1.Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the real property and the building and other improvements thereon known as and located at 425 Smith Street Farmingdale, New York 11735 as shown on Exhibit "A" annexed hereto (such real property, building and improvements being hereinafter referred to as the "Premises" and such building being hereinafter referred to as the "Building"). The parties stipulate and agree that the Premises contains 46,280 square feet in a Building containing 68,282 square feet which constitutes 100.00 percent of the areas of the Building ("Tenant's Proportionate Share"). The Premises are let subject to covenants, restrictions and easements of record, governmental laws, rules, regulations and orders, and the reservation by Landlord of all air rights above, around and about the Premises and all rights to increase the sizes of surrounding buildings based on the air rights appurtenant to the Premises, an, if and when permitted by any present or future zoning laws, ordinances, orders or regulations. TERM 2. (a) The term ("Term" or "Demised Term" or "term") of this lease shall commence on the date of this lease (the "Term Commencement Date"). Tenant's obligation to pay Rent (as defined in Article 3) shall commence on Sept. 1, 1999. The Term of this lease shall expire on the day (hereinafter referred to as the "Expiration Date") which is ten (10) years after (I) the Rent Commencement Date, if such date is the first day of a calendar month, or (ii) the first day of the first full calendar month following the Rent Commencement Date, if such date is not the first day of a calendar month. (b) Tenant waives any right to rescind this lease under Section 223-a of the New York Real Property Law or any successor statute of similar import then in force and further waives the right to recover any damages which may result from Landlord's failure to deliver possession of the Premises by the Rent Commencement Date. (c) Upon the request of Landlord, Tenant agrees to execute a writing, prepared and executed by Landlord, setting forth the actual date on which the Term Commencement Date, the Rent Commencement Date and the Expiration Date took place or will take place. Notwithstanding anything to the contrary contained herein, such writing shall be deemed a part of this lease and conclusive evidence of such dates. (d) A "Lease Year" shall comprise a period of twelve (12) consecutive calendar months. The first Lease Year shall commence on the Rend Commencement Date but, notwithstanding the first sentence of this paragraph, if the Rend Commencement Date is not the first day of a month, then the first Lease Year shall include the additional period from the Rend Commencement Date to the end of the month in which the Rent Commencement Date shall take place. Each succeeding Lease Year shall end on the anniversary date of the last day of the preceding Lease Year. For example, if the Rent Commencement Date is January 1, 1999, the first Lease Year would begin on January 1, 1999 and end on January 31, 2000, the second Lease Year would begin on February 1, 2000, and each succeeding Lease Year would end on January 31st. RENT 3. (a) Tenant covenants to pay to Landlord at its principal office, or at such place as Landlord shall from time to time direct in writing, the minimum annual rent set forth below, and the additional rent required to be paid pursuant to the terms of this lease. Minimum annual rent and such other additional rent and charges which Tenant shall be required to pay are hereinafter sometimes referred to as "Rent". Minimum annual rent shall be as follows: During the first Lease Year, the minimum annual rent shall be $312,390.00 payable in equal monthly installments of $26,032.50. During the second Lease Year, the minimum annual rent shall be $324,885.60 payable in equal monthly installments of $27,073.80. During the third Lease Year, the minimum annual rend shall be $337,881.02 payable in equal monthly installments of $28,156.75. During the fourth Lease Year, the minimum annual rent shall be $351,396.26 payable in equal monthly installments of $29,283.02. During the fifth Lease Year, the minimum annual rent shall be $365,452.12 payable in equal monthly installments of $30,454.34. During the sixth Lease Year, the minimum annual rent shall be $376,415.68 payable in equal monthly installments of $31,367.97. During the seventh Lease Year, the minimum annual rent shall be $387,708.15 payable in equal monthly installments of $32,309.01. During the eighth Lease Year, the minimum annual rent shall be $401,277.93 payable in equal monthly installments of $33,439.83. During the ninth Lease Year, the minimum annual rent shall be $415,322.66 payable in equal monthly installments of $34,610.22. During the tenth Lease Year, the minimum annual rent shall be $429,858.96 payable in equal monthly installments of $35,821.58. (b) Tenant shall pay the minimum annual rent in equal monthly installments in advance on the first day of each calendar month included in the term, except that Tenant shall pay the first month's rent upon execution of this lease. (c) All Rent shall be paid in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, at the address of Landlord set forth in this lease or at such other place as Landlord in writing may designate without any set-off or deduction whatsoever and without any prior demand therefor. (d) Unless another time shall be herein expressly provided, any additional rent shall be due and payable on demand or together with the next succeeding installment of minimum annual rent, whichever shall first occur; and Landlord shall have the same remedies for failure to pay the additional rent as for a non-payment of minimum annual rent. (e) For any portion of a calendar month included at the beginning or end of the term, Tenant shall pay 1/30th of the closest applicable monthly installment of minimum annual rent (specifically excluding month one of the first Lease Year and months eleven and twelve of the tenth Lease Year) for each day of such portion, payable in advance at the beginning of such portion. (f) In any case in which the minimum annual rent of additional rent is not paid within five (5) days of the day when same is due, Tenant shall pay a late charge equal to 8-1/2 cents for each dollar so due; and, in addition thereto, the sum of $100.00 for the purpose of defraying expenses incident to the handling of such delinquent account. Tenant further agrees that the late charge imposed herein is fair and reasonable, complies with all laws, regulations and statutes, and constitutes an agreement between Landlord and Tenant as to the estimated compensation for costs and administrative expenses incurred by Landlord due to the late payment of rent to Landlord by Tenant. Tenant further agrees that the late charge assessed pursuant to this lease is not interest, and the late charge assessed does not constitute a lender or borrower/creditor relationship between Landlord and Tenant. (g) If Tenant shall default in making any payment required to be made by Tenant or in performing any obligation of Tenant under this lease which shall require the expenditure of money, Landlord may, but shall not be obligated to, make such payment on behalf of Tenant or expend such sum as may be necessary to perform or fulfill such obligation. Any sums so paid by Landlord shall be deemed Rent and shall be due and payable to Landlord at the time of payment of the next installment of minimum annual rent. USE OF PREMISES 4. (a) Tenant shall use and occupy the Premises solely for light manufacturing of microwave components and products, and executive and administrative offices related thereto and for no other purpose. Tenant shall not use or permit the use of the Premises contrary to any applicable statute, ordinance of regulation or in violation of the Certificate of Occupancy of the Building, or in a manner which would cause structural injury to the Building. (b) Tenant acknowledges that the value of the Premises and the reputation of Landlord will be seriously injured if the Premises are used for any obscene or pornographic purposes or if any obscene or pornographic material is permitted on the Premises. Tenant further agrees that Tenant will not permit any such uses by Tenant or a subleassee of the Premises or an assignee of this lease. This Paragraph shall directly bind any successors in interest to Tenant. Tenant agrees that, if at any time, Tenant violates any of the provisions of this Paragraph, such violation shall be deemed a breach of a substantial obligation of the terms of this lease and objectionable conduct. Pornographic material is defined for purposes of this Paragraph as any written or pictorial matter with prurient appeal or any objects or instruments that are primarily concerned with lewd or prurient sexual activity. Obscene material is defined here as it is in Penal Law ss.235.00. TAXES 5. (a) During the term of this lease, Tenant covenants and agrees to pay, in the manner set forth in this Article, all Real Estate Taxes, as additional rent. (b) The term "Real Estate Taxes" shall be deemed to mean all taxes and assessments, special or otherwise, assessed upon or with respect to the ownership and all other taxable interests in the land and improvements thereon of which the Demised Premises are part, imposed by Federal, State or local governmental authority or any other taxing authority having jurisdiction over Landlord's tax lot or lots, but shall not include income, intangible, franchise, capital stock, estate in inheritance taxes, or taxes based upon the receipt of rentals (unless the same shall be in lieu of "Real Estate Taxes" as herein defined by whatever name the tax may be designated). (c) Commencing on the Rent Commencement Date and continuing throughout the term of this lease, Tenant shall pay to Landlord the Real Estate Taxes for each tax year occurring in whole or part during the term of this lease. Any amount due to Landlord under the provisions of this Article shall be paid within five (5) days after receipt by Tenant from Landlord of an invoice therefor. Landlord shall furnish Tenant with evidence of the amount of such Real Estate Taxes. A copy of the tax bill shall be sufficient evidence of the amount of Real Estate Taxes imposed upon the Premises. Tenant shall also pay when due any occupancy taxes arising under or in connection with this lease. In addition to the foregoing, Tenant shall also be responsible for any increase in Real Estate Taxes resulting from Tenant's improvements performed by or on behalf of Tenant. (d) Landlord's failure during the term of this lease to prepare and deliver any of the foregoing invoices, tax statements, or other demand for payment of Real Estate Taxes or Landlord's failure to make a demand for any other item of additional rent due hereunder shall not in any way waive or cause Landlord to forfeit or surrender its rights to collect any of the foregoing items of additional rend which may have become due during the term of this lease. (e) If any mortgagee of the Premises requires that funds for the payment of Real Estate taxes be escrowed with such mortgagee, Tenant shall pay to such mortgagee, in a timely manner, the amounts required by such mortgagee to be escrowed for the payment of Real Estate Taxes. (f) Tenant shall pay to Landlord on demand any Real Estate Taxes relating to the term of this lease which may have been prepaid by Landlord. With respect to any period at the expiration of the term of this lease which shall constitute a partial tax year, Tenant shall be responsible for the Real Estate Taxes allocable to such partial tax year and Landlord's tax statement shall apportion the amount of the additional rental due hereunder. The obligation of Tenant in respect of such additional rent applicable for the last year of the term of this lease or part thereof shall survive the expiration of the term of this lease. CONDITION OF PREMISES AND DELIVERY OF POSSESSION 6. (a) Except as otherwise specifically set forth in Article 7 hereof, Tenant agrees to accept the Premises in its "as is" condition and understands and agrees that Landlord shall not be required to perform any work, supply any materials or incur any expense to prepare the Premises for Tenant's occupancy. (b) If Landlord shall be unable to deliver possession of the Premises by the Rent Commencement Date, Landlord shall not be subject to any liability for such failure to give possession and Tenant hereby waives the provisions of Section 223-a of the Real Property Law of the State of New York and any other law of like import now or hereafter enacted. INITIAL CONSTRUCTION 7. The heating, ventilating and air conditioning systems servicing the Premises shall be in good working order as of the Rend Commencement Date. Tenant shall, at Tenant's sole cost and expense, perform the work necessary to prepare the Premises for Tenant's occupancy in accordance with and pursuant to the provisions of Article 9 herein. Upon completion of the foregoing work and Landlord's satisfactory inspection of same, Landlord shall provide Tenant with a work allowance of Twenty Seven Thousand ($27,000.00) Dollars to be used by Tenant in connection with the work necessary to prepare the Premises for Tenant's occupancy. REPAIRS, MAINTENANCE, FLOOR LOADS AND PARKING RESTRICTUION 8. (a) Tenant shall at all times keep and maintain the Premises in good order, condition and repair, and shall make all nonstructural repairs to the Premises, including, without limiting the generality of the foregoing, (i) maintenance and repair of the electrical, plumbing, heating, air conditioning, ventilation and all other mechanical systems servicing the Premises; (ii) regularly-scheduled cleaning and maintenance of the interior of the Premises; (iii) the repair and maintenance of all plate glass; (iv) all common areas, landscaping, sidewalks, driveways and parking areas at the Building; and (vi) keeping the exterior Premises clean and free of debris, snow and ice. Tenant shall obtain and keep in full force and effect for the benefit of Landlord and Tenant, wish a responsible company doing business in Nassau or Suffolk County, a service, repair and maintenance contract with respect to the heating, ventilating and air conditioning systems of the Premises. A copy of such contract and all renewals thereof shall, upon issuance and thereafter not later than ten (10) days prior to expiration, be furnished to Landlord together with evidence of payment. If Tenant fails to make any repairs or replacements required to be made by Tenant, Landlord may, without obligation, perform same for the account of Tenant at Tenant's expense and the cost thereof shall be due and payable by Tenant to Landlord as additional rent. In the event that structural repairs, replacement or alterations or any other repairs or replacements included under Article I(b) hereof shall be necessitated or occasioned, in whole or in part, by the acts, omissions, or neglect of Tenant or any person claiming through or under Tenant or any of their servants, employees, contractors, agents, visitors or licensees, or by the use of occupancy or manner of use or occupancy of the Premises by Tenant, or any such person, Landlord shall make such repairs, replacements or alterations at Tenant's sole cost and expense. (b) Landlord shall be responsible for maintenance and repair of the structural elements of the Building, excluding the roof, which Tenant shall be responsible to repair and maintain. In the event that maintenance and repair of the structural elements of the Building are caused or necessitated by the negligence or intentional acts of Tenant, its agents, servants, employees, licensees or invitees, Landlord shall perform such repairs at Tenant's sole cost and expense. Landlord shall not be required to commence any repairs