-----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, K5OsaryRC2wEPNs3xNLxLYUrHjBidkxjdQDVJsNrTvaI9fXaLYrl4wNcIEaPze0Y yj3HA7p4iGIs6S7JGB0qdQ== 0000950123-97-010278.txt : 19971212 0000950123-97-010278.hdr.sgml : 19971212 ACCESSION NUMBER: 0000950123-97-010278 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19971211 SROS: NONE 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-39767 FILM NUMBER: 97736081 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 S-1/A 1 AMENDMENT #3 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1997 REGISTRATION STATEMENT NO. 333-39767 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 HERLEY INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3679 23-2413500 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NUMBER)
------------------------ LEE N. BLATT CHIEF EXECUTIVE OFFICER HERLEY INDUSTRIES, INC. 10 INDUSTRY DRIVE 10 INDUSTRY DRIVE LANCASTER, PENNSYLVANIA 17603 LANCASTER, PENNSYLVANIA 17603 (717) 397-2777 (717) 397-2777 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT EXECUTIVE OFFICES) FOR SERVICE)
Copies to: DAVID H. LIEBERMAN, ESQ. TERRY M. SCHPOK, P.C. BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. 100 JERICHO QUADRANGLE, SUITE 225 1700 PACIFIC AVENUE, SUITE 4100 JERICHO, NEW YORK 11753 DALLAS, TEXAS 75201 (516) 822-4820 (214) 969-2870 (516) 822-4824 FAX (214) 969-4343 FAX
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective, and with respect to the shares of Common Stock issuable upon the exercise of the Warrants, from time to time thereafter. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] ================================================================================ 2 PROSPECTUS HERLEY INDUSTRIES LOGO HERLEY INDUSTRIES, INC. 1,100,000 SHARES OF COMMON STOCK AND 1,100,000 COMMON STOCK PURCHASE WARRANTS Of the 1,100,000 shares (the "Shares") of Common Stock (the "Common Stock") and 1,100,000 Common Stock Purchase Warrants (the "Warrants") offered hereby, 700,000 shares of Common Stock and 1,100,000 Warrants are being offered by Herley Industries, Inc. ("Herley" or the "Company") and 400,000 shares of Common Stock are being offered by certain selling stockholders (the "Selling Stockholders"). The Shares and Warrants are sometimes hereinafter collectively referred to as the "Securities." The Company will not receive any of the proceeds from the sale of Shares sold by the Selling Stockholders. See "Principal and Selling Stockholders." Each Warrant entitles the holder to purchase one share of Common Stock at $14.40 per share for thirteen months from the date of issuance and thereafter at $15.60 per share until twenty-five months from the date of issuance. The Warrant exercise price and the number of shares issuable upon exercise of the Warrants are subject to adjustment under certain circumstances. One Warrant must be purchased for each Share of Common Stock purchased, although the Warrants and the Shares will be separately transferable immediately following the completion of this offering. The Common Stock is traded on the Nasdaq National Market under the symbol "HRLY." The Company has applied for inclusion of the Warrants on the Nasdaq National Market. On December 10, 1997 the closing sale price of the Company's Common Stock as reported by the Nasdaq National Market was $13.25 per share. See "Price Range of Common Stock." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED PRIOR TO PURCHASING THE SECURITIES. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================= UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) PROCEEDS TO SELLING STOCKHOLDERS - ------------------------------------------------------------------------------------------------- Per Share............... $12.00 $.72 $11.28 $11.28 - ------------------------------------------------------------------------------------------------- Per Warrant............. $.10 $.006 $.094 $-- - ------------------------------------------------------------------------------------------------- Total(3)................ $13,310,000 $798,600 $7,999,400 $4,512,000 =================================================================================================
(1) Does not include additional compensation to be received by Janney Montgomery Scott Inc. (the "Representative") and Southwest Securities, Inc. (collectively, with the Representative, the "Managing Underwriters") in the form of a warrant (the "Managing Underwriters' Warrant") entitling the Managing Underwriters to purchase additional Securities equal to 10% of the Securities sold. In addition, the Company, the Selling Stockholders, and the underwriters named herein (the "Underwriters") have agreed to indemnity and contribution provisions regarding certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. The Managing Underwriters are the only Underwriters. See "Underwriting." (2) Before deducting other offering expenses payable by the Company estimated at $500,000. See "Use of Proceeds." (3) The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 165,000 additional shares of Common Stock from the Selling Stockholders and 165,000 additional Warrants from the Company solely for the purpose of covering over-allotments, if any. If the Underwriters exercise such over-allotment option in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $15,306,500, $918,390, $8,014,910, and $6,373,200, respectively. See "Underwriting." The Securities are offered by the Underwriters, subject to prior sale, when, as and if accepted by the several Underwriters named herein and subject to certain other conditions, including the right of the Underwriters to withdraw, cancel, modify or reject any order, in whole or in part. It is expected that the delivery of the certificates representing the Common Stock and the Warrants will be made on or about December 16, 1997 at the offices of Janney Montgomery Scott Inc., 26 Broadway, New York, New York. JANNEY MONTGOMERY SCOTT INC. SOUTHWEST SECURITIES The date of this Prospectus is December 11, 1997 3 PHOTO The MAGIC(2) System provides Command and Control of multiple vehicles to a range of 400 nautical miles over the horizon with a Relay. The equipment set forth herein represent the standard components utilized by the MAGIC(2) System, including the Command Panels used for control, the Transponder located in the airborne target, the Radio Frequency Module used to communicate to the Transponder and the Operator Consoles showing the current status of the target. The MAGIC(2) System components use Computers in the Controller Consoles running standard software as the Operating System. High Performance Field Programmable Gate Arrays are utilized in the Transponder and Radio Frequency Module to perform the encoding and decoding of data. GPS based position information provides precise location of the vehicle. The TTCS, which utilizes a C-band tracking antenna for the control of a single vehicle, is used by many customers who have an installed base of equipment designed around C-band operation. These customers continue to update hardware as their older components become obsolete and additional operating features are desired. The Shelter is shown in a configuration used by most of the Company's customers today. By providing the required environmental control, the shelter allows either the TTCS or MAGIC(2) System to be operated in harsh environments. 4 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND THE WARRANTS, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK AND THE WARRANTS ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (the "Registration Statement"), pursuant to the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Securities. This Prospectus does not contain all of the information set forth in the Registration Statement, and the exhibits thereto. For further information with respect to the Company and the Securities, reference is made to the Registration Statement and its exhibits. The Company is also subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy and information statements, and other information with the Commission. The Registration Statement and such reports, proxy and information statements, and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its following regional offices: Suite 788, 1375 Peachtree St. N.E., Atlanta, Georgia 30367; Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60621-2511; and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the Commission's Web site located at http://www.sec.gov. In addition, the Company's Common Stock is listed on the Nasdaq National Market and copies of the foregoing materials and other information concerning the Company can be inspected at the offices of the Nasdaq National Market at 1735 K Street, N.W., Washington, D.C. 20006. FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this Prospectus, including without limitation statements under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," regarding the Company's financial position, business strategy and the plans and objectives of the Company's management for future operations, are forward-looking statements. When used in this Prospectus, 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, such as those disclosed under "Risk 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. 3 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the over-allotment option described under "Underwriting" or the exercise of any other options or warrants. All references herein to the Company are to Herley Industries, Inc. on a consolidated basis with its subsidiaries, and includes their predecessors, unless the context otherwise requires. Except where otherwise indicated, this Prospectus gives effect to the four-for-three stock split of the Common Stock, effected as a stock dividend, on September 30, 1997. Certain technical and other terms used in this Prospectus are defined in the Glossary appearing at the end of this Prospectus. THE COMPANY Herley Industries, Inc. principally designs, manufactures and sells flight instrumentation components and systems, 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 also manufactures microwave devices used in its flight instrumentation systems and products and in connection with the radar and defense electronic systems on tactical fighter aircraft. Herley believes that the demand for its systems and products should continue to increase because of a number of important factors. The Department of Defense has begun to place more emphasis on improved military readiness, using advanced electronics for enhanced performance and extended life of its equipment. The Company believes the electronic content of the military procurement budget will grow at the expense of traditional armaments. A modern military force must defend against multiple attacking aircraft, cruise missiles, and short range ballistic missiles such as the Exocet and SCUD. The Company's MAGIC(2) system, which uses Global Positioning Satellites ("GPS"), and which the Company believes is the only commercially available command and control system to control complex scenarios such as multiple targets attacking from over the horizon, is being used by the U. S. Navy, the Company's largest customer, to test and train against multiple simultaneous threats. The Company also has supplied its command and control systems and other electronic products to foreign countries worldwide, which historically have followed the lead of the U.S. government in purchasing military electronic products. The Company anticipates supplementing or replacing installed systems and establishing new foreign country clients, through "teaming" arrangements with major domestic military contractors and otherwise. A rapidly growing component of the Company's business is the production of range safety transponders, which are expendable devices used to track satellite space launches. The Company believes that it is the only qualified supplier of space launch range safety transponders in the U.S. The two factors expected to increase the number of commercial space launches and the Company's space launch business are the growing number of global mobile satellite telephone systems and the continued development of the world's satellite communications infrastructure. The Company has grown internally and through five strategic acquisitions. As a result, the Company has experienced a compound annual growth rate of 41% in its operating income before unusual items for the five fiscal years ended August 3, 1997. See "Selected Financial Data." With these acquisitions, the Company has 4 6 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. The new products and systems that the Company plans to design, manufacture and sell are data link systems, which include telemetry data encoders. Data link systems and data encoders are currently being sold by others to the Company's existing customers. With its recent acquisition of Metraplex Corporation ("Metraplex"), the Company may now offer data link systems to its customers, either directly or through teaming arrangements. Upon receipt of an order, the Company will customize the design of a system for its customer for delivery typically nine months after receipt of such order. The Company's growth strategy is to: - Design and manufacture new products and systems using its expertise in digital, software and microwave technologies; - Broaden existing markets for the Company's products through the aggressive pursuit of large data link and command and control system sales; - Expand the sales of the Company's products and systems in international markets; - Extend the capabilities and uses of the Company's products in the rapidly growing space launch industry and certain commercial industrial applications; - Implement cost saving measures through the continued vertical integration of the Company's recent acquisitions; and - Continue to capitalize on strategic acquisition opportunities. The Company was incorporated in New York in 1965 and reincorporated in Delaware in June 1986. The Company's executive offices are located at 10 Industry Drive, Lancaster, Pennsylvania 17603, and its telephone number is (717) 397-2777. 5 7 THE OFFERING Securities Offered by: The Company................................ 700,000 Shares of Common Stock and 1,100,000 Warrants. Selling Stockholders....................... 400,000 Shares of Common Stock. One Warrant must be purchased for each Share of Common Stock purchased, although the Warrants and the Shares will be separately transferable immediately following the completion of this offering. Description of Warrants...................... Each Warrant is exercisable for 25 months and entitles the registered holder to purchase one share of Common Stock at an exercise price of $14.40 per share for thirteen months from date of issuance and thereafter at $15.60 per share. The Warrant exercise price and the number of shares issuable upon exercise of the Warrants are subject to adjustment under certain circumstances. See "Description of Securities." Common Stock Outstanding: Before the Offering........................ 4,541,146 Shares(1) After the Offering......................... 5,241,146 Shares(1) Use of Proceeds.............................. The $7,499,400 of net proceeds from the sale by the Company of the Securities will be used for general corporate purposes including working capital and for possible acquisitions. See "Use of Proceeds." Nasdaq National Market Symbols: Common Stock............................... HRLY Warrants................................... HRLYW (Proposed) Risk Factors................................. See "Risk Factors."
- --------------- (1) Assumes no exercise of: (i) the Underwriters' over-allotment option to purchase 165,000 Warrants from the Company, (ii) the 1,100,000 Warrants offered by the Company in this offering, (iii) the 220,000 shares of Common Stock issuable upon exercise of the Managing Underwriters' Warrant, including the exercise of the Warrants underlying the Managing Underwriters' Warrant, (iv) the 916,327 shares of Common Stock issuable upon the exercise of the outstanding options under the Company's 1992, 1996 and 1997 stock option plans, and (v) the 320,000 shares of Common Stock issuable upon the exercise of the outstanding warrants issued to officers and directors. See "Management -- Stock Plans," "Description of Securities" and "Underwriting." 6 8 SUMMARY FINANCIAL INFORMATION The following summary financial information concerning the Company, other than the as adjusted balance sheet data, has been derived from the consolidated financial statements included elsewhere in this Prospectus and should be read in conjunction with such consolidated financial statements and the notes thereto. See "Financial Statements."
52 WEEKS ENDED 53 WEEKS ----------------------- ENDED JULY 30, JULY 28, AUGUST 3, 1995 1996 1997 --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales................................................. $ 24,450 $ 29,001 $ 32,195 Cost and expenses......................................... 23,189 25,630 27,047 --------- --------- --------- Operating income before unusual item...................... 1,261 3,371 5,148 Unusual item(1)........................................... (5,447) -- -- --------- --------- --------- Operating income (loss)................................... (4,186) 3,371 5,148 Other income (expense).................................... (700) 400 136 --------- --------- --------- Income (loss) before income taxes......................... (4,886) 3,771 5,284 Provision for income taxes................................ 4 102 480 --------- --------- --------- Net income (loss)......................................... $ (4,890) $ 3,669 $ 4,804 ========= ========= ========= Earnings (loss) per common and common equivalent share(2)................................................ $ (0.98) $ 0.86 $ 1.01 ========= ========= ========= Weighted average number of common and common equivalent shares outstanding(2)................................... 4,978,868 4,253,785 4,733,682 ========= ========= =========
AUGUST 3, JULY JULY 1997 30, 28, -------------------------- 1995 1996 ACTUAL AS ADJUSTED(3) ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Total assets................................... $42,229 $42,509 $39,257 $ 46,756 Current liabilities............................ 9,974 7,559 9,813 9,813 Long-term debt, net of current portion......... 10,525 11,021 2,890 2,890 Shareholders' equity........................... $18,988 $21,032 $23,371 $ 30,870
RECENT FINANCIAL PERFORMANCE: For the quarter ended November 2, 1997, the Company's net sales were approximately $10,573,000 as compared to approximately $7,508,000 for the quarter ended November 3, 1996. - --------------- (1) The unusual item consists of settlement costs, legal fees, and related expenses in connection with the settlement of certain legal claims. (2) As adjusted to give effect to a four-for-three stock split on September 30, 1997. (3) The pro forma balance sheet data reflects the anticipated receipt of the net proceeds from this offering and the repayment of certain loans by the Company's officers as if this offering and the repayment of such loans had occurred as of August 3, 1997. See "Use of Proceeds." 7 9 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. The following risk factors should be considered carefully in addition to the other information in this Prospectus before purchasing the Securities offered hereby. GOVERNMENT CONTRACTS SUBJECT TO TERMINATION Approximately 71% and 77% of the Company's sales for fiscal 1997 and 1996, respectively, were made to U. S. government agencies or prime contractors or subcontractors on U.S. military and aerospace programs. Changes in government policies, priorities or program funding levels, resulting from defense budget cuts or otherwise, could adversely affect the Company's business or financial performance. 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 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. All of the Company's contracts are fixed price contracts, some of which require delivery over periods in excess of one year. The Company agrees to deliver products at a fixed price except for costs incurred because of change orders issued by the customer. Any cost overruns or performance problems may have a material adverse effect on the Company's business, operating results and financial condition. In addition, the profitability of such contracts is subject to inherent uncertainties as to the cost of completion. Failure of the Company to replace sales attributable to a significant defense program or contract at the end of that program or contract, whether due to cancellation, spending cuts, budgetary constraints or otherwise, could have a material adverse effect upon the Company's business, operating results and financial condition in subsequent periods. See "Business -- Government Contracts." RISKS ASSOCIATED WITH INTERNATIONAL SALES In fiscal 1997 and 1996, international sales comprised approximately 29% and 23%, respectively, of the Company's total sales, and the Company expects its international business to continue to account for an increasing part of its revenues. International sales are subject to numerous risks, including political and economic instability in foreign markets, including current currency and economic difficulties in the Pacific Rim, restrictive trade policies of foreign governments, inconsistent product regulation by foreign agencies or governments, imposition of product tariffs and burdens and costs of complying with a wide variety of international and U.S. export laws and regulatory requirements. The governments of Japan, South Korea, Taiwan and the United Kingdom are all significant customers of the Company. With respect to South Korea, the International Monetary Fund and other world bodies have provided assistance and may impose restraints on South Korea's economic policies and there is no assurance that such policies will not adversely effect the Company's sales to South Korea. The Company's international sales are subject to the Company obtaining export licenses for certain products and systems. There can be no assurance that the Company will be able to continue to compete successfully in international markets or that its international sales will be profitable. All of the Company's revenues in fiscal 1997 were denominated in U.S. dollars, and the Company intends to continue to enter into U.S. dollar-denominated contracts. Accordingly, the Company does not, and believes that in the future it will not, have significant exposure to fluctuations in currency. Nevertheless, fluctuations in currency could adversely affect the Company's customers, which may lead to delays in the timing and execution of orders. See "Business -- Business Strategy" and "-- Products." TECHNOLOGICAL CHANGE The flight instrumentation industry is characterized by technological change. The Company's future success will depend upon its ability continually to enhance its current products and systems and develop and introduce new products and systems that keep pace with the increasingly sophisticated needs of its customers and the technological advancements of its competitors. There can be no assurance that the Company will be successful in developing and marketing product enhancements, new products or totally new systems that will 8 10 adequately meet the requirements of the marketplace. As a result, the Company has expended substantial resources for system and product development and intends to continue to expend such resources in the future. The development of new or enhanced systems or products results in expenditures and costs that the Company may not recover if the system or product is unsuccessful. See "Business -- New Product Development and Applications." DEPENDENCE ON PROPRIETARY TECHNOLOGY The Company's success is dependent upon its proprietary technology. The Company does not currently have any material patents and relies principally on trade secret and copyright laws and certain employee and third-party non-disclosure agreements, as well as limiting access to and distribution of proprietary information, to protect its technology. Trade secret laws afford the Company limited protection because they cannot be used to prevent third parties from reverse engineering and reproducing the Company's products. Similarly, copyright laws afford the Company limited protection because copyright protection extends only to the expression of an idea and cannot be used to protect the idea itself. Moreover, third parties could independently develop technologies that compete with the Company's technologies. There can be no assurance that the obligations to maintain the confidentiality of the Company's proprietary technology will prevent disclosure of such information. Litigation may be necessary for the Company to defend against claims of infringement or protect its proprietary technology, which could result in substantial cost to the Company and diversion of management's efforts. There can be no assurance that the Company would prevail in any such litigation. The inability of the Company to protect its proprietary technology could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company believes that its products and proprietary rights do not infringe patents and proprietary rights of third parties, there can be no assurance that infringement claims, regardless of merit, will not be asserted against the Company. In addition, effective copyright and trade secret protection of the Company's proprietary technology may be unavailable or limited in certain foreign countries. In 2004, the Company's exclusive license to manufacture, market, and sell the Multiple Aircraft GPS Integrated Command and Control ("MAGIC(2)") system, including enhancements to such system, expires. Thereafter, the Company and licensor each will have the non-exclusive right to manufacture, market, license and sell the MAGIC(2) system without any payment to the other. See "Business -- Intellectual Property." RISKS ASSOCIATED WITH ENTERING NEW MARKETS AND EXPANSION The Company has historically derived its revenues principally from the U.S. Department of Defense and other government agencies. In addition to maintaining current defense business, the Company intends to pursue a strategy that leverages the technical capabilities and expertise derived from its defense business into related commercial markets, both domestic and foreign. The Company's efforts to expand its presence in the commercial market will require significant resources, including capital and management time. There can be no assurance that the Company will be successful in addressing these risks or in developing these commercial business opportunities. In general, the failure to manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operation. See "Business -- Business Strategy" and "-- New Product Development and Applications." RISKS ASSOCIATED WITH ACQUISITIONS The Company's strategy includes pursuing additional acquisitions that will complement its business. In attempting to make acquisitions, the Company often competes with other potential acquirors, many of which have greater financial and operational resources. Acquisitions involve significant risk, including (i) the diversion of management's time and attention to the negotiation of the acquisitions and the assimilation of the businesses acquired, (ii) the need to modify financial and other systems and add management resources, (iii) the potential liabilities of the acquired businesses, (iv) the unforeseen difficulties in the acquired operations, (v) the possible adverse short-term effects on the Company's results of operations and (vi) the financial reporting effects of the amortization of goodwill and other intangible assets. There can be no assurance that any business acquired in the future will achieve acceptable levels of revenue and profitability or otherwise perform as expected or that the Company will be able to consummate or successfully integrate any future acquisitions or that any acquisition, when consummated, will not materially adversely affect the 9 11 Company's business, operating results or financial condition. In addition, in connection with certain potential acquisitions and investments in the past and future, the Company has entered or may enter into letters of intent and other agreements. After performing due diligence on the acquisition or investment candidate, the Company has determined or may determine that the acquisition or investment is not in the Company's best interests. In such a case, the Company may not proceed with such acquisition or investment. No assurance exists that the Company's election not to proceed with any such acquisition or investment would not have a material adverse effect upon the Company's business, financial condition and operating results. While certain of the proceeds of this offering may be used for acquisitions, the Company has no present arrangements or understandings with any party with respect to any intended acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PRODUCT LIABILITY; RISK OF PRODUCT DEFECTS As the Company expands into related commercial markets, the sale of products and systems by the Company may entail the risk of product liability and related claims. A product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Complex products, such as those offered by the Company, may contain defects or failures when introduced. There can be no assurance that, despite testing by the Company, errors will not be found in new products after commencement of commercial shipments, resulting in loss of market share or failure to achieve market acceptance. Upon entering the commercial markets, the Company intends to maintain product liability insurance in amounts it deems adequate. Although the Company has not experienced any claims to date related to its systems or products, the occurrence of such a claim could have a material adverse effect upon the Company's business, operating results and financial condition. See "Business -- Business Strategy" and "-- Manufacturing, Assembly and Testing." BACKLOG The Company's order backlog is subject to fluctuations and is not necessarily indicative of future sales. There can be no assurance that current backlog will necessarily lead to sales in any future period. The Company's order backlog as of August 3, 1997 was approximately $36,911,000. See "Business -- Backlog." BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS The Company expects to use net proceeds from this offering for possible acquisitions and for working capital and other general corporate purposes. The Company's management will have broad discretion to allocate the proceeds of the offering, and the amounts actually expended for acquisitions or working capital may vary significantly depending on a number of factors, including the amount of future revenues, the amount of cash generated or used by the Company's operations and the availability of suitable acquisitions. Stockholders will not vote upon any acquisition nor will stockholders have an opportunity to review the financial status of any potential acquisition. See "Use of Proceeds." COMPETITION The flight instrumentation products that the Company manufactures are subject to varied competition depending upon the product and market served. Competition is generally based upon technology, design, price and past performance. Many of the Company's competitors are larger and possess greater financial resources than the Company. Competitors include Aydin Corporation, L-3 Communications Corporation, Microsystems, Inc., AMP, Inc. and Remec, Inc. Competition in follow-on procurements is generally limited after an initial award unless the original supplier has had performance difficulties. See "Business -- Competition." CONTROL BY MANAGEMENT The Company's executive officers and their relatives beneficially own a substantial portion of the outstanding shares of the Common Stock and currently comprise three of the seven members of the Board of Directors. As a result, such persons have had, and may in the future have, the ability to exercise influence over 10 12 significant matters regarding the Company, including transactions between such persons and the Company. Such a high level of influence may discourage or prevent unsolicited mergers, acquisitions, tender offers, proxy contests or changes of incumbent management, even when the stockholders other than such persons consider such a transaction or event to be in their best interests. Accordingly, holders of the Common Stock may be deprived of an opportunity to sell their shares at a premium over the trading price of the shares. See "Management," "Management -- Certain Transactions" and "Principal and Selling Stockholders." DEPENDENCE UPON KEY PERSONNEL The success of the Company depends upon the efforts of its executive officers and other key personnel, including Lee N. Blatt, Chairman of the Board and Chief Executive Officer, Myron Levy, President, and Gerald I. Klein, its chief technologist, and in the event of an acquisition, its ability to attract and retain other highly qualified management and technical personnel. Although the Company has existing employment agreements with Messrs. Blatt, Levy and Klein, the loss of the services of Mr. Blatt, Mr. Levy and Mr. Klein could have an adverse effect on the Company's business and prospects. The Company does not maintain key-man life insurance. There can be no assurance that the Company will be successful in the event it needs to hire and retain additional key personnel. See "Management." FLUCTUATIONS IN QUARTERLY RESULTS; VOLATILITY OF TRADING PRICE The Company's quarterly results have in the past been, and will continue to be, subject to significant variations due to a number of factors, any one of which could substantially affect the Company's results of operations for any particular fiscal quarter. In particular, quarterly results of operations can vary due to the timing, cancellation or rescheduling of customer orders and shipments, the pricing and mix of systems and products sold, new system and product introductions by the Company, the Company's ability to obtain components and subassemblies from contract manufacturers and suppliers, and variations in manufacturing efficiencies. Accordingly, the Company's performance in any one fiscal quarter is not necessarily indicative of financial trends or future performance. The trading prices of the Common Stock and the Warrants could fluctuate widely in response to variations in the Company's quarterly operating results, changes in earnings estimates by securities analysts, changes in the Company's business and changes in general market or economic conditions. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. These fluctuations have significantly affected the trading prices of the securities of many companies without regard to their specific operating performance. Such market fluctuations could have a material adverse effect on the trading prices of the Common Stock and the Warrants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Price Range of Common Stock." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market after this offering may have an adverse effect on the market price of the Common Stock and the Warrants. Upon completion of this offering, the Company will have outstanding 5,241,146 shares of Common Stock. The shares sold in this offering generally will be freely transferable without restriction. Of the remaining 4,541,146 shares, 3,806,363 shares are freely transferable, including 313,193 shares previously registered for approximately 85 former stockholders of Metraplex, which shares were recently issued in connection with such acquisition, and 734,783 shares may not be sold unless the sale is registered under the Securities Act, or an exemption from registration is available, including the exemption provided by Rule 144 under the Securities Act. Without the prior written consent of the Representative, the Selling Stockholders, the Company's directors and certain of the Company's officers and key employees have agreed that they will not, directly or indirectly, offer, sell, contract to sell, pledge, grant any option for the sale of or otherwise dispose of any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock for a period of 120 days after the date hereof provided that such persons shall have the right to sell or otherwise dispose of any shares of Common Stock during such 120 day period beginning seven days after the date hereof at a sale price of $13.00 per share or more. In the event that the sales price per share of Common Stock is $13.00 or 11 13 more during such period, and after such period, the 949,302 shares of Common Stock held by such persons will be eligible for sale in the public market in reliance upon Rule 144 subject to the restrictions contained therein. See "Underwriting" and "Description of Securities -- Common Stock -- Shares Eligible for Future Sale." POSSIBLE DILUTIVE EFFECT OF THE ISSUANCE OF SUBSTANTIAL ADDITIONAL SHARES WITHOUT STOCKHOLDER APPROVAL After this offering, the Company will have an aggregate of approximately 1,007,943 shares of Common Stock authorized but unissued and not reserved for specific purposes. All of such shares may be issued without any action or approval by the Company's stockholders. The Company intends to propose an increase in its authorized shares of Common Stock from 10,000,000 to 20,000,000 shares at its next annual meeting of stockholders presently scheduled to be held in January 1998. Any shares issued would further dilute the percentage ownership of the Company held by the investors in this offering. Unissued but reserved shares of Common Stock include shares of Common Stock reserved for issuance in connection with the exercise of (i) the Warrants, (ii) the stock options issued under the Company's stock option plans, (iii) the warrants held by officers and directors, and (iv) the Managing Underwriters' Warrant, including the shares of Common Stock issuable upon the exercise of the Warrants issuable upon exercise of the Managing Underwriters' Warrant. The terms on which the Company could obtain additional capital during the terms of these stock options and warrants may be adversely affected because of such potential dilution and because the holders thereof might be expected to convert or exercise them if the market price of the Common Stock exceeds their conversion or exercise price. See "Description of Securities" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DETERMINATION OF THE WARRANT EXERCISE PRICE The exercise price of the Warrants has been set at a premium to the existing market price of the Common Stock and bears no relationship to any objective criteria of future value. Accordingly, such exercise price should in no event be regarded as an indication of any future market price of the Common Stock. See "Price Range of Common Stock." ABSENCE OF TRADING MARKET FOR THE WARRANTS There currently is no trading market for the Warrants. Although the Company has applied for inclusion of the Warrants in the Nasdaq National Market, there can be no assurance that an active market will develop for the Warrants or if such a market develops, that it will be maintained. The market price for the Warrants is expected to be directly related to the market price of the Common Stock. The market price of the Common Stock and thus the trading price of the Warrants are likely to be subject to significant fluctuations in response to variations in quarterly results of operations, general trends in the marketplace and other factors, many of which are not within the Company's control. See "-- Fluctuations in Quarterly Results; Volatility of Trading Price" and "Price Range of Common Stock." CURRENT REGISTRATION REQUIRED TO EXERCISE THE WARRANTS Holders of the Warrants will be able to exercise their Warrants only if this Registration Statement or another registration statement relating to the sale of the shares of Common Stock underlying the Warrants is then in effect, or the sale of such shares upon exercise of the Warrants is exempt from the registration requirements of the Securities Act, and such shares are qualified for sale or exemption from qualification under applicable laws of the states where the holders of the Warrants reside. Although the Company is required to maintain this Registration Statement in effect with respect to the sale of the shares of Common Stock underlying the Warrants until the Warrants expire, there can be no assurance that the Company will be able to maintain the effectiveness of the Registration Statement during such period. Those persons desiring to exercise their Warrants will be unable to purchase the underlying shares of Common Stock if this Registration Statement or another registration statement covering the sale of such shares is not effective, unless the sale of such shares is exempt from the registration requirements of the Securities Act, or if such shares are not qualified or exempt from qualification in the states where the holders of the Warrants reside. The Warrant 12 14 Agreement governing the terms of the Warrants, however, provides that the expiration date for the Warrants will be extended if a registration statement with respect to the sale of underlying shares of Common Stock has not been continuously effective during the 90 days immediately preceding the expiration date for the Warrants (or the Company has not maintained the registration or qualification of such shares under applicable state securities laws during such period). See "Description of Securities." POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTIFICATE OF INCORPORATION Certain provisions of Delaware law and the Company's Certificate of Incorporation and By-laws could make a merger, tender offer or proxy contest involving the Company more difficult, even if such events could be beneficial to the interests of the stockholders. These provisions include Section 203 of the Delaware General Corporation Law, which prohibits certain business combinations with interested stockholders, the classification of the Company's Board of Directors into three classes and the requirement that stockholders owning at least 66 2/3% of the outstanding shares of Common Stock approve certain transactions, including mergers and sales or transfers of all or substantially all of the assets of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock and the Warrants. See "Description of Securities." LIMITATIONS ON PERSONAL LIABILITY OF DIRECTORS The Company's Certificate of Incorporation and By-laws contain provisions that reduce the potential personal liability of directors for certain monetary damages and provide for indemnity of directors and other persons. The Company is unaware of any pending or threatened litigation against the Company or its directors that would result in any liability for which a director would seek indemnification or similar protection. The Company also maintains officers and directors liability insurance and has entered into indemnification agreements with certain of its officers and directors. The indemnification agreements provide for reimbursement for all direct and indirect costs of any type or nature whatsoever (including attorneys' fees and related disbursements) reasonably incurred in connection with either the investigation, defense or appeal of a covered legal proceeding, including amounts paid in settlement by or on behalf of an indemnitee thereunder. See "Description of Securities -- Certain Provisions of the Certificate of Incorporation." USE OF PROCEEDS The net proceeds to the Company from the sale of the Securities offered by the Company hereby (after deducting underwriting commissions and discounts and estimated offering expenses) are estimated to be $7,499,400, excluding the proceeds from the exercise of any Warrants. See "Capitalization." The Company intends to use the net proceeds of this offering for general corporate purposes including working capital and for possible acquisitions. Although the Company considers acquisitions from time to time as part of its normal business operations and planning, it has no present commitments or agreements with respect to any intended acquisition. See "Risk Factors -- Broad Discretion of Management to Allocate Offering Proceeds" and "-- Risks Associated with Acquisitions." If the Underwriters exercise the over-allotment option in full, the Company will realize additional net proceeds of $15,510, which will be added to the Company's working capital. The exercise price that the Company receives upon the exercise of any Warrants will also be added to the Company's working capital and used for general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pending use of the proceeds from this offering as set forth above, the Company may invest all or a portion of such proceeds in short-term, interest-bearing securities, U.S. Government securities, money market investments and short-term, interest-bearing deposits in major banks. The Company will not receive any proceeds from the sale of the Shares sold by the Selling Stockholders. 13 15 PRICE RANGE OF COMMON STOCK The Common Stock is traded in the Nasdaq National Market under the symbol HRLY. The following table sets forth the high and low closing sales price as reported by the Nasdaq National Market for the Common Stock for the periods indicated and gives retroactive effect to the four-for-three stock split of the Common Stock on September 30, 1997.
HIGH LOW ------ ------ Fiscal Year 1996 First Quarter............................................................ $ 4.59 $ 3.66 Second Quarter........................................................... 6.19 3.84 Third Quarter............................................................ 7.97 5.25 Fourth Quarter........................................................... 9.19 6.00 Fiscal Year 1997 First Quarter............................................................ 7.97 6.19 Second Quarter........................................................... 10.69 7.31 Third Quarter............................................................ 8.91 6.09 Fourth Quarter........................................................... 10.69 6.19 Fiscal Year 1998 First Quarter............................................................ 15.00 10.13 Second Quarter (through December 10, 1997)............................... 14.63 12.50
The closing price on December 10, 1997 was $13.25. As of December 10, 1997, there were approximately 360 record holders and approximately an additional 1,100 beneficial holders of the Common Stock. There have been no cash dividends declared or paid by the Company on its Common Stock during the past two fiscal years or the current fiscal year. DIVIDEND POLICY Holders of the Common Stock are entitled to dividends when, as and if declared by the Board of Directors out of funds legally available therefor. The Company has not declared or paid any dividends for the past two fiscal years, or the current fiscal year, except for a four-for-three stock split effected as a stock dividend on September 30, 1997. The Company does not intend to pay cash dividends in the foreseeable future. 14 16 CAPITALIZATION The following table sets forth the capitalization and certain other items of the Company as of August 3, 1997 and stock capitalization as adjusted to give effect to the consummation of this offering as if it occurred on August 3, 1997. This table should be read in conjunction with the financial statements and related notes included elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
AUGUST 3, 1997 -------------------------- ACTUAL AS ADJUSTED(1) ------- -------------- (IN THOUSANDS, EXCEPT NUMBER OF SHARES) Cash and cash equivalents........................................... $ 1,195 $ 10,795 ======= ======= Current portion of long-term debt................................... 335 335 Long-term debt...................................................... 2,890 2,890 Note payable to related party....................................... 846 846 Shareholders' equity: Common stock, $.10 par value; 10,000,000 shares authorized, 4,209,365 shares issued and outstanding and 4,909,365 shares, as adjusted(2)(3).............................................. 421 491 Additional paid-in capital........................................ 8,857 16,286 Retained earnings................................................. 14,093 14,093 ------- ------- Total shareholders' equity..................................... 23,371 30,870 ------- ------- Total capitalization...................................... $27,442 $ 34,941 ======= =======
- --------------- (1) Adjusted to give effect to the consummation of this offering as if it occurred on August 3, 1997, including the repayment of notes receivable of $2,100,913 at closing from certain officers of the Company. See "Management -- Certain Transactions." (2) Gives effect to the four-for-three stock split on September 30, 1997. (3) Excludes: (i) the 165,000 shares of Common Stock issuable upon the exercise of the Warrants issuable upon exercise of the Underwriters' over-allotment option, (ii) the 110,000 shares of Common Stock and the 110,000 shares of Common Stock issuable upon the exercise of the Warrants issuable upon exercise of the Managing Underwriters' Warrant, (iii) the 1,100,000 shares of Common Stock issuable upon the exercise of the Warrants in connection with this offering, (iv) the 916,327 shares of Common Stock issuable upon the exercise of the outstanding options granted under the Company's 1992, 1996 and 1997 stock option plans, and (v) the 320,000 shares of Common Stock issuable upon the exercise of warrants issued to officers and directors. See "Underwriting," "Management -- Stock Plans" and "Description of Securities." 15 17 SELECTED FINANCIAL DATA The following selected consolidated financial data for each of the five fiscal years ended August 3, 1997 are derived from the Company's audited financial statements. This data should be read in conjunction with the consolidated financial statements of the Company, related notes, and other financial information included elsewhere in this Prospectus. See "Financial Statements."
52 WEEKS ENDED 53 WEEKS --------------------------------------------------- ENDED JULY JULY JULY AUGUST AUGUST 1, 31, 30, 28, 3, 1993 1994 1995 1996 1997 --------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales........................ $21,335 $30,508 $24,450 $29,001 $32,195 Cost of products sold............ 15,129 19,625 18,118 19,798 20,754 Selling and administrative....... 4,909 7,743 5,071 5,832 6,293 ------- ------- ------- ------- ------- Income before unusual items...... 1,297 3,140 1,261 3,371 5,148 Unusual items(1)................. -- (746) (5,447) -- -- ------- ------- ------- ------- ------- Income (loss) from operations.... 1,297 2,394 (4,186) 3,371 5,148 Other income (expense)(2)........ 532 143 (700) 400 136 ------- ------- ------- ------- ------- Income (loss) before income taxes.......................... 1,829 2,537 (4,886) 3,771 5,284 Provision for income taxes(5).... 438 676 4 102 480 ------- ------- ------- ------- ------- Income (loss) from continuing operations..................... 1,391 1,861 (4,890) 3,669 4,804 Discontinued operations(3)....... (2,464) -- -- -- -- Cumulative effect of accounting change(4)...................... 2,081 -- -- -- -- ------- ------- ------- ------- ------- Net income (loss)................ $ 1,008 $ 1,861 $(4,890) $ 3,669 $ 4,804 ======= ======= ======= ======= ======= Earnings (loss) per Common Share: (6) Continuing operations....... $ 0.26 $ 0.33 $ (0.98) $ 0.86 $ 1.01 Discontinued operations(3)............. (0.47) -- -- -- -- Change in accounting(4)..... 0.40 -- -- -- -- ------- ------- ------- ------- ------- Net income (loss).............. $ 0.19 $ 0.33 $ (0.98) $ 0.86 $ 1.01 ======= ======= ======= ======= ======= Weighted average number of common and common equivalent shares outstanding(6)................. 5,256,139 5,701,896 4,978,868 4,253,785 4,733,682 ======== ======= ======= ======= ======= JULY JULY JULY AUGUST AUGUST 1, 31, 30, 28, 3, 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Current assets................... $17,909 $15,971 $15,453 $16,263 $20,476 Current liabilities.............. 14,369 10,218 9,974 7,559 9,813 Working capital.................. 3,540 5,753 5,479 8,704 10,663 Total assets..................... 58,375 53,752 42,229 42,509 39,257 Long-term debt, less current portion........................ 14,054 14,823 10,525 11,021 2,890 Total shareholders' equity....... $27,182 $28,281 $18,988 $21,032 $23,371
- --------------- (1) Represents settlement costs, legal fees, and related expenses in connection with the settlement of certain legal claims in 1995; and charges in excess of reserves for warranty claims in connection with an acquisition in 1994. (2) Consists principally of interest expense offset by investment income as detailed in the Company's consolidated statements of operations. (3) Results from the sale of the Company's Marine Products division in 1993. (4) Relates to the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" in 1993. (5) See Note "I" entitled "Income Taxes" in the Notes to Consolidated Financial Statements. (6) As adjusted to give effect to a four-for-three stock split on September 30, 1997. 16 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the historical consolidated financial statements of the Company, related notes and other financial information included elsewhere in this Prospectus. OVERVIEW The Company principally designs, manufactures and sells flight instrumentation components and systems, 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. Of the Company's total backlog of $36,911,000 at August 3, 1997, $26,135,000 is attributable to domestic orders and $10,776,000 is attributable to foreign orders. Management anticipates that approximately $30,330,000 of its backlog will be shipped during the fiscal year ending August 2, 1998. The Company includes in its backlog only firm orders for which it has accepted a written purchase order. However, backlog is not necessarily indicative of future sales. A substantial amount of the Company's backlog can be cancelled at any time without penalty, except in most cases, for the recovery of the Company's actual committed costs and profit on work performed up to the date of cancellation. 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. Revenues recognized on these contracts are 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 costs. Losses, if any, on contracts are recorded when first reasonably determined. While certain revenues were recognized under the percentage of completion method on a quarterly basis during fiscal 1997, there were no long-term contracts of this nature during fiscal 1996 and 1995 nor as of August 3, 1997. 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 these development activities, including employees' time and prototype development, net of amounts paid by customers, was approximately $1,828,000, $1,453,000 and $970,000 in fiscal 1997, 1996 and 1995, 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 income tax rate for fiscal 1996 and 1997 was 2.7% and 9.1%, respectively, reflecting the utilization of prior year net operating loss ("NOL") carryforwards and the reversal of a valuation allowance for the NOL carryforwards 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 17 19 its effective income tax rate. The Company anticipates that its effective income tax rate for fiscal 1998 will be approximately 34%. RECENT FINANCIAL PERFORMANCE For the quarter ended November 2, 1997, the Company's net sales were approximately $10,573,000 as compared to approximately $7,508,000 for the quarter ended November 3, 1996. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statements of operations expressed as a percentage of net sales. There can be no assurance that trends in sales growth or operating results will continue in the future.
52 WEEKS ENDED 53 WEEKS ----------------------- ENDED JULY 30, JULY 28, AUGUST 3, 1995 1996 1997 -------- -------- --------- Net sales..................................................... 100.0% 100.0% 100.0% Cost of products sold......................................... 74.1 68.3 64.5 ----- ----- ----- Gross profit.................................................. 25.9 31.7 35.5 ----- ----- ----- Selling and administrative expenses........................... 20.7 20.1 19.5 Income before unusual item.................................... 5.2 11.6 16.0 Unusual item.................................................. (22.3) -- -- ----- ----- ----- Operating income (loss)....................................... (17.1) 11.6 16.0 ----- ----- ----- Other income (expense): Net gain (loss) on available-for-sale securities and other investments.............................................. (1.5) 3.1 1.3 Dividend and interest income................................ 2.5 1.3 0.8 Interest expense............................................ (3.9) (3.0) (1.7) ----- ----- ----- (2.9) 1.4 0.4 ----- ----- ----- Income (loss) before income taxes............................. (20.0) 13.0 16.4 Provision for income taxes.................................... 0.0 0.4 1.5 ----- ----- ----- Net income (loss)............................................. (20.0)% 12.7% 14.9% ===== ===== =====
FISCAL 1997 COMPARED TO FISCAL 1996 Net sales for the 53 weeks ended August 3, 1997 were approximately $32,195,000 compared to $29,001,000 for fiscal 1996. The sales increase of $3,194,000 (11%) is primarily attributable to an increase in the sales of flight instrumentation products, including a Target Tracking Control System for the Republic of Korea. Gross profit of 35.5% for the 53 weeks ended August 3, 1997 exceeded the prior year of 31.7% due to an increase of $2,842,000 in higher margin foreign sales from $6,556,000 in 1996 to $9,398,000 in 1997, as well as an increase in absorption of fixed costs due to the higher sales volume. Selling and administrative expenses for the 53 weeks ended August 3, 1997 were $6,293,000 compared to $5,832,000 for fiscal 1996, an increase of $461,000 of which $360,000 was attributable to settlement and litigation costs involving two class action lawsuits, $325,000 to performance incentives, and $48,000 to additional travel costs. These increases were offset by a reduction in representative fees on foreign sales of $205,000 (partially due to a negotiated decrease in the rate paid), and a reduction of $75,000 in personnel and related expenses. As a percentage of net sales, selling and administrative expenses decreased from 20.1% in 1996 to 19.5% in 1997. Other income (expense) for the 53 weeks ended August 3, 1997 decreased $265,000 from the prior year due to decreases in gains on the sale of investments and dividend and interest income of $488,000 and $118,000, respectively, offset by a decrease in interest expense of $341,000. 18 20 The effective income tax rate in 1997 was 9.1%. The 1997 and 1996 tax provisions reflect the utilization of prior year NOL 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. See Note I entitled "Income Taxes" to the Consolidated Financial Statements. FISCAL 1996 COMPARED TO FISCAL 1995 Net sales for the 52 weeks ended July 28, 1996 were approximately $29,001,000 compared to $24,450,000 for fiscal 1995. The sales increase of $4,551,000 (18.6%) is attributable to an increase of approximately $5,845,000 in flight instrumentation products, of which Stewart Warner Electronics Co., acquired in July 1995, contributed $4,321,000, offset by a decrease of $1,294,000 in microwave components. Gross profit of 31.7% for the 52 weeks ended July 28, 1996 exceeded the prior year of 25.9% due to an increase of $2,648,000 in higher margin foreign sales from $3,908,000 in 1995 to $6,556,000 in 1996, 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 July 28, 1996 were $5,832,000 compared to $5,072,000 for fiscal 1995, an increase of $760,000 of which $388,000 is attributable to increased representative fees on foreign sales, an increase of $233,000 in personnel and related expenses and other expenses of $46,000, offset by a reduction of $150,000 in the provision for customer disputed charges, and decreases in group insurance of $90,000, depreciation of $69,000 and outside services of $48,000. The addition of Stewart Warner Electronics Co. added $450,000 in selling and administrative expenses in fiscal 1996, the specific expenses of which are included in the above numbers. As a percentage of net sales, selling and administrative expenses decreased from 20.7% in 1995 to 20.1% in 1996. Included in unusual items in 1995 are settlement costs in connection with certain legal actions of $4,310,000, legal fees of $829,000, and related expenses of $308,000. Other income (expense) for the 52 weeks ended July 28, 1996 increased $1,100,000 from the prior year due to net gains on available-for-sale securities and other long-term investments of $898,000 as compared to losses of $356,000 in 1995, and a decrease in interest expense of $88,000, offset by decreased dividend and interest income of $242,000. The effective income tax rate in 1996 was 2.7%. The 1996 tax provision reflects the utilization of prior year NOL carryforwards. No income tax benefit was recorded in 1995 due to an increase in the valuation allowance. The valuation allowance was provided relating to that portion of NOL carryforwards that management believed might expire unutilized. 19 21 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly consolidated financial data for each of the eight consecutive quarters in fiscal 1996 and 1997. This information is derived from unaudited consolidated financial statements that include, in the opinion of the Company, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with the consolidated financial statements of the Company and notes thereto included elsewhere in this Prospectus.
14 WEEKS 13 WEEKS ENDED 13 WEEKS ENDED ENDED ---------------------------- ----------------------------------------------- -------- FEB. AUG. OCT. 29, JAN. 28, APR. 28, JUL. 28, NOV. 3, 2, MAY 4, 3, 1995 1996 1996 1996 1996 1997 1997 1997 -------- -------- -------- -------- -------- ------ ------ ------ Net sales.................. $7,063 $7,197 $7,236 $ 7,505 $7,508 $7,146 $8,426 $9,115 Cost of products sold...... 4,888 5,028 4,929 4,953 5,171 4,916 5,278 5,388 ------ ------ ------ ------ ------ ------ ------ ------ Gross profit............... 2,175 2,169 2,307 2,552 2,337 2,230 3,148 3,727 Selling and administrative expenses................. 1,415 1,541 1,357 1,519 1,399 1,352 1,532 2,010 ------ ------ ------ ------ ------ ------ ------ ------ Operating income*.......... 760 628 950 1,033 938 878 1,616 1,717 ------ ------ ------ ------ ------ ------ ------ ------ Other income (expense): Gain (loss) on sale of available-for-sale securities............. 55 1,109 (131) (136) 15 -- 81 313 Dividend and interest income................. 63 100 126 87 48 90 62 58 Interest expense......... (227) (219) (168) (260) (129) (188) (126) (89) ------ ------ ------ ------ ------ ------ ------ ------ (109) 990 (173) (309) (66) (98) 17 282 ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes.................... 651 1,618 777 724 872 780 1,633 1,999 Provision for income taxes (benefit)................ 135 81 -- (114) -- -- 182 298 ------ ------ ------ ------ ------ ------ ------ ------ Net income................. $ 516 $1,537 $ 777 $ 838 $ 872 $ 780 $1,451 $1,701 ====== ====== ====== ====== ====== ====== ====== ======
20 22 The following table sets forth, for the periods indicated, the percentage of net sales represented by the indicated items:
14 WEEKS 13 WEEKS ENDED 13 WEEKS ENDED ENDED ---------------------------- ----------------------------------------------- -------- FEB. AUG. OCT. 29, JAN. 28, APR. 28, JUL. 28, NOV. 3, 2, MAY 4, 3, 1995 1996 1996 1996 1996 1997 1997 1997 -------- -------- -------- -------- -------- ------ ------ ------ Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of products sold...... 69.2 69.9 68.1 66.0 68.9 68.8 62.6 59.1 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit............... 30.8 30.1 31.9 34.0 31.1 31.2 37.4 40.9 Selling and administrative expenses................. 20.0 21.4 18.8 20.2 18.6 18.9 18.2 22.1 ----- ----- ----- ----- ----- ----- ----- ----- Operating income*.......... 10.8 8.7 13.1 13.8 12.5 12.3 19.2 18.8 ----- ----- ----- ----- ----- ----- ----- ----- Other income (expense): Gain (loss) on sale of available-for-sale securities............. 0.8 15.4 (1.8) (1.8) 0.2 -- 1.0 3.4 Dividend and interest income................. 0.9 1.4 1.7 1.2 0.6 1.3 0.7 0.6 Interest expense......... (3.2) (3.0) (2.3) (3.5) (1.7) (2.6) (1.5) (1.0) ----- ----- ----- ----- ----- ----- ----- ----- (1.5) 13.8 (2.4) (4.1) (0.9) (1.4) 0.2 3.1 ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes.................... 9.2 22.5 10.7 9.6 11.6 10.9 19.4 21.9 Provision for income taxes (benefit)................ 1.9 1.1 -- (1.5) -- -- 2.2 3.3 ----- ----- ----- ----- ----- ----- ----- ----- Net income................. 7.3% 21.4% 10.7% 11.2% 11.6% 10.9% 17.2% 18.7% ===== ===== ===== ===== ===== ===== ===== =====
- --------------- * There were no unusual items in fiscal 1996 and 1997. The Company has experienced in the past and will experience in the future quarterly variations in net sales and net income. Thus, operating results for any particular quarter are not necessarily indicative of results for any future period. Factors that have affected quarterly operating results include the timing, execution or delay of contract awards, the relative mix of foreign and domestic shipments, the relative mix of flight instrumentation products and microwave components, the timing and integration of acquisitions, and the level of selling and administrative expenses. LIQUIDITY AND CAPITAL RESOURCES As of August 3, 1997 and July 28, 1996, working capital was approximately $10,662,000 and $8,704,000, respectively, and the ratio of current assets to current liabilities was 2.09 to 1.00 and 2.15 to 1.00, respectively. At August 3, 1997, the Company had cash and cash equivalents of approximately $1,195,000. As is customary in the defense industry, inventory is partially financed by advance payments. The unliquidated balance of these advance payments was approximately $3,091,000 at the end of fiscal 1997, and $1,480,000 at the end of fiscal 1996. Net cash provided from operations and investing activities in 1997 was approximately $3,647,000, and $6,159,000, respectively. Cash provided by investing activities 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 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 $11,000,000, which expires January 31, 1999. No borrowings were outstanding on this line at August 3, 1997. As of July 28, 1996, the Company had borrowings outstanding of $6,950,000. 21 23 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 400,000 post-split shares of Common Stock, which was terminated in June 1997. The Company also acquired 463,639 shares, valued at $6,429,124 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, existing credit facilities, and the Company's net proceeds from this offering. 22 24 BUSINESS GENERAL The Company principally designs, manufactures and sells flight instrumentation components and systems, 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'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 also manufactures microwave devices used in its flight instrumentation systems and products and in connection with the radar and defense electronic systems on tactical fighter aircraft. The Company has grown internally and through five strategic acquisitions. As a result, the Company has experienced a compound annual growth rate of 41% in its operating income before unusual items for the five fiscal years ended August 3, 1997. See "Selected Financial Data." With these acquisitions, 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, 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. ("Vega") of Vienna, Virginia, a manufacturer of flight instrumentation products and command and control systems for sale in domestic and foreign markets. In October 1993, the Company moved the Vega operations to Lancaster, Pennsylvania. In March 1994, the Company entered into a license agreement granting the Company the right to manufacture, market, license and sell the MAGIC(2) system. 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 of Frederick, Maryland, enabling the Company to enter the airborne PCM and FM telemetry and data acquisition systems market. INDUSTRY OVERVIEW AND ACTIVITIES United States Defense Market. The U. S. defense industry has undergone significant changes resulting from federal budget pressures. These changes include attrition in the number of military equipment suppliers and industry consolidation among survivors. Also, new tactical threats have created new objectives and roles for defense contractors. The Department of Defense and the industry has begun to place more emphasis on improved military readiness and using advanced electronics for enhanced performance and extended life of its equipment. The focus is now on quick reaction to military and political incidents, rather than all out nuclear war. The electronic content of the military procurement budget is expected to grow at the expense of traditional armaments such as tanks and ships. The Company serves the test and training ranges established by the government to test and develop new weapons and train troops in their use. The government procures airborne target vehicles that simulate aggressor aircraft during the training exercise. The function of the command and control system is to "fly" the unmanned target through its pre-planned mission as it simulates its attack on a ship or a ground target. The defenders will fire an instrumented defense weapon, such as a missile, at the target as it is commanded through 23 25 its attack plan. The Company believes that it has been a principal supplier of command and control systems to the training ranges in the United States. Until recently, the Company's command and control system was the transportable 6104 TTCS and the portable 6157 TTCS. These systems could control a single target, generally from up to 100 miles away. With the limited range of defensive weapons then available, and prior to the widespread use of GPS, the single attacking target was an acceptable training scenario. With the weaponry available today, such military exercises are no longer acceptable for realistic training. A modern military force must defend against multiple attacking aircraft, cruise missiles, and short range ballistic missiles such as the Exocet and SCUD. The Company's MAGIC(2) system has been designed to control complex scenarios such as multiple targets attacking from over the horizon. The Company's largest customer is the Navy. For more than 20 years the Navy has been developing the Aegis fire control radar, which is installed on destroyers and cruisers in connection with the protection of a battle fleet. The Aegis is a long range radar that is used in conjunction with the Standard missile to defend the battle fleet against aggressors. The Standard missile has recently been improved with an extended range that permits it to attack hostile forces over the horizon. Prior to the development of the extended range Standard missile, the Navy was able to train its naval forces by simulating an attack by a single UAV at relatively close range. Recently Congress and the Department of Defense have instructed the Navy to: (i) change its training methods to present multiple UAVs acting as aggressor aircraft, (ii) detect and defend against them at long ranges, taking advantage of the new range of the Standard missile and (iii) otherwise prepare for the naval engagement of the future. Those future naval engagements are expected to be conducted in a "littoral" warfare scenario, meaning "along the shore," such as the Persian Gulf. With this new directive calling for realistic training against multiple threats at extended ranges in a littoral warfare scenario, the Navy has used the Company's MAGIC(2) system. This system was tested and qualified by the Navy in 1995 and has been installed at the Navy range at Patuxent River, Maryland. The primary ranges using the Company's instrumentation products are: Naval Air Warfare Center, Weapons Division, Pt. Mugu, California; Naval Air Warfare Center, Weapons Division, China Lake, California; Naval Air Warfare Center Aircraft Division, Atlantic Ranges and Facilities, Patuxent River, Maryland; U.S. Army White Sands Missile Range, New Mexico; Eglin Air Force Base, Florida; Edwards Air Force Base, California; Pacific Missile Range Facility, Barking Sands, Hawaii; and Atlantic Fleet Weapons Training Facility, Roosevelt Roads, Puerto Rico. International Defense Market. The Company believes that the training range market is a niche market for the sale of command and control systems, test equipment and flight instrumentation products. The highest profit margins experienced by the Company have been from sales to foreign customers in this niche market. Approximately 29% of the Company's backlog is from foreign customers, especially customers in the Pacific Rim and Europe. The governments of Japan, South Korea, Taiwan and the United Kingdom are all significant customers of the Company and have the potential to become larger customers. With respect to South Korea, the International Monetary Fund and other world bodies have provided assistance and may impose restraints on South Korea's economic policies and there is no assurance that such policies will not adversely effect the Company's sales to South Korea. The governments of Egypt, France, Singapore and Australia are also customers of the Company. These countries purchase the Company's products to train their forces to defend themselves against enemies. The Company's intent is to build its business based on these long-term relationships. This growth is intended to be fueled by the Company's newly-developed command and control systems, including MAGIC(2), which has already been sold to the governments of Australia and Singapore. The Company has approximately 20 technical representative agencies around the world, which are experienced in selling within their markets. In addition, the Company's products are supported by qualified service and field engineering personnel, who are available on short notice to service the Company's systems and products abroad. Space Launch Systems and Satellites. In the 1950s, the development of space launch systems and satellites was funded primarily by government agencies responsible for national security and scientific exploration. Beginning in the 1960s government expenditures for space programs were supplemented with commercial investments as the advantages of using satellites for relaying television and telephone conversa- 24 26 tions over long distances were recognized. Organizations such as the Communications Satellite Corporation ("COMSAT") and the International Telecommunications Satellite Organization ("INTELSAT") were formed to promote and regulate the use of satellites for commercial communications in the United States and abroad. Major contractors such as TRW Inc., Space Systems/Loral Inc., Hughes Electronics Corporation, and Lockheed-Martin Corp. invested private funds in developing satellites for commercial communications. Other major corporations, such as Boeing Co., Lockheed-Martin and Orbital Sciences Corp. developed expendable launch vehicles that could place the satellites in orbit around the globe. The Company believes that the satellite communications business today represents the largest commercial market in the space industry. More recently, advances in microprocessors, antennas and power systems and other electronic technologies have made it possible to manufacture smaller, less expensive and higher performance launch vehicles and communication and observation satellites. These improvements permit space-based systems to be applied to a much broader range of commercial, research and educational applications, including global personal communications, environmental monitoring and vehicle navigation and position reporting. In addition to the large number of satellites now in use that have been placed in geosynchronous orbit (fixed position in space) at high altitudes, a less expensive market for low earth orbit ("LEO") satellites is developing. Space launch vehicles capable of launching clusters of small satellites in geosynchronous orbit are increasingly being used for satellite-based communications services. A rapidly growing commercial portion of the Company's business is the production of range safety transponders for the placement of satellites in orbit. These transponders are expendable devices used to track a satellite space launch. The Company believes that for the past ten years, it has been the only qualified supplier of range safety transponders for all space launches conducted in the United States. The Company's primary vehicle customers are Lockheed-Martin Corp. for the Atlas, Atlas-Centaur and Titan, Boeing Co. for the Delta II, III and IV, and Orbital Sciences Corp. for the Taurus and Pegasus. The Company has expended over $5 million in engineering funds during the past ten years in development of a series of Herley range safety transponders, some of which expenses have been borne by the Company's customers. The frequency of space launches has been growing steadily during the past few years. Two factors are expected to increase the number of space launches, and the Company's space launch business, in the next few years. The first factor is the growing number of global mobile satellite telephone systems, headed by the Motorola Iridium, that are being placed in orbit around the world. Motorola's Iridium system requires a constellation of 66 satellites. A competitive system, the Orbcomm, developed by Orbital Sciences Corp., will use 34 satellites. Another competitive system, the Loral Globalstar currently is being manufactured, and is planned for a 1998 space installation. The Globalstar will use 48 satellites. In addition, a satellite network called Teledesic manufactured by Boeing Co. received an FCC license to build 288 LEO satellites which is scheduled to be in operation by the year 2002. Motorola also has plans to build a 63 LEO network called Celestri by the year 2002. The second factor working to increase the number of space launches is that the boundaries of space are now being used for innovative applications of new technologies. Examples of the applications of new systems include high-speed data delivery, broadcasting interactive television and games, video conferencing, Internet access, "intranets" for business, telemedicine, television on demand, connecting cellular phone networks, software distribution and training. The main target market is interactive broadband services. Leading these applications are a joint venture of Alcatel of France with their Skybridge network, and Loral Space and Communication with their Cyberstar system. 