required to be performed by it until after Notice from Tenant that same are necessary, which notice, except in the case of emergency, shall be in writing and shall permit Landlord ten (10) days in which to commence such repair. When necessary by reason of accident or other casualty occurring in the Building or at the Premises or in order to make any necessary repairs, alterations or improvements in or relating to the Building or the Premises or other portions of Landlord's property, Landlord reserves the right to interrupt, temporarily, and on written notice to Tenant the supply of utility service until said repairs or improvements shall have been completed. There shall be no abatement in Rent because of any such interruption. (c) Tenant shall not place a load upon any floor of the Premises which exceeds the floor load per square foot area which such floor was designed to carry. If tenant shall desire a floor load in excess of that for which the floor of any portion of the Premises is designed, upon submission to Landlord of plans showing the location of and the desired floor live load for the area in question, Landlord may strengthen and reinforce the same, at Tenant's sole expense, so as to carry the live load desired. Business machines and mechanical equipment used by Tenant which cause vibration or noise that may be transmitted to or through the Building shall be placed and maintained by Tenant, at its expense, in settings of cork, rubber or spring-type vibration eliminators sufficient to eliminate such vibration or noise. (d) Tenant shall comply with the following restrictions with respect to the Premises: (i) Tenant shall store all trash and refuse in appropriate sealed and covered containers either within the Premises or in a concealed location at the rear of the Building and shall attend to the regular disposal and removal thereof. (ii) Tenant shall receive all deliveries, load and unload goods, merchandise, supplies, fixtures, equipment, furniture and rubbish only through proper service doors and loading docks serving the Building, but in no event through the main front entrance thereof. (iii) Tenant shall not change the exterior colors or architectural treatment of the Premises or make any alterations or changes to the exterior of the Building or to the grading, planting or landscaping of the exterior of the Building without the consent of Landlord, which shall not be unreasonably withheld. (iv) Tenant shall not place or install or suffer to be placed or installed any sign upon the Building or the Premises unless such sign shall be approved by Landlord and shall be harmonious with the signs of adjoining properties. In any event, Tenant shall not place or cause to be placed upon the Building any awning, canopy, banner, flag, pennant, aerial, antenna or the like. All signs or lettering on or about the Premises or the Building shall be neat and of reasonable size. The following are strictly prohibited: (x) Paper signs and stickers; (y) Moving, flickering or flashing lights; (z) Exposed neon or florescent tubes or other exposed light sources. (v) Tenant shall not permit the parking of any vehicle on the streets and roadways adjoining or surrounding the Building and Tenant shall require its employees, customers, invitees, licensees and visitors to park only in the parking areas serving the Premises. Tenant agrees that any violators of this parking restriction may be towed away by Landlord at Tenant's sole cost and expense and Tenant shall indemnify, defend and hold Landlord harmless against any claims or liabilities (including Landlord's attorneys' fees) arising by reason of such towing by Landlord. (vi) Tenant shall not manufacture or store any item which, in the opinion of Landlord, causes offensive odors, irritations, or any discomfort to occupants of the Building of which the Premises form a part. TENANT'S ALTERATION 9. Tenant shall not make, without Landlord's prior written consent, any installations, repairs, alterations, improvements or changes in or to the Premises. All improvements, alterations and replacements, and all building service equipment made or installed by or on behalf of Tenant, shall immediately upon completion or installation thereof be and become the property of Landlord (except for purposes of sales tax which shall remain Tenant's obligation) and shall remain upon the Premises at the expiration or sooner termination of this lease. Notwithstanding the foregoing, all trade fixtures, movable partitions, furniture and furnishings installed at the expense of Tenant shall remain the property of Tenant and Tenant may remove the same or any part thereof during the term of this lease, or if the term shall end prior to the date herein specifically fixed for such termination, then within a reasonable time thereafter, but Tenant shall, at its expense, repair any and all damage to the Premises resulting from or caused by such removal. Title to any property which Tenant elects not to remove or which is abandoned by Tenant shall, at the end of the term, vest in Landlord. Tenant shall not make any repairs, alterations or improvements until it shall have first submitted to Landlord all drawings, plans, layouts and specifications for such work (plans and specifications") and Landlord shall have approved same. All such work to be performed by Tenant shall be in accordance with the approved plans and specifications and Landlord shall have the right at any time during the pendency of such work to inspect the Premises and the manner of construction. All plans and specifications shall be compatible with the Landlord's building plans; comply with all applicable laws, including without limitation, the Americans with disabilities Act of 1990, as amended, and the rules, regulations, requirements and orders of any and all government agencies, departments or bureaus having jurisdiction; and be fully detailed. Including locations and complete dimensions. Tenant shall, at Tenant's expense, (i) cause all plans and specifications to be fled with the governmental agencies having jurisdiction thereover, (ii) obtain when necessary all governmental permits, licenses and authorizations required for the work to be done in connection therewith, and (iii) obtain all necessary certificates of occupancy, both temporary and permanent. Landlord shall execute such documents as may be reasonably required in connection with the foregoing and Landlord shall otherwise cooperate with Tenant in connection with obtaining the foregoing, but without any expense to Landlord. No work shall commence in the Premises until (i) Tenant has procured all necessary permits therefor and has delivered copies of same to Landlord, (ii) Tenant has procured a paid builder's risk insurance policy with a combined single limit of Three Million ($3,000,000.00) Dollars for personal injury, death and property damage claims arising out of any one occurrence naming Landlord as an additional insured and has delivered to Landlord a certificate of insurance evidencing such policy, and (iii) Tenant or its contractor has procured a worker's compensation insurance policy covering the activities of all persons working at the Premises and has delivered to Landlord a certificate of insurance evidencing such policy. Tenant may use any licensed architect or engineer, reasonably approved by Landlord, to prepare its plans and specifications to file for permits. However, all such plans and permit applications shall be subject to review, revision and approval by Landlord or its architect. In the event of any such repairs, alterations or improvements, Landlord shall have the option to require Tenant to deliver to Landlord at Tenant's cost and expense a bond satisfactory to Landlord in the sum equal to the cost of the work. Any mechanic's liens filed at any time against the Premises, for work claimed to have been performed or for materials claimed to have been furnished to Tenant or Tenants contractors or subcontractors, shall be discharged by Tenant within ten (10) days after filing by bonding, payment or otherwise, and upon Tenant's failure to timely discharge any such lien, Landlord may discharge same through payment, bonding or otherwise and Tenant shall reimburse Landlord, upon demand, for all costs incurred by Landlord in connection therewith. UTILITIES 10. (a) Tenant shall provide (through a provider selected by Landlord), at its own expense, fuel, heat, water, electricity and all other utilities required in connection with its use of the Premises. Landlord shall be obligated only to make available to Tenant the utility lines and facilities servicing the Premises in working order at the commencement of the term of this lease. (b) Tenant shall be responsible for all deposits required by the respective utilities for service. Tenant shall comply with all requirements of the utilities supplying said service. Landlord shall have no responsibility for the installation of telephone or data service. REQUIREMENTS OF LAW, SPRINKLERS 11. (a) Tenant shall promptly execute and comply with all statutes, ordinances, rules, orders, regulations and requirements (including those which require structural alterations) of all federal, state, county and local government and of any and all their departments and bureaus applicable to the Premises, for the correction, prevention or abatement of nuisances or other grievances in, upon, or connected with the Premises during the term; and shall also promptly comply with and execute all rules, orders and regulations of the New York Board of Fire Underwriters for the prevention of fires at the Tenant's own cost and expense. In the event Tenant is required by the provisions of this paragraph to make a structural alteration, Landlord shall perform such alteration at Tenant's sole cost and expense. b) Tenant shall keep and maintain any sprinkler system now or hereafter installed in the Premises in good repair and working condition, and if the New York Board of Fire Underwriters or the New York Fire Insurance Exchange or any bureau, department or official of any federal, state or local governmental or quasi-governmental authority shall require or recommend any changes, modifications or alterations, including without limitation, additional sprinkler heads or other equipment, to be made or supplied by reason of Tenant's business or the location of partitions, trade fixtures, or other contents of the Premises, or if such changes, modifications, alterations, additional sprinkler heads or other equipment in the Premises are necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in the firs insurance rate as fixed by said Exchange or by any fire insurance company with respect to the Building, the Premises or any adjoining or nearby buildings or improvements, Tenant shall at Tenant's sole cost and expenses, promptly make and supply such changes, modifications, alterations, additional sprinkler heads or other equipment. (c) If by reason of Tenant's use and occupancy or abandonment of the Premises, or if by reason of the improper or careless conduct of any business upon or use of the Premises, the fire insurance rates for the Building, or any other tenants or occupants of the Building or any adjoining or nearby buildings or improvements (including contents and equipment coverage) shall at any time be higher than it otherwise would be, Tenant shall reimburse Landlord, as additional rent hereunder, for that part of all fire insurance premiums charged to such other owners, tenants or occupants because of the improper or careless conduct of any business upon or use of the Premises, and shall make such reimbursement upon the first day of the month following billing thereof by Landlord. In any action or proceeding based upon or arising out of this provision, a schedule or "make up" of rates of the Building or any other affected insurance coverage purporting to have been issued by the New York Fire Insurance Exchange, or other body making fire insurance rates, shall be prima facie evidence of the facts therein stated. (d) Tenant shall keep or cause the Premises to be kept free of Hazardous Materials (hereafter defined). Without limiting the foregoing, Tenant shall not cause or permit the Premises to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials excepts in compliance with all applicable federal, state and local laws or regulations, nor shall Tenant cause or permit, as a result of any intentional or unintentional act or omission on the part of Tenant or any subtenant, a release of Hazardous Materials onto the Premises or onto any other property. Tenant shall comply with and ensure compliance by all subtenants with all applicable federal, state and local laws, ordinances, rules and regulations whenever and by whomever triggered, and shall obtain and comply with and ensure that all subtenants obtain and comply with, any and all approvals, registrations or permits required thereunder. Tenant shall (A) conduct and complete all investigations, studies, samplings, and testing, and all remedial removal, and other actions necessary to clean up and remove all Hazardous Materials, on, from, or affecting the Premises (i) in accordance with all applicable federal, state and local laws, ordinances, rules, regulations, and policies, (ii) to the satisfaction of Landlord, and (iii) in accordance with the orders and directives of all federal, state, and local governmental authorities, and (B) defend, indemnify, and hold harmless landlord, its employees, agents, officers, and directors from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs, or expenses or whatever kind or nature, known or unknown, contingent or otherwise, arising out of, or in any way related to, (i) the presence, disposal, release or threatened release of any Hazardous Materials which are on, from, or affecting the soil, water, vegetation, buildings, personal property,, persons, animals, otherwise; (ii) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials; (iii) any lawsuit brought or threatened, settlement reached, or government order relating to such Hazardous Materials; and/or I9iv) any violation of laws, orders, regulations, requirements, or demands of government authorities, or any policies or requirements of Landlord which are based upon or in any way related to such Hazardous Materials, including, without limitation, attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses. In the event this lease is terminated, or Tenant is dispossessed, Tenant shall deliver the Premises to Landlord free of any and all Hazardous Materials so that the conditions of the Premises shall conform with all applicable Federal, State and Local laws, ordinances, rules or regulations affecting the Premises. For purposes of this paragraph, "Hazardous Materials" includes, without limit, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or related materials defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U. S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U. S. C. Sections 1801 et seq.), the Resource Conservation and Recovery Act, as amended (42 U. S. C. Sections 9601, et seq.), and in the regulations adopted and publications promulgated pursuant thereto, or any other federal, state or local environmental law, ordinance, rule, or regulation. INSURANCE 12. (a) Tenant shall obtain and keep in full force and effect during the Term, at its own cost and expense, (i) General Comprehensive Commercial Liability Insurance, such insurance to afford protection in an amount of not less than Three Million $3,000,000) Dollars combined single limit coverage for injury, death and property damage arising out of any one occurrence, protecting Tenant as insured and Landlord as additional insured against any and all claims for personal injury, death or property damage, such policy or policies to cover the Premises, inclusive of sidewalks and parking facilities; and (ii) Fire and Extended Coverage Insurance on Tenant's property, insuring against damage by fire, and such other risks and hazards as are insurable under present and future standard forms of fire and extended coverage insurance policies, to Tenant's property for the full insurable value thereof, protecting Tenant as insured and Landlord as additional insured. (b) Said insurance is to be written in form and substance satisfactory to Landlord by a good and solvent insurance company of recognized standing, admitted to do business in the State of New York, which shall be reasonably satisfactory to Landlord. Tenant shall procure, maintain and place such insurance and pay all premiums and charges therefor and upon failure to do so Landlord may, but shall not be obligated to, procure, maintain and place such insurance or make such payments, or in such event the Tenant agrees to pay the amount thereof, plus interest at the maximum rate permitted by law, to Landlord on demand and said sum shall be in each instance collectible as additional rent on the first day of the month following the date of payment by Landlord. Tenant shall cause to be included in all such insurance policies a provision to the effect that the same will be non-cancelable except upon twenty (20) days written notice to landlord. At least ten (10) days prior to Tenant's occupancy of the Premises, the original insurance policies or appropriate certificates shall be deposited with landlord. Any renewals, replacements or endorsements thereto shall also be deposited with Landlord to the end that said insurance shall be in full force and effect during the Term. (c) Each party agrees to use its best efforts to include in each of its insurance policies (insuring the Building and Landlord's property, in the case of Tenant, against loss, damage or destruction by fire or casualty) a waiver of insurer's right of subrogation against the other party, or if such waiver should be unobtainable or unenforceable (i) an express agreement that such policy shall not be invalidated if the insured waives or has waived before the casualty, the right of recovery against any party responsible for a casualty covered by the policy, or (ii) any other form of permission for the release of the other party, or (iii) the inclusion of the other party as an additional insured, but not a party to whom any loss shall be payable. If such waiver, agreement or permission shall not be, or shall cease to be, obtainable without additional charge at all, the insured party shall so notify the other party promptly after learning thereof. In such as, if the other party shall agree in writing to pay the insurer's additional charge therefor, such waiver, agreement or permission shall be included in the policy, or the other party name shall be named as an additional insured in the policy, but not a party to whom any loss shall be payable. Each such policy which shall so name a party hereto as an additional insured shall contain, if obtainable, agreements by the insurer that the policy will not be cancelled without at least twenty (20) days prior notice to both insureds and that the act or omission of one insured will not invalidate the policy as to the other insured. (d) As long as Landlord's fire insurance policies then if force include the waiver of subrogation or agreement or permission to release liability referred to in Subsection (c0 or name the tenant as an additional insured, Landlord hereby waives (I) any obligation on the part of Tenant to make repairs to the Premises necessitated or occasioned by fire or other casualty that is an insured risk under such policies, and (ii) any right of recovery against Tenant, any other permitted occupant of the Premises, and any of their servants, employees, agents or contractors, for any loss occasioned by fire or other casualty that is an insured risk under such policies. In the event that at anytime Landlord's fire insurance carriers shall not include such or similar provisions in Landlord's fire insurance policies, the waivers set forth in the foregoing sentence shall be deemed of no further force or effect. (e) As long as Tenant's fire insurance policies then in force include the waiver or subrogation or agreement or permission to release liability referred to in Subsection (c), or name the Landlord as an additional insured, Tenant hereby waives (and agrees to cause any other permitted occupants of the Premises to execute and deliver to Landlord written instruments waiving) any right of recovery against Landlord, any other tenants or occupants of the Building, and any servants, employees, agents or contractor of Landlord or of any such other tenants or occupants of the Building, and any servants, employees, agents or contractors of Landlord or of any such other tenants or occupants, for any loss occasioned by fire or other casualty ;which is an insured risk under such policies. In the event that at any time Tenant's fire insurance carriers shall not include such or similar provisions in Tenant's fire insurance policies, the waiver set forth in the foregoing sentence shall, upon notice given by Tenant to Landlord, be deemed of no further force or effect with respect to any insured risks under such policy from and after the giving of such notice. During any period while the foregoing waiver of right of recovery is in effect, Tenant, or any other permitted occupant of the Premises, as the case may be, shall look solely to the proceeds of such policies to compensate Tenant or such other permitted occupant for any loss occasioned by fire or other casualty which is an insured risk under such policies. (f) Tenant shall reimburse Landlord, as additional rent, for one hundred (100%) percent of all premiums payable by Landlord for fire insurance upon th4e Building, including extended coverage, rental value, vandalism and malicious mischief, to be maintained upon the Building during the Term of this lease. The aforesaid charge shall be due and payable to Landlord as additional rent on the Rent date next following the giving of notice to Tenant by Landlord of the amount due for such premium. The parties shall apportion such premium at the commencement and termination of the lease Term. DAMAGE OR DESTRUCTION 13. (a) If the Building or the Premises or any part thereof shall be damaged by fire or other casualty and Tenant gives prompt notice thereof to Landlord, Landlord shall proceed with reasonable diligence to repair or cause to be repaired such damage. The minimum annual rent shall be abated to the extent that the Premises shall have been rendered untenantable, such abatement to be from the date of such damage or destruction to the date the Premises shall be substantially repaired or rebuilt, in proportion which the area of the part of the Premises so rendered untenantable bears to the total area of the Premises. (b) If the Premises shall be totally damaged or rendered wholly untenantable by fire or other casualty, and Landlord has not terminated this lease pursuant to Subsection (c) and Landlord has not completed making of the required repairs and restored and rebuilt the Premises an/or access thereto within twelve (12) months from the date of such damage or destruction, and such additional time after such date (but in no event to exceed six (c) months) as shall equal the aggregate period Landlord may have been delayed in doing so by unavoidable delays or adjustment of insurance, Tenant may serve notice on Landlord of its intention to terminate this lease, and, if within thirty (30) days thereafter Landlord shall not have completed the making of the required repairs and restored and rebuilt the Premises, this lease shall terminate on the expiration of such thirty (30) day period as if such termination date were the Expiration Date, and the Rent shall be apportioned as of such date any prepaid portion of Rent for any period after such date shall be refunded by Landlord to Tenant. (c) If the Premises shall be totally damaged or rendered wholly untenable by fire or other casualty or if the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Landlord's opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), then in any of such events Landlord may, at its option, terminate this lease and the Term and estate hereby granted, by giving Tenant thirty (30) days notice of such termination within ninety (90) days after the date of such damage. In the event that such notice of termination shall be given, this lease and the Term and estate hereby granted, shall terminate as of the date provided in such notice of termination (whether or not the Term shall have commenced) with the same effect as if that were the Expiration Date, and the Rent shall be apportioned as of such date or sooner termination and any prepaid portion of minimum annual rent or additional rent for any period after such date shall be refunded by Landlord to Tenant. (d) Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage by fire or other casualty or the repair thereof. Landlord will not carry insurance of any kind on Tenant's property, and Landlord shall not be obligated to repair any damage thereto or replace the same. (e) This lease shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty, and Section 227 of the Real Property Law of the State of New York providing for such a contingency in the absence of such express agreement, and any other law of like import now or hereafter enacted, shall have no application in such case. SUBORDINATION 14. This lease shall be subject and subordinate at all times to the lien of any mortgages (i) now encumbering the Building or the Premises and to all advances made or hereafter to be made upon the security thereof, and (ii) hereafter made provided same are made to a lending institution. Tenant shall execute and deliver such further instrument or instruments subordinating this lease to the lien of any such mortgage or mortgages as shall be desired by any mortgagee or proposed mortgagee and Tenant hereby appoints Landlord the attorney-in-fact of Tenant, irrevocably, to execute and deliver any such instrument or instruments for the Tenant. As used in this lease, the term "lending institution" shall mean savings bank, savings and loan association, bank or trust company, real estates investment trust, investment bank or an affiliate thereof, insurance company, university, public or private, or employee, welfare, pension or retirement fund or system. (b) Upon demand, Tenant shall furnish to Landlord certified balance sheets and operating statements for the past five (5) years and such other information, financial or otherwise, concerning Tenant which may reasonably be required by any prospective mortgagee. (c) Tenant shall, upon not less than five (5) days' prior request by Landlord, execute, acknowledge and deliver to Landlord a statement in writing certifying (i) that the lease is unmodified and in full force and effect (or if there have been modifications that the same are in full force and effect as modified and identifying the modifications), (ii) The dates to which the Rent and other charges have been paid, and (iii) that so far as the person making the certificate knows, Landlord is not in default under any provision of this lease. It is intended that any such statement may be relied upon by any person proposing to acquire Landlord's interest in this lease, any prospective purchaser of the Premises, or any prospective mortgagee, or assignee of any mortgage upon the Premises. (d) So long as there is a first mortgage lien encumbering the Premises, Landlord and Tenant shall not, without first obtain in the written consent of such mortgagee, enter into any agreement, the effect of which would be to (i) modify, cancel, terminate or surrender this lease; (ii) grant any concession in respect thereof; (iii) reduce the Rent or require the prepayment of any rent in advance of the due date thereof; (iv) create any offsets or claims against Rent; (v) assign in whole or in part any of the rents therefrom or Tenant's interests in this lease or sublet the whole or any portion of the Premises except as provided in this lease. (e) Tenant shall, within ninety (90) days after the end of each fiscal year of Tenant, furnish to Landlord and any first mortgagee of the Premises, copies of balance sheets of Tenant for such fiscal year, certified by a certified public accountant. (f) In the event of any act or omission by Landlord which would give Tenant the right to terminate this lease or to claim a partial or total eviction, Tenant shall not exercise any such right until (I) it shall have served written notice, by registered mail, of such act or omission, to Landlord and to the holder of any mortgage whose name and address shall have been furnished to Tenant in writing, at the last address so furnished, and (ii) a reasonable period of time for remedying such act or omission shall have elapsed following the serving of such notice; provided, however, that following the serving of such notice, Landlord or said holder shall, with reasonable diligence, have commenced and continued to remedy such act or omission or to cause the same to be remedied. INDEMNIFICATION 15. Tenant shall indemnify, defend, save and hold Landlord harmless from and against any and all liability and damages and any and all injury, loss, claim, damage or suite of every kind and nature, including Landlord's reasonable counsel fees, to any person, firm, association or corporation or to any property, arising out of or based upon, related to, or in any way connected with, the use or occupancy of the Premises or the conduct or operation of Tenant's business unless such injury, loss, claim or damage is attributable solely to the negligence of Landlord or its agents, servants or employees. EMINENT DOMAIN 16. (a) If the whole of the Premises be taken under the power of eminent domain for any public or quasi-public improvement or use, the term of this lease shall expire as of the date of vesting of title in the condemning authority. (b) If 25% or more of the Building is taken under the power of eminent domain or for any public or quasi-public purpose, Landlord shall have the option of canceling and terminating this lease by written notice service within sixty (60) days after the taking, and this lease shall thereupon expire on the 90th day after the serving by Landlord of said notice. (c) If less than 25% of the Building is taken, this lease shall remain in full force and effect, however, minimum annual rent shall be reduced in proportion to the percentage of square feet of the Building so taken. If Tenant's parking area only is taken, then (i) if 25% or less is taken, this lease shall not terminate but minimum annual rent only shall be apportioned pro rata in accordance with the size and usefulness of the portion taken, unless Landlord provides substitute parking for Tenant within reasonable walking distance of the Premises, substantially equal in size to that which was taken, within sixty (60) days after the taking; or (ii) if more than 25% is taken, then, unless Landlord provides substitute parking, substantially equal in size to that which was taken, and within reasonable walking distance of the Premises, within sixty (60) days after the taking, this lease shall, at the option of either Landlord or Tenant, by written notice served between the 61st and 90th day after the taking, be canceled and terminated effective (60) days from the date of said taking and if such notice is not served, this lease shall not terminate but minimal annual rent only shall be apportioned pro rata in accordance with the size and usefulness of the portion taken. (d) If this lease is not terminated or terminable under the provisions of this Article 16, Landlord shall, with reasonable dispatch and at Landlord's sole cost and expense, restore, reconstruct