25 27 BUSINESS STRATEGY The Company's growth strategy to achieve its objectives involves the following key elements: - DESIGN AND MANUFACTURE NEW PRODUCTS AND SYSTEMS USING ITS EXPERTISE IN DIGITAL, SOFTWARE AND MICROWAVE TECHNOLOGIES. The Company has experience in microwave technologies and in the use of software technology in designing and manufacturing its systems and products. With the 1997 acquisition of Metraplex, the Company has acquired the digital expertise necessary to manufacture and design additional products for both military and commercial use. - BROADEN EXISTING MARKETS FOR THE COMPANY'S PRODUCTS THROUGH THE AGGRESSIVE PURSUIT OF LARGE DATA LINK AND COMMAND AND CONTROL SYSTEM SALES. Through its recent acquisition of Metraplex, which offers a comprehensive product line of PCM and FM products, the Company now has the capability of expanding sales to its existing customers through the sale of complete data link systems for aerospace and missile applications. Previously, the Company only could offer products comprising part of the data link system, such as transponders, because the Company did not sell PCM encoders, which are important components of the data link system. In contrast to the sale of individual products, contracts for a complete data link system are generally multi-year, multi-million dollar projects. The ability to sell a complete data link system also affords the Company the opportunity to expand its customer base for its command and control systems through the introduction and sale of command and control systems to new customers purchasing a complete data link system. - EXPAND THE SALES OF THE COMPANY'S PRODUCTS AND SYSTEMS IN THE INTERNATIONAL MARKETS. In January 1996, the Company formed Global Security Systems ("GSS"), a marketing group, to pursue additional opportunities and service components and systems in the international marketplace. The Company's products have been installed in a number of training ranges throughout the world, as countries continue to train armed forces to defend against enemies. This is a niche market served by the Company. The Company intends to increase sales in this high margin business through the sale of its newly developed command and control systems, including MAGIC(2), and the ancillary business created in test equipment and the replenishing of expendable products. - EXTEND THE CAPABILITIES AND POTENTIAL USES OF THE COMPANY'S PRODUCTS IN THE RAPIDLY GROWING SPACE LAUNCH INDUSTRY AND IN CERTAIN COMMERCIAL INDUSTRIAL APPLICATIONS. The Company believes that for the past ten years, it has been the only qualified supplier of range safety transponders for any military or commercial space launches conducted in the United States. The Company intends to capitalize on changes in government policy that has enabled private industry to launch satellites, and new technology providing for use of satellites, by selling its transponders and systems for use on the numerous space launches to be conducted in the next few years. The Company also intends to expand the sale of its products and systems into new commercial areas. - IMPLEMENT COST SAVING MEASURES THROUGH THE CONTINUED VERTICAL INTEGRATION OF THE COMPANY'S RECENT ACQUISITIONS. The Company believes that additional cost saving measures can be achieved through consolidating the manufacturing operations of its various recent acquisitions. These cost savings include reducing corporate, administrative and facilities expenses and from certain operating performance improvements. - CONTINUE TO CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. The Company intends to continue to consider potential acquisitions in related areas that offer opportunities to increase market share and expand the Company's line of systems and products. 26 28 PRODUCTS Command and Control Systems. For over thirty years, Vega (a division of 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 MAGIC(2) 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 MAGIC(2) system as a supplement to, or replacement for, this installed base of equipment. The MAGIC(2) 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 MAGIC(2) 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. 27 29 The MAGIC(2) system provides control of multiple targets from a single ground control system, it utilizes GPS to provide accurate position information. The MAGIC(2) system meets a growing requirement to test against multiple threats and the automated defense capabilities of ships like the AEGIS cruiser and the E-2C aircraft. MAGIC(2) MULTIPLE AIRCRAFT GPS INTEGRATED COMMAND & CONTROL [DIAGRAM OF USE OF MAGIC2 SYSTEM CONTROLLING MULTIPLE TARGETS OVER THE HORIZON IN THE TESTING OF AN AEGIS CRUISER] - -------------------------------------------------------------------------------- The TTCS provides reliable control of a single target, it has been utilized for over 20 years. The TTCS is used in support of missile, aircraft and other weapons systems development and testing. Herley continues to provide this system to customers to support their requirements. TTCS 6104 [DIAGRAM OF THE USE OF TTCS TO CONTROL A SINGLE TARGET] 28 30 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 recent 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. The Company believes that Metraplex is now a leading manufacturer of PCM and FM telemetry and data acquisition systems for severe environment applications. Metraplex products are used worldwide for testing space launch vehicle instrumentation, aircraft flight testing, and amphibian, industrial and automotive vehicle testing. A product portfolio ranges in size and complexity from miniature encoders to completely programmable data acquisition systems. The Company's recent acquisition of Metraplex will allow 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 can offer 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 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. 29 31 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. Microwave Devices. Herley manufactures solid state microwave devices in both Lancaster, Pennsylvania and at its MDI facility in Woburn, Massachusetts for use in its transponders and existing long-term military programs, both as part of new production and 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. In Woburn, the Company designs and manufactures complex microwave integrated circuits ("MICs"), which consist of sophisticated assemblies that perform many functions, primarily involving switching of microwave signals. MICs manufactured by the Company are employed in many defense electronics military systems as well as missile programs. The Company also manufactures magnetrons, which are the power source utilized in the production of the Company's transponders. The Company produces receiver protector devices. 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. With the contraction of the defense business, the Company believes that it has only one competitor in this market. In its Chicago facility, the Company 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. 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. 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 $1,828,000, $1,453,000, and $970,000 in fiscal 1997, 1996, and 1995, respectively. The new products and systems that the Company plans to design, manufacture and sell are data link systems, which include telemetry data encoders. Data link systems and data encoders are currently being sold by others to the Company's existing customers. With its recent acquisition of Metraplex, the Company may now offer data link systems to its customers, either directly or through teaming arrangements. Upon receipt of 30 32 an order, the Company will customize the design of a system for its customer for delivery typically nine months after receipt of such order. Data Link Systems. Data link systems contain transmitters, amplifiers, receivers and other components, and provide the means of communication between the control tower, the ground station and the test or launch vehicle. Data link systems are the equivalent of telephone links between the air and ground portions of launch vehicles or test and training ranges. The uplink communication to the airborne vehicle is transmitted via a telemetry signal from the ground to the vehicle. The telemetry signals are used to command the airborne vehicle through its command control transponder. The transponder will then change the flight control guidance system as directed. The downlink signals from the airborne telemetry transmitter to the ground telemetry receiver provide tracking signals for range safety, confirmation of the uplink command and their implementation by the vehicle and compilation of the data from on-board sensors gathered by the telemetry data encoder. Through the application of technology acquired from the Metraplex acquisition, the Company now has the ability to manufacture data encoders. Airborne targets and flight test missiles must have many critical parameters simultaneously monitored from the ground to gain the data required for verification of satisfactory performance or for identification of details of hardware requiring design improvements. On-board sensors may measure temperature, strain levels, vibration level and frequency, acoustic noise levels, air pressure, air velocity, humidity and other parameters of interest. The function of the encoder system is to convert the output of each of these sensors to a signal form that may be sequentially sampled by an electronic switch (multiplexer) produced by the Company in a known sequence and rate so as to create a data stream that may be transmitted to the ground by the telemetry system. Commercial Lighting. Over the past two years, the Company has been seeking commercial applications for the magnetron tubes produced by the Company's MDI division. In 1995, the Company signed agreements to develop miniature cost-effective magnetron tubes, using electrode-less high density ("EHD") techniques, for medical and industrial lighting applications. The Company believes that the other company in this joint engineering program is one of the largest lighting companies in the world. Based on initial engineering results, prototype tubes were designed, manufactured and tested satisfactorily to the specifications required. The Company and this other company are currently planning limited production of magnetron tubes to be used in an EHD industrial lighting application. 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. 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. 31 33 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. BACKLOG The Company's backlog of firm orders was approximately $36,911,000 on August 3, 1997 ($26,135,000 in domestic orders and $10,776,000 in foreign orders) as compared to approximately $23,770,000 on July 28, 1996 ($13,632,000 in domestic orders and $10,138,000 in foreign orders). Management anticipates that approximately $30,330,000 of the backlog will be shipped during the fiscal year ending August 2, 1998. 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 before use in products. Physical inspection requires 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 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 32 34 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 resources than the Company. Competitors include Aydin Corporation, L-3 Communications Corporation, Microsystems, Inc., AMP, Inc. and Remec, Inc. EMPLOYEES As of December 1, 1997, the Company employed 292 full-time persons. A total of 208 employees were engaged in manufacturing, 36 in engineering, 22 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 stock option plans. INTELLECTUAL PROPERTY The Company does not presently hold any significant 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. Furthermore, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company or with respect to its products for which the Company has indemnified certain of its customers. Asserting the Company's rights or defending against third party claims could involve substantial costs and diversion of resources, thus materially and adversely affecting the Company's business, results of operations and financial condition. In the event a third party were successful in a claim that one of the Company's products infringed its proprietary rights, the Company would have to pay substantial royalties or damages, remove that product from the marketplace or expend substantial amounts to modify the product so that it no longer infringed such proprietary rights, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. PROPERTIES The Company's properties are as follows:
AREA OWNED OCCUPIED OR LOCATION PURPOSE OF FACILITY (SQ. FT.) LEASED - --------------------------------- ------------------------------------------- --------- ------- Lancaster, PA(1)................. Production, engineering, administrative and 71,200 Owned executive offices Woburn, MA....................... Production, engineering and administration 60,000 Owned Chicago, IL...................... Production, engineering and administration 9,500 Leased Frederick, MD.................... Production, engineering and administration 14,700 Leased Lancaster, PA(2)................. Land held for expansion 21 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) See "Management -- Certain Transactions." The Company believes that its facilities are adequate for its current and presently anticipated future needs. LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings. 33 35 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
NAME AGE POSITION(S) WITH THE COMPANY - ----------------------------------- --- -------------------------------------------------- Lee N. Blatt....................... 69 Chairman of the Board and Chief Executive Officer Myron Levy......................... 57 President and Director Anello C. Garefino................. 50 Vice President -- Finance, Treasurer and Chief Financial Officer Allan Coon......................... 61 Vice President Adam J. Bottenfield................ 37 Vice President -- Engineering Ray Umbarger....................... 50 Vice President -- Domestic Marketing George Hopp........................ 59 Vice President -- International Marketing Glenn Rosenthal.................... 38 Vice President David H. Lieberman................. 52 Secretary and Director Adm. Thomas J. Allshouse (Ret.).... 72 Director, Member of Compensation and Audit Committees Alvin M. Silver.................... 66 Director, Member of Compensation and Audit Committees John A. Thonet..................... 47 Director Adm. Edward K. Walker, Jr. Director, Member of Compensation and Audit (Ret.)........................... 64 Committees
Mr. Lee N. Blatt is a co-founder of the Company and has been Chairman of the Board of the Company since its organization in 1965. Mr. Blatt holds a Bachelors Degree in Electrical Engineering from Syracuse University and a Masters Degree in Business Administration from City College of New York. Mr. Blatt's term as a director expires at the 1997 annual meeting of stockholders to be held in January 1998. Mr. Myron Levy has been President of the Company since June 1993 and served as Executive Vice President and Treasurer since May 1991, and prior thereto as Vice President for Business Operations and Treasurer since October 1988. For more than ten years prior to joining the Company, Mr. Levy, a certified public accountant, was employed in various executive capacities, including Vice-President, by Griffon Corporation (formerly Instrument Systems Corporation). Mr. Levy's term as a director expires at the 1998 annual meeting of stockholders. Mr. Levy is a director of Mike's Original, Inc., a manufacturer and distributor of premium ice cream products. Mr. Anello C. Garefino has been employed by the Company in various executive capacities for more than the past five years. Mr. Garefino, a certified public accountant, was appointed Vice President -- Finance, Treasurer and Chief Financial Officer in June 1993. From January 1990 to June 1993, Mr. Garefino was Finance Manager of the Company. From 1987 to January 1990, Mr. Garefino was Corporate Controller of Exide Corporation. Mr. Allan Coon joined the Company in 1992 and was appointed Vice President in December 1995. Prior to joining the Company, Mr. Coon was Senior Vice President and Chief Financial Officer of Alpha Industries, Inc., a publicly traded company engaged in military and commercial electronic programs. Mr. Adam J. Bottenfield was appointed Vice President -- Engineering in July 1997. Mr. Bottenfield has been employed by the Company as Systems Engineering Manager of Herley-Vega Systems since the Company's acquisition of Vega in 1993. From 1984 to 1993, Mr. Bottenfield was Manager of Digital and Software Engineering of Vega. Mr. Ray Umbarger was appointed Vice President -- Domestic Marketing in July 1997, having been employed by the Company since June 1995. For more than ten years prior to that, Mr. Umbarger served in the U.S. Navy where he was a Captain. His responsibilities in the Navy included the design, development 34 36 production, deployment and life cycle support of all Navy, and in some cases, all Department of Defense target systems. Mr. Umbarger received a Bachelors Degree in Aeronautical Engineering from the U.S. Naval Academy, a Masters Degree in Aeronautical Engineering from Princeton University and a Masters Degree in Business Administration from Monmouth College. Mr. George Hopp was appointed Vice President -- International Marketing in July 1997. Mr. Hopp has been employed by the Company in a sales and marketing position since 1995 and directs the operations of the Company's GSS division. For more than ten years prior to joining the Company, Mr. Hopp was Director of International Programs for Northrop Grumman, Military Aircraft Division. Mr. Glenn Rosenthal was appointed Vice President of the Company in August 1997. From June 1988 until its acquisition by the Company in August 1997, Mr. Rosenthal was employed by Metraplex Corporation, holding the positions of President (from June 1996) and Chief Operations Officer (from 1995). Mr. Rosenthal holds a Bachelors Degree in Engineering from Carnegie Mellon University. Mr. David H. Lieberman has been a director of the Company since 1985 and Secretary of the Company since 1994. Mr. Lieberman has been a practicing attorney in the State of New York for more than the past ten years and is a member of the firm of Blau, Kramer, Wactlar & Lieberman, P.C., general counsel to the Company. Mr. Lieberman's term as a director expires at the 1999 annual meeting of stockholders. Admiral Thomas J. Allshouse (Ret.) has been a director of the Company since September 1983. Prior to 1981, when he retired from the United States Navy, Admiral Allshouse served for 34 years in various naval officer positions, including acting as commanding officer of the United States Naval Ships Parts Control Center. Admiral Allshouse holds a Bachelors Degree in Engineering from the United States Naval Academy and a Masters Degree in Business Administration from Harvard University. Admiral Allshouse's term as a director expires at the 1999 annual meeting of stockholders. Mr. John A. Thonet has been a director of the Company since 1991 and President of Thonet Associates, an environmental consulting firm specializing in land planning and zoning matters for the past ten years. Mr. Thonet is the son-in-law of Mr. Blatt. Mr. Thonet's term as a director expires at the 1998 annual meeting of stockholders. Dr. Alvin M. Silver has been a director of the Company since October 1997. Since 1977, Dr. Silver has been Executive Vice President of the Ademco Division of Pittway Corporation. Dr. Silver holds a Bachelors Degree in Industrial Engineering from Columbia University, a Masters Degree in Industrial Engineering from Stevens Institute of Technology and a Doctor of Engineering Science Degree in Industrial Engineering/ Operations Research from Columbia University. Dr. Silver is a Professor at the Frank G. Zarb School of Business of Hofstra University. Mr. Silver's term as a director expires at the 1998 annual meeting of stockholders. Admiral Edward K. Walker, Jr. (Ret.) has been a director of the Company since October 1997. Since his retirement from the United States Navy in 1988, Admiral Walker has been Vice President, Administration for Resource Consultants, Inc., a member of Gilbert Associates, Inc. which is a professional services company providing services to the Department of Defense, particularly the Navy, in a wide range of technical, engineering and management disciplines. Prior to his retirement from the United States Navy, Admiral Walker served for 34 years in various naval officer positions, including Commander of the Naval Supply Systems Command, and Chief of Supply Corps. Admiral Walker holds a Bachelors Degree from the United States Naval Academy and Masters Degree in Business Administration from The George Washington University. Admiral Walker's term as a director expires at the 1997 annual meeting of stockholders, to be held in January 1998. Mr. Gerald Klein, Chief Technologist for the Company since March 1994, has been employed by the Company since 1988, serving as Chief Operating Officer and Executive Vice President from July 1988 until December 1996 and was a director of the Company from 1991 until December 1996. 35 37 CORPORATE GOVERNANCE In November, 1997, the Board of Directors of the Company amended the Company's By-laws to add a new article, which concerns certain corporate governance matters. This article may only be amended or repealed with the approval of the holders of 66 2/3% of the outstanding shares of the Common Stock. In addition, in the Underwriting Agreement the Company agreed to certain compensation restrictions during the two years immediately after the closing of this offering. By-laws. The new article requires that any corporate opportunity presented to any director or officer of the Company (or any director or officer of any subsidiary of the Company), including any affiliates of such director or officer, concerning a business transaction involving the type of business conducted by the Company or any of its subsidiaries, to be defined therein, be submitted to the Company's Board of Directors for its approval. Such director or officer may not take any action with respect to such opportunity until the earlier of: (i) the decision by the Board of Directors of the Company not to pursue the opportunity or (ii) the expiration of 30 days after submission of such opportunity to the Board of Directors. The new article prohibits the Company, and requires the Company to prohibit any of its subsidiaries, from entering into any transaction with any director or officer of the Company or any of its subsidiaries, or any affiliate of such director or officer, unless such transaction has been unanimously approved by the disinterested directors of the Company's Board of Directors. The new article provides that both the Audit Committee and the Compensation Committee of the Board of Directors must contain only independent directors. As described above, in November 1997, the Board of Directors expanded the number of directors comprising the Board of Directors to seven members and elected Mr. Silver and Admiral Walker to fill the two vacancies created. Mr. Silver and Admiral Walker will serve on the Audit Committee and the Compensation Committee with Admiral Allshouse. The new article requires the Company to invest any cash not necessary for the Company's current needs in certain high quality short-term securities. Underwriting Agreement. In the Underwriting Agreement, the Company agreed that for the two years immediately after the closing of this offering, the Company would not issue or sell any shares of Common Stock (except with respect to outstanding options or warrants), or securities convertible into, exchangeable for, or options or other rights to acquire shares of Common Stock to Lee N. Blatt, Myron Levy, or Gerald I. Klein, or any relative or affiliate of such individuals (collectively, the "Executives") or increase any compensation payable to any Executive unless such issuance or sale of securities or increase in compensation is unanimously approved by the members of the Compensation Committee. During such two year period, the Company also agreed that it would not re-price any outstanding stock options. In addition, the Company agreed that during such two year period the compensation to the Company's directors and executive officers would be based upon standards established with the assistance of an outside compensation specialist. In furtherance of certain of these new policies, Messrs. Blatt, Levy and Klein amended certain aspects of their employment agreements with the Company and will repay the loans that the Company previously made to them, at the closing of this offering. 36 38 EXECUTIVE COMPENSATION The following table sets forth the annual and long-term compensation with respect to the Chairman/Chief Executive Officer, the Company's four most highly compensated executive officers other than the Chief Executive Officer and one individual who served as an executive officer for a portion of fiscal year 1997 and all of fiscal years 1996 and 1995 (the "named executive officers") for services rendered for the fiscal years ended August 3, 1997, July 28, 1996 and July 30, 1995. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION(1) -------------------------------- --------------------------------- SECURITIES NAME AND FISCAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OPTIONS/SARS(4) COMPENSATION - -------------------------------- ------ --------- -------- --------------- ------------ Lee N. Blatt.................... 1997 $ 531,629 $302,432 599,999(5) $4,500(6) Chairman of 1996 483,028 203,068 133,333(7) 4,500 the Board 1995 503,842 -- 133,333 4,620 Myron Levy...................... 1997 $ 307,764 $181,460 400,000(5) $9,000(6) President 1996 288,726 121,841 66,667(7) 7,380 1995 295,331 27,500 66,666 6,636 Allan Coon...................... 1997 $ 110,011 -- 73,332(5) $5,751(6) Vice President 1996 110,011 $ 30,000 13,333(7) 4,569 1995 99,008 15,000 -- 4,245 Anello C. Garefino.............. 1997 $ 101,914 -- 59,999(5) $3,579(6) Vice President 1996 97,885 $ 15,000 13,333(7) 3,424 Finance-Treasurer 1995 90,620 -- 13,333 3,173 George Hopp..................... 1997 $ 107,615 -- 18,666(5) $1,422(6) Vice President 1996 104,000 -- -- 1,185 1995 44,000 -- 6,667 -- Gerald I. Klein(8).............. 1997 $ 307,764 $181,460 99,999(5) $4,500(6) 1996 288,726 121,841 66,667(7) 4,500 1995 295,328 -- 66,666 4,620
- --------------- (1) Does not include Other Annual Compensation because amounts of certain perquisites and other non-cash benefits provided by the Company do not exceed the lesser of $50,000 or 10% of the total annual base salary and bonus disclosed in this table for the respective officer. (2) Amounts set forth herein include cost of living adjustments under employment contracts. (3) Represents for Messrs. Blatt, Levy and Klein incentive compensation under employment agreements. No incentive compensation was earned under the employment agreements in fiscal 1995. Mr. Levy was awarded a bonus by the Board of Directors for fiscal 1995. See "Management -- Employment Agreements." (4) Adjusted to give effect to a four-for-three stock split on September 30, 1997. This table includes warrants issued to these individuals outside the stock option plans. (5) Consisting of the following options issued in October 1996 for the right to purchase Common Stock of the Company at a price of $6.9375: Lee N. Blatt - 133,333; Myron Levy - 100,000, Allan Coon - 26,666, Anello C. Garefino - 13,333; options granted in February 1997 at a price of $8.3438 and repriced to $6.0938 in April 1997: Lee N. Blatt 133,333, Myron Levy - 100,000, Allan Coon - 20,000, Anello C. Garefino - 20,000, Gerald I. Klein - 33,333 and George Hopp - 5,333; and options granted in May 1997 at a price of $6.4688: Lee N. Blatt - 333,333, Myron Levy - 200,000, Allan Coon - 26,666, Anello C. Garefino - 26,666, Gerald I. Klein - 66,666 and George Hopp - 13,333. (6) All Other Compensation includes: (a) group term life insurance as follows: $4,500 for Mr. Levy, $2,387 for Mr. Coon, $522 for Mr. Garefino, and $1,422 for Mr. Hopp, and (b) contributions to the Company's 401(k) Plan as a pre-tax salary deferral as follows: $4,500 for each of Messrs. Blatt, Levy and Klein, $3,364 for Mr. Coon, and $3,057 for Mr. Garefino. (7) Represents warrants issued in December 1995 for the right to purchase Common Stock of the Company at a price of $4.6425. (8) Effective December 1996, Mr. Klein ceased to serve as an executive officer of the Company. 37 39 The following table sets forth certain information concerning the stock options granted to the named executive officers during fiscal 1997. Since the end of fiscal 1997, the Company has not granted any stock options or warrants to any of these individuals. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1) --------------------------------------------------- POTENTIAL REALIZABLE VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF SECURITIES OPTIONS ISSUED STOCK PRICE APPRECIATION UNDERLYING TO EMPLOYEES EXERCISE FOR OPTION TERM(4) OPTIONS IN PRICE EXPIRATION ----------------------------------- NAME GRANTED(2) FISCAL YEAR(3) ($/SH) DATE 0% 5% 10% - ------------------- ---------- -------------- -------- ---------- ----- ---------- ---------- Lee N. Blatt....... 133,333 9 $ 6.9375 10/08/06 $0.00 $ 581,726 $1,474,208 133,333 9 $ 6.0938 04/04/07 $0.00 $ 510,980 $1,294,923 333,333 24 $ 6.4688 05/01/07 $0.00 $1,356,063 $3,436,530 Myron Levy......... 100,000 7 $ 6.9375 10/08/06 $0.00 $ 436,296 $1,105,659 100,000 7 $ 6.0938 04/04/07 $0.00 $ 383,236 $ 971,195 200,000 14 $ 6.4688 05/01/07 $0.00 $ 813,638 $2,061,920 Allan Coon......... 26,666 2 $ 6.9375 10/08/06 $0.00 $ 116,343 $ 294,835 20,000 1 $ 6.0938 04/04/07 $0.00 $ 76,647 $ 194,239 26,666 2 $ 6.4688 05/01/07 $0.00 $ 108,482 $ 274,916 Anello C. Garefino......... 13,333 1 $ 6.9375 10/08/06 $0.00 $ 58,171 $ 147,417 20,000 1 $ 6.0938 04/04/07 $0.00 $ 76,647 $ 194,239 26,666 2 $ 6.4688 05/01/07 $0.00 $ 108,482 $ 274,916 George Hopp........ 5,333 -- $ 6.0938 04/04/07 $0.00 $ 20,438 $ 51,794 13,333 1 $ 6.4688 05/01/07 $0.00 $ 54,241 $ 137,458 Gerald I. Klein.... 33,333 2 $ 6.0938 04/04/07 $0.00 $ 127,744 $ 323,728 66,666 5 $ 6.4688 05/01/07 $0.00 $ 271,210 $ 687,301
- --------------- (1) Adjusted to give effect to a four-for-three stock split on September 30, 1997. During fiscal 1997, no warrants were issued to these individuals outside the stock option plans. (2) Options were issued in fiscal 1997 at 100% of the closing price of the Company's Common Stock on dates of issue and vest as follows: Lee N. Blatt - all options vest at date of grant; Myron Levy, Allan Coon, Anello C. Garefino and Gerald I. Klein - one third of the options vest at date of grant, one-third vest one year from date of grant and the balance vest two years from date of grant; George Hopp - one fifth of the options vest one year from date of grant and one fifth each year thereafter. (3) Total options issued to employees and directors in fiscal 1997 were for 1,465,649 shares of Common Stock. (4) The amounts under the columns labeled "5%" and "10%" are included by the Company pursuant to certain rules promulgated by the Commission and are not intended to forecast future appreciation, if any, in the price of the Common Stock. Such amounts are based on the assumption that the named persons hold the options for the full term of the options. The actual value of the options will vary in accordance with the market price of the Common Stock. The column headed "0%" is included to demonstrate that the options were issued with an exercise price equal to the trading price of the Common Stock so that the holders of the options will not recognize any gain without an increase in the stock price, which increase benefits all stockholders commensurately. 38 40 AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES The following table sets forth stock options and warrants exercised during fiscal 1997 and all unexercised stock options and warrants held by the named executive officers as of August 3, 1997.