and rebuild the remaining portion of the Premises and the Building and all the appurtenances, equipment, utilities, facilities and installations to their condition prior to such taking, in such ;manner that the resulting building and parking area a driveways; shall be a complete and integrated structural, architectural and functional unit similar to and of equal material and workmanship to the Building and parking area and driveways prior to such taking, with all the appurtenances, equipment, utilities, facilities and installations throughout in good working order so as to put both the parking area and driveways and the Premises in proper condition to be used by Tenant for the same purpose as at the time of such taking, all in accordance with plans and specifications to be prepared by Landlord, at the sole cost and expense of Landlord. (e) If the nature of the work to be performed as a result of the taking is such as to prevent the operation of the business then being conducted thereon, or to make it impractical so to do, then the Rent and other charges to be paid by Tenant under this lease shall abate until substantial completion of such work by Landlord. (f) If in the event of any taking under the power of eminent domain, Landlord shall be entitled to and shall receive the entire award, except that Tenant shall be entitled to and shall receive any part of any award made for Tenant's cost of moving Tenant's trade fixtures (provided same does not reduce the amount of Landlord's award). (g) In the event of any dispute under the provisions of this Article 16, it shall be resolved by arbitration in Suffolk County, New York before three disinterested and impartial arbitrators, in accordance with the rules of the American Arbitration Association. Each arbitrator shall have a minimum of ten (10) years' experience in dealing with, renting or appraising industrial real estate. All fees and expenses of the arbitrators and the American Arbitration Association shall be borne equally by the parties. RIGHT TO SUBLET OR ASSIGN 17. (a) Tenant covenants that it shall not assign this lease nor sublet the Demised Premises or any part thereof by operation of law or otherwise, including, without limitation, an assignment or subletting as defined in (d) below, without the prior written consent of Landlord in each instance, except on the conditions hereinafter stated. Tenant may assign this lease or sublet all or a portion of the Demised Premises with Landlord's written consent, provided: (i) That such assignment or sublease is for a use which is in compliance with this lease and the then existing zoning regulations and the Certificate of Occupancy; (ii) That, at the time of such assignment or subletting, there is not default under the terms of this lease on the Tenant's part' (iii) That, in the event of an assignment, the assignee shall assume in writing the performance of all of the terms and obligations of the within lease; (iv) That a duplicate original of said assignment or sublease shall be delivered by certified mail to the Landlord at the address herein set forth within ten (10) days from the said assignment or sublease and within ninety (90) days of the date that Tenant first advises Landlord of the name and address of the proposed subtenant or assignee, as required pursuant to subparagraph (b) hereof; (v) Such assignment or subletting shall not, however, release the within Tenant or any successor tenant or any guarantor from their liability for the full and faithful performance of all of the terms and conditions of this lease; (vi) If this lease be assigned, or if the Demised Premises or any part thereof be underlet or occupied by anybody other than Tenant, Landlord may after default by Tenant collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved; and (vii) That, in the event Tenant shall request Landlord's consent to a proposed assignment of this lease or proposed sublease of all or a portion of the Demised Premises, Tenant shall pay or reimburse to Landlord the reasonable attorney fees incurred by Landlord in processing such request. (b) Notwithstanding anything contained in this Article 17 to the contrary, no assignment or underletting shall be made by Tenant in any event until Tenant has offered to terminate this lease as of the last day of any calendar month during the Term hereof and to vacate and surrender the Demised Premises to landlord on the date fixed in the notice served by Tenant upon Landlord (which date shall be prior to the date of such proposed assignment or the commencement date of such proposed lease). Simultaneously with said offer to terminate this leas, Tenant shall advise the Landlord, in writing, of the name and address of the proposed assignee or subtenant, a reasonably detailed statement of the proposed subtenant/assignee's business, reasonably detailed financial references, and all the terms, covenants, and conditions of the proposed sublease or assignment. (c) Tenant may, without the consent of Landlord, assign this lease to an affiliated (i.e., a corporation 20% or more of whose capital stock is owned by the same stockholders owning 20% or more of Tenant's capital stock), a parent or subsidiary corporation of Tenant or to a corporation to which it sells or assigns all or substantially all of its assets or stock or with which it may be consolidated or merged, provided such purchasing, consolidated, merged, affiliated or subsidiary corporation shall, in writing, assume and agree to perform all of the obligations of Tenant under this lease and it shall deliver such assumption with a copy of such assignment to Landlord within ten (10) days thereafter, and provided further than Tenant shall not be released to discharged from any liability under this lease by reason of such assignment. (d) For purposes of this Article 17, (i) the transfer of a majority of the issued and outstanding capital stock of any corporate tenant, or of a corporate subtenant, or the transfer of a majority of the total interest in any partnership tenant or subtenant, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this lease, or of such sublease, as the case may be; (ii) any person or legal representative of Tenant, to whom Tenant's interest under this lease passes by operation of law or otherwise, shall be bound by the provisions of this Article 17; and (iii) a modification or amendment of a sublease shall be deemed a sublease. (e) Whenever Tenant shall claim under this Article or any other part of this lease that Landlord has unreasonably withheld or delayed its consent to some request of Tenant, Tenant shall have no claim for damages by reason of such alleged withholding or delay, and Tenant's sole remedy thereof shall be a right to obtain specific performance or injunction but in no event with recovery of damages. (f) Tenant shall not mortgage, pledge, hypothecate or otherwise encumber its interest under this lease without Landlord's prior written consent. (g) Notwithstanding anything contained in this Article 17 to the contrary, no assignment or underletting shall be made by Tenant to any brokerage firm. RIGHT TO INSPECT; POSTING SIGNS 18. (a) Tenant shall permit Landlord or Landlord's agent to enter the Premises at all reasonable hours for the purpose of (i) inspecting the same; (ii) making repairs required by the terms of this lease to be made by Tenant and which Tenant neglects or refuses to make; (iii) exhibiting the Premises to prospective purchasers and mortgagees; (iv) during the twelve (12) months preceding the expiration of this lease, exhibiting the Premises to brokers and prospective tenants; and (v) for the purpose of making any additions or alterations to the Building or to any surrounding building provided, in each and every case, Landlord shall use its reasonable effort not to unreasonably interfere with the conduct of Tenant's business at the Premises. If, at reasonable hours, admission to the Premises for the aforesaid purposes cannot be obtained or, if at any time entry shall be deemed necessary for the inspection or protection of the Premises or for making any repairs, whether for the benefit of Tenant or not, Landlord or Landlord's agents may enter the Premises by any lawful means without rendering Landlord or its agents liable to Tenant for damages by reason thereof. (b) During the twelve (12) months preceding the end of the term, Landlord may post and maintain, without hindrance or molestation, signs or notices indicating that the Premises are for sale and/or for rent; however, no such sign shall be affixed to a door or window of the premises. BANKRUPTCY 19. (a) If, at any time prior to the commencement of the term of this lease, or if at any time during the term, there shall be filed by or against Tenant in any curt, pursuant to any statute, either of the United States of any State, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's property, and within thirty (30) days thereof Tenant fails to secure a discharge thereof, or if Tenant makes an assignment for the benefit of creditors or petition for or enters into an arrangement, this lease at the option; of Landlord, exercised within a reasonable time after notice of the happening of any one or more of such events, may be canceled and terminated, in which event neither Tenant nor any person claiming through or under Tenant by virtue of any statute or of any order of any court, shall be entitled to possession or to remain in possession of the Premises but shall forthwith quit and surrender the Premises, and Landlord, in addition to any other rights, may retain any rent, security deposit or monies received by it from Tenant or others in behalf of Tenant as partial liquidated damages. (b) In the event of the termination of this lease pursuant to paragraph (a) of this Article 19, Landlord shall forthwith, notwithstanding any other provision of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the Rent reserved hereunder for the unexpired portion of the term and the then fair and reasonable rental value of the Premises for the same period. In the computation of such damages, the difference between any installment of Rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the Premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of 4% per annum. If the Premises, or any part thereof, be relet by Landlord for the unexpired term of this lease, the amount of rent reserved upon such reletting shall prima facie be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. Nothing herein contained shall limit or prejudice the right of Landlord to prove for and obtain as liquidated damages by reason of such termination an amount equal to the maximum allowed by any statute or rule of law, in effect at the time when, and governing the proceeding in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. DEFAULT 20. (a) If Tenant shall fail to pay any installment of minimum annual rent or any additional rent or other charges within five (5) days of the day on which same are required to be paid hereunder, or if Tenant defaults in fulfilling any of the other covenants of this lease and such default shall continue for a period of ten (10) days after notice, or if Tenant shall dissolve or liquidate or commence to dissolve or liquidate, or if the Premises become vacant or deserted, or if the said default or omission complained of shall be such a nature that the same cannot be completely cured or remedied within said ten (10) day period, and if Tenant shall not have diligently commenced during such default within such ten (10) day period, and shall not thereafter with reasonable diligence and in good faith proceed to remedy or cure such default, then, in any one or more of such events, Landlord may serve a written three (3) day notice of cancellation of this lease upon Tenant, and upon the expiration of said three (3) days, this lease and the term thereunder shall end and expire as fully and completely as if the date of expiration of such three (3) day period were the day herein defined fixed for the end and expiration of this lease, and the term thereof, and Tenant shall remain liable as hereinafter provided. If Tenant shall default (i) in the timely payment of any item of Rent, and such default shall continue or be repeated for two consecutive months for a total of four months in any period of twelve months, or (ii) in the performance of any particular term, condition or covenant of this lease more than six times in any period of twelve months, then, notwithstanding that such defaults shall have each been cured within the period after notice, if any, as provided in this lease, any further similar default shall be deemed to be deliberate and Landlord thereafter may serve a written ten (10) day notice of termination of this lease to Tenant without affording Tenant an opportunity to cure such further default. (b) If (i) the notice provided for in paragraph (a) above shall have been given and the term shall expire as aforesaid, or (ii) if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the Premises or any part thereof shall be taken or occupied or attempted to be taken or occupied by someone other than Tenant, or (iii) if Tenant shall make default with respect to any other lease between Landlord and Tenant, or (iv) if Tenant shall fail to move into or take possession of the Premises within fifteen (15) days after the Premises are substantially complete, then, and in any of such events Landlord may, without notice, re-enter the Premises either by force or any lawful means, and dispossess Tenant (or the legal representative of Tenant or other occupant of the Premises) by summary proceedings or otherwise and remove their effects and hold the Premises as if this leas had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall be in default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Landlord may cancel and terminate such renewal or extension agreement by written notice. REMEDIES OF LANDLORD 21. (a) If this lease is terminated or if Landlord re-enters the Premises under Article 20 or any other such default provision contained herein, Tenant shall pay to Landlord as damages, at the election of Landlord, sums equal to the minimum annual rent ant additional rent that would have been payable by Tenant through and including the Expiration date had this lease not terminated or had Landlord not re-entered the Premises, payable upon the due dates therefor specified in this lease; provided, that if Landlord shall relet all or any part of the Premises for all or any part of the period commencing on the day following the date of such termination or re-entry to and including the Expiration, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the expenses incurred or paid by Landlord in terminating this lease and of re-entering the Premises and of securing possession thereof, as well as the expenses of reletting, including, without limitation, altering and preparing the Premises for new tenants, brokers' commissions, and all other expenses properly chargeable against the Premises and the rental therefrom in connection with such reletting, it being understood that any such reletting may;; be for a period equal to or shorter or longer than said period; provided, further, that (i) in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable to Tenant to Landlord under this lease, (ii) in no event shall Tenant be entitled, in any suit for the collection of damages pursuant to this Article 21(a), to a credit in respect of any net rents from a reletting except to the extent that such net rents are actually received by Landlord prior to the commencement of such suit, and (iii) Landlord shall have not obligation to so relet the Premises and Tenant hereby waives any right Tenant may have, at law or in equity, to require Landlord to so relet the Premises. At any time after the Demised Term shall have