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AND WARRANTS AT OPTIONS AND WARRANTS AT SHARES FISCAL YEAR-END(2) FISCAL YEAR-END(3) ACQUIRED ON VALUE ---------------------------- ------------------------------ NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------- ----------- -------------- ----------- ------------- ----------- ------------- Lee N. Blatt....... 688,886 $3,203,301 133,333 177,779 $ 706,532 $ 785,698 Myron Levy......... 264,441 1,255,128 66,667 255,558 353,293 969,833 Allan Coon......... 13,333 70,625 32,222 41,110 109,350 140,202 Anello Garefino.... 41,109 200,659 13,333 38,889 70,657 153,102 George Hopp........ 4,443 22,442 2,667 18,222 10,261 72,993 Gerald Klein....... 163,330 854,708 66,667 83,335 353,293 382,947
- --------------- (1) Values are calculated by subtracting the exercise price from the trading price of the Common Stock as of the exercise date. (2) Adjusted to give effect to a four-for-three stock split on September 30, 1997. (3) Based upon the trading price of the Common Stock of $9.94 on August 3, 1997, as adjusted to give effect to the four-for-three stock split on September 30, 1997. EMPLOYMENT AGREEMENTS Lee N. Blatt has entered into a new employment agreement with the Company, dated as of November 1, 1997, which provides for a three year term, terminating on October 31, 2000. Pursuant to the agreement, Mr. Blatt receives compensation consisting of a base salary of $375,000, with an annual cost of living increase and an incentive bonus. Mr. Blatt's incentive bonus is 5% of the pretax income of the Company in excess of 10% of the Company's stockholders' equity for specific periods, as adjusted for stock issuances. Mr. Blatt's incentive bonus cannot exceed his base salary. Myron Levy has entered into a new employment agreement with the Company, dated as of November 1, 1997, which provides for a five year term, terminating on October 31, 2002, and a five year consulting period commencing at the end of the employment period. Pursuant to the agreement, Mr. Levy receives compensation consisting of a base salary of $275,000, with an annual cost of living increase and an incentive bonus. Mr. Levy's incentive bonus is 4% of the pretax income of the Company in excess of 10% of the Company's stockholders' equity for specific periods, as adjusted for stock issuances. Mr. Levy's incentive bonus cannot exceed his base salary. Mr. Levy's compensation during the consulting period is at the annual rate of $60,000. Gerald Klein has entered into a new employment agreement with the Company, dated as of November 1, 1997, which provides for a four year term, terminating on October 31, 2001, and a consulting period commencing at the end of the employment period and terminating on December 31, 2010. Pursuant to the agreement, Mr. Klein receives compensation consisting of a base salary of $275,000, with an annual cost of living increase and an incentive bonus. Mr. Klein's incentive bonus is 3% of the pretax income of the Company in excess of 10% of the Company's stockholders' equity for specific periods, as adjusted for stock issuances. Mr. Klein's incentive bonus cannot exceed his base salary. Mr. Klein has the right at any time during his full time employment to terminate such employment and commence his consulting arrangement. Mr. Klein's compensation during his consulting period is at the annual rate of $100,000. The employment agreements with Messrs. Blatt, Levy and Klein provide for certain payments following death or disability. The employment agreements also provide, in the event of a change in control of the Company, as defined therein, the right, at their election, to terminate the agreement and receive a lump sum payment of approximately twice their annual salary. Glenn Rosenthal entered into an employment agreement with the Company and Metraplex, dated as of August 4, 1997, which provides for a three year term, terminating on August 4, 2000. Pursuant to this 39 41 agreement, Mr. Rosenthal receives annual compensation consisting of a base salary of $130,000 and an incentive bonus based on 3% of the pre-tax income of Metraplex. The employment agreement also provides that if Mr. Rosenthal is relocated out of Frederick, Maryland, he shall receive $260,000 if during the first year of the employment agreement, $195,000 if during the second year, and $130,000 if during the third year or beyond. In addition, Allan Coon has entered into a severance agreement with the Company, dated June 11, 1997, which provides that in the event Mr. Coon is terminated other than for cause prior to June 11, 1999, he is entitled to two years' base salary and in the event he is so terminated after June 11, 1999 and before June 11, 2002, he is entitled to one year's base salary. Mr. Coon's present base salary is $110,000. INDEMNIFICATION AGREEMENTS The Company has entered into separate indemnification agreements with the officers and directors of the Company. The Company has agreed to provide indemnification with regard to certain legal proceedings so long as the indemnified officer or director has acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company and with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The Company will only provide indemnification for expenses, judgments, fines and amounts paid in settlement actually incurred by the relevant officer or director, or on his or her behalf, arising out of proceedings brought against such officer or director by reason of his or her corporate status. TABLE OF TEN-YEAR OPTION REPRICINGS The following table sets forth information concerning options of the named executive officers that were repriced during fiscal 1997.
MARKET PRICE EXERCISE LENGTH OF ORIGINAL NUMBER OF SECURITIES OF STOCK AT PRICE NEW OPTION TERM UNDERLYING OPTIONS TIME OF AT TIME OF EXERCISE REMAINING AT DATE OF REPRICED OR REPRICING OR REPRICING OR PRICE REPRICING OR NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) ($) AMENDMENT - --------------------- ------- -------------------- ------------ ------------ ------- -------------------- Lee N. Blatt......... 4/8/97 133,333 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months Myron Levy........... 4/8/97 100,000 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months Gerald I. Klein...... 4/8/97 33,333 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months Anello C. Garefino... 4/8/97 20,000 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months Allan Coon........... 4/8/97 20,000 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months
The Board of Directors determined to reprice the above described stock options to strengthen the link that the Company believes exists between executive compensation and corporate objectives. CERTAIN TRANSACTIONS In November 1995 and March 1996, the Company loaned $1,400,000, $300,000 and $300,000, to Messrs. Blatt, Levy and Klein, respectively, as authorized by the Board of Directors, pursuant to the terms of non-negotiable promissory notes. The loans are secured by 315,774, 50,000, and 80,000 shares of Common Stock, respectively. The notes were initially due November 1996, March 1997 and March 1997, respectively. The notes were extended by the Company and are now due April 30, 1998, January 31, 1998 and January 31, 1998, respectively. Interest is payable at maturity at the average rate of interest paid by the Company on borrowed funds during the fiscal year. The pledge agreement also provides for the Company to have the right of first refusal to purchase the pledged securities, based on a formula as defined, in the event of the death or disability of the officer. Upon completion of this offering, the loans will be repaid. On March 6, 1996, the Board of Directors, by action of the disinterested directors, approved the purchase of an industrial parcel of land from the Chairman of the Company for $940,000. A deposit of $94,000 was paid on execution of the contract, and the balance of $846,000 will be paid at settlement on or before March 31, 1998. The Company intends to use this land for possible future expansion. 40 42 STOCK PLANS Certain officers and directors of the Company hold options or warrants to purchase Common Stock under the Company's 1992 Non-Qualified Stock Option Plan, 1996 Stock Option Plan, 1997 Stock Option Plan (collectively, the "Stock Plans") and warrant agreements. 1992 Non-Qualified Stock Option Plan. The 1992 Non-Qualified Stock Option Plan covers 1,333,333 shares of 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 date of grant. The date of exercise is determined at the time of grant by the Compensation Committee or the Board of Directors. 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. In December 1995, this plan was terminated except for outstanding options thereunder. At August 3, 1997, non-qualified options to purchase 151,127 shares of Common Stock were outstanding under this plan. 1996 Stock Option Plan. The 1996 Stock Option Plan covers 666,666 shares of Common Stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") or non-qualified stock options. Under the terms of the plan, the exercise price of options granted under the plan will be the fair market value at the date of grant. The nature and terms of the options to be granted are determined at the time of grant by the Compensation Committee or the Board of Directors. 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 of Common Stock were granted during the fiscal year ended August 3, 1997. At August 3, 1997, non-qualified options to purchase 394,662 shares of Common Stock were outstanding under this plan. 1997 Stock Option Plan. The 1997 Stock Option Plan covers 1,666,666 shares of Common Stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code or non-qualified stock options. Under the terms of the plan, the exercise price of options granted under the plan will be the fair market value at the date of grant. The nature and terms of the options to be granted are determined at the time of grant by the Compensation Committee or the Board of Directors. 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 801,660 shares of Common Stock were granted during the fiscal year ended August 3, 1997. At August 3, 1997, options to purchase 369,553 shares of Common Stock were outstanding under this plan. Warrant Agreements. In April 1993, common stock warrants were issued to certain officers and directors for the right to acquire 573,333 shares of Common Stock at an exercise price of $5.3475 per share, which was the closing price of the Common Stock on the date of issue. In December 1995, warrants with respect to 533,333 of these shares were canceled. The warrants expire April 30, 1998. In December 1995, warrants were issued to certain officers for the right to acquire 293,333 shares of Common Stock at an exercise price of $4.6425 per share, which was the closing price of the Common Stock on the date of issue. These warrants expire December 13, 2005. EMPLOYEE SAVINGS PLAN The Company maintains an Employee Savings Plan that qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan 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' salary so contributed and 25% of the next 4% of salary. Additional Company contributions can be made, depending on profits. The aggregate benefit payable to an employee depends upon the employee's rate of contribution, the earnings of the fund, and the length of time such employee continues as a participant. The Company accrued approximately $178,000 for the fiscal year ended August 3, 1997 and contributed approximately $159,000 and $151,000 to this plan for the years ended July 28, 1996 and July 30, 1995, respectively. For the year ended August 3, 1997, $4,500, $4,500, $3,364, and $3,057 was contributed by the Company to this plan for Messrs. Blatt, Levy, Coon and Garefino, respectively, and $20,452 was contributed for all executive officers and directors as a group. 41 43 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth the indicated information as of the date of this Prospectus with respect to the beneficial ownership of the Company's securities by: (i) all persons known to the Company to be beneficial owners of more than 5% of the outstanding shares of Common Stock, (ii) each director and named executive officer of the Company, and (iii) by all executive officers and directors as a group:
SHARES TO BE SOLD IN THIS OFFERING ------------ SHARES OF COMMON SHARES OF COMMON STOCK BENEFICIALLY STOCK BENEFICIALLY OWNED PRIOR TO THIS OWNED AFTER OFFERING(1)(5) THIS OFFERING ------------------- ----------------------- NAME SHARES PERCENT SHARES(6) PERCENT(6) - ------------------------------------------- --------- ------- --------- ---------- Lee N. Blatt(2)(4)(5)...................... 913,065 19.3% 315,000 598,065 11.0% Myron Levy(4)(5)(7)........................ 396,687 8.5% -- 396,687 8.5% Gerald I. Klein(4)(5)...................... 356,186 7.7% 42,500 313,686 5.9% Anello C. Garefino(4)(5)................... 47,440 1.0% -- 47,440 1.0% Allan Coon(4).............................. 45,555 1.0% -- 45,555 1.0% Adam J. Bottenfield(4)..................... 18,442 -- -- 18,442 -- Ray Umbarger(4)............................ 7,953 -- -- 7,953 -- George Hopp(4)............................. 7,111 -- -- 7,111 -- Glenn Rosenthal............................ 262 -- -- 262 -- Adm. Thomas J. Allshouse (Ret.)(4)(5)...... 32,798 -- -- 32,798 -- David H. Lieberman(4)(5)................... 20,799 -- -- 20,799 -- John A. Thonet(3)(4)(5).................... 28,359 -- -- 28,359 -- Alvin M. Silver............................ -- -- -- -- -- Adm. Edward K. Walker, Jr. (Ret.).......... -- -- -- -- -- Kathi Thonet............................... 156,309 3.4% 42,500 113,809 2.2% Directors and executive officers as a group (11 persons)............................. 1,518,471 30.3% 315,000 1,203,471 21.1%
- --------------- (1) No executive officer or director owns more than one percent of the outstanding shares of Common Stock unless otherwise indicated. Ownership represents sole voting and investment power. (2) Does not include an aggregate of 562,259 shares owned by family members, including Hannah Thonet, Rebecca Thonet, Kathi Thonet, Randi Rossignol, Max Rossignol, Henry Rossignol, Patrick Rossignol and Allyson Gerber, certain of which are to be sold in this offering, of which Mr. Blatt disclaims beneficial ownership. (3) Does not include 153,332 shares, owned by Mr. Thonet's children, Hannah and Rebecca Thonet, and 156,309 shares owned by his wife, Kathi Thonet, certain of which are to be sold in this offering. Mr. Thonet disclaims beneficial ownership of these shares. (4) Includes shares subject to options exercisable within the 60 days after the date of this Prospectus at prices ranging from $2.535 to $6.9375 per share pursuant to the Company's Stock Plans: Lee N. Blatt - 66,667, Myron Levy - 50,002, Anello C. Garefino - 6,667, Allan Coon - 45,555, George Hopp - 2,667, Adm. Thomas J. Allshouse - 6,665, David H. Lieberman - 6,666, John A. Thonet - 6,666, Ray Umbarger - 7,000, Adam J. Bottenfield - 16,442. (5) Includes shares subject to outstanding warrants exercisable within 60 days after the date of this Prospectus at a price of $4.6425: Lee N. Blatt - 133,333, Myron Levy - 66,667, Gerald I. Klein - 66,667, Anello C. Garefino - 13,333, and the following at a price of $5.3475: Adm. Thomas J. Allshouse - 13,333, David H. Lieberman 13,333, John A. Thonet - 13,333. (6) Does not assume exercise of the Underwriters' over-allotment option for 165,000 Warrants, nor exercise of any of the Warrants sold in this offering. (7) Does not include 12,666 shares owned by Mr. Levy's children, Stephanie Levy and Ronnie Roth, of which Mr. Levy disclaims beneficial ownership. 42 44 DESCRIPTION OF SECURITIES CAPITAL STOCK The Company's authorized capital stock consists of 10,000,000 shares of Common Stock, $.10 par value per share. COMMON STOCK General. The Company has 10,000,000 authorized shares of Common Stock, 4,541,146 of which were issued and outstanding as of December 7, 1997. The Company intends to propose an increase in its authorized shares of Common Stock to 20,000,000 shares at its next annual meeting of stockholders presently scheduled to be held in January 1998. All shares of Common Stock currently outstanding are validly issued, fully paid and non-assessable, and all shares which are the subject of this Prospectus (when issued and paid for pursuant to this offering with respect to the Shares that the Company will issue) will be validly issued, fully paid and non-assessable. Voting Rights. Each share of Common Stock entitles the holder thereof to one vote, either in person or by proxy, at meetings of the stockholders. The Company's Board of Directors consists of three classes, each of which serves for a term of three years. At each annual meeting of the stockholders the directors in only one class will be elected. The holders are not permitted to vote their shares cumulatively. Accordingly, the holders of more than 50% of the outstanding shares of Common Stock can elect all of the directors of the Company standing for election at a stockholders' meeting. Dividend Policy. All shares of Common Stock are entitled to participate ratably in dividends when and as declared by the Company's Board of Directors out of the funds legally available therefor. Any such dividends may be paid in cash, property or additional shares of Common Stock. The Company has not paid any cash dividends in the past two fiscal years or the current fiscal year and anticipates that no cash dividends on the shares of Common Stock will be declared in the foreseeable future. While the Company declared a four-for-three stock split effected as a stock dividend effective September 30, 1997, payment of future dividends will be subject to the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements, general business conditions and other pertinent facts. Therefore there can be no assurance that any dividends on the Common Stock will be paid in the future. See "Dividend Policy." Miscellaneous Rights and Provisions. Holders of Common Stock have no preemptive or other subscription rights, conversion rights, redemption or sinking fund provisions. In the event of the liquidation or dissolution, whether voluntary or involuntary, of the Company, each share of Common Stock is entitled to share ratably in any assets available for distribution to holders of the equity of the Company after satisfaction of all liabilities. Shares Eligible for Future Sale. Upon completion of this offering, the Company will have 5,241,146 shares of Common Stock outstanding. Of these shares, 4,506,363, including the 1,100,000 shares sold in this offering (1,265,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act, except for any shares purchased by an "affiliate" of the Company (in general, a person who has a control relationship with the Company), which will be subject to the limitations of Rule 144 adopted under the Securities Act. The remaining shares are deemed to be "restricted securities," as that term is defined under Rule 144. The freely tradeable shares include 313,193 shares issued to the former stockholders of Metraplex in connection with the Metraplex acquisition. In August 2000 and for two years thereafter, each former Metraplex stockholder has the right to put such stockholder's shares of Common Stock received in connection with the acquisition to the Company at certain guaranteed prices. In addition, the Company will have issued 1,100,000 Warrants (1,265,000 Warrants if the Underwriters' over-allotment option is exercised in full) that will be exercisable for 1,100,000 newly issued shares of Common Stock (1,265,000 shares if the Underwriters' over-allotment option is exercised in full). Upon 43 45 exercise of those Warrants, all of these shares of Common Stock will also be freely tradeable without restriction or future registration under the Securities Act. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person, who owns restricted securities for at least one year is entitled to sell, within any three-month period, a number of such securities that does not exceed the greater of 1% of the total number of securities outstanding of the same class or the average weekly trading volume of the securities on all exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the issuer. In addition, an affiliate of the issuer is subject to such volume limitations when selling both restricted and unrestricted securities. A person who has not been an affiliate of the Company for at least the three months immediately preceding the sale and who has beneficially owned the securities for at least two years, however, is entitled to sell such securities under Rule 144 without regard to any of the limitations described above. Of the 734,783 shares of Common Stock that constitute restricted securities, 474,733 shares have been held for more than one year. Persons who have agreed not to sell their shares of Common Stock for a period up to 120 days unless the sale price of the Company's Common Stock is $13.00 per share or more, however, own all of these shares of Common Stock. No predictions can be made as to the effect, if any, that sales of shares of Common Stock under Rule 144 or otherwise or the availability of shares for sale will have on the market, if any, prevailing from time to time. Sales of a substantial number of shares of the Common Stock pursuant to Rule 144 or otherwise may adversely affect the market price of the Common Stock or the Warrants. DESCRIPTION OF WARRANTS The following is a brief summary of certain provisions of the Warrants. Such summary does not purport to be complete and is qualified in all respects by reference to the Warrant Agreement (the "Warrant Agreement") between the Company and American Stock Transfer & Trust Company (the "Warrant Agent"). A copy of the Warrant Agreement has been filed as an exhibit to the Registration Statement. Exercise Price and Terms. Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at an exercise price of $14.40 per share for thirteen months from date of issuance and thereafter at $15.60 per share until twenty-five months from date of issuance, subject to adjustment in accordance with the anti-dilution and other provisions referred to below. The holder of any Warrant may exercise such Warrant by surrendering the certificate representing the Warrant to the Warrant Agent, with the subscription form thereon properly completed and executed, together with payment of the exercise price. The Warrants may be exercised at any time in whole or in part at the exercise price then in effect until expiration of the Warrants. No fractional shares will be issued upon the exercise of the Warrants. The exercise price of the Warrants has been set at a premium to the existing trading price of the Common Stock and bears no relationship to any objective criteria of future value. Accordingly, such exercise price should in no event be regarded as an indication of any future trading price. Adjustments. The exercise price and the number of shares of Common Stock purchasable upon the exercise of the Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassifications of the Common Stock, or certain sales by the Company of shares of its Common Stock or other securities convertible into Common Stock (excluding sales of shares upon certain events, such as the exercise or conversion of outstanding options, warrants and convertible securities the exercise of stock options granted under the Stock Plans in the future, and the exercise of the Managing Underwriters' Warrant, as defined herein) at a price below the market price of the Common Stock as defined in the Warrant Agreement. Additionally, an adjustment would be made in the case of a reclassification or exchange of Common Stock, consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation) or sale of all or substantially all of the assets of the Company followed by a related distribution to 44 46 stockholders in order to enable Warrant holders to acquire the kind and number of shares of stock or other securities or property receivable in such event by a holder of the number of shares of Common Stock that might otherwise have been purchased upon the exercise of the Warrant. Transfer, Exchange and Exercise. The Warrants are in registered form and may be presented to the Warrant Agent for transfer, exchange or exercise at any time on or prior to their expiration date twenty-five months from the closing of this offering, at which time the Warrants become wholly void and of no value. If a market for the Warrants develops, the holder may sell the Warrants instead of exercising them. There can be no assurance, however, that a market for the Warrants will develop or continue. Warrant Holder Not a Stockholder. The Warrants do not confer upon holders any voting, dividend or other rights as stockholders of the Company. Modification of Warrants. The Company and the Warrant Agent may make such modifications to the Warrants as they deem necessary and desirable that do not adversely affect the interests of the Warrant holders. The Company may, in its sole discretion, at any time and from time to time, lower the exercise price of the Warrants for a period of not less than 30 days on not less than 30 days prior written notice to the Warrant holders and the Managing Underwriters. Except as described above, modification of the number of securities purchasable upon the exercise of any Warrant, the exercise price and the expiration date with respect to any Warrant or any other modification to the Warrant requires the consent of the holders of 66 2/3% of the outstanding Warrants. The Warrants are not exercisable unless, at the time of the exercise, the Company has a registration statement in effect under the Securities Act covering the shares of Common Stock issuable upon exercise of the Warrants, or the sale of such shares upon exercise of the Warrants is exempt from the registration requirements of the Securities Act, and such shares have been registered, qualified or are deemed to be exempt under the securities laws of the state of residence of the exercising holder of the Warrants. Although the Company will use its best efforts to have all the shares of Common Stock issuable upon exercise of the Warrants registered or qualified on or before the exercise date and to maintain a registration statement relating thereto until the expiration of the Warrants, there can be no assurance that it will be able to do so. Notwithstanding the stated expiration date of the Warrants, however, such expiration date will be extended if the Company has not maintained a registration statement in effect with respect to the shares of Common Stock underlying the Warrants during the 90 days immediately preceding such stated expiration date (or the Company has not maintained the registration or qualification of such shares under applicable state securities laws during such period). The extended expiration date will be the first date thereafter for which the Company has maintained such a registration statement for such 90-day period. The Warrants are separately transferable immediately upon issuance. Although the Warrants will not knowingly be sold to purchasers in jurisdictions in which the Warrants are not registered or otherwise qualified for sale, purchasers may buy Warrants in the aftermarket in, or may move to, jurisdictions in which the shares underlying the Warrants are not so registered or qualified during the period that the Warrants are exercisable. In this event, the Company would be unable to issue shares to those persons desiring to exercise their Warrants, and holders of Warrants would have no choice but to attempt to sell the Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION The Company's Certificate of Incorporation and By-laws contain certain provisions, including a prohibition against removal of directors other than for cause, that are intended to enhance the continuity and stability of management by making it more difficult for stockholders to remove or change the incumbent members of the Board of Directors. The Certificate of Incorporation includes additional provisions that are intended to discourage certain types of transactions that involve an actual or threatened change of control of the Company. The Certificate of Incorporation provides for a Board of Directors classified into three groups, each of which group's term of office expires in successive years. The Certificate of Incorporation also provides that written notice of the intent to make a nomination at a meeting of stockholders must be received by the Company at least 90 days in advance of such meeting. 45 47 The Certificate of Incorporation further requires that stockholders entitled to vote 80% of the outstanding shares of the Common Stock approve certain business combinations with interested stockholders. These business combinations include mergers, sales of assets in excess of $5,000,000, issuance of certain securities having an aggregate fair market value of $5,000,000 or more, adoption of any plan of liquidation or dissolution and any reclassification of securities unless approved by the disinterested members of the Board of Directors or the transaction complies with certain provisions relating to the fair valuation and consummation of such business combination. The Certificate of Incorporation further provides that stockholders of the Company are not permitted to call a special meeting of stockholders or to require the Board of Directors to call such a special meeting. Thus, a stockholder could not force stockholder consideration of a proposal over the opposition of the Board of Directors by calling a special meeting of the stockholders. The foregoing provisions may adversely affect the ability of potential acquirers to obtain control of the Company in any transaction that is not approved by the Company's Board of Directors. The use of these provisions as anti-takeover devices might preclude stockholders from taking advantage of certain situations that they believe could be favorable to their interests. DELAWARE GENERAL CORPORATION LAW The Delaware General Corporation Law further contains certain anti-takeover provisions. Section 203 of the Delaware General Corporation Law provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person who owns 15% or more of the corporation's outstanding voting stock (an "interested stockholder") for a period of three years from the date that such person became an interested stockholder unless: (i) the transaction resulting in a person's becoming an interested stockholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested stockholder, (ii) the interested stockholder acquires 85% or more of the outstanding voting stock of the corporation (excluding shares owned by persons who are both officers and directors of the corporation and shares held by certain employee stock ownership plans), or (iii) the business combination is approved by the corporation's board of directors and by the holders of at least 66 2/3% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. TRANSFER AGENT, REGISTRAR AND WARRANT AGENT The transfer agent and registrar for the Common Stock and Warrant Agent for the Warrants is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219. 46 48 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement, each of the Underwriters has severally agreed to purchase, and the Company and the Selling Stockholders have agreed to sell to each such Underwriter, the respective number of Securities set forth opposite the name of such Underwriter below at the price to public less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF SHARES NUMBER OF UNDERWRITERS OF COMMON STOCK WARRANTS --------------------------------------------------------------- --------------- --------- Janney Montgomery Scott Inc. .................................. 550,000 550,000 Southwest Securities, Inc. .................................... 550,000 550,000 --------- --------- Total................................................ 1,100,000 1,100,000 ========= =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Securities offered hereby are subject to certain conditions. The Underwriters are obligated to take and pay for all of the Securities offered hereby (other than those Securities covered by the over-allotment option described below), if any such Securities are to be purchased. The Underwriters, for whom Janney Montgomery Scott Inc. is acting as Representative, propose to initially offer the Securities directly to the public at the initial offering price set forth on the cover page hereof and to certain dealers (who may be Underwriters) at a price that represents a concession not in excess of $.397 per Share and $.003 per Warrant under the initial offering price. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $.10 per Share and $.0006 per Warrant to other dealers. After the commencement of the offering, the public offering prices, such concessions and other selling terms may be changed by the Representative. The Representative has informed the Company and the Selling Stockholders that the Underwriters do not intend to confirm sales to any account over which the Underwriters exercise discretionary authority. The Company and Selling Stockholders have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 165,000 additional Shares from the Selling Stockholders and 165,000 additional Warrants from the Company at the offering prices set forth on the cover page hereof, less the underwriting discounts and commissions. The Underwriters may exercise such option to purchase additional Shares and Warrants solely for the purpose of covering over-allotments, if any, incurred in connection with the sale of the Securities offered hereby. If purchased, the Underwriters will sell such additional Shares and Warrants on the same terms as those on which the Shares and the Warrants that the Underwriters have agreed to purchase from the Company and the Selling Stockholders are being offered. This offering is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and withdrawal, cancellation or modification of this offering without notice. The Underwriters reserve the right to reject any order for the purchase of any Shares or Warrants, in whole or in part. Southwest Securities, Inc. currently makes a market in the Common Stock, and although it has no obligation to do so, intends to make a market in the Warrants. Although it has no obligation to do so, the Representative currently intends to make a market in the Common Stock and the Warrants and may otherwise effect transactions in such Securities. Such market-making activity may be discontinued at any time. During the period beginning at the close of the market on December 3, 1997 and ending upon the completion of each Underwriter's distribution of the Shares and the Warrants in this offering (including the distribution of any Shares and Warrants received upon the exercise of the Underwriters' over-allotment option), rules of the Commission will limit the ability of such Underwriter to bid for and purchase shares of Common Stock and Warrants. During this period, any market making by such Underwriter will be limited to passive market making on the Nasdaq National Market. Passive market making consists of displaying bids and effecting transactions in a security at a price that is not in excess of the highest bid price for the security that is displayed by a market maker who is not an Underwriter or affiliated purchaser. New purchases on each 47 49 day by a passive market maker are limited to 30% of the average daily trading volume in the security during a certain period. In addition, the Representative may engage in certain transactions that stabilize the price of the Common Stock and the Warrants. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock and the Warrants. If the Underwriters create a short position in the Common Stock or the Warrants in connection with this offering, i.e, if they sell more Shares or Warrants than are set forth on the cover page of this Prospectus, the Managing Underwriters may reduce the short position by purchasing Common Stock or Warrants in the open market. The Managing Underwriters may then impose a penalty bid on certain Underwriters and selling group members. This means that if the Managing Underwriters purchase shares of Common Stock or Warrants in the open market to reduce the short position or stabilize the price of the Common Stock or the Warrants, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those Shares or Warrants as part of this offering. In general, purchase of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it discourages resales. Neither the Company, the Selling Stockholders, nor any of the Underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the trading price of the Common Stock or the Warrants. In addition, neither the Company, the Selling Stockholders, nor any of the Underwriters make any representation that the Representative or the Managing Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without further notice. The Selling Stockholders and the Company's directors, executive officers, and certain key employees have agreed that they will not, without the prior written consent of the Representative, sell, offer to sell, contract to sell or otherwise transfer or dispose of any shares of Common Stock, options, rights or warrants to acquire shares of Common Stock (other than the Shares offered by them in this offering) during the period beginning on the date of the Underwriting Agreement and ending 120 days after the date hereof, except that the Company may issue shares of Common Stock upon the exercise of outstanding stock options and warrants previously issued to them, provided that such persons shall have the right to sell or otherwise dispose of any shares of Common Stock during such 120 day period beginning seven days after the date hereof at a sale price of $13.00 per share or more. The price to the public for the Shares offered hereby was based upon negotiations among the Company, the Selling Stockholders, and the Managing Underwriters. The price to the public for each Warrant was based upon negotiations between the Company and the Managing Underwriters. The Company, the Selling Stockholders and the Underwriters have agreed to certain indemnity and contribution provisions regarding certain civil liabilities that may be incurred in connection with this offering, including liability that may be incurred under the Securities Act. The Company has agreed to pay the Managing Underwriters a financial advisory fee equal to 1.0% of the gross proceeds received by the Company in this offering. Such financial advisory fee relates to financial advisory services provided by the Managing Underwriters to the Company in connection with this offering and related matters. In addition, in a letter of intent between the Representative and the Company (the "Letter of Intent"), the Company agreed that if the Company or any of its subsidiaries were sold during the six months following the offering, the Company would retain the Managing Underwriters as the Company's joint investment bankers in such transaction and pay them an aggregate cash fee equal to 1.0% of the transaction's value. In addition, if such transaction value exceeds $10.0 million, the Company will retain the Representative to render an opinion concerning whether the transaction is fair to the Company and its stockholders from a financial point of view for an additional fee of $200,000. If such transaction value is less than $10.0 million and 48 50 the Company's Board of Directors seeks a fairness opinion, the Company will also retain the Representative to render such an opinion for a mutually agreed upon additional fee, which will not be less than $100,000. The Letter of Intent also provides that if during the first year following the completion of this offering either Managing Underwriter is instrumental in introducing an acquisition candidate to the Company and the Company consummates a transaction with such acquisition candidate within two years following the completion of this offering, the introducing Managing Underwriter will receive a fee from the Company equal to 1.0% of the transaction's value. If the transaction value exceeds $10.0 million, the Company will retain the other Managing Underwriter to render a fairness opinion for a mutually agreed upon fee, which shall not be less than $100,000. If the transaction value is less than $10.0 million and the Company's Board of Directors seeks a fairness opinion, the Company will also retain the other Managing Underwriter to render such fairness opinion for a fee upon which they mutually agree. If this offering is not consummated for certain reasons, the Company has agreed to pay certain expenses of the Managing Underwriters. In connection with this offering, for $10 the Company has agreed to sell to the Managing Underwriters a warrant to purchase from the Company 110,000 shares of Common Stock at an exercise price of $14.40 per share and 110,000 Warrants at an exercise price of $.12 per Warrant. The Managing Underwriters' Warrant is exercisable with respect to the Common Stock for a period of four years commencing one year after the closing of this offering and with respect to the Warrants, for a period of thirteen months following such one year period. The Managing Underwriters' Warrant provides for adjustment in the number of shares of Common Stock and the number of Warrants issuable upon the exercise thereof as a result of events similar to the events providing for an adjustment of the number of shares of Common Stock issuable upon the exercise of the Warrants. The Managing Underwriters' Warrant has no anti-dilution terms designed to provide for the receipt or accrual of cash dividends prior to the receipt of the shares of Common Stock underlying the Managing Underwriters' Warrant. The Managing Underwriters' Warrant may not be sold, transferred, assigned or hypothecated for a period of one year after the effective date of this offering, except to the officers of either of the Managing Underwriters. A new registration statement will be required to be filed and declared effective by the Commission before a public sale or distribution of: (i) the Managing Underwriters' Warrant, (ii) the shares of Common Stock issuable upon exercise of the Managing Underwriters' Warrant, (iii) the Warrants issuable upon exercise of the Managing Underwriters' Warrant, and (iv) the shares of Common Stock issuable upon exercise of the Warrants issued upon exercise of the Managing Underwriters' Warrant (collectively, the "Registrable Securities"). In addition, before a public sale or distribution of the Registrable Securities occurs, the Registrable Securities must also be registered or qualified under the applicable state securities laws. Pursuant to a Registration Rights Agreement, the Company has granted the Managing Underwriters one demand registration right with respect to the Registrable Securities. Either Managing Underwriter may exercise this right during the period beginning on the first anniversary of the closing of this offering and ending on the fifth anniversary of the closing of this offering. Upon such demand, the Company will make the required filings for the Registrable Securities (including all divisible portions thereof) at the Company's expense (subject to a maximum expense of $10,000 for the reimbursement of the Managing Underwriters' legal fees). The Company will then use its best efforts to cause such filings to become effective and remain effective for at least four years. After such four year period, each Managing Underwriter may make one additional demand registration for such securities on terms identical to the demand registration rights described above for such securities, provided that the demanding Managing Underwriter pay all of the Company's fees and expenses, including reasonable legal fees, in connection with such filings. In addition, the Company has granted the holders of the Managing Underwriters' Warrant (and the holders of any other Registrable Securities not issued, sold, or distributed in a transaction registered under the Securities Act and applicable state securities laws) unlimited piggy-back registration rights during the period beginning on the first anniversary of the closing of this offering and ending on the fifth anniversary of the closing of this offering with respect to the Registrable Securities. In connection with such rights, the Company will notify such holders if the Company intends to file certain registration statements. Such holders will then have the right to require the Company to 49 51 include such holder's Registrable Securities in such registration statement and maintain the effectiveness of such registration statement for at least one year. There is no current agreement with any person concerning the payment of any solicitation fee upon the exercise of the Warrants. The foregoing includes a summary of the principal terms of the Underwriting Agreement, the Letter of Intent, the Managing Underwriters' Warrant, and the Registration Rights Agreement and does not purport to be complete. Reference is made to the form of Underwriting Agreement, the copy of the Letter of Intent, the form of the Managing Underwriters' Warrant Agreement, and the form of the Registration Rights Agreement that are on file as exhibits to the Registration Statement of which this Prospectus is a part. LEGAL MATTERS The validity of the issuance of the Securities offered hereby will be passed upon for the Company by the law firm of Blau, Kramer, Wactlar & Lieberman, P.C., Jericho, New York. The law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P, Dallas, Texas will pass on certain aspects of this offering on behalf of the Underwriters. Employees of Blau, Kramer, Wactlar & Lieberman, P. C. own an aggregate of 800 shares of Common Stock, none of which are registered for resale hereunder, 13,333 options to purchase shares of Common Stock and 13,333 warrants to purchase shares of Common Stock. EXPERTS The financial statements of the Company as of August 3, 1997 and July 28, 1996 and for the 53 weeks ended August 3, 1997, and the 52 weeks ended July 28, 1996 and July 30, 1995, included herein and in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. 50 52 HERLEY INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS............................................ F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets, August 3, 1997 and July 28, 1996..................... F-3 Consolidated Statements of Operations for the 53 Weeks Ended August 3, 1997, and the 52 Weeks Ended July 28, 1996 and July 30, 1995............................. F-4 Consolidated Statements of Shareholders' Equity for the 53 Weeks Ended August 3, 1997, and the 52 Weeks Ended July 28, 1996 and July 30, 1995................... F-5 Consolidated Statements of Cash Flows for the 53 Weeks Ended August 3, 1997, and the 52 Weeks Ended July 28, 1996 and July 30, 1995............................. F-6 Notes to Consolidated Financial Statements........................................ F-7
Schedules have been omitted as not applicable. F-1 53 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 3, 1997 and July 28, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the 53 weeks ended August 3, 1997 , and the 52 weeks ended July 28, 1996 and July 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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 provide a reasonable basis for our opinion. In our opinion, 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 3, 1997 and July 28, 1996, and the consolidated results of their operations and their cash flows for the 53 weeks ended August 3, 1997, and the 52 weeks ended July 28, 1996, and July 30, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Lancaster, PA September 19, 1997 F-2 54 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AUGUST 3, JULY 28, 1997 1996 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents....................................... $ 1,194,650 $ 1,104,445 Accounts receivable............................................. 5,176,523 3,249,225 Notes receivable-officers....................................... 2,100,913 2,083,543 Other receivables............................................... 152,148 124,992 Inventories..................................................... 9,790,382 8,010,687 Deferred taxes and other........................................ 2,061,066 1,689,988 ----------- ----------- Total Current Assets.................................... 20,475,682 16,262,880 Property, Plant and Equipment, net................................ 11,704,755 12,579,044 Intangibles, net of amortization of $1,133,750 in 1997 and $861,650 in 1996................................................ 4,308,136 4,580,236 Available-for-sale Securities..................................... -- 4,912,387 Other Investments................................................. 1,313,502 3,000,000 Other Assets...................................................... 1,455,111 1,174,395 ----------- ----------- $39,257,186 $42,508,942 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt............................... $ 335,000 $ 300,000 Note payable to related party................................... 846,000 -- Accounts payable and accrued expenses........................... 4,986,740 5,123,868 Income taxes payable............................................ 76,635 166,295 Reserve for contract losses..................................... 478,000 489,110 Advance payments on contracts................................... 3,091,001 1,480,033 ----------- ----------- Total Current Liabilities............................... 9,813,376 7,559,306 Long-term Debt.................................................... 2,890,000 11,021,000 Deferred Income Taxes............................................. 2,696,394 1,923,058 Excess of fair value of net assets of business acquired over cost, net of amortization of $973,667 in 1997 and $486,833 in 1996.... 486,833 973,667 ----------- ----------- 15,886,603 21,477,031 ----------- ----------- Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 10,000,000 shares; issued and outstanding 4,209,365 in 1997 and 2,936,122 in 1996......................................................... 420,936 293,612 Additional paid-in capital...................................... 8,856,516 11,448,827 Retained earnings............................................... 14,093,131 9,289,472 ----------- ----------- Total Shareholders' Equity.............................. 23,370,583 21,031,911 ----------- ----------- $39,257,186 $42,508,942 =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 55 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
53 WEEKS 52 WEEKS ENDED ENDED ------------------------------- AUGUST 3, 1997 JULY 28, 1996 JULY 30, 1995 -------------- ------------- ------------- Net sales.......................................... $ 32,195,168 $ 29,001,404 $ 24,450,267 ----------- ----------- ----------- Cost and expenses: Cost of products sold............................ 20,753,707 19,798,692 18,117,874 Selling and administrative expenses.............. 6,293,199 5,831,830 5,071,840 Unusual item..................................... -- -- 5,447,005 ----------- ----------- ----------- 27,046,906 25,630,522 28,636,719 ----------- ----------- ----------- Operating income (loss).................. 5,148,262 3,370,882 (4,186,452) ----------- ----------- ----------- Other income (expense): Net gain (loss) on available-for-sale securities and other investments......................... 409,399 897,919 (355,709) Dividend and interest income..................... 257,676 376,007 617,645 Interest expense................................. (531,678) (873,452) (961,650) ----------- ----------- ----------- 135,397 400,474 (699,714) ----------- ----------- ----------- Income (loss) before income taxes........ 5,283,659 3,771,356 (4,886,166) Provision for income taxes......................... 480,000 102,400 4,000 ----------- ----------- ----------- Net income (loss)........................ $ 4,803,659 $ 3,668,956 $ (4,890,166) =========== =========== =========== Earnings (loss) per common and common equivalent share............................................ $ 1.01 $ .86 $ (.98) =========== =========== =========== Weighted average number of common and common equivalent shares outstanding.................... 4,733,682 4,253,785 4,978,868 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 56 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 53 WEEKS ENDED AUGUST 3, 1997, AND 52 WEEKS ENDED JULY 28, 1996 AND JULY 30, 1995
UNREALIZED GAIN (LOSS) ON COMMON STOCK ADDITIONAL AVAILABLE ------------------------ PAID-IN RETAINED FOR-SALE TREASURY SHARES AMOUNT CAPITAL EARNINGS SECURITIES STOCK TOTAL ---------- --------- ----------- ----------- ---------- ---------- ----------- Balance at July 31, 1994.................. 4,278,189 $ 427,819 $17,989,374 $10,510,682 $(201,117) $ (445,620) $28,281,138 Net (loss).............. (4,890,166) (4,890,166) Issuance of common stock................. 35,000 3,500 99,313 102,813 Unrealized gain on available-for-sale securities............ 226,117 226,117 Purchase of 1,194,701 shares of treasury stock................. (4,732,165) (4,732,165) Retirement of 1,297,201 shares of treasury stock................. (1,297,201) (129,720) (5,048,065) 5,177,785 -- --------- -------- ---------- ---------- --------- --------- ----------- Balance at July 30, 1995.................. 3,015,988 301,599 13,040,622 5,620,516 25,000 -- 18,987,737 Net income.............. 3,668,956 3,668,956 Exercise of stock options............... 406,432 40,643 2,577,360 (2,483,552) 134,451 Unrealized loss on available-for-sale securities............ (25,000) (25,000) Purchase of 270,339 shares of treasury stock................. (1,734,233) (1,734,233) Retirement of treasury shares................ (486,298) (48,630) (4,169,155) 4,217,785 -- --------- -------- ---------- ---------- --------- --------- ----------- 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 ========= ======== ========== ========== ========= ========= ===========
The accompanying notes are an integral part of these financial statements. F-5 57 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
53 WEEKS 52 WEEKS ENDED ENDED -------------------------- AUGUST 3, JULY 28, JULY 30, 1997 1996 1995 ---------- ----------- ----------- Cash flows from operating activities: Net income (loss)................................. $4,803,659 $ 3,668,956 $(4,890,166) ---------- ---------- ----------- Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization.................. 1,538,283 1,563,354 2,116,233 (Gain) loss on sale of available-for-sale securities and other investments............. (409,572) (1,018,643) 355,709 Decrease (increase) in deferred tax assets..... -- (393,389) 596,055 Increase in deferred tax liabilities........... 773,336 376,723 255,240 Unrealized loss on available-for-sale securities................................... -- 121,550 -- Unusual item................................... -- -- 5,447,005 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable... (1,927,298) 1,430,692 1,285,694 (Increase) in notes receivable-officers...... (17,370) (2,083,543) -- Decrease (increase) in other receivables..... (27,156) 38,410 136,635 Decrease (increase) in inventories........... (1,779,695) 1,319,366 2,208,137 (Increase) in prepaid expenses and other..... (371,078) (25,940) (753,838) (Decrease) in accounts payable and accrued expenses.................................. (137,128) (513,649) (3,879,974) Increase (decrease) in income taxes payable................................... (89,660) 166,295 (162,543) (Decrease) in reserve for contract losses.... (11,110) (6,890) (4,000) Increase (decrease) in advance payments on contracts................................. 1,610,968 3,393 (1,397,334) Other, net................................... (309,500) 40,000 153,335 ---------- ---------- ----------- Total adjustments......................... (1,156,980) 1,017,729 6,356,354 ---------- ---------- ----------- Net cash provided by operations................ 3,646,679 4,686,685 1,466,188 ---------- ---------- ----------- Cash flows from investing activities: Purchase of available-for-sale securities and other investments.............................. (159,364) (11,077,331) (22,766,138) Proceeds from sale of fixed assets................ 15,468 -- -- Proceeds from sale of available-for-sale securities and other investments............... 7,164,538 11,879,157 30,417,016 Capital expenditures.............................. (862,129) (643,330) (182,241) ---------- ---------- ----------- Net cash provided by investing activities...... 6,158,513 158,496 7,468,637 ---------- ---------- ----------- Cash flows from financing activities: Borrowings under bank line of credit.............. 2,825,000 9,875,000 4,044,668 Proceeds from exercise of stock options........... 317,699 134,451 -- Payments under lines of credit.................... (9,775,000) (9,925,000) (8,025,000) Payments under litigation settlement.............. -- (2,000,000) (2,000,000) Payments of long-term debt........................ (300,000) (363,709) (512,735) Purchase of treasury stock........................ (2,782,686) (1,734,233) (2,708,732) ---------- ---------- ----------- Net cash (used in) financing activities........ (9,714,987) (4,013,491) (9,201,799) ---------- ---------- ----------- Net increase (decrease) in cash and cash equivalents.................................. 90,205 831,690 (266,974) Cash and cash equivalents at beginning of period.... 1,104,445 272,755 539,729 ---------- ---------- ----------- Cash and cash equivalents at end of period.......... $1,194,650 $ 1,104,445 $ 272,755 ========== ========== =========== Supplemental cash flow information: Cashless exercise of stock options................ $6,429,124 $ 2,483,552 ========== ========== Liabilities assumed in connection with acquisition.................................... $ 915,000 ===========
The accompanying notes are an integral part of these financial statements. F-6 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Nature of Operations The Company principally designs, manufactures and sells flight instrumentation 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 year 1997 consisted of 53 weeks, and fiscal years 1996 and 1995 consisted of 52 weeks. 3. Basis of Financial Statement Presentation The consolidated financial statements include the accounts of Herley Industries, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany 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. Revenue and Cost Recognition Under fixed-price contracts, sales and related costs are recorded primarily as deliveries are made. Certain costs under long-term, fixed-price contracts (principally either directly or indirectly with the U.S. Government), which include non-recurring billable engineering, are deferred until these costs are contractually billable. Revenue under certain long-term, fixed price contracts, principally 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 costs). Losses on contracts are recorded when first reasonably determined. 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. 5. Inventories Inventories, other than inventory costs relating to long-term contracts and programs, are stated at lower of cost (principally first-in, first-out) or market. Inventory costs relating to long-term contracts and programs are stated at the actual production costs, including factory overhead, reduced by amounts identified with revenue recognized on units delivered or progress completed. Inventory costs relating to long-term contracts and programs are reduced by any amounts in excess of estimated realizable value. The costs attributed to units delivered under long-term contracts and programs are based on the average costs of all units produced. 6. 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. F-7 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Intangibles Intangibles are comprised of customer lists, installed products base, drawings, patents, licenses, certain government qualifications and technology and goodwill in connection with the acquisition of Vega Precision Laboratories, Inc. in 1993. Intangibles are being amortized over twenty years. 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 3, 1997, there were no adjustments to the carrying amount of the cost in excess of net assets acquired resulting from these evaluations. 8. 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, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary are included in other income (expense). The cost of securities sold is based on the specific identification method. Interest and dividends on securities are included in other income (expense). 9. Other Investments The Company is a limited partner in certain nonmarketable limited partnerships in which it owns approximately a 10% interest. Beginning in 1997 other investments are accounted for under the equity method. Previously, the cost method was utilized as the amount was not significantly different from the equity method. 10. 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. 11. 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. F-8 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Earnings Per Common Share Earnings per common share and common equivalent share is based on the weighted average number of outstanding shares of common stock (reflective of a 4-for-3 stock split on September 30, 1997), including common stock equivalents (options and warrants) as determined under the treasury stock method as follows: 4,733,682 shares in 1997; 4,253,785 shares in 1996; and 4,978,868 shares in 1995. 13. Cash and Cash Equivalents For purposes of the statement of cash flows, short-term investments which have a maturity of ninety days or less at the date of acquisition are considered cash equivalents. 14. Product Development The Company's primary efforts are focused on engineering design and product development activities rather than pure research. The cost of these development activities, including employees' time and prototype development, net of amounts paid by customers, was approximately $1,828,000, $1,453,000, and $970,000 in fiscal 1997, 1996, and 1995, respectively. 15. New Accounting Standards In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for both interim and annual periods ending after December 15, 1997. SFAS 128 supersedes 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. Earlier application of this Statement is not permitted. Therefore, the EPS in the Consolidated Statements of Operations are presented under APB No. 15. NOTE B -- ACQUISITIONS In July 1995, the Company entered into an agreement effective as of the close of business June 30, 1995, to acquire certain assets and the business (consisting principally of inventories and trade receivables) of Stewart Warner Electronics Corporation, a Delaware corporation. The transaction, which closed on July 28, 1995, provided for the payment of $250,000 in cash and the assumption of approximately $915,000 in liabilities and has been accounted for by the purchase method. The acquisition resulted in excess of fair value over cost of net assets acquired of $1,460,500 which is being amortized over a three-year period. NOTE C -- NOTES RECEIVABLE-OFFICERS In fiscal 1996 the Company loaned $1,400,000, $300,000, and $300,000 to certain officers, as authorized by the Board of Directors, pursuant to the terms of nonnegotiable promissory notes. The notes were initially due November 1996, November 1996 and March 1997, respectively. The notes may be renewed by the Company from year to year. The notes were extended by the Company in fiscal 1997 and are now due April 30, 1998, January 31, 1998, and January 31, 1998, respectively. The loans are secured by 594,365 shares of common stock of the Company. Interest is payable at maturity at the average rate of interest paid by the Company on borrowed funds during the fiscal year. The pledge agreement also provides for the Company to have the right of first refusal to purchase the pledged securities, based on a formula as defined, in the event of the death or disability of the officer. F-9 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D -- INVENTORIES The major components of inventories are as follows:
AUGUST 3, JULY 28, 1997 1996 -------------- ------------- Purchased parts and raw materials................. $4,780,336 $ 3,358,256 Work in process................................... 4,899,551 4,580,538 Finished products................................. 110,495 71,893 ---------- ---------- $9,790,382 $ 8,010,687 ========== ==========
NOTE E -- AVAILABLE-FOR-SALE SECURITIES In September 1996, the Company liquidated all of its available-for-sale securities for approximately $4,912,000 and used the proceeds to reduce its long-term bank debt. A provision for unrealized losses of $121,550 is included in the statement of operations for fiscal year 1996. The fair value of available-for-sale securities at July 28, 1996 was $4,912,387. NOTE F -- 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 December 1995, the Company sold its investment and terminated its limited partnership interest in M.D. Sass Re/Enterprise Partners, L.P., a Delaware limited partnership for $3,823,233 realizing a gain of $1,095,727. 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 3, 1997 and July 28, 1996 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. NOTE G -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are comprised of the following:
AUGUST 3, JULY 28, ESTIMATED 1997 1996 USEFUL LIFE -------------- ------------- ----------- Land........................................ $ 880,270 $ 880,270 Building and building improvements.......... 5,438,663 5,362,409 10-40 years Machinery and equipment..................... 17,515,954 16,788,901 5-8 years Furniture and fixtures...................... 494,056 494,056 5-10 years Tools....................................... 24,869 24,869 5 years Leasehold improvements...................... 288,757 288,757 5-10 years ----------- ----------- 24,642,569 23,839,262 Less accumulated depreciation............... 12,937,814 11,260,218 ----------- ----------- $ 11,704,755 $ 12,579,044 =========== ===========
F-10 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE H -- 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 53 weeks ended August 3, 1997, and the 52 weeks ended July 28, 1996 and July 30, 1995 was approximately $229,900, $284,600, and $158,000, respectively. Minimum annual rentals under noncancellable leases are as follows:
AMOUNT -------- Year ending fiscal 1998........................................... $204,800 1999........................................... 153,900 2000........................................... 97,400
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 six years from that date not to extend, in any event, beyond December 31, 2006. These agreements provide for aggregate annual salaries of $1,185,000. Certain agreements provide for an annual increment equal to the greater of a cost of living adjustment based on the consumer price index or 10%, and also provide for incentive compensation related to pretax income. Incentive compensation in the amount of $665,352 was expensed in fiscal year ended August 3, 1997. Incentive compensation of $446,750 was expensed in fiscal 1996. No incentive compensation was due for the fiscal year ended July 30, 1995. 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. As of August 3, 1997, the amount payable in the event of such termination would be approximately $2,050,000. One of the employment contracts provides for a consulting agreement commencing January 1, 2002 and terminating December 31, 2010 at the annual rate of $100,000. Another one of the employment contracts, as amended January 1, 1997, 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 $60,000. One officer of the Company has a severance agreement providing for a lump-sum payment of $220,000 through June 1999, adjusted to $110,000 through June 2002. Litigation In November 1996, the Company settled all claims in connection with two class action complaints, related to the Company's acquisition of Carlton Industries, Inc. and its subsidiary, Vega Precision Laboratories, Inc. for $450,000. In August 1997, the Company settled all claims in connection with a class action complaint filed in 1995 for $170,000. The claim related to the Company's settlement of the Litton Action in the Essex Superior Court of Massachusetts which alleged, inter alia, that there was insufficient disclosure by the Company of its true potential exposure in that claim. In July 1996, the Company was notified by the American Arbitration Association of the decision of the arbitrators in an action commenced in March 1994 by the principal selling shareholders of Carlton Industries, Inc. and its subsidiary, Vega Precision Laboratories, Inc. According to the award, the Company was to pay to the claimants the sum of $1,052,900, inclusive of interest. Correspondingly, the claimants were to pay the Company the sum of $277,719, inclusive of interest. The Company paid $775,181 to claimants, representing F-11 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the difference between the award to the claimants and the award to the Company, in August, 1996. The award to the claimants was offset by $593,162 otherwise payable to one of the selling shareholders. The Company is also involved in other legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. Stand-by Letters of Credit The Company maintains a letter of credit facility with a bank that provides for the issuance of stand-by letters of credit and requires the payment of a fee of 1.0% per annum of the amounts outstanding under the facility. The facility expires January 31, 1999. At August 3, 1997 stand-by letters of credit aggregating $3,241,392 were outstanding under this facility. NOTE I -- INCOME TAXES Income tax provision consisted of the following:
52 WEEKS ENDED 53 WEEKS ENDED ------------------------------- AUGUST 3, 1997 JULY 28, 1996 JULY 30, 1995 -------------- ------------- ------------- Current...................................... Federal.................................... $ (52,000) $ 90,000 $ -- State...................................... 89,000 12,400 -- --------- -------- ------ 37,000 102,400 -- --------- -------- ------ Deferred..................................... Federal.................................... (142,000) -- 4,000 State...................................... 585,000 -- -- --------- -------- ------ 443,000 -- 4,000 --------- -------- ------ $ 480,000 $ 102,400 $ 4,000 ========= ======== ======
The Company paid income taxes of approximately $178,000 in 1997, $19,000 in 1996, and $122,000 in 1995. 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 3, 1997 JULY 28, 1996 JULY 30, 1995 -------------- ------------- ------------- U.S. Federal statutory rate.................. 34.0% 34.0% (34.0)% State taxes, net of federal tax benefit...... 12.2 0.2 -- Alternative minimum tax...................... -- 2.4 -- Benefit of net operating loss carryforward... (30.8) (35.2) -- Non-deductible expenses...................... .3 1.3 -- Increase (decrease) in valuation allowance... (9.4) -- 34.0 Other, net................................... 2.8 -- -- ----- ----- ----- Effective tax rate........................... 9.1% 2.7% --% ===== ===== =====
The 1997 and 1996 tax provisions reflect 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. F-12 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. As of August 3, 1997, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $2,000,000 which expire in 2010. Components of deferred tax assets and liabilities are as follows:
AUGUST 3, 1997 JULY 28, 1996 ----------------------- ----------------------- DEFERRED DEFERRED DEFERRED DEFERRED TAX TAX TAX TAX ASSETS LIABILITIES ASSETS LIABILITIES ---------- ---------- ---------- ---------- Intangibles............................. $ -- $1,681,375 $ 807,537 $ -- Alternative minimum tax................. 265,906 -- 176,707 -- Accrued vacation pay.................... 123,644 -- 118,104 -- Accrued bonus........................... 343,398 -- 243,760 -- Warranty costs.......................... 220,000 -- 220,000 -- Inventory............................... 985,703 -- 910,081 -- Depreciation............................ -- 2,006,038 -- 1,923,058 Net operating loss carryforwards........ 725,113 -- 2,781,480 -- Litigation settlement................... -- -- 495,080 -- Contract losses......................... 275,635 -- 215,208 -- Other................................... 71,917 78,967 97,645 -- ---------- ---------- ---------- ---------- 3,011,316 3,766,380 6,065,602 1,923,058 Valuation allowance..................... -- -- 4,454,627 -- ---------- ---------- ---------- ---------- $3,011,316 $3,766,380 $1,610,975 $1,923,058 ========== ========== ========== ==========
NOTE J -- LONG-TERM DEBT Long-term debt is summarized as follows:
AUGUST 3, JULY 28, RATE 1997 1996 ----------- -------------- ------------- Note payable bank(a)....................... 6.22%-8.50% $ -- $ 6,950,000 Mortgage note(b)........................... 10.4% 3,225,000 3,525,000 Long-term liability(c)..................... -- -- 846,000 ---------- ----------- 3,225,000 11,321,000 Less current portion....................... 335,000 300,000 ---------- ----------- $2,890,000 $ 11,021,000 ========== ===========
(a) In January 1997, the Company renewed the revolving credit agreement with its bank that provides for the extension of credit in the aggregate principal amount of $11,000,000 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, 1999. Interest is set biweekly at 1% over the FOMC Target Rate applied to outstanding balances up to 80% of the net equity value of available-for-sale securities, and at the bank's Base Rate for outstanding balances in excess of this limit. There were no borrowings outstanding at August 3, 1997. The premium rate portion of the facility would be secured by any available-for-sale securities. The agreement contains various financial covenants, including, among other matters, the maintenance of working capital, tangible net worth, and restrictions on cash dividends and other borrowings. F-13 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (b) The mortgage note provides for annual principal payments at varying amounts through 2004 plus semiannual interest payments. Land and buildings in Lancaster, Pa. are pledged as collateral. The mortgage note agreement contains various financial covenants, including, among other matters, the maintenance of specific amounts of working capital and tangible net worth. In connection with this loan, the Company paid approximately $220,000 in financing costs. Such costs are included in Other Assets in the accompanying consolidated balance sheets at August 3, 1997 and July 28, 1996 and are being amortized over the term of the loan (15 years). (c) Under a contract for the purchase of an industrial parcel of land from its Chairman, the Company is obligated to pay $846,000 at settlement on or before April 30, 1998. The Company paid interest of approximately $567,000 in 1997, $854,000 in 1996, and $1,010,000 in 1995. Future payments required on long-term debt are as follows:
AMOUNT ---------- Fiscal year ending during: 1998......................................................... $ 335,000 1999......................................................... 370,000 2000......................................................... 410,000 2001......................................................... 450,000 2002......................................................... 500,000 Thereafter................................................... 1,160,000 ---------- $3,225,000 ==========
NOTE K -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses include the following:
AUGUST 3, JULY 28, 1997 1996 ---------- ---------- Accounts payable.................................... $1,841,468 $1,579,230 Accrued payroll and bonuses......................... 1,483,915 1,160,345 Accrued commissions................................. 205,692 247,687 Accrued interest.................................... 55,900 95,925 Accrued litigation expenses......................... 297,538 1,206,914 Accrued expenses.................................... 1,102,227 833,794 ---------- ---------- $4,986,740 $5,123,868 ========== ==========
NOTE L -- 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. The Company has accrued approximately $178,000 for the 53 weeks ended August 3, 1997, and contributed approximately $159,000, and $151,000 to this plan for the 52 weeks ended July 28, 1996, and July 30, 1995, respectively. F-14 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE M -- SHAREHOLDERS' EQUITY The Company has two 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 6.1%; volatility factor of the expected market price of the Company's common stock of .63; and a weighted-average expected life of the option of .4 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. Had compensation cost for stock options granted in fiscal 1997 been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
53 WEEKS ENDED AUGUST 3, 1997 ---------- Net earnings -- as reported.................................... $4,803,659 Net earnings -- pro forma...................................... $3,451,882 Earnings per share -- as reported.............................. $ 1.01 Earnings per share -- pro forma................................ $ .73
No options were granted in fiscal 1996. 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 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 801,660 shares were granted during the fiscal year ended August 3, 1997. 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 F-15 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 53 weeks ended August 3, 1997, and the 52 weeks ended July 28, 1996, and July 30, 1995 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 31, 1994..... 929,969 $4.27 - 9.01 5.00 573,333 $ 5.35 Granted..................... 339,986 2.54 2.54 Canceled.................... (13,331) 2.54 - 5.25 4.88 ---------- ------------- -------- -------- ------------- Outstanding July 30, 1995..... 1,256,624 $2.54 - 9.01 4.33 573,333 $ 5.35 Granted..................... -- 293,333 4.64 Exercised................... (541,900) 2.54 - 5.72 4.87 Canceled.................... (31,330) 2.54 - 5.25 4.83 (533,333) 5.35 ---------- ------------- -------- -------- ------------- 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 ========== ========
F-16 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options to purchase 130,218 shares of common stock were exercisable under all plans at August 3, 1997 at a weighted average exercise price of $5.59 with a weighted average remaining contractual life of 6.8 years as follows: OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF AUGUST 3, 1997
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 ------------------------------- ----------- ---------------- -------------- ----------- -------------- $2.5350 - $5.2500............. 151,117 6.43 $ 2.9164 38,672 $ 4.0255 6.0938 - 6.0938............. 259,997 4.67 6.0938 56,995 6.0938 6.4688 - 6.4688............. 326,550 9.74 6.4688 8,889 6.4688 6.9375 - 10.4063............. 178,663 4.31 7.0152 25,662 6.9375 ------- ------- ---- ------- ------- $2.5350 - $10.4063............. 916,327 6.79 $ 5.8728 130,218 $ 5.5948 ======= =======
In April 1993, common stock warrants were issued to certain officers and directors for the right to acquire 573,333 shares of common stock of the Company at the fair market value of $5.35 per share at date of issue. In December 1995 warrants for 533,333 shares were canceled. The warrants vest immediately and expire April 30, 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 13,333 shares were exercised in fiscal 1997. In connection with the sale of common stock to the public in 1992, the Company issued to the underwriter, for its own account, warrants to purchase 170,529 shares of common stock of the Company (as adjusted under the agreement), exercisable for a period of four years at a price of $9.06 per share (as adjusted under the agreement), subject to further adjustment in certain events. The warrants expired in February 1997. On July 31, 1993, the Company issued 46,666 shares of common stock valued at $5.91 per share in connection with the acquisition of substantially all of the assets of Micro-Dynamics, Inc. These shares were subsequently canceled and reissued in January 1995. NOTE N -- RELATED PARTY TRANSACTIONS On March 6, 1996, the Board of directors approved the purchase of an industrial parcel of land from the Chairman of the Company for $940,000. A deposit of $94,000 was paid on execution of the contract, and the balance of $846,000 will be paid at settlement on or before April 30, 1998. The Company intends to use this land for possible future expansion. NOTE O -- MAJOR CUSTOMERS Net sales to the U.S. Government in 1997, 1996, and 1995 accounted for approximately 34%, 33%, and 30% of net sales, respectively. Net sales to the Republic of Korea and Lockheed Martin accounted for approximately 22% of net sales in 1997. Foreign sales amounted to approximately $9,320,000, $6,556,000, and $3,908,000 in fiscal 1997, 1996, and 1995, respectively. Included in accounts receivable as of August 3, 1997 and July 28, 1996 are amounts due from the U.S. Government of approximately $1,454,000 and $933,000, respectively. NOTE P -- UNUSUAL ITEM The Consolidated Statements of Operations for the fifty-two weeks ended July 30, 1995 includes an unusual charge of $5,447,005 for settlement costs, legal fees, and related expenses in connection with the settlement of certain legal claims against the Company. Payments of $2,000,000 each, without interest, were made in July 1995 and July 1996 in connection with the settlement of one of the claims. F-17 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Q -- 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. Notes receivable-officers: The carrying amount reported in the balance sheet for notes receivable from officers 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. The carrying amounts and fair values of the Company's financial instruments are presented below:
AUGUST 3, 1997 ------------------------------ CARRYING AMOUNT FAIR VALUE --------------- ---------- Cash and cash equivalents........................ $ 1,194,650 $1,194,650 Notes receivable-officers........................ 2,100,913 2,100,913 Long-term debt................................... 2,890,000 3,408,000 Stand-by letters of credit....................... -- 3,241,392
NOTE R -- CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to credit risk consist primarily of trade accounts receivable. Credit risk with respect to trade receivables is minimized since most of the Company's business is direct to the U. S. Government or as a subcontractor to companies with significant financial resources acting as prime contractors to the U. S. Government, as well as to foreign governments. Additionally, shipments to foreign governments are generally under irrevocable letters of credit. NOTE S -- SUBSEQUENT EVENTS On August 4, 1997, the Company completed the acquisition of Metraplex Corporation, a Maryland corporation for 313,193 shares of common stock of the Company 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. Metraplex products are used worldwide for testing space launch vehicle instrumentation, aircraft flight testing, and amphibian, industrial and automotive vehicle testing. The transaction will be accounted for under the purchase method. 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 effect of the split is presented within shareholders' equity at August 3, 1997. The distribution increased the number of shares outstanding from 3,157,024 to 4,209,365. The amount of $105,234 was transferred from the 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 this annual report have been restated to reflect the stock split. F-18 70 GLOSSARY C2 Command and Control referring to a system which controls UAVs and directs their flight path. EHD Electrode-less High Density EMI Electro-Magnetic Interference FTR Flight Termination Receiver, which is a device for the translation of range safety command information into self-destruct signals FM Frequency Modulation, which is angle modulation of a sine wave carrier in which the instantaneous frequency of the modulated wave differs from the carrier frequency by an amount proportional to the instantaneous value of the modulating wave GSS Global Security Systems, the international marketing group of the Company that provides range instrumentation solutions to the international community GPS Global Positioning System which is the satellite network used to provide point positioning for users anywhere on the earth with the use of a GPS receiver IFF Identification of Friend from Foe, referring to a radar interrogation-transponder system in which the transponder, when interrogated, provides a coded response to identify the corresponding vehicle as a "friend" MAGIC(2) Multiple Aircraft GPS Integrated Command and Control, referring to a system manufactured by the Company having the capability to provide simultaneous command and control functionality for multiple remotely piloted vehicles with the GPS used for vehicle tracking MIC Microwave Integrated Circuit, which are devices incorporating multiple discrete microwave components in a single, encapsulated, package PCM Pulse Code Modulation, referring to a variety of pulse modulation wherein the modulating (data) signal is sampled at regular intervals, quantized into discrete steps, and then transmitted over the system by means of a code pattern of a series of pulses PPC Pulse Position Coding, referring to a variety of pulse modulation wherein the modulating (data) signal is sampled at regular intervals and the sampled data is used to vary the position in time of a pulse, relative to its unmodulated time of occurrence PCS Personal Communication System, referring to a cellular communication technology utilizing spreadspectrum, microwave, communications techniques RF Radio Frequency RPV Remotely Piloted Vehicle, referring to a vehicle deriving its command and control inputs from a source external to the vehicle RSO Range Safety Officer, which for range operations is the person assigned the task of ensuring safe conditions during the operations period TTCS Target Tracking and Control System, referring to a system manufactured by the Company having the capability to provide Command and Control functionality for remotely piloted vehicles with radar tracking techniques used for vehicle tracking UAV Unmanned Airborne Vehicle, referring to an aircraft deriving its command and control inputs either autonomously or from a source external to the vehicle
G-1 71 ====================================================== NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. ANY INFORMATION OR PRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES BY ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information................. 3 Forward-Looking Statements............ 3 Prospectus Summary.................... 4 Risk Factors.......................... 8 Use of Proceeds....................... 13 Price Range of Common Stock........... 14 Dividend Policy....................... 14 Capitalization........................ 15 Selected Financial Data............... 16 Management's Discussion and Analysis and of Financial Condition and Results of Operations............... 17 Business.............................. 23 Management............................ 34 Principal and Selling Stockholders.... 42 Description of Securities............. 43 Underwriting.......................... 47 Legal Matters......................... 50 Experts............................... 50 Financial Statements.................. F-1 Glossary.............................. G-1
====================================================== ====================================================== HERLEY INDUSTRIES, INC. 1,100,000 SHARES OF COMMON STOCK 1,100,000 COMMON STOCK PURCHASE WARRANTS ----------------- PROSPECTUS ----------------- JANNEY MONTGOMERY SCOTT INC. SOUTHWEST SECURITIES DECEMBER 11, 1997 ====================================================== 72 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses of the distribution, all of which shall be borne by the Company, are as follows: SEC Registration Fee...................................................... $ 13,202 NASD Filing Fee........................................................... 4,857 NASDAQ National Market Fees............................................... 39,679 Blue Sky Fees and Expenses (including legal fees)......................... 5,000 Transfer Agent and Warrant Agent Fees..................................... 7,500 Accounting Fees and Expenses.............................................. 50,000 Legal Fees and Expenses................................................... 150,000 Printing and Engraving.................................................... 95,000 Managing Underwriters' Financial Advisory Fee............................. 85,100 Miscellaneous............................................................. 49,662 ------- Total................................................................... $500,000 =======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company, a Delaware corporation, is empowered by Section 145 of the Delaware General Corporation Law (the "Delaware Act"), subject to the procedures and limitations stated therein, to indemnify certain parties. Section 145 of the Delaware Act provides in part that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Similar indemnity is authorized for such persons against expenses (including attorneys' fees) actually and reasonably incurred in defense or settlement of any threatened, pending or completed action or suit by or in the right of the corporation, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and provided further that (unless a court of competent jurisdiction otherwise provides) such person shall not have been adjudged liable to the corporation. Any such indemnification may be made only as authorized in each specific case upon a determination by the stockholders or disinterested directors that indemnification is proper because the indemnitee has met the applicable standard of conduct. Where an officer or a director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director actually or reasonably incurred. Section 145 provides further that indemnification pursuant to its provisions is not exclusive of other rights of indemnification to which a person may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The Company's Certificate of Incorporation and By-laws contain provisions that limit the potential personal liability of directors for certain monetary damages and provide for indemnity of directors and other persons. The Company also maintains officers and directors liability insurance. The policy coverage is $3,000,000, which includes reimbursement for costs and fees, with a maximum deductible for officers and directors of $150,000 for each claim. The Company is unaware of any pending or threatened litigation II-1 73 against the Company or its directors that would result in any liability for which such director would seek indemnification or similar protection. The provisions affecting personal liability do not abrogate a director's fiduciary duty to the Company and its stockholders, but eliminate personal liability for monetary damages for breach of that duty. The provisions do not, however, eliminate or limit the liability of a director for failing to act in good faith, for engaging in intentional misconduct or knowingly violating a law, for authorizing the illegal payment of a dividend or repurchase of stock, for obtaining an improper personal benefit, for breaching a director's duty of loyalty (which is generally described as the duty not to engage in any transaction that involves a conflict between the interests of the Company and those of the director) or for violations of the federal securities laws. The provisions also limit or indemnify against liability resulting from grossly negligent decisions, including grossly negligent business decisions relating to attempts to change control of the Company. The provisions regarding indemnification provide, in essence, that the Company will indemnify its directors against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding arising out of the director's status as a director of the Company, including actions brought by or on behalf of the Company (shareholder derivative actions). The provisions do not require a showing of good faith. Moreover, they do not provide indemnification for liability arising out of willful misconduct, fraud, or dishonesty, for "short-swing" profits violations under the federal securities laws, or for the receipt of illegal remuneration. The provisions also do not provide indemnification for any liability to the extent such liability is covered by insurance. One purpose of the provisions is to supplement the coverage provided by such insurance. These provisions diminish the potential rights of action that might otherwise be available to shareholders by limiting the liability of officers and directors to the maximum extent allowable under Delaware law and by affording indemnification against most damages and settlement amounts paid by a director of the Company in connection with any stockholders derivative action. However, the provisions do not have the effect of limiting the right of a stockholder to enjoin a director from taking actions in breach of the director's fiduciary duty, or to cause the Company to rescind actions already taken, although as a practical matter courts may be unwilling to grant such equitable remedies in circumstances in which such actions have already been taken. The Company has entered into indemnification agreements with certain of its officers and directors. The indemnification agreements provide for reimbursement for all direct and indirect costs of any type or nature whatsoever (including attorneys' fees and related disbursements) actually and reasonably incurred in connection with either the investigation, defense or appeal of a legal proceeding, including amounts paid in settlement by or on behalf of an indemnitee thereunder. The Underwriting Agreement among the Company, the Selling Stockholders and the Underwriters provides for the indemnification by the Underwriters of the Company, certain of its directors and officers and any controlling person against any liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In August 1997, the Company purchased all of the outstanding common stock of Metraplex Corporation, a Delaware corporation, in exchange for 313,193 shares of Common Stock. Pursuant to demand registration rights, the Company included these 313,193 shares in a Registration Statement on Form S-3, which was declared effective by the Commission on October 16, 1997. The transaction exchanging the Metraplex common stock for the Company's Common Stock was a transaction by the issuer not involving any public offering that was exempt from the registration requirements under the Securities Act pursuant to Section 4(2) thereof. II-2 74 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Exhibits
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement between the Company, the Selling Stockholders and the Underwriters. 2.1 Agreement and Plan of Reorganization, dated as of July 8, 1997, by and among the Company, Metraplex Acquisition Corp. and Metraplex Corporation (Incorporated by reference to Exhibit 2.1 of the Company's Registration Statement on Form S-3, File No. 333-35485 dated September 4, 1997).* 2.2 Stock Purchase Agreement, dated as of June 1, 1993, among the Company, Herley Interim Corp., Milton Barnard, Edward M. Webber, Marvin Adler and Carlton Industries, Inc. (Incorporated by reference to Exhibit 7(c) of the Company's Report on Form 8-K, dated June 18, 1993).* 2.3 Asset Purchase Agreement, dated as of September 1, 1992, between Micro-Dynamics, Inc. and the Company (Incorporated by reference to Exhibit 7(c) of the Company's Report on Form 8-K dated October 22, 1992).* 2.4 Purchase and Sale Agreement, dated as of July 28, 1995, between Stewart Warner Electronics Co. and the Company.* 3.1 Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-2, File No. 2-87160).* 3.2 By-laws of the Company, as amended.* 4.1 Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-2, File No. 2-87160).* 4.2 Form of Warrant Certificate.* 4.3 Form of Warrant Agreement between the Company and the Warrant Agent. 5.1 Opinion and Consent of Blau, Kramer, Wactlar & Lieberman, P.C. regarding the legality of the Securities being registered. 10.1 1992 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit A to the Company's Proxy Statement filed December 30, 1992).* 10.2 1996 Stock Option Plan (Incorporated by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the fiscal year ended July 28, 1996).* 10.3 1997 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1997). * 10.4 Form of Employment Agreement between the Company and Lee N. Blatt dated as of November 1, 1997.* 10.5 Form of Employment Agreement between the Company and Myron Levy dated as of November 1, 1997.* 10.6 Form of Employment Agreement between the Company and Gerald Klein dated as of November 1, 1997.* 10.7 Severance Agreement between the Company and Allan Coon dated June 11, 1997.* 10.8 Revised Non-Negotiable Promissory Note of Lee N. Blatt dated June 2, 1997 (Incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1997).* 10.9 Revised Non-Negotiable Promissory Note of Gerald I. Klein dated June 2, 1997 (Incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1997).* 10.10 Revised Non-Negotiable Promissory Note of Myron Levy dated June 2, 1997 (Incorporated by reference to Exhibit 10.6 of the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1997).* 10.11 Loan Agreement between the Company and Allstate Municipal Income Opportunities Trust (Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1989).*
II-3 75
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------- 10.12 Form of Warrant Agreement with directors.* 10.13 Credit Agreement, dated January 25, 1996 between Dauphin Deposit Bank and the Company.* 10.14 Form of Indemnification Agreement with officers and directors.* 10.15 Form of Managing Underwriters' Warrant Agreement between the Company and the Managing Underwriters. 10.16 Form of Registration Rights Agreement between the Company and the Managing Underwriters. 10.17 License Agreement, dated March 1, 1994, between the Company and Clem Whittemore d/b/a Allied Consulting and Engineering Services.* 10.18 Agreement for Sale of Real Estate, dated April 11, 1996, between the Company and Lee N. Blatt.* 10.19 Letter of Intent, dated October 30, 1997, between the Representative and the Company.* 10.20 Employment Agreement, dated August 4, 1997, among Metraplex Corporation, the Company and Glenn Rosenthal.* 11.1 Statement regarding Computation of Earnings Per Share.* 21.1 Subsidiaries of the Company.* 23.1 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 25.1 Powers of Attorney (included on the signature page to the initial filing of this Registration Statement).*
- --------------- * Previously filed. Financial Statement Schedules Not applicable. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the issuer pursuant to the foregoing provisions, or otherwise, the issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the issuer of expenses incurred or paid by a director, officer or controlling person of the issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Registrant hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining any liability under the Securities Act of 1933, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-4 76 (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 77 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Lancaster, Pennsylvania on the 11th day of December, 1997. HERLEY INDUSTRIES, INC. By: /s/ LEE N. BLATT ------------------------------------ Lee N. Blatt Chairman of the Board (Chief Executive Officer) Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to the Registration Statement has been signed below on December 11, 1997, by the following persons in the capacities indicated.