expired and come to an end or Landlord shall have re-entered upon the premises, as the case may be, whether or not Landlord shall have collected any monthly deficiencies as provided below, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, as and for liquidated and agreed final damages, a sum equal to the amount by which the minimum annual rent and additional rent reserved in this lease for the period which otherwise would have constituted the unexpired portion of the Demised Term exceeds the then fair and reasonable rental value of the Premises for the same period, both discounted to present worth at the rate of four (4%) percent per annum. If, before presentation of proof of such liquidated damages to any court, commission, or tribunal, the Premises, or any part thereof, shall have been relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Demised Term, or any part thereof, the amount of Rent reserved upon such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. Suit or suits for the recovery of any damages payable hereunder by Tenant or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall require Landlord to postpone suit until the date when the Term would have expired but for such termination or re-entry. In all cases hereunder, and in any suit, action or proceeding of any kind between the parties, it shall be presumptive evidence of the fact of the existence of a charge being due, if Landlord shall produce a bill, notice or certificate of any public official entitled to give such bill, notice or certificate to the effect that such charge appears of record on the books in his or her office and has not been paid. (b) Nothing contained in this lease shall be construed as limiting or precluding the recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Anything in this lease to the contrary notwithstanding, during the continuation of any default by Tenant, Tenant shall not be entitled to exercise any rights or options, or to receive any funds or proceeds being held, under or pursuant to this lease. (c) The specified remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may lawfully be entitled, and Landlord may invoke any remedy allowed at law or in equity if specific remedies were not herein provided for. ATTORNEY'S FEES 22. If Tenant shall at any time be in default hereunder, and if Landlord shall institute an action or summary proceeding against Tenant based upon such default and Landlord shall be successful, or if Landlord shall otherwise engage an attorney in connection with the enforcement of any provision of this lease, then Tenant shall reimburse Landlord for the reasonable expenses of attorney's fees and disbursements incurred by Landlord. The amount of such expenses shall be deemed to be "additional rent' hereunder and shall be due from Tenant to Landlord on the first day of the month following the incurring of such expenses. WAIVER OR REDEMPTION, COUNTERCLAIM, TRIAL BY JURY 23. Tenant hereby expressly (i) waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause or in the event of Landlord obtaining possession of the Premises by reason of the violation by Tenant of any of the covenants and conditions of this lease or otherwise; (ii) waives all rights to stay summary proceedings; and (iii) agrees that it shall not interpose any counterclaim in any summary proceeding or any action based on non-payment of Rent or any other payments or charges required to be made by Tenant to Landlord. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either of them against the other with respect to any; matters arising out of or connected with this lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the premises, and/or any claim of injury or damage and any emergency statutory or any other statutory remedy. NO WAIVER 24. No act or thing done by Landlord or Landlord's agents during the term hereby demised shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys of the Premises prior to the termination of this lease. The delivery of keys to any employee of Landlord or of Landlord's agents shall not operate as a termination of this lease or a surrender of the premises. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this lease shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach. No provision of this lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord. The words "re-enter" and "re-entry" as used herein are not restricted to their technical legal meaning. END OF TERM (a) On the last day of the term hereof or on the earlier termination thereof, Tenant shall peaceably and quietly leave, surrender and deliver the Premises up to Landlord, broom clean, together with any and all alterations, changes, additions, and improvements which may have been made upon the Premises (except) movable furniture or movable trade fixtures installed at the expense of Tenant) in good repair and good order and safe condition, except for reasonable wear and tear and damage by; fire, other insured casualty or the elements excepted, and Tenant shall remove all of its personal property from the Premises and any property not to removed shall be deemed to have been abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without notice to Tenant and without obligations to account therefor. Tenant's obligation under this Article 25 shall survive the expiration or other termination of this lease. (b) In the event of any holding over by Tenant after the expiration or termination of this lease without the consent of Landlord, Tenant shall: (i) pay as holdover rental for each month of the holdover tenancy an amount equal to the greater of (y) the fair market rental value of the Premises for such month (as reasonably determined by Landlord) or (z) two hundred (200%) of the minimum annual rent payable by Tenant for the third month prior to the Expiration Date of the term of this lease, and otherwise observe, fulfill and perform all of its obligations under this lease, including but not limited to, those pertaining to additional rent, in accordance with its terms; ii) be liable to Landlord for any payment or rent concession which Landlord may be required to make to any tenant in order to induce such tenant not to terminate an executed lease covering all or any portion of the Premises by reason of the holdover by Tenant; and (iii) be liable to Landlord for any damages suffered by Landlord as the result of Tenant's failure to surrender the Premises. The holdover, with respect to all or any part of the Premises, of a person deriving an interest in the Premises from or through Tenant, including, but not limited to, an assignee or subtenant, shall be deemed a holdover by Tenant. Notwithstanding anything in this Article contained to the contrary, the acceptance of any Rent paid by Tenant pursuant to this Paragraph 25 (b), shall not preclude Landlord from commencing and prosecuting a holdover or eviction action or proceeding or any action or proceeding in the nature thereof. The preceding sentence shall be deemed to be an "agreement expressly provided otherwise" within the meaning of Section 232-c of the Real Property Law of the State of New York and any successor law of like import. (c) If at any time during the last month of the term of this lease Tenant shall have removed all or substantially all of Tenant's property from the Premises, Landlord may, and Tenant hereby irrevocably grants to Landlord a license to, immediately enter and alter, renovate and redecorate the Premises, without elimination, diminution or abatement of minimum annual rent or additional rent, or incurring liability to Tenant for any compensation, and such acts shall have no effect upon this lease. BROKER 26. Tenant represents that this lease was brought about by M. Barrett Associates LLC as broker and all negotiations with respect to this lease were conducted exclusively through said broker. Tenant agrees that if any claim is made for commissions by any broker other than said broker, by, through or on account of any acts of Tenant, Tenant will hold Landlord free and harmless from any and all liabilities and expenses in connection therewith, including Landlord's reasonable attorney's fees. QUIET ENJOYMENT 27. Landlord covenants that if and so long as Tenant pays the minimum annual rent and additional rent and other charges reserved by this lease, and performs all the terms, covenants and conditions of this lease on the part of Tenant to be performed, Tenant shall quietly enjoy the premises subject, however, to the terms of this lease and of any mortgage or mortgages to which this lease by its terms is subject. NONLIABILITY OF LANDLORD 28. (a) Landlord and Landlord's agents and employees shall not be liable for, and Tenant waives all claims for, loss or damage to Tenant's business or damage to person or property sustained by Tenant resulting from any accident or occurrence (unless caused by or resulting from the negligence of Landlord, its agents, servants or employees other than accidents or occurrences against which Tenant is insured) in or upon the Premises or the Building, including, but not limited to, claims for damage resulting from: (i) any equipment or appurtenances becoming out of repair; (ii) injury done or occasioned by wind; (iii) any defect in or failure or plumbing, heating or air conditioning equipment, electric wiring or installation thereof, gas, water, or steam pipes, stairs, porches, railings or walks; (iv) broken glass; (v) the backing up of any sewer pipe or downspout; (vi) the bursting, leaking or running of any tank, tub, washstand, water closet, waste pipe, drain or other pipe or tank in, upon or about the Building or the Premises; (vii) the escape of steam or hot water; (viii) water, snow or ice being upon or coming through the roof, skylight, trapdoor, stairs, doorways, windows, walks or any other place upon or near the Building or the Premises or otherwise; (ix) the falling of any fixture, plaster, tile or stucco; and (x) any act, omission or negligence of other tenants, licensees or of any other persons or occupants of the Building or of adjoining or contiguous buildings or of owners of adjacent or contiguous property. (b) If Landlord or a successor in interest is an individual (which term as used herein includes aggregates of individuals such as joint ventures, general or limited partnerships, or associations), such individual shall be under no personal liability with respect to its obligations under this lease, Tenant shall look solely to the equity of such individual in the land and building constituting the Premises for the satisfaction of Tenant's remedies, and in no event shall Tenant attempt to secure any personal judgement against any such individual or any principal, partner, employee or agent of Landlord by reason of such default by Landlord. (c) The word "Landlord" as used herein means only the owner in fee for the time being of the Premises, and in the event of any sale of the Premises, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder and it shall be deemed and construed without further agreement between the parties or between the parties and the purchaser of the Premises, that such purchaser has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. NO ABATEMENT 29. No diminution or abatement of Rent or other compensation shall be claimed or allowed for inconvenience or discomfort arising from the Landlord's making of additions, repairs or improvements to the Building or to its equipment and fixtures, nor for any space taken to comply with any law, ordinance or order of a governmental authority except as specifically provided in this lease. APPLICABLE LAW AND CONSTRUCTION 30. The laws of the State of New York shall govern the validity, performance and enforcement of this lease. The invalidity or unenforceability of any provision of this lease shall not affect or impair any other provision. The submission of this document to Tenant for examination does not constitute an offer to lease, or a reservation of or option to lease, and becomes effective only upon execution and delivery thereof by Landlord and Tenant. All negotiations, considerations, representations and understandings between the parties are incorporated in this lease. Landlord or Landlord's agents have made no representations or promises with respect to the Building or the Premises except as herein expressly set forth. The headings of the several articles and sections contained herein are for convenience only and do not define, limit or construe the contents of such articles or sections. Whenever herein the singular number is used, the same shall include the plural, and the neuter gender shall include the masculine and feminine genders. Neither this lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. CONSTRUCTION ON ADJACENT PREMISES OR BUILDINGS 31. If any construction is in progress at, on or about the Building or any excavation or other building operation shall be about the be made or shall be made on any premises adjoining or above or below the Premises or on any portion of the Building, Tenant shall permit Landlord or the adjoining owner or tenant and their respective agents, employees, licensees and contractors, to enter the Premises and to shore the foundations and/or walls around and about the Premises (but not so as to preclude entry thereto) and to do any act or thing necessary for the safety or preservation of the Premises. Tenant's obligations under this lease shall not be affected by any such construction or excavation work, shoring-up, scaffolding or barricading. Landlord shall no be liable in any such case for any inconvenience, disturbance, loss of business or any other annoyance arising from such construction, excavation, shoring-up, scaffolding or barricades, but Landlord shall use its best efforts so that such work will cause al little inconvenience, annoyance or disturbance to Tenant as possible consistent with accepted construction practice in the vicinity and so that such work shall be expeditiously completed. UTILITY EASEMENT 32. This lease is subject and subordinate to any utility, gas, water, electric, or telephone line easements, now or hereafter granted, affecting the Premises, the Building, or the land upon which they are located, provided that the same do not unreasonably interfere with the Building nor unreasonably interfere with the use of the Premises by Tenant. NOTICES 33. All notices to be given hereunder shall be in writing and given by hand delivery or by certified or registered mail addressed to either of the parties at the address hereinabove given or at any other subsequent mailing address they may indicate by written notice. Any notice given hereunder by mail shall be deemed delivered when deposited in a United States general or branch post office, addressed as above provided. Tenant hereby authorizes and designates the manger of the Premises as an officer authorized to accept and receive service of process. BINDING EFFECT OF LEASE 34. The covenants, agreements and obligations contained in this Lease shall, except as herein otherwise provided, extend to, bind and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and permitted assigns. Each covenant, agreement, obligation or other provision herein contained shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the same, not dependent on any other provision of this lease unless otherwise expressly provided. UNAVOIDABLE DELAYS 35. Whenever Landlord shall be required by the terms of this lease or otherwise to make any improvements or repairs, to furnish any service, to perform any construction or reconstruction, or to fulfill in other obligation hereunder, and Landlord shall be delayed in, or prevented from, so doing, Landlord shall not be deemed to be in default and this lease and the obligation of Tenant to pay Rent hereunder and to perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall not be affected, impaired or excused, and any time limit herein fixed for Landlord's performance thereof shall be extended if and so long as Landlord's non-performance, delay or default shall be caused by reason of strike or labor troubles, accidents, any rule, order, regulation or delay of any governmental agency, or any department or subdivision thereof, governmental pre-emption in connection with any national emergency or war, insurance claim or adjustment, the conditions of supply and demand which have been or are affected by war or other emergency, or any other cause beyond Landlord's reasonable control. SANITARY SYSTEMS 36. Tenant shall only permit sanitary discharge into the sanitary system servicing the Premises. Tenant shall comply with all requirements of the County of Suffolk, Department of Public Works, as they relate to use of the sanitary system, including the payment of any excess volume charges as determined by the County of Suffolk. PARKING 37. Tenant shall have the right to use the parking areas designated for the Building. The parking areas available for the use of Tenant herein are to be used by Tenant, its servants, employees, agents, business invitees and patrons subject to the rules and regulations of Landlord and it is also understood and agreed that Landlord shall have the right at any time to modify or alter the parking layout and traffic pattern in the parking areas and to diminish the available parking areas without any liability to Tenant or any diminution or abatement of rent or additional rent. Tenant shall not use nor permit any of its officers, agents or employees to use any parking spaces in excess of Tenant's allotted number of spaces therein. CLEANING, RUBBISH REMOVAL 38. All janitorial work at the Premises shall be done at the cost and expense of Tenant. Tenant shall provide for its own trash, rubbish and garbage removal at its own expense and all rubbish, trash and garbage shall be kept at the Premises subject to the rules and regulations of the appropriate municipal authorities having jurisdiction thereof, and subject to the reasonable rules and regulations set by Landlord, and shall at all times be kept in closed containers reasonably acceptable to Landlord. IN WITNESS WHEREOF, the parties have executed this agreement as of the day and year first above written. Landlord: By: M. Barrett Managing Agent Tenant: By: A. L. Coon Senior Vice President EX-10.9 6 LOAN AGREEMENT Exhibit 10.9 ------------ THIS LOAN AGREEMENT is made as of February 16, 1999, by and between HERLEY INDUSTRIES, INC. (the "Borrower") and THE FIRST NATIONAL BANK OF MARYLAND, a division of FMB BANK (the "Lender"). 1. DEFINITIONS. 1.1 Defined Terms. As used in this Agreement, terms defined in the preamble have the meanings therein indicated, and the following terms have the following meanings: "Advance": each loan or advance made under the Revolving Loan at such time as such loan or advance is made or is being maintained. "Agreement": this Loan Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Authorized Signatory": the chairman of the board or the president. "Borrowing Date": any Business Day on which any Advance is made. "Business Day": any day other than a Saturday, a Sunday or a day on which commercial banks located in Pennsylvania are authorized or required by law or other governmental action to close. "Collateral": all of the tangible and intangible assets, property rights, and benefits with respect to which the Borrower has granted a security interest or other Lien to or for the direct or indirect benefit of the Lender or has assigned as security or otherwise pledged to or for the direct or indirect benefit of the Lender pursuant to the Loan Documents. "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 the applicable fiscal year, less dividends to stockholders with respect to the applicable fiscal year, plus non-cash charges (such as depreciation and amortization) for such fiscal year, divided by scheduled principal payments on Borrower's Debt for such fiscal year. "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. "Federal Funds Target Rate": the Federal Funds Target Rate as established by the Federal Open Market Committee of the Federal Reserve Board from time to time. "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. "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. "Lender's Counsel": Rhoads & Sinon LLP, counsel to the Lender in connection with the transactions contemplated by this Agreement. "Lender's Marginal Cost of Funds": a rate of interest per annum specified by the Lender from time to time as a reference rate for the guidance of its officers. "LIBOR": as defined in Section 2.5(a). "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. "Loan" and "Loans": the Revolving Loan and/or the Mortgage Loan, as the case may be. "Loan Documents": collectively, this Agreement, the Notes, the Mortgage 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. "Mortgage": the Mortgage and Security Agreement made by the Borrower and delivered to the Lender for the benefit of the Lender, as the same may be amended, supplemented or otherwise modified from time to time, securing the Mortgage Loan and encumbering the Mortgaged Property. "Mortgaged Property": that certain parcel or tract of real property, and the improvements thereon and hereafter constructed thereon, known as 10 Industry Drive, Lancaster, Lancaster County, Pennsylvania, as more fully described in the Mortgage. "Mortgage Loan": as defined in Section 2.3. "Mortgage Loan Note": the Mortgage Loan Note from the Borrower, as the maker thereof, payable to the order of the Lender, evidencing the Mortgage Loan, as the same may be amended, extended, renewed or otherwise modified or replaced from time to time. "Note" and "Notes": the Revolving Loan Note and/or the Mortgage Loan Note, as the case may be. "Outstanding Revolving Loan Amount": for any date of determination, the aggregate principal amount of all outstanding Advances. "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. "Prepayment Premium": an amount equal to the greater of: (i) the sum of the present values (as of the Principal Prepayment Date) of the interest payments, discounted at the Treasury Rate, which the Borrower would have made with respect to the Principal Prepayment Amount after the Principal Prepayment Date but for the Principal Prepayment Event, or (ii) one percent (1.0%) of the Principal Prepayment Amount. "Principal Prepayment Amount": the amount of principal prepaid upon the occurrence of a Principal Prepayment Event. "Principal Prepayment Date": the date that a Principal Prepayment Event occurs. "Principal Prepayment Event": the prepayment of principal, in whole or in part, prior to the date provided under the Mortgage Loan Note for payment of the Principal Prepayment Amount for any reason whatsoever, whether by declaration, acceleration or otherwise and whether or not an Event of Default has occurred. "Revolving Loan": as defined in Section 2.2. "Revolving Loan Commitment Period": the period from the Effective Date through the day preceding the Revolving Loan Maturity Date. "Revolving Loan Maturity Date": January 31, 2001, or such earlier date on which the Revolving Loan Note shall become due and payable, whether by demand, acceleration or otherwise, unless extended in writing by the Bank. "Revolving Loan Note": the Revolving Loan Note, of even date herewith, from the Borrower, as the maker thereof, payable to the order of the Lender in the stated principal amount of Twenty Million Dollars ($20,000,000.00), as the same may be amended, extended, renewed or otherwise modified or replaced from time to time. "Surety" and "Sureties": one or more of HMS Investments, Inc., Metraplex Corporation, General Microwave Corporation, General Microwave Israel Corporation, General Microwave Israel, Ltd., General Microcircuits Corporation and any additional operating subsidiaries which Borrower or any Surety may create or acquire at any time any Loan remains outstanding and unpaid or any other amount is owing under any Loan Document to Lender. "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. "Treasury Rate": the average coupon equivalent yield, in the secondary market, that Lender could obtain by purchasing United States Treasury Securities on the Principal Prepayment Date, in amounts approximately equal to the Principal Prepayment Amount, and maturing on or about the date on which the Principal Prepayment Amount would have been paid pursuant to the terms of the Mortgage Loan Note. (Lender shall use standard yield interpolation methods if no such securities mature on or about such date.) 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 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. TERMS OF THE LOANS. 2.1 The Loans. Subject to the terms and conditions of the Loan Documents, the Lender agrees to extend to the Borrower the Revolving Loan and the Mortgage Loan. 2.2 Revolving Loan. Subject to the terms and conditions hereof, Lender agrees to make a revolving line of credit loan (the "Revolving Loan") under which the Borrower, from time to time during the Revolving Loan Commitment Period, may obtain Advances from time to time; provided, that in no event shall the Lender have any obligation to make any Advance if, after giving effect thereto, the Outstanding Revolving Loan Amount shall exceed Twenty Million Dollars ($20,000,000.00). The Borrower covenants that it will not request any Advance under the Revolving Loan which would cause the Outstanding Revolving Loan Amount to exceed the aforesaid limitation. Any termination of the Revolving Loan, whether by expiration of the Revolving Loan Commitment Period or as a result of the existence or continuance of any Event of Default, shall relieve the Lender of the Lender's obligation 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 preceding sentence is intended to apply only so long as any sums remain outstanding, due or owing under the Loans. 2.2.1 Procedure for Advances. The Borrower may borrow under the Revolving Loan at any time and from time to time during the Revolving Loan Commitment Period by notifying the Lender (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 Loan, (B) the requested Borrowing Date, and (C) the account of the Borrower maintained with the Lender to be credited with the amount of the Advance. Any such notice shall be irrevocable. The Lender shall be authorized to rely upon any request for an Advance by any representative of the Borrower as constituting an authorized request for an Advance under the Revolving Loan by the Borrower. 2.2.2 Repayment and Interest. All Advances under the Revolving Loan shall be evidenced by and shall be repaid with interest in accordance with the provisions of the Revolving Loan Note, the terms and conditions of which are incorporated herein by reference. The date and amounts of each Advance made by the Lender and each payment made by the Borrower shall be recorded by the Lender on the books and records of the Lender, but any failure to record such dates or amounts shall not relieve the Borrower of its duty to pay under the Loan Documents. All repayments shall be credited to the balances due under the Revolving Loan in accordance with the normal and customary practices of the Lender. Interest accrued under the Revolving Loan shall be computed on outstanding balances as reflected on the Lender's books and records. 2.2.3 Duration of the Revolving Loan. All sums outstanding under the Revolving Loan shall be paid in full and the Revolving Loan shall expire on the Revolving Loan Maturity Date. At any time and from time to time during the Revolving Loan Commitment Period, the Company may borrow, repay and reborrow under the Revolving Loan, subject, however, to the continued observance by the Borrower of the terms and conditions of the Loan Documents. 2.3 Mortgage Loan. Subject to the terms and conditions hereof, Lender agrees to make to the Borrower a Mortgage Loan in an aggregate principal amount not to exceed Two Million Nine Hundred Fifteen Thousand Dollars ($2,915,000.00). 2.3.1 Mortgage Loan Note. The Mortgage Loan shall be evidenced by and repaid with interest in accordance with a separate Mortgage Loan Note, the terms and conditions of which shall be incorporated herein by reference. The date and amount of the Mortgage Loan made by the Lender and each payment made by the Borrower with respect to such Mortgage Loan shall be recorded by the Lender on the books and records of the Lender, but any failure to record such dates or amounts shall not relieve the Borrower of its duty to pay under the Loan Documents. All repayments shall be credited to the balances due under the Mortgage Loan in accordance with the normal and customary practices of the Lender. Interest accrued under the Mortgage Loan shall be computed on the outstanding balances as reflected on the Lender's books and records. 2.3.2 Duration of the Mortgage Loan. The Mortgage Loan shall be for a term of ten (10) years, subject to the right of the Lender to accelerate payment under the Mortgage Loan in accordance with the terms and conditions of the Loan Documents. The amount of the required monthly installments of principal and interest shall be based upon a twenty (20) year amortization. 2.4 Prepayments of the Loans. (a) Revolving Loan. The Borrower may, at its option, prepay the Revolving Loan, in whole or in part, without premium or penalty, at any time and from time to time. (b) Mortgage Loan. In the event interest shall be accruing on the Mortgage Loan at a floating rate of interest as provided in Section 2.5(a) of this Agreement, the Borrower may, at its option, prepay the Mortgage Loan, in whole or in part, without premium or penalty, at any time and form time to time. In the event interest shall be accruing on the Mortgage Loan at a fixed rate of interest as provided in Section 2.5(a) of this Agreement and any portion of the principal amount of the Mortgage Loan is prepaid, in whole or in part, a Prepayment Premium shall be due and payable by the Borrower to Lender, without notice, at the time of prepayment. The Prepayment Premium shall become part of the indebtedness evidenced by the Mortgage Loan Note, and secured by the Collateral. In no event shall the Prepayment Premium, 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. Partial prepayments shall be applied against the remaining installments of principal required to be paid under the Mortgage Loan in the inverse order of the maturity thereof. 2.5 Interest Rate and Payment Dates. (a) Prior to Maturity. Except as otherwise provided in this Section 2.5, prior to maturity the Loans shall bear interest on the outstanding principal balance thereof at the applicable interest rate or rates per annum set forth below. Loan Rate Revolving Loan Federal Funds Target Rate plus one and sixty-five hundredths percent (1.65%) Mortgage Loan Prior to the closing on the Mortgage Loan, the Borrower shall elect one or the other of the following interest rate options: (i) a daily adjusted rate of interest equal to the 30 day London Interbank Offered Rate (LIBOR) as quoted by the Lender two (2) Business Days prior to the date any change in the 30 day LIBOR is to be effective, plus one and sixty-five hundredths percent (1.65%); (ii) a fixed rate of interest for a period of up to ten (10) years as offered by the Lender in its sole discretion equal to the Lender's Marginal Cost of Funds plus one and sixty-five hundredths percent (1.65%); or (iii) such other rate or rates as the Lender and the Borrower shall agree in writing. (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 2.5(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 the Loans. Interest shall be payable in arrears on a monthly basis as part of the monthly installment payments provided for in the Mortgage Loan Note and, in the case of the Revolving Loan, as provided in the Revolving Loan Note. Any change in the interest rate on the Loans resulting from a change in the Federal Funds Target Rate or the 30 day LIBOR, as the case may be, shall become effective as of the opening of business on the day on which such change shall become effective. The Lender shall notify the Borrower of the effective date and the amount of each such change in the Federal Funds Target Rate or the 30 day LIBOR, as the case may be, by means of a monthly statement of account, but any failure to so notify shall not in any manner affect the obligations of the Borrower to pay interest on the Loans in the amounts and on the dates required. Each determination of the Federal Funds Target Rate, the 30 day LIBOR or the Lender's Marginal Cost of Funds, as the case may be, by the Lender 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, 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 Lender. If interest payable to Lender on any date would exceed the maximum amount permitted by the Highest Lawful Rate applicable to 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 without incurring a Prepayment Premium. The Borrower acknowledges that to the extent interest payable on the Loans is based on the Federal Funds Target Rate, the 30 day LIBOR or the Lender's Marginal Cost of Funds, such rates are only some of the bases for computing interest on loans made by the Lender, and by basing interest payable on any of such rates, the Lender has 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 Lender may now or in the future make loans to other borrowers. 2.6 Use of Proceeds. (a) The proceeds of the Revolving Loan shall be used for working capital and general corporate purposes; provided, however, that the maximum aggregate amount of Advances outstanding under the Revolving Loan at any time for purposes of financing an acquisition by the Borrower as contemplated by Section 6.2 or Section 6.8 of this Agreement shall not exceed Ten Million Dollars ($10,000,000.00) without Lender's prior written consent (except that Advances for the purpose of financing the acquisition of General Microwave Corporation shall not be subject to such limitation). To the extent that the Lender, in its sole discretion, determines that funds are available under the Revolving Loan, the Lender may issue one or more standby letters of credit on behalf of the Borrower, subject to such terms and conditions as may be required and approved by the Lender in its discretion, including without limitation, the term of the letter of credit and the terms of repayment to be set forth in a separate reimbursement agreement in form and substance acceptable to the Lender. (b) The proceeds of the Mortgage Loan shall be used to satisfy the existing mortgage indebtedness encumbering the Mortgaged Property. 2.7 Fees. (a) If the Lender is requested to issue a standby letter of credit pursuant to Section 2.6(a) of this Agreement, a separate letter of credit fee equal in amount to one percent (1.00%) of the amount of the letter of credit shall be due and payable by the Borrower to the Lender upon the issuance of the letter of credit and at each annual anniversary of the issuance date occurring during the term of the letter of credit. (b) The Borrower shall pay to the Lender at the closing of the Mortgage Loan an amount equal to one-half of one percent (0.5%) of the actual principal amount of the Mortgage Loan. (c) All such fees shall be the absolute property of the Lender upon payment. Payment of such fees shall not be considered payment of any of the Lender's expenses incurred in connection with the Loans, and shall be paid independent of the amount of proceeds of the Loans ultimately disbursed to the Borrower, even if such amounts are less than the above-stated principal amounts of 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. 2.8 Lender's Records. The Lender'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 such Loans 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. 2.9 Set-Off: Payment From Accounts. 2.9.1 Security Interest in Money and Property Held By Lender; Set-Offs. [Not Applicable] 2.9.2 Application of Deposits. In addition to any rights of set-off arising under the Loan Documents or under law, the Borrower hereby authorizes the Lender to apply any amount on deposit in any deposit account of the Borrower now or hereafter maintained with the Lender against any of the Borrower's indebtedness under the Loan Documents which is not paid when due. 3. CONDITIONS OF LENDING - GENERAL. In addition to the conditions precedent set forth in Section 4, the obligation of Lender to make the Loans shall be subject to the fulfillment of the following conditions precedent: 3.1 Evidence of Action. The Lender 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 Lender) 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 such officer or officers, and (iv) attaching a certificate of good standing of the Secretary of State of the Commonwealth of Pennsylvania. 3.2 This Agreement. The Lender shall have received counterparts of this Agreement duly executed by an Authorized Signatory of the Borrower. 3.3 Notes. The Lender shall have received the Revolving Loan Note and the Mortgage Loan Note, each duly executed by an Authorized Signatory of the Borrower. 3.4 Security Agreement. [ Not Applicable] 3.5 Mortgage. The Lender shall have received from the Borrower the Mortgage (and UCC-1 Financing Statements appurtenant thereto), duly executed by an Authorized Signatory of the Borrower. 3.6 Mortgaged Property Documentation. The Lender shall have received the following items, all of which must be satisfactory to the Lender: (1) Mortgage title insurance dated the date of closing of the Mortgage Loan with respect to the Mortgage and the Mortgaged Property in a face amount not less than the principal amount of the Mortgage Loan, free and clear of all liens, encumbrances and objections, and shall insure the Mortgage as a first and best lien on and covering the respective Mortgaged Property, with standard Pennsylvania endorsements 100, 300 and 710, together with evidence of the payment of the premiums therefor, which policies must be in form and substance satisfactory to the Lender and issued by a title insurance company or companies satisfactory to the Lender; (2) Tax and municipal violations searches and, if required by the Lender, escrows or affidavits regarding the future correction of any violations; (3) Casualty and liability insurance with respect to the Mortgaged Property in the form required by Section 5.3, together with the endorsements thereto required thereby; (4) An appraisal of the Mortgaged Property conforming in all respects with the applicable regulations promulgated under Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended; and (5) A Phase I environmental site assessment of the Mortgaged Property in form and substance satisfactory to the Lender and issued by an environmental consultant satisfactory to Lender, certifying that the Mortgaged Property is free of the presence of any Hazardous Substance. 3.7 Opinion of Counsel to the Borrower. The Lender shall have received an opinion of counsel to the Borrower, addressed to the Lender and Lender's Counsel, dated the closing date, in form and substance and covering such matters as the Lender may reasonably request. 3.8 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. 3.9 Search Reports. The Lender 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 Collateral or showing the Borrower as a debtor, except for Permitted Liens. 3.10 Property, Public Liability and Other Insurance. The Lender 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. 3.11 Other Documents. The Lender shall have received such other documents as the Lender shall reasonably request. 3.12 Fees and Expenses of Lender's Counsel. The fees and expenses of Lender's Counsel in connection with the preparation, negotiation and closing of the Loan Documents shall have been paid by Borrower. 3.13 Sureties. Each of the Sureties shall execute and deliver to the Lender Suretyship Agreements in form and substance acceptable to the Lender, 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 - REVOLVING LOAN. The obligation of Lender to make any Advance under the Revolving Loan 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 Loans, (b) there shall exist no Default or Event of Default, and (c) the Outstanding Revolving Loan Amount will not exceed the limitations as to the maximum unpaid principal amount of the Revolving Loan specified in Section 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 Lender on or before the applicable Borrowing Date shall have been executed and shall have been delivered at the office of the Lender 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 Lender and the Lender shall have received all information and copies of all documents which the Lender 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 Lender's Counsel. 4.6 Supplemental Opinions. If requested by the Lender with respect to the applicable Borrowing Date, there shall have been delivered to the Lender favorable supplementary opinions of counsel to the Borrower, addressed to the Lender and dated such Borrowing Date, covering such matters incident to the transactions contemplated herein as the Lender may reasonably request. 4.7 Other Documents. The Lender shall have received such other documents as the Lender 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 Lender, the Borrower shall, except as otherwise specifically provided: 5.1 Reports to Lender. Deliver to the Lender the following reports: (a) The Borrower's financial statements as follows: (1) the first three (3) quarterly consolidated statements certified by the Borrower's chief financial officer within forty-five (45) days after the end of each calendar quarter; (2) year-end consolidated statements within ninety (90) days after Borrower's fiscal year-end, which 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 year-end financial statements required under Section 5.1(a)(3), a certificate of compliance with the requirements set forth in Sections 6.12, 6.13 and 6.14 of this Agreement signed by the Borrower's chief financial officer. (d) Such other reports as may be reasonably requested by the Lender from time to time. All of the foregoing reports shall be in form and substance reasonably satisfactory to the Lender. 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 Lender. 5.2 Certificates; Other Information. Furnish to the Lender 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 Mortgaged Property 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 appraised market value of the Mortgaged Property as set forth in the appraisal required pursuant to Section 3.6(4) of this Agreement or that percentage of the full replacement cost of all buildings and improvements now or hereafter erected thereon (exclusive of the cost of excavations, foundations, and footings below the lowest basement floor), required to satisfy any applicable co-insurance requirement in such policy and with not more than $5,000.00 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 occurring on, in or about the Mortgaged Property and the adjoining streets, sidewalks and passageways, 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 Lender) for all employees of Borrower engaged on or with respect to the Mortgaged Property in such amount as is reasonably satisfactory to Lender, or if such limits are established by law, in such amounts; (iv) During the course of construction or repair of the Mortgaged Property, builder's completed value risk insurance against "all risks of physical loss," during construction, with deductibles not to exceed $1,000.00, in non-reporting form, covering the total value of work performed and equipment, supplies and materials furnished. If requested by Lender, such policy of insurance shall contain the "permission to occupy upon completion of work or occupancy" endorsement. (v) Directors and Officers liability insurance to a limit of not less than $3,000,000. (vi) Such other insurance, and in such amounts, as may from time to time be reasonably required by Lender 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 Lender. All policies of insurance shall have attached thereto a mortgagee clause in favor of Lender, and in form reasonably satisfactory to Lender, providing that the Lender shall not be subject to contribution, and a lender's loss payable endorsement for benefit of Lender, all of a form satisfactory to Lender. Borrower shall furnish Lender with a signed duplicate original policy with respect to all required insurance coverage. If Lender 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 Lender 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 Lender as First Mortgagee. At least twenty (20) days prior to the expiration of each such policy, Borrower shall furnish Lender with evidence satisfactory to Lender 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 Lender, shall be in form satisfactory to Lender, shall be maintained in force and effect, shall be assigned and delivered to Lender, 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 Lender. 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 Lender to be unsatisfactory, Borrower shall obtain new insurance reasonably satisfactory to Lender. (d) In the event the Borrower fails to provide, maintain, keep in force or deliver or furnish to Lender the policies of insurance required by this Agreement, Lender may procure such insurance or single-interests insurance for such risks covering Lender's interest, and Borrower will pay all premiums thereon promptly upon demand by Lender, and until such payment is made by Borrower, the amount of all such premiums, together with interest thereon at the rate specified in the Revolving Loan Note, shall be secured by the Mortgage. (e) In the event of loss, Borrower will give immediate notice thereof to Lender, and Lender 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 Lender instead of to Borrower and Lender jointly, and Borrower appoints Lender 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 Lender. (f) The proceeds of all insurance on the Mortgaged Property shall be applied as follows: (i) If the Mortgaged Property is partially or totally destroyed by fire, flood, windstorm or other casualty so as to render the Mortgaged Property unsuitable for Borrower's continued use, Borrower shall have the option of not replacing, restoring or repairing the damaged Mortgaged Property but, in lieu of such replacement, restoration or repair, have the Lender apply the proceeds of such insurance on the Mortgaged Property toward prepayment of the amounts due under the Mortgage Loan Note (any excess proceeds to be paid to Borrower); or (ii) If Borrower does not elect to apply the proceeds of such insurance to prepay the amounts due under the Mortgage Loan Note, the proceeds of such insurance shall be held by the Lender in a separate insurance loss account until such time as Borrower shall have delivered to Lender for its approval and to its satisfaction, sufficient plans, specifications and contracts containing a detailed breakdown of the costs to replace, restore or repair the damaged Mortgaged Property; thereafter, the Lender will, upon delivery to it of a certificate of Borrower setting forth the costs theretofore incurred or paid, subject to Lender inspection and acceptance of the replacement, restoration or repair of the damaged Mortgaged Property, apply so much as may be necessary of the proceeds of such insurance toward the payment of the costs of such replacement, restoration or repair. If said proceeds are not sufficient to pay in full the costs as reflected in the certificate of Borrower of such replacement, restoration or repair, the Borrower will nonetheless complete (or cause to be completed) the work thereof and will pay such excess costs prior to requesting Lender to apply any of the proceeds of such insurance to the cost of such replacement, restoration or repair. Any balance of said proceeds of insurance remaining after the payment of all costs of such replacement, restoration or repair, shall be applied toward the prepayment of the amounts due under the Loan Documents. If said amounts shall have been paid in full, any balance of said proceeds of insurance shall be paid to the Borrower; provided, however, that if the Borrower does not elect to prepay amounts due under the Loan Documents in full, there shall be no diminution in or postponement of future installments payable under the Loan Documents until payment thereof in full, and the Borrower shall proceed promptly to replace, restore or repair the Mortgaged Property damaged or destroyed or cause said work, to be done. 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 Lender. 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 Lender against any liability in respect thereof. 5.8 Audits by Lender. Upon the occurrence of an Event of Default or if the Lender reasonably believes that an Event of Default is imminent based on reports or financial reports received by Lender, permit the Lender 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 Lender 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 Lender, and furnish to the Lender 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 Lender 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 Lender 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 Lender 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 Lender 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 Lender with an environmental site assessment or report, all in scope, form, and content satisfactory to the Lender. Upon any such event, the Lender, 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 Lender or its designated agent and to provide such information as may be requested. All of the costs and expenses incurred by the Lender with respect to the audits, tests, inspections, and examinations which the Lender 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 Lender 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 Borrower's primary deposit relationship with the Lender. 5.14 Further Assurances And Power Of Attorney. Execute from time to time such other and further documents, including but not limited to promissory notes, security agreements, mortgages, financing statements, continuation statements, and the like which, in the opinion of the Lender or the Lender's counsel, may be reasonably necessary to perfect, confirm, establish, reestablish, continue, or complete the agreements of the Borrower under the Loan Documents, the security interests and other Liens in the Collateral 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 Lender, 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 Lender to establish, reestablish, continue, complete, confirm or perfect any Lien or security interest in any Collateral or collect any amount payable thereon, the Borrower hereby appoints the Lender or any officer of the Lender 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 Lender, the Borrower will not, directly or indirectly, without prior adequate notice to Lender with respect to Section 6.3 and without the prior written consent of the Lender for all other Sections: 6.1 Borrower's Indebtedness. [Not Applicable] 6.2 Combinations. [Not Applicable] 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, and (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. 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) mortgages, Liens, pledges and security interests in favor of the Lender; (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, provided that no such purchase money security interest shall attach to the Collateral or any portion thereof. 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. Pay dividends on any of its outstanding shares of capital stock or make treasury purchases of any such shares. 6.7 Impairment of Collateral. Permit anything to be done that may materially impair the value of the Collateral. 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 Lender 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 $25,000,000 at any time any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to Lender. 6.12 Maximum Debt to Tangible Net Worth Ratio. Maintain a Debt to Tangible Net Worth Ratio of the Borrower at not greater than 1.70-to-1 at any time any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to 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 on the last day of each fiscal year of Borrower that any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to Lender. 7. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender to enter into this Agreement and to make the Loans, the Borrower makes the following representations and warranties to the Lender and acknowledges the 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. 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 Lender 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 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 in respect of the Mortgaged Property. 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 Lender 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 Lender. 7.8 No Margin Stock Purchases. No part of the proceeds of the Loan 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, including without limitation the Mortgaged Property, 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) No Hazardous Substances have been generated or manufactured on, transported to or from, treated at, stored at or discharged from the Mortgaged Property in violation of any Environmental Laws; no Hazardous Substances have been discharged into subsurface waters under the Mortgaged Property in violation of any Environmental Laws; no Hazardous Substances have been discharged from the Mortgaged Property on or into property or waters (including subsurface waters) adjacent to the Mortgaged Property in violation of any Environmental Laws; and any underground or above ground storage tanks situated on the Mortgaged 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 the Mortgaged Property 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 the Mortgaged Property 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 the Mortgaged Property 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. (d) To the Borrower's knowledge, the Mortgaged Property is not located in an area identified by the Secretary of Housing and Urban development as an area having special flood hazards. 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 Year 2000. (i) Based on a comprehensive review and assessment of its systems and equipment the Borrower reasonably believes that Year 2000 issues (hereinafter defined) including costs of remediation, could not be expected to result in a material adverse change in the financial condition of the Borrower or any Surety from that expressed in the financial statements most recently submitted to the Lender prior to the date hereof; (ii) the Borrower and each Surety have developed plans for responding to Year 2000 Issues and the implementation of such plans, including testing, are on schedule in all material respects; and (iii) the Borrower and each Surety shall provide the Lender with any further assurances as a resolution of Year 2000 Issues requested by the Lender. The term "Year 2000 Issues" shall include, but not be limited to, the inability of computers and computer software, as well as embedded microchips in non-computing devices, to perform properly, including performance of date-sensitive functions with respect to certain dates prior to and after December 31, 1999. 7.17 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 Lender 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 obligation of the Lender 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 at the option of the Lender 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 the Loans within 10 days after it is due; or (b) The failure of the Borrower to pay the amount by which the unpaid principal amount of the Revolving Loan exceeds the limitations as to the maximum unpaid principal amount of such Loan as set forth herein within two (2) Business Days after written notice thereof shall have been given by the Lender to the Borrower; or (c) Failure by the Borrower or other party 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 Lender to the Borrower; or (d) Subject to the expiration of any applicable grace or cure period expressly provided for in or in connection with the applicable "Debt Instrument" (as hereinafter defined) (i) failure to perform any term, condition or covenant of any note, loan agreement, guaranty, mortgage or other instrument or agreement in connection with the borrowing of money or the obtaining of advances or credit to which the Borrower is a party or by which it is bound, or by which any of its properties or assets may be affected (a "Debt Instrument"), so that, as result of any such failure to perform, the indebtedness included therein or secured or covered thereby is declared due and payable prior to the date on which such indebtedness would otherwise become due and payable; or (ii) any event or condition referred to in any Debt Instrument shall occur or fail to occur, so that, as a result thereof, the indebtedness included therein or secured or covered thereby is declared due and payable prior to the date on which such indebtedness would otherwise become due and payable; or (iii) any material indebtedness included in any Debt Instrument or secured or covered thereby is not paid when due, except to the extent that such matters are being appropriately contested by Borrower in good faith with adequate reserves therefor having been set aside and with security satisfactory to the Lender; 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 Lender 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 Lender in this Agreement, the Notes or other Loan Documents or in connection with the making of the Loans 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 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 Lender'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 Lender'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 Lender 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 the Lender by the Borrower and all property of Borrower now or at any time in Lender's possession in any capacity whatsoever (set-off) and (ii) sell all or any part of the Collateral in accordance with the Pennsylvania Uniform Commercial Code, as applicable, and the Loan Documents, and the obligation of the Lender to make loans or otherwise extend credit to the Borrower shall immediately terminate. The Lender may exercise any other right or remedy provided pursuant to the Loan Documents and hereby granted or allowed to it by law including but not limited to the rights and remedies of a secured party under the Uniform Commercial Code of Pennsylvania and each and every right and remedy provided pursuant to the Loan Documents and hereby granted to the Lender or allowed to it by law shall be cumulative and not exclusive the one of the other, and may be exercised by the Lender from time to time and as often as may be necessary. The Lender shall have at any time, in its discretion, the right to enforce collection and payment of any of the Collateral 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 Loans and any other indebtedness or liabilities of the Borrower aforesaid, all without notice to the Borrower. The Lender shall not be required to marshall any security or guarantees or to resort to the same in any particular order. 9. GENERAL. 9.1 Survival of Warranties. All agreements, representation and warranties made herein shall survive the delivery of this Agreement. 9.2 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 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. 9.3 Rights Cumulative. Each and every right granted to the Lender hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Lender 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. 9.4 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. 9.5 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. 9.6 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. 10 Industry Drive Lancaster, Pennsylvania 17603 Attn: Lee N. Blatt, Chairman & CEO The Lender: The First National Bank of Maryland, a division of FMB Bank 1703 Oregon Pike Lancaster, Pennsylvania 17601-4201 Attn: Eric A. Rebert, Senior Vice President 9.7 Expenses of Lender. The Borrower shall pay all fees and expenses reasonably incurred by the Lender 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, or the perfection, protection and maintenance of the Lender's interest in any collateral. These fees and expenses shall include, without limitation, fees and disbursements of legal counsel for the Lender. 9.8 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 assigns of the parties hereto. The Borrower may not assign its rights or obligations hereunder without the prior written consent of Lender. 9.9 Waiver of Trial by Jury. THE 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 LENDER, OR COUNSEL TO THE LENDER, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE 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 LENDER HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION. 9.10 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 Bank's office indicated in Section 9.6 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 Bank 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 Bank and the Borrower agree that the venue provided above is the most convenient forum for both the Bank 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:_________________________________ Asst. Secretary, Margaret M. Guzzetti Myron Levy, President _____________________________________ By:__________________________________ Asst. Secretary, Margaret M. Guzzetti Anello C. Garefino, Vice President (SEAL) THE FIRST NATIONAL BANK OF MARYLAND, a division of FMB BANK By:____________________________ Eric A. Rebert Senior Vice President LOAN AGREEMENT by and between HERLEY INDUSTRIES, INC., as Borrower and THE FIRST NATIONAL BANK OF MARYLAND, a division of FMB BANK, as Lender Dated as of February 16, 1999 EX-23.1 7 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated September 17, 1999 included in this Form 10-K, into Herley Industries, Inc's. previously filed Registration Statement File Nos. 333-72427, 333-17369, 333-19739,333-46777, and 333-35485. ARTHUR ANDERSEN LLP Lancaster, PA October 26, 1999 EX-23.2 8 CONSENT OF BRIGHTMAN, BARLEVA, FRIEDMAN & CO. Exhibit 23.2 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement File Nos. 333-72427, 333-17369, 333-19739,333-35485, and 333-46777 of our report dated October 21, 1999 (relating to the financial statements of General Microwave (Israel) Corporation and Subsidiary not included therein) appearing in this annual report on Form 10-K of Herley Industries, Inc. for the year ended August 1, 1999. Brightman, BarLeva, Friedman & Co. Certified Public Accountants Jerusalem, Israel October 21, 1999 EX-27 9 FDS--AUG-1-1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 52 WEEKS ENDED AUGUST 1, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR AUG-1-1999 AUG-3-1998 AUG-1-1999 2,741,163 0 10,678,638 0 19,880,370 36,215,865 39,296,419 17,407,866 74,056,237 10,513,340 0 0 0 503,028 42,396,580 74,056,237 61,035,722 61,035,722 36,748,901 48,626,272 0 0 747,846 11,959,703 4,098,000 7,861,703 0 (126,826) 0 7,734,877 1.48 1.37
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