SIGNATURE TITLE/CAPACITY - ------------------------------------------ ------------------------------------------------- /s/ LEE N. BLATT Chairman of the Board (Chief Executive Officer) - ------------------------------------------ Lee N. Blatt /s/ MYRON LEVY President and Director - ------------------------------------------ Myron Levy /s/ ANELLO C. GAREFINO* Vice President -- Finance, Treasurer (Chief - ------------------------------------------ Financial Officer and Principal Accounting Anello C. Garefino Officer) /s/ THOMAS J. ALLSHOUSE* Director - ------------------------------------------ Thomas J. Allshouse /s/ DAVID H. LIEBERMAN* Secretary and Director - ------------------------------------------ David H. Lieberman /s/ JOHN THONET* Director - ------------------------------------------ John Thonet /s/ ALVIN M. SILVER* Director - ------------------------------------------ Alvin M. Silver /s/ EDWARD K. WALKER, JR.* Director - ------------------------------------------ Edward K. Walker, Jr. *By: /s/ MYRON LEVY ------------------------------------- Myron Levy Attorney-in-Fact
II-6 78 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement between the Company, the Selling Stockholders and the Underwriters. 2.1 Agreement and Plan of Reorganization, dated as of July 8, 1997, by and among the Company, Metraplex Acquisition Corp. and Metraplex Corporation (Incorporated by reference to Exhibit 2.1 of the Company's Registration Statement on Form S-3, File No. 333-35485 dated September 4, 1997).* 2.2 Stock Purchase Agreement, dated as of June 1, 1993, among the Company, Herley Interim Corp., Milton Barnard, Edward M. Webber, Marvin Adler and Carlton Industries, Inc. (Incorporated by reference to Exhibit 7(c) of the Company's Report on Form 8-K, dated June 18, 1993).* 2.3 Asset Purchase Agreement, dated as of September 1, 1992, between Micro-Dynamics, Inc. and the Company (Incorporated by reference to Exhibit 7(c) of the Company's Report on Form 8-K dated October 22, 1992).* 2.4 Purchase and Sale Agreement, dated as of July 28, 1995, between Stewart Warner Electronics Co. and the Company.* 3.1 Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-2, File No. 2-87160).* 3.2 By-laws of the Company, as amended.* 4.1 Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-2, File No. 2-87160).* 4.2 Form of Warrant Certificate.* 4.3 Form of Warrant Agreement between the Company and the Warrant Agent. 5.1 Opinion and Consent of Blau, Kramer, Wactlar & Lieberman, P.C. regarding the legality of the Securities being registered. 10.1 1992 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit A to the Company's Proxy Statement filed December 30, 1992).* 10.2 1996 Stock Option Plan (Incorporated by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the fiscal year ended July 28, 1996).* 10.3 1997 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1997). * 10.4 Form of Employment Agreement between the Company and Lee N. Blatt dated as of November 1, 1997.* 10.5 Form of Employment Agreement between the Company and Myron Levy dated as of November 1, 1997.* 10.6 Form of Employment Agreement between the Company and Gerald Klein dated as of November 1, 1997.* 10.7 Severance Agreement between the Company and Allan Coon dated June 11, 1997.* 10.8 Revised Non-Negotiable Promissory Note of Lee N. Blatt dated June 2, 1997 (Incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1997).* 10.9 Revised Non-Negotiable Promissory Note of Gerald I. Klein dated June 2, 1997 (Incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1997).* 10.10 Revised Non-Negotiable Promissory Note of Myron Levy dated June 2, 1997 (Incorporated by reference to Exhibit 10.6 of the Company's Quarterly Report on Form 10-Q for the period ended May 4, 1997).*
79
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------- 10.11 Loan Agreement between the Company and Allstate Municipal Income Opportunities Trust (Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1989).* 10.12 Form of Warrant Agreement with directors.* 10.13 Credit Agreement, dated January 25, 1996 between Dauphin Deposit Bank and the Company.* 10.14 Form of Indemnification Agreement with officers and directors.* 10.15 Form of Managing Underwriters' Warrant Agreement between the Company and the Managing Underwriters. 10.16 Form of Registration Rights Agreement between the Company and the Managing Underwriters. 10.17 License Agreement, dated March 1, 1994, between the Company and Clem Whittemore d/b/a Allied Consulting and Engineering Services.* 10.18 Agreement for Sale of Real Estate, dated April 11, 1996, between the Company and Lee N. Blatt.* 10.19 Letter of Intent, dated October 30, 1997, between the Representative and the Company.* 10.20 Employment Agreement, dated August 4, 1997, among Metraplex Corporation, the Company and Glenn Rosenthal.* 11.1 Statement regarding Computation of Earnings Per Share.* 21.1 Subsidiaries of the Company.* 23.1 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 25.1 Powers of Attorney (included on the signature page to the initial filing of this Registration Statement).*
- --------------- * Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 1,100,000 SHARES OF COMMON STOCK 1,100,000 COMMON STOCK PURCHASE WARRANTS HERLEY INDUSTRIES, INC. LEE N. BLATT GERALD I. KLEIN KATHI THONET UNDERWRITING AGREEMENT December 10, 1997 Janney Montgomery Scott Inc., as Representative of the Several Underwriters 26 Broadway New York, New York 10004 Attention: Syndicate Department Ladies and Gentlemen: Herley Industries, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters") 700,000 shares of its common stock, par value $.10 per share (the "Common Stock"), and 1,100,000 Common Stock Purchase Warrants, and those certain stockholders of the Company named in Schedule II hereto (the "Selling Stockholders") propose to sell to the Underwriters 400,000 shares of Common Stock. Each such Common Stock Purchase Warrant shall entitle the holder thereof to purchase one share of Common Stock at an exercise price equal to 120% of the public offering price per share of Common Stock during the first 13 months of the warrant's term and 130% during the remaining 12 months of the warrant's term. The Common Stock Purchase Warrants shall expire 25 months after the closing of the offering, unless such term is extended pursuant to the Warrant Agreement governing the terms of the Common Stock Purchase Warrants (the "Warrant Agreement"). The Warrant Agreement shall be in the form of the Warrant Agreement attached as an exhibit to the Registration Statement on Form S-1 (as amended from time to time, the "Registration Statement") on file with the Securities and Exchange Commission (the "Commission") covering the offer and sale of the shares of Common Stock, the Common Stock Purchase Warrants, and the shares of Common Stock issuable upon the exercise of the Common Stock Purchase Warrants on the date the Commission declares the Registration Statement effective (the "Effective Date"). The 1,100,000 shares of Common Stock to be purchased by the Underwriters are hereinafter referred to as the "Firm Shares" and the 1,100,000 Common Stock Purchase Warrants -1- 2 to be purchased by the Underwriters as the "Firm Warrants." The Firm Shares and the Firm Warrants are hereinafter collectively referred to as the "Firm Securities." In addition, the Company and the Selling Stockholders propose to grant to the several Underwriters, solely for the purpose of covering over- allotments in the sale of the Firm Securities, the option described in Section 2 of this Agreement (this "Agreement") to purchase up to 165,000 additional shares of Common Stock (the "Additional Shares") and 165,000 additional Common Stock Purchase Warrants (the "Additional Warrants"). The Additional Shares and the Additional Warrants are hereinafter collectively referred to as the "Additional Securities." The Firm Warrants and the Additional Warrants are hereinafter collectively referred to as the "Warrants"; the Shares of Common Stock to be issued or sold upon the exercise of the Warrants as the "Warrant Shares"; and the Firm Securities, the Additional Securities, and the shares of Common Stock issuable upon the exercise of the Firm Warrants and the Additional Warrants as the "Offered Securities." This Agreement, the Warrant Agreement, the Managing Underwriters' Warrant Agreement, and the Registration Rights Agreement (as such terms are defined herein) are hereinafter collectively referred to as the "Operative Documents." You, as the representative of the Underwriters (the "Representative"), have advised the Company and the Selling Stockholders that you and the other Underwriters desire to purchase, severally and not jointly, the Firm Shares and Firm Warrants as described on Schedule I hereto and that you have been authorized by the Underwriters to execute this Agreement on their behalf. 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Commission in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Securities Act"), the Registration Statement (File No. 333-39767), including a prospectus subject to completion, relating to the Offered Securities. The prospectus in the form included in the Registration Statement when the Commission declares the Registration Statement effective, or if the prospectus included in the Registration Statement omits information in reliance upon Rule 430A under the Securities Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act or as part of a post-effective amendment to the Registration Statement after the Registration Statement becomes effective, the prospectus as so filed, is referred to in this Agreement as the "Prospectus." The prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of such Registration Statement with the Commission and as such prospectus is amended from time to time until the date of the Prospectus is referred to in this Agreement as the "Prepricing Prospectus." 2. AGREEMENTS TO SELL AND PURCHASE. The Company and the Selling Stockholders (in accordance with Schedule II hereto) hereby agree, severally and not jointly, to sell the Firm Securities to the Underwriters, and upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders contained herein and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders at a purchase price of $11.28 per Firm -2- 3 Share and $.094 per Firm Warrant, the number of Firm Shares and Firm Warrants set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares and Firm Warrants as adjusted pursuant to Section 11 hereof). The Company and the Selling Stockholders hereby also agree to sell to the Underwriters, and upon the basis of the representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right for 30 days after the Closing Date (as defined herein) to purchase from the Selling Stockholders up to an aggregate of 165,000 Additional Shares and to purchase from the Company 165,000 Additional Warrants at a price identical to the price per Firm Share and Firm Warrant, respectively, set forth above. The Additional Shares and Additional Warrants may be purchased solely for the purpose of covering over-allotments, if any, made in connection with the offering of the Firm Securities. If any Additional Shares and Additional Warrants are to be purchased, each Underwriter, severally and not jointly, agrees to purchase the number of Additional Shares and Additional Warrants (subject to such adjustments as you may determine to avoid fractional shares) that bears the same proportion to the total number of Additional Shares and Additional Warrants to be purchased by the Underwriters as the number of Firm Shares and Firm Warrants, respectively, set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares and Firm Warrants as adjusted pursuant to Section 11 hereof) bears to the total number of Firm Shares and Firm Warrants. Upon any election by the Underwriters to purchase less than all the Additional Shares and Additional Warrants, the aggregate number of Additional Shares and Additional Warrants to be purchased from the Company by all the Underwriters shall be in the same proportion as the maximum number of Additional Shares and Additional Warrants that may be purchased from the Company as set forth on Schedule II hereto. At the Closing (as defined herein), the Company shall sell to the Representative and Southwest Securities, Inc. (collectively with the Representative, the "Managing Underwriters") a warrant (the "Managing Underwriters' Warrant") for $10 entitling the holder thereof to (i) purchase up to 110,000 shares of Common Stock for five years after the Closing Date for an exercise price per share equal to $14.40 per share, and (ii) purchase up to 110,000 Warrants, identical to the Firm Warrants and the Additional Warrants, for an exercise price per Warrant equal to $.12 per Warrant. The Managing Underwriters' Warrant shall be exercisable with respect to the shares of Common Stock for a period of four years commencing one year after the Closing Date, and the Managing Underwriters' Warrant shall be exercisable with respect to the Warrants for a period of 13 months commencing one year after the Closing Date. The Managing Underwriters' Warrant shall also contain the other terms and conditions as set forth in the Managing Underwriters' Warrant Agreement included as an exhibit to the Registration Statement on the Effective Date (the "Managing Underwriters' Warrant Agreement"). In addition, the holders of the Managing Underwriters' Warrant shall be entitled to the registration rights with respect to the resale of the Managing Underwriters' Warrant, the resale of the shares of Common Stock issuable upon the exercise of such warrant, the resale of the Warrants issuable upon the exercise of such warrant, and the issuance of the shares of Common Stock issuable upon the exercise of such Warrants as set forth in the Registration Rights Agreement included as an exhibit to the Registration Statement on the Effective Date (the "Registration Rights -3- 4 Agreement"). As used herein, "Managing Underwriters' Securities" shall mean the Managing Underwriters' Warrant, including the shares of Common Stock and Warrants issuable upon the exercise thereof and the shares of Common Stock issuable upon the exercise of such Warrants. At the Closing, the Company also shall pay to the Managing Underwriters a fee equal to 1.00% of the Company's gross proceeds from its sale of the Firm Securities (the "Financial Advisory Fee"). 3. TERMS OF PUBLIC OFFERING. The Company and the Selling Stockholders have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Firm Securities and any Additional Securities as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable, and initially to offer the Firm Securities and any Additional Securities upon the terms set forth in the Prospectus. 4. DELIVERY OF CERTAIN SECURITIES AND PAYMENT THEREFOR. You contemplate that the delivery to the Underwriters of the Firm Securities and payment therefor (the "Closing") shall be made at the office of Janney Montgomery Scott Inc., 26 Broadway, New York, New York, at 10:00 a.m., New York City time, on December 16, 1997 (the "Closing Date"). The place of closing for the Firm Securities and the Closing Date may be varied by you as you consider advisable. Delivery to the Underwriters of and payment for any Additional Securities to be purchased by the Underwriters shall be made at the office of Janney Montgomery Scott Inc., 26 Broadway, New York, New York, at 10:00 a.m., New York City time, on such date or dates (each an "Additional Closing Date," which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than three nor later than ten business days after the giving of the notice hereinafter referred to) as shall be specified in a written notice from you on behalf of the Underwriters to the Company of the Underwriters' determination to purchase a number, specified in such notice, of Additional Securities. Such notice may be given to the Company by you at any time within 30 days after the Closing Date. The place of closing for the Additional Securities and the Additional Closing Date may be varied by you as you consider advisable. Certificates for the Firm Securities and for any Additional Securities to be purchased hereunder shall be registered in such names and in such denominations as you shall request prior to 1:00 p.m., New York City time, not later than the second full business day preceding the Closing Date or the Additional Closing Date, as the case may be. Such certificates shall be made available to you in New York, New York for inspection and packaging not later than 9:30 a.m., New York City time, on the business day immediately preceding the Closing Date or the Additional Closing Date, as the case may be. The certificates evidencing the Firm Securities and any Additional Securities to be purchased hereunder shall be delivered to you, for the respective accounts of the several Underwriters, on the Closing Date or the Additional Closing Date, as the case may be, against payment of the purchase price therefor by wire transfer to accounts designated in writing to you by the Company and each of the Selling Stockholders or by certified or official bank check or checks payable in New York Clearing House funds. Time -4- 5 shall be of the essence and delivery at the time and place specified in this Agreement is a further condition to the obligations of each Underwriter. 5. COVENANTS AND AGREEMENTS. The Company and each Selling Stockholder severally, and not jointly, covenants and agrees with the several Underwriters as follows (except with respect to the covenants and agreements below made by the Company, for which the Selling Stockholders shall bear no responsibility): a. The Company will cause the Registration Statement and any post-effective amendments thereto to be prepared in conformity with the requirements of the Securities Act. In addition, the Company will use its best efforts to cause the Registration Statement and any post-effective amendments thereto to become effective and will advise you promptly, and if requested by you, will confirm such advice in writing (i) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective; (ii) if Rule 430A under the Securities Act is used, when the Prospectus has been timely filed pursuant to Rule 424(b) under the Securities Act; (iii) of any request by the Commission for amendments or supplements to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Offered Securities for offering or sale in any jurisdiction or the initiation of any proceeding for such purposes and (v) of any change in the Company's condition (financial or other), business, properties, net worth, results of operations, or prospects or of any event that comes to the attention of the Company that makes any statement made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue in any material respect or that requires the making of any additions thereto or changes therein in order to make the statements therein not misleading in any material aspect, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Securities Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal of such order at the earliest possible time. b. The Company will furnish to you, without charge, three signed duplicate originals of the Registration Statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto, and will also furnish to you, without charge, such number of conformed copies of the Registration Statement as originally filed and of each amendment thereto as you may reasonably request. c. The Company will not file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus of which you shall not previously have been advised (with a reasonable opportunity to review such amendment or supplement) or to which you have reasonably objected after being so advised. -5- 6 d. The Company will prepare and file with the Commission, upon your reasonable request, any amendments or supplements to the Registration Statement or Prospectus, in form and substance reasonably satisfactory to counsel for the Company, as in the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the Underwriters, may be necessary or advisable in connection with the distribution of the Offered Securities and the exercise of the Warrants included therein, and will use its best efforts to cause the same to become effective as promptly as possible. The Company will keep the Registration Statement effective for the term of the Firm Warrants and Additional Warrants with respect to the issuance and sale of the related Warrant Shares. e. Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested copies of each form of the Prepricing Prospectus. The Company and the Selling Stockholders have consented to the use, in accordance with the provisions of the Securities Act and with the securities or Blue Sky laws of the jurisdictions in which the Offered Securities are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished. f. As soon after the execution and delivery of this Agreement as is practicable and thereafter from time to time for such period as in the reasonable opinion of counsel for the Underwriters a prospectus is required by the Securities Act to be delivered in connection with sales by any Underwriter or a dealer, and for so long a period as you may request for the distribution of the Offered Securities, the Company will deliver to each Underwriter, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as they may reasonably request. The Company and the Selling Stockholders consent to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Securities Act and with the securities or Blue Sky laws of the jurisdictions in which the Offered Securities are offered by the several Underwriters and by all dealers to whom Offered Securities may be sold, both in connection with the offering and sale of the Offered Securities and for such period of time thereafter as the Prospectus is required by the Securities Act to be delivered in connection with sales by any Underwriter or dealer. If at any time during the period during which a Prospectus is required to be delivered in accordance with the Securities Act any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with the Securities Act or any other law, the Company will forthwith prepare and, subject to Sections 5(a) and 5(c) hereof, file with the Commission and use its best efforts to cause to become effective as promptly as possible an appropriate supplement or amendment thereto, and will furnish to each Underwriter who has previously requested Prospectuses, without charge, a reasonable number of copies thereof. -6- 7 g. The Company and the Selling Stockholders will cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Offered Securities for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may reasonably designate and will file such consents to service of process or other documents as may be reasonably necessary in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now required to be qualified or to take any action that would subject it to service of process in suits, other than those arising out of the offering or sale of the Offered Securities, in any jurisdiction where it is not now so subject. h. The Company will make generally available to its security holders as soon as practicable, but not later than 45 days after the end of the 12 month period beginning at the end of the fiscal quarter of the Company during which the Effective Date occurs, or 90 days if such 12 month period coincides with the Company's fiscal year, a consolidated earnings statement (in form complying with the provisions of Section 11(a) of the Securities Act and Rule 158 under the Securities Act), which need not be audited, covering such 12 month period. i. During the period beginning on the date hereof and ending on the fifth anniversary of the Closing Date, the Company will furnish to you and, upon your request, to each of the other Underwriters, (i) as soon as available, a copy of each proxy statement, quarterly or annual report or other report of the Company mailed to stockholders or filed with the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or any securities exchange or the Nasdaq National Market (as defined herein) and (ii) from time to time such other information concerning the Company as you may reasonably request. j. If this Agreement is terminated after the execution hereof (other than pursuant to Section 11 hereof), including any termination by the Underwriters because of breach of any representation and warranty of, or failure to perform any agreement by, the Company or any Selling Stockholder herein or to comply with any of the terms or provisions hereof, the Company agrees to reimburse you and the other Underwriters for all actual accountable out-of pocket expenses (including travel expenses and fees and expenses of counsel for the underwriters) reasonably incurred by the Underwriters in connection herewith. k. The Company will apply the net proceeds from the sale of the Offered Securities to be sold by it substantially in conformity with the purposes set forth under "Use of Proceeds" in the Prospectus. l. If Rule 430A under the Securities Act is used, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Securities Act. -7- 8 m. Prior to the Closing Date or the Additional Closing Date, as the case may be, the Company will furnish to you, as promptly as possible, copies of any unaudited interim consolidated financial statements of the Company and its subsidiaries for any quarterly period subsequent to the periods covered by the financial statements appearing in the Prospectus. n. The Company will comply in all material respects with all provisions of the undertakings contained in the Registration Statement. o. Neither the Company nor any Selling Stockholder will take any action constituting, or which might reasonably be expected to constitute or result in, stabilization or manipulation of the trading price of the Common Stock or the Warrants to facilitate the sale or resale of the Offered Securities. p. The Company will use its best efforts to qualify or register the shares of Common Stock and the Warrants for sale in non-issuer transactions under (or obtain exemptions from the application of) the Blue Sky laws of each state where necessary to permit market making transactions and secondary trading if you, based on advice of counsel, advise the Company that such qualification, registration or exemption is necessary or desirable, and will comply with such Blue Sky laws and will continue such qualifications, registrations and exemptions in effect for a period of five years after the Closing Date. q. The Company will timely file with the NASD Automated Quotation National Market System (the "Nasdaq National Market") or such other exchange upon which its securities are listed all documents and notices required by the Nasdaq National Market or such other applicable exchange of companies that have issued securities that are traded on such market. r. So long as the Company shall be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company shall furnish to its stockholders and warrant holders annual reports containing financial statements of the Company audited by its independent certified public accountants and will make available to such stockholders and warrant holders upon their request quarterly reports for the first three quarters of its fiscal year containing financial information, which may be unaudited. s. So long as the Company shall be subject to the reporting requirements of the Exchange Act, the Company will, from time to time, after the date the Registration Statement becomes effective, file with the Commission such reports as are required by the Securities Act and Exchange Act and with state securities commissions in states where the Offered Securities have been sold by the Underwriters such reports as are required to be filed by the securities acts and the regulations of those states. -8- 9 t. The Company will cause the Selling Stockholders and each officer, director and employee of the Company or any Subsidiary (as defined herein) who owns shares of Common Stock or options or warrants to acquire shares of Common Stock and who is listed on Schedule III attached hereto to enter into an agreement with the Representative to the effect that, for the period beginning on the date hereof and ending 120 days from the Effective Date, such Selling Stockholder, officer, director and employee will not, without the prior written consent of the Representative, directly or indirectly, offer, sell, offer to sell, grant any option to purchase or otherwise sell or dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable therefor (other than in connection with a conversion, exercise or exchange in which the holder retains the shares of Common Stock) or with respect to which such person has the power of disposition, provided that at any time during such period after the seventh day following the Effective Date such person may sell shares of Common Stock at a price of $13.00 per share or more. u. The Prospectus and any amendment or supplement thereto will at all times up to and including the Closing Date and any Additional Closing Date, and during such longer period as the Prospectus may be required to be delivered in connection with the issuance and/or sale by the Company or the Selling Stockholders of shares of Common Stock or Warrants or the exercise of any of the Warrants, comply in all material respects with the provisions of the Securities Act and will not contain any untrue statement of a material fact and will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. v. Until the second anniversary of the Effective Date: (i) All members of the Audit and Compensation Committees of the Company's Board of Directors (the "Board of Directors") shall be Independent Directors as defined in the Bylaws of the Company attached as an exhibit to the Registration Statement on the date hereof. (ii) Article V of the Company's Bylaws, which concerns certain corporate governance matters, shall not be modified or rescinded without the approval of the holders of 66 2/3% of the outstanding shares of Common Stock. (iii) The Company shall not (x) issue or sell shares of Common Stock or securities convertible into, or exchangeable for, or options or other rights to acquire, shares of Common Stock to Lee N. Blatt, Myron Levy, Gerald I. Klein or any relative or affiliate of any such person (collectively, the "Executives"), except for issuances of shares of Common Stock upon the exercise of stock options and warrants outstanding on the date hereof and described in the Prospectus, or (y) increase any compensation payable to any of the Executives, unless such issuance or -9- 10 sale of securities or increase of compensation is unanimously approved by the Compensation Committee of the Board of Directors. (iv) The Company shall base the compensation for the Company's directors and executive officers upon standards established with the assistance of an outside compensation specialist. w. At the Closing, the Company will enter into the Managing Underwriters' Warrant Agreement and the Registration Rights Agreement. x. The Company will not reprice any stock options or warrants before the second anniversary of the Closing Date. y. The Company and the Selling Stockholders will do and perform all things required to be done and performed under this Agreement by them prior to the Closing Date and use their best efforts to satisfy all conditions precedent within their control to the delivery of the Offered Securities. z. The Company and the Selling Stockholders will comply in all material respects with the Operative Documents. aa. At the Closing, the Company will enter into the Warrant Agreement with American Stock Transfer & Trust Company ("American Stock Transfer" or the "Warrant Agent"). bb. At the Closing, Lee N. Blatt, Myron Levy, and Gerald I. Klein will repay all indebtedness owed to the Company or any Subsidiary (as defined herein), including the indebtedness evidenced by their non-negotiable promissory notes payable to the Company set forth as exhibits to the Registration Statement on the Effective Date. 6. REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY. The Company represents and warrants to each Underwriter on the date hereof, and shall be deemed to represent and warrant to each Underwriter on the Closing Date and any Additional Closing Date, that: a. Each Prepricing Prospectus included as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424(a) under the Securities Act, complied when so filed in all material respects with the provisions of the Securities Act, except that this representation and warranty does not apply to statements in or omissions from such Prepricing Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. -10- 11 b. The Registration Statement, in the form in which it becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective, and the Prospectus, and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Securities Act, will comply in all material respects with the provisions of the Securities Act and will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the Registration Statement or the Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. c. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware, with full power and authority to own, lease and operate its properties and to conduct its business as presently conducted and as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to so register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth, results of operations or prospects of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). d. Except for the subsidiaries listed in Exhibit 21.1 to the Registration Statement as of the date hereof, the Company does not own a material interest in or control, directly or indirectly, any other corporation, partnership, joint venture, association, trust or other business organization that is material to the business of the Company. Each of the subsidiaries described on Exhibit 21.1 to the Registration Statement as of the date hereof (collectively, the "Subsidiaries") is a corporation duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, with full power and authority to own, lease and operate its properties and to conduct its business as presently conducted and as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each other jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to so register or qualify does not have a Material Adverse Effect. All of the outstanding shares of capital stock of each of the Subsidiaries has been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any security interest, lien, adverse claim, equity or other encumbrance. e. The capitalization of the Company is and will be as set forth in the Prospectus as of the date set forth therein. All of the outstanding shares of Common -11- 12 Stock have been, and as of the Closing Date will be, duly authorized and validly issued, are fully paid and nonassessable and free of any preemptive or similar rights; the Firm Shares to be issued and sold to the Underwriters by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights; the capital stock of the Company conforms in all material respects to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement thereto); and the delivery of certificates for the Firm Shares and the Additional Shares pursuant to the terms of this Agreement and payment for the Firm Shares and the Additional Shares will pass valid title to the Firm Shares and the Additional Shares, free and clear of any claim, encumbrance or defect in title to the several Underwriters purchasing the Firm Shares and the Additional Shares. The certificates for the Firm Shares and the Additional Shares are in valid and sufficient form. f. The Firm Shares and Additional Shares to be sold to the Underwriters by the Selling Stockholders were duly authorized and validly issued, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights. g. There are no legal or governmental proceedings pending or, to the knowledge of the Company after reasonable inquiry and investigation, threatened, against the Company or any of the Subsidiaries, or to which the Company, any of the Subsidiaries, or any of their respective properties is subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) but are not described as required. Except as described in the Prospectus, there is no action, suit, inquiry, proceeding, or investigation by or before any court or governmental or other regulatory or administrative agency or commission pending or, to the knowledge of the Company after reasonable inquiry and investigation, threatened, against or involving the Company or any Subsidiary, which might individually or in the aggregate prevent or adversely affect the transactions contemplated by this Agreement or result in a Material Adverse Effect, nor is there any basis for any such action, suit, inquiry, proceeding, or investigation. There are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the Securities Act. All such contracts to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against and by the Company or such Subsidiary in accordance with the terms thereof except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as the enforceability of any indemnification provision may be limited under federal or state securities laws and (iii) as the remedy of specific forms of equitable relief may be subject to equitable defenses and discretion of the court before which any -12- 13 proceeding may be brought (collectively, the "Enforceability Exceptions"), and neither the Company nor any Subsidiary, nor to the Company's knowledge after reasonable inquiry and investigation, any other party, is in breach of or default under any of such contracts. h. Neither the Company nor any of the Subsidiaries is in violation in any material respect of its certificate or articles of incorporation or bylaws, or other organizational documents, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries, or in default in the performance of any obligation, agreement or condition contained in (i) any bond, debenture, note or any other evidence of indebtedness, or (ii) any material agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound; and to the Company's knowledge after reasonable inquiry and investigation there does not exist any state of facts that constitutes an event of default on the part of the Company or any Subsidiary as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default. i. The execution and delivery of this Agreement and the performance by the Company of its obligations under this Agreement, including the issuance and sale of the Offered Securities on the terms set forth in this Agreement, have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms subject to the Enforceability Exceptions. j. The execution and delivery of the Warrant Agreement and the performance by the Company of its obligations under the Warrant Agreement have been duly and validly authorized by the Company, and at the Closing the Warrant Agreement will be duly executed and delivered by the Company and constitute the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms subject to the Enforceability Exceptions. k. The execution and delivery of the Managing Underwriters' Warrant Agreement and the performance by the Company of its obligations under the Managing Underwriters' Warrant Agreement have been duly and validly authorized by the Company, and at the Closing the Managing Underwriters' Warrant Agreement will be duly executed and delivered by the Company and constitute the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms subject to the Enforceability Exceptions. l. The execution and delivery of the Registration Rights Agreement and the performance by the Company of its obligations under the Registration Rights Agreement have been duly and validly authorized by the Company, and at the Closing the -13- 14 Registration Rights Agreement will be duly executed and delivered by the Company and constitute the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms subject to the Enforceability Exceptions. m. The Warrants have been duly and validly authorized by the Company for issuance and sale pursuant to this Agreement and, when issued and countersigned in accordance with the terms of the Warrant Agreement and delivered against payment therefor in accordance with the terms hereof and thereof, will be validly issued and the legal, valid and binding obligations of the Company subject to the Enforceability Exceptions. The Company has duly reserved a sufficient number of shares of Common Stock for the issuance of the Warrant Shares upon the exercise of the Warrants and has duly and validly authorized the issuance of such Warrant Shares upon the exercise of the Warrants. Upon the exercise of the Warrants and the payment of the exercise price thereof, the respective Warrant Shares will be validly issued, fully paid and nonassessable, and not issued in violation of any preemptive or similar rights. The Warrants conform in all material respects to the description thereof contained in the Prospectus. n. The Managing Underwriters' Warrant has been duly and validly authorized by the Company for issuance and sale pursuant to this Agreement and, when payment is made therefor in accordance with the terms hereof and the Managing Underwriters' Warrant Agreement, will be validly issued and the legal, valid and binding obligation of the Company subject to the Enforceability Exceptions. The Company has duly reserved a sufficient number of its shares of Common Stock for the issuance of the shares of Common Stock upon the exercise of the Managing Underwriters' Warrant, including the shares of Common Stock issuable upon the exercise of the Warrants issuable upon the exercise of the Managing Underwriters' Warrant, and has duly and validly authorized the issuance of such shares of Common Stock upon the exercise of the Managing Underwriters' Warrant and the Warrants issuable upon the exercise of the Managing Underwriters' Warrant. Upon the exercise of the Managing Underwriters' Warrant and the shares of Common Stock issuable upon the exercise of the Warrants issuable upon the exercise of the Managing Underwriters' Warrant, and the payment of the exercise price thereof, the respective shares of Common Stock will be validly issued, fully paid and nonassessable, and not issued in violation of any preemptive or similar rights. The Managing Underwriters' Warrant conforms in all material respects to the description thereof contained in the Prospectus. o. Neither the issuance and sale of the Offered Securities, the execution, delivery or performance of this Agreement and the other Operative Documents by the Company nor the consummation by the Company of the transactions contemplated hereby or thereby (i) requires any consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required under the Securities Act and compliance with the securities or Blue Sky laws of various jurisdictions) or conflicts with or will conflict with or constitutes or will constitute a -14- 15 breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties is bound, or violates any statute, law, regulation, filing, judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective properties, or results in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them is bound or to which any of the property or assets of any of them is subject. p. Except as set forth in the Prospectus, the Company does not have outstanding and at the Closing Date (and any Additional Closing Date) will not have outstanding any options to purchase, or any warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of Common Stock or any such options, warrants or convertible securities or obligations. No holder of securities of the Company has rights to the registration of any securities of the Company because of the filing of the Registration Statement that have not been satisfied or heretofore waived in writing. q. The financial statements, together with related schedules and notes, included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), comply as to form in all material respects with the applicable accounting requirements of the Securities Act for Registration Statements on a Form S-1 and present fairly the consolidated financial position, results of operations and changes in cash flows of the Company and the Subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data set forth in the Registration Statement and Prospectus (and any amendment or supplement thereto) is accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. No other financial statements or schedules are required to be included in the Registration Statement. Neither the Company nor any Subsidiary has undergone any Material Adverse Effect since the date of the most recent balance sheet included in the financial statements set forth in the Prospectus. r. Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), (i) the Company and its Subsidiaries have not incurred any liabilities or obligations, indirect, direct or contingent, or entered into any transaction that is not in the ordinary course of business or that could result in a material -15- 16 reduction in the future earnings of the Company and the Subsidiaries; (ii) the Company and the Subsidiaries have not sustained any material loss or interference with respect to their businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company and its Subsidiaries are not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than upon the sale of the Offered Securities and the Managing Underwriters' Warrant hereunder and upon the exercise of options and warrants described in the Prospectus) or indebtedness material to the Company and the Subsidiaries (other than in the ordinary course of business); and (v) there has not been any material adverse change, or any development involving or that may reasonably be expected to involve a potential future material adverse change in the condition (financial or otherwise), business, properties, net worth, results of operations or prospects of the Company and the Subsidiaries. s. The Company and each of the Subsidiaries has good and marketable title to all property (real and personal) described in the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances except (i) such as are described in the financial statements included in the Prospectus or (ii) such as are not materially burdensome and do not interfere in any material respect with the use of the property or the conduct of the business of the Company and the Subsidiaries taken as a whole. The property (real and personal) held under lease by each of the Company and the Subsidiaries is held by it under valid, subsisting and enforceable leases, with only such exceptions as in the aggregate are not material and do not interfere in any material respect with the conduct of the business of the Company and the Subsidiaries taken as a whole. t. The Company has not distributed and will not distribute any offering material in connection with the offering and sale of the Offered Securities other than the Prepricing Prospectus and the Prospectus. u. The Company has not taken, directly or indirectly, any action constituting, or which might reasonably be expected to constitute or result in, stabilization or manipulation of the trading price of the Common Stock to facilitate the sale or resale of the Offered Securities. v. The Company is not, and does not intend to conduct its business in a manner in which it would become, an "investment company" under the Investment Company Act of 1940, as amended. w. The Company and each of the Subsidiaries have all permits, licenses, franchises, approvals, consents and authorizations of governmental or regulatory authorities (hereinafter "permit" or "permits") as are necessary to own their respective properties and to conduct their respective businesses in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; the -16- 17 Company and each of the Subsidiaries have fulfilled and performed all of their material obligations with respect to each such permit and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination of any such permit or result in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus. x. The Company and the Subsidiaries have complied and will comply with wage and hour determinations issued by the U.S. Department of Labor under the Service Contract Act of 1965 and the Fair Labor Standards Act in paying its employee salaries, fringe benefits, and other compensation for the performance of work or other duties in connection with contracts with the U.S. government. The Company and the Subsidiaries have complied and will comply with the terms of all certifications and representations made to the U.S. government in connection with the submission of any bid or proposal or any contract. The Company and the Subsidiaries have complied and will comply with their obligations under their agreements and contracts with the U.S. government and agencies thereof. Neither the Company nor any of the Subsidiaries is involved in any labor dispute that might reasonably be expected to result in a Material Adverse Effect nor, to the knowledge of the Company after reasonable investigation and inquiry, is any such dispute threatened. y. The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. z. Neither the Company nor any Subsidiary has, directly or indirectly, (i) made any unlawful contribution to any candidate for political office, or failed to disclose fully any contribution in violation of law; or (ii) made any payment to any federal, state or foreign governmental official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States and applicable foreign jurisdictions. aa. The Company and the Subsidiaries have obtained all required permits, licenses and other authorizations, if any, which are required under federal, state, local and foreign statutes, ordinances and other laws relating to pollution or protection of the environment ("Environmental Laws"). The Company and the Subsidiaries are in compliance with all terms and conditions of all required permits, licenses and authorizations, and are also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws. There is no pending or, to the knowledge of the -17- 18 Company after reasonable inquiry and investigation, threatened civil or criminal litigation, notice of violation, or administrative proceeding relating to the Environmental Laws involving the Company or the Subsidiaries. There have not been and there are not any past, present, or to the Company's knowledge after reasonable inquiry and investigation, foreseeable future events, conditions, circumstances, activities, practices, incidents, actions or plans relating to the Company or the Subsidiaries that may interfere with or prevent continued compliance with, or that may give rise to any common law or legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study or investigation under the Environmental Laws. bb. Each of the Company and the Subsidiaries has sufficient trademarks, trade names, registered service marks, patents, patent applications, patent rights, licenses, permits, copyright protection and governmental or other authorizations currently required for the conduct of its business, and each of the Company and the Subsidiaries is in all material respects complying therewith, and the products and services, and the marks associated therewith, used by the Company and each Subsidiary do not violate or infringe any trademarks, trade names, registered service marks, patents, patent rights, licenses, permits or copyrights held or owned by any other party. Neither the Company nor any Subsidiary has received any notice of violation or infringement of or conflict with asserted rights of others with respect to any trademarks, trade names, registered service marks, patents, patent rights, licenses, permits, copyrights or authorizations owned or used by the Company, any Subsidiary or any other person. Other than as disclosed in the Prospectus, the expiration of any such trademarks, trade names, registered service marks, patents, patent rights, licenses, permits, copyrights and governmental or other authorizations would not materially adversely affect the condition (financial or otherwise), business, results of operations or prospects of the Company and its Subsidiaries, taken as a whole, and neither the Company nor any Subsidiary has received any notice of violation or infringement of or conflict with asserted rights of others with registered service marks, patents, patent rights, licenses, permits, copyrights or authorizations owned or used by the Company, any Subsidiary or any other person. cc. The Company has filed with the Nasdaq National Market an application for listing on the Nasdaq National Market of the additional shares of Common Stock that the Company will issue in this offering, the Warrants, and the shares of the Common Stock issuable upon the exercise of the Warrants. The Nasdaq National Market has approved this application, subject to the occurrence of the Closing. The Company has previously filed with the Nasdaq National Market applications for the listing on the Nasdaq National Market of all outstanding shares of Common Stock, including the shares that are subject to sale under the Company's stock option plans and warrants previously issued to certain directors and officers. The Nasdaq National Market has approved all of such applications. dd. All federal, state and local tax returns required to be filed by or on behalf of the Company or any Subsidiary have been filed (or are the subject of a valid extension) with the appropriate federal, state and local authorities and all such tax returns, -18- 19 as filed, are accurate in all material respects. All federal, state and local taxes (including estimated tax payments) required to be shown on all such tax returns or claimed to be due from or with respect to the business of the Company or any Subsidiary have been paid or reflected as a liability on the consolidated financial statements of the Company for the appropriate periods, except for those taxes or claims therefor which are being contested by the Company in good faith and for which appropriate reserves are reflected in the Company's consolidated financial statements. All deficiencies asserted as a result of any federal, state or local tax audits have been paid or finally settled and no issue has been raised in any such audit that, by application of the same or similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so audited. To the Company's knowledge after reasonable inquiry and investigation, no state of facts exists or has existed that would constitute grounds for the assessment of any tax liability with respect to the periods that have not been audited by appropriate federal, state or local authorities. There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any federal, state or local tax return of the Company or any Subsidiary. On the Closing Date, and any Additional Closing Date, all stock transfer and other taxes that are required to be paid in connection with the sale of the Firm Securities, Additional Securities and Managing Underwriters' Warrant to be sold by the Company or the Selling Stockholders will have been fully paid by the Company and the Selling Stockholders and all laws imposing such taxes will have been complied with. ee. Except as set forth in the Prospectus, there are no transactions with affiliates, as defined in Rule 405 promulgated under the Securities Act, which are required by the Securities Act and the applicable rules and regulations thereunder to be disclosed in the Registration Statement. ff. The Company has procured the written agreement of the Selling Stockholders, and each officer, director and employee of the Company or any Subsidiary who owns shares of Common Stock or options or warrants to acquire shares of Common Stock and who is listed on Schedule III attached hereto not to sell, offer to sell or contract to sell, or otherwise dispose of or transfer, directly or indirectly, any shares of Common Stock owned or controlled, or hereafter acquired, by such persons, or any rights to purchase any of such shares of Common Stock (other than in connection with a conversion, exercise or exchange in which the holder retains the shares of Common Stock), for the period beginning on the date hereof and ending 120 days after the Effective Date for each such Selling Stockholder, officer, director and employee without the prior written consent of the Representative, provided that at any time during such period after the seventh day following the Effective Date such person may sell shares of Common Stock at a price of $13.00 per share or more. gg. No officer, director, nominee for director or stockholder of the Company has any direct or indirect affiliation or association with any member of the NASD. -19- 20 hh. The Company and each of the Subsidiaries has its property adequately insured against loss or damage by fire, maintains adequate insurance against liability for negligence, and maintains such other insurance in such nature and amounts of coverage as is usually maintained by companies engaged in the same or similar business. ii. To the Company's knowledge after reasonable inquiry and investigation, the Company has not incurred any liability for any finder's fees or similar payments in connection with any of the transactions herein contemplated. jj. Neither the Company, any of the Subsidiaries, nor to the Company's knowledge after reasonable inquiry and investigation, any of their respective officers, directors, employees, agents or any other person acting on their behalf, has directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or an agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder their respective businesses (or assist in connection with any actual or proposed transaction) which (a) reasonably may subject any of them to any damage or penalty in any civil, criminal or governmental litigation or proceeding; (b) if not given in the past, could have resulted in a Material Adverse Effect; or (c) if not continued in the future, could reasonably be expected to result in a Material Adverse Effect. The internal accounting controls and procedures of the Company and the Subsidiaries are sufficient to enable them to comply with the Foreign Corrupt Practices Act of 1977, as amended. kk. The Company has entered into the amended and restated employment agreements with Lee Blatt, Chairman and Chief Executive Officer of the Company, Myron Levy, President of the Company, and Gerald I. Klein that are attached as exhibits to the Registration Statement on the date hereof (collectively, the "Employment Agreements"). The execution and delivery of the Employment Agreements and the performance by the Company of its obligations under the Employment Agreements has been duly and validly authorized by the Company, and the Employment Agreements have been duly executed and delivered by the Company and the employees that are parties thereto and constitute the valid and legally binding agreements of the Company and such employees, enforceable against and by the Company and such employees in accordance with their terms subject to the Enforceability Exceptions. No payment under any Employment Agreement will constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended. ll. The Company has amended and restated the Bylaws as set forth as an exhibit to the Registration Statement on the Effective Date. mm. As contemplated under Section 3.02 of the Joint Venture Agreement, dated as of August 26, 1997 (the "ATI Agreement"), between the Company -20- 21 and Advanced Techcom, Inc. ("ATI"), the Company and ATI approached ATI's bank and requested such bank to increase ATI's line of credit with the bank by $1,000,000 based upon the Company's guarantee of such incremental borrowing or delivery of a letter of credit with respect thereto. As the bank nevertheless declined to increase the line of credit, the Company will not provide any financing to ATI pursuant to the ATI Agreement or otherwise. In addition, the Company has abandoned the ATI Agreement because of the bank's failure to increase ATI's line of credit and for other reasons. The Company's abandonment of the ATI Agreement will not have a Material Adverse Effect. nn. None of the execution, delivery and performance of this Agreement, the issuance and sale of the Offered Securities, the application of the proceeds from the issuance and sale of the Offered Securities and the consummation of the transactions contemplated thereby as set forth in the Prospectus, will violate Regulations G, T, U or X promulgated by the Board of Governors of the Federal Reserve System or analogous foreign laws and regulations. oo. There exist no conditions that would constitute a default by the Company or the Selling Stockholders (or an event which with notice or the lapse of time, or both, would constitute a default) under this Agreement or any of the other Operative Documents. pp. The Company has applied for and obtained a CUSIP number for the Warrants. qq. The Company and the Subsidiaries have obtained proper export licenses for all foreign sales and will obtain proper export licenses for all future foreign sales. rr. The Company has terminated its agreement with Stonegate Securities, Inc., dated July 25, 1997, pursuant to its terms. ss. Since July 28, 1996, the Company has not issued any securities except pursuant to an issuance registered under the Securities Act (with respect to securities registered or qualified under the applicable state securities or Blue Sky laws) or exempt from registration under the Securities Act (and registration or qualification under applicable state securities or Blue Sky laws). tt. The issuance of the Offered Securities (including the issuance of shares of Common Stock upon the exercise of the Warrants) and the issuance of the Managing Underwriters' Warrant (including the issuance of shares of Common Stock and Warrants upon the exercise thereof and the issuance of shares of Common Stock upon the exercise of such Warrants) will not cause an anti-dilution event to occur in any material respect with respect to any of the Company's outstanding securities, including any outstanding stock options or warrants. -21- 22 Each certificate signed by an officer of the Company and delivered to the Representative or counsel for the Representative shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. 7. REPRESENTATIONS AND WARRANTIES CONCERNING THE SELLING STOCKHOLDERS. Each Selling Stockholder, severally, and not jointly, represents and warrants to each Underwriter on the date hereof, and shall be deemed to represent and warrant to each Underwriter on the Closing Date and any Additional Closing Date, that: a. All consents, approvals, authorizations and orders necessary for the execution and delivery by such Selling Stockholder of this Agreement, and for the sale and delivery of the Firm Shares and Additional Shares to be sold by such Selling Stockholder hereunder, have been obtained; and such Selling Stockholder has, as to himself or herself the full right, power and authority to enter into this Agreement, and to sell, assign, transfer and deliver the Firm Shares and Additional Shares to be sold by such Selling Stockholder hereunder. b. This Agreement has been duly executed and delivered by such Selling Stockholder and constitute the valid and binding agreement of such Selling Stockholder, enforceable against such Selling Stockholder in accordance with its terms subject to the Enforceability Exceptions. c. The performance of this Agreement and the consummation of the transactions contemplated herein will not result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, voting trust agreement, note agreement, lease or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder or his or her properties are bound, or under any order, rule or regulation of any court or governmental agency or body applicable to such Selling Stockholder or his or her business or property. d. Such Selling Stockholder has, and immediately prior to the Closing Date such Selling Stockholder will have, good and valid title to the Firm Shares and Additional Shares to be sold by such Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities, stockholder agreements, voting trusts or claims of any nature whatsoever, and upon delivery of such Firm Shares and Additional Shares and payment therefor pursuant hereto, good and valid title to such Firm Shares and Additional Shares, free and clear of all liens, encumbrances, equities, stockholder agreements, voting trusts or claims of any nature whatsoever, will pass to the several Underwriters. e. Such Selling Stockholder will not from the date hereof until 120 days after the Effective Date, directly or indirectly, sell, offer to sell, contract to sell or otherwise dispose of or transfer any shares of Common Stock or rights to purchase shares -22- 23 of Common Stock (other than in connection with a conversion, exercise or exchange in which the holder retains the shares of Common Stock), otherwise than hereunder without the prior written consent of the Representative, provided that any time during such period after the seventh day following the Effective Date such person may sell shares of Common Stock at a price of $13.00 per share or more. f. Such Selling Stockholder has not taken, directly or indirectly, any action constituting or which might reasonably be expected to constitute or result in, stabilization or manipulation of the trading price of the Common Stock to facilitate the sale or resale of the Offered Securities. g. No consent, approval, authorization or order of, or any filing of declaration with, any court or governmental agency or body is required for the consummation by such Selling Stockholder of the transactions on its part contemplated herein, except such as have been obtained under the Securities Act and such as may be required under state securities or Blue Sky laws or the by-laws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Firm Shares and Additional Shares to be sold by such Selling Stockholder. h. All information with respect to such Selling Stockholder contained in the Registration Statement, the Prepricing Prospectus and the Prospectus (as amended or supplemented, if the Company shall have filed with the Commission any amendment or supplement thereto) complied and will comply in all material respects with all applicable provisions of the Securities Act, contains and will contain all statements required to be stated therein in accordance with the Securities Act, and does not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. i. Such Selling Stockholders have not distributed and will not distribute any offering material in connection with the offering and sale of the Offered Securities other than the Prepricing Prospectus and the Prospectus. j. On the Closing Date (and any Additional Closing Date), all stock transfer and other taxes (other than income taxes) that are required to be paid in connection with the sale and transfer of the Firm Shares (and Additional Shares) to be sold by such Selling Stockholder to the several Underwriters hereunder will have been fully paid for by such Selling Stockholder and all laws imposing such taxes will have been fully complied with. k. The Firm Shares and Additional Shares to be sold to the Underwriters by such Selling Stockholder were duly authorized and validly issued, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights. -23- 24 In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, such Selling Stockholder agrees to deliver to you at least two days prior to the Closing a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). Each Selling Stockholder hereby grants an irrevocable power of attorney to Lee N. Blatt and Myron Levy (the "Attorneys-in-Fact"), with full power of substitution and re-substitution to execute and deliver any agreements or documents related to this offering on behalf of such Selling Stockholder, deliver the Firm Shares and Additional Shares to be sold by such Selling Stockholder hereunder or otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement. Prior to the date of this Agreement, each Selling Stockholder has delivered to the Attorneys-in-Fact certificates in negotiable form representing all the Firm Shares and Additional Shares to be sold by such Selling Stockholder hereunder, to be held by the Attorneys-in-Fact until such time as the Attorneys-in-Fact shall deliver such Firm Shares and Additional Shares to the Underwriters or if this Agreement is terminated prior to such delivery, to return such Firm Shares and Additional Shares to such Selling Stockholder. Each Selling Stockholder specifically agrees that the Firm Shares and Additional Shares represented by the certificates held in custody with respect to such Selling Stockholder are subject to the interest of the Underwriters hereunder, and that the arrangements made by such Selling Stockholder for the custody, and the appointment by such Selling Stockholder of the Attorneys-in-Fact by the , are to that extent irrevocable. Each certificate signed by such Selling Stockholder, or by an Attorney-in-Fact on behalf of such Selling Stockholder, and delivered to the Representative or counsel for the Representative shall be deemed to be a representation and warranty by such Selling Stockholder to the Underwriters as to the matters covered thereby. 8. EXPENSES. Whether or not the transactions contemplated hereby are consummated or this Agreement becomes effective or is terminated, the Company and the Selling Stockholders, jointly and severally, shall be responsible for and shall pay or cause to be paid the following: (i) all fees, disbursements and expenses of the Company's and each Selling Stockholder's respective counsel and accountants in connection with the registration of the Offered Securities under the Securities Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof and of any Prepricing Prospectus to the Underwriters and dealers; (ii) all registration and filing fees of the Commission; (iii) all printing and delivery (including, without limitations postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, the Prospectus, each Prepricing Prospectus, the Operative Documents, the Blue Sky memoranda, the Agreement Among Underwriters, the Selected Dealers Agreement, any ancillary agreements and documents, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Firm Securities and Additional Securities; (iv) all expenses in connection with the qualification of the Firm Securities and -24- 25 Additional Securities for offering and sale under state securities laws or Blue Sky laws, including the reasonable fees of the counsel for the Underwriters in connection therewith; (v) all filing fees incident to securing the review by the NASD of the terms of the sale of the Offered Securities; (vi) all Nasdaq National Market listing, designation and other filing fees; (vii) all costs of preparing stock and warrant certificates; (viii) all costs and charges of any transfer agent, warrant agent or registrar; (ix) all costs of the tax stamps, if any, in connection with the issuance and delivery of the Firm Securities and Additional Securities to the respective Underwriters; (x) all expenses in connection with the "road shows"; (xi) all fees, disbursements and expenses of the Warrant Agent's counsel in connection with the review of the Warrant Agreement ; (xii) all other fees, costs and expenses referred to in Item 13 of the Registration Statement, except that the Financial Advisory Fee shall only be payable if the Closing occurs; and (xiii) all other costs and expenses incurred in the performance of the obligations of the Company and the Selling Stockholders hereunder that are not otherwise specifically provided for in this section. In addition, in the event that the proposed offering is terminated for the reasons set forth in Section 5(j) hereof, the Company agrees to reimburse the Underwriters as provided in Section 5(j). 9. INDEMNIFICATION AND CONTRIBUTION. The Company and each of the Selling Stockholders, jointly and severally, agree to indemnify and hold harmless you and each other Underwriter, the directors, officers, employees and agents of each Underwriter, and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable attorneys' fees and costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or in any application or other document executed by the Company or any Selling Stockholder, or arising out of or based upon any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of or based upon any inaccuracy in the representations and warranties of the Company or any of the Selling Stockholders contained herein or any failure of the Company or any of the Selling Stockholders to perform their respective obligations under this Agreement, any other Operative Document, or applicable law, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon an untrue statement or omission or alleged untrue statement or omission that has been made in any Prepricing Prospectus, the Registration Statement, or the Prospectus or omitted therefrom in reliance upon and in conformity with the information furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that with respect to any untrue statement or omission made in any Prepricing Prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any Underwriter (or to the benefit of any other person entitled to such indemnification) from whom the person asserting any such losses, claims, damages or liabilities purchased the Offered Securities concerned if both (i) a copy of the Prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such Offered Securities to such person as required by the Securities Act, and (ii) the untrue statement or omission in the Prepricing Prospectus was corrected in the Prospectus. Notwithstanding anything in this Section 9, in no event shall any Selling Stockholder's obligation under the preceding sentence exceed the total net proceeds from -25- 26 the offering received by such Selling Stockholder (it being agreed that the Company shall bear the balance.) If any action or claim shall be brought against any Underwriter, any director, officer, employee or agent of any Underwriter, or any person controlling any Underwriter (the "indemnified parties") in respect of which indemnity may be sought against the Company and the Selling Stockholders (the "indemnifying parties"), the indemnified party shall promptly notify in writing the indemnifying parties, and such indemnifying parties shall assume the defense thereof, including the employment of counsel reasonably acceptable to the indemnified party and payment of all fees and expenses. The indemnified party shall have the right to employ separate counsel (but the indemnifying parties shall not be liable for the fees and expenses of more than one counsel) in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying parties have agreed in writing to pay such fees and expenses, (ii) the indemnifying parties have failed to assume the defense and employ counsel reasonably acceptable to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include the indemnified party and the indemnifying parties, and the indemnified party shall have been advised by its counsel that one or more legal defenses may be available to the indemnified party that may be unavailable to the indemnifying parties, or that representation of such indemnified party and any indemnifying parties by the same counsel would be inappropriate under applicable standards of professional conduct due to actual or potential differing interests between them (in which case the indemnifying parties shall not have the right to assume the defense of such action on behalf of the indemnified party (notwithstanding their obligation to bear the fees and expenses of such counsel)). The indemnifying parties shall not be liable for any settlement of any such action effected without their written consent, which may not be unreasonably withheld, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, the indemnifying parties agree to indemnify and hold harmless any indemnified party from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment, but in the case of a judgment only to the extent provided in this Section 9. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, and any person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and the Selling Stockholders, to the same extent as the foregoing indemnity from the Company and the Selling Stockholders, but only with respect to information furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action or claim shall be brought or asserted against the Company, any of its directors, any such officers, any such controlling person or the Selling Stockholders based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph, such Underwriter shall have the rights and duties of the indemnifying party in the preceding paragraph (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof), and the Company, its directors, any such officers, and any -26- 27 such controlling persons and the Selling Stockholders shall have the rights and duties given to the indemnified party in such paragraph. If the indemnification provided for in this Section 9 is unavailable or insufficient for any reason whatsoever in respect of any losses, claims, damages, liabilities or expenses referred to herein, then the persons otherwise responsible for providing such indemnification shall contribute to the amount paid or payable by the persons otherwise entitled to such indemnification (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and each of the Selling Stockholders on the one hand and the Underwriters on the other hand from the offering of the Offered Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that, in the event that the Underwriters shall have purchased any Additional Securities hereunder, any determination of the relative benefits received by the Company and the Selling Stockholders or the Underwriters from the offering of the Offered Securities shall include the net proceeds (before deducting expenses) received by the Company and the Selling Stockholders, and the underwriting discounts and commissions received by the Underwriters, from the sale of such Additional Securities, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, each of the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable as a result of the losses, claims, damages, liabilities and expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions with respect to the Firm Securities and Additional Securities underwritten by it and distributed to -27- 28 the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay with respect to the public offering. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule I hereto (or such numbers of Firm Shares increased as set forth in Section 11 hereof), and not joint. Notwithstanding anything to the contrary in this Section 9, any losses, claims, damages, liabilities or expenses for which a person is entitled to indemnification or contribution under this Section 9 shall be paid by the person required to provide such indemnification or contribution as such losses, claims, damages, liabilities or expenses are incurred. The indemnity, contribution and reimbursement agreements contained in this Section 9 and the representations and warranties of the Company and each of the Selling Stockholders, respectively, set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter, any person controlling any Underwriter, the Company, its directors or officers, any person controlling the Company or any of the Selling Stockholders, (ii) acceptance of any Firm Securities and Additional Securities and payment therefor hereunder and (iii) any termination of this Agreement. A successor to any Underwriter, any person controlling any Underwriter, the Company, its directors or officers, any person controlling the Company or any of the Selling Stockholders, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 9. Any controversy arising out of the operation of the interim reimbursement arrangements set forth in this Section 9, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration will be limited to the operation of the interim reimbursement provisions contained in this Section 9, and will not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses created by the provisions of this Section 9. 10. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Firm Securities hereunder are subject to the following conditions: a. The Registration Statement shall have become effective not later than 10:00 a.m. New York City time, on the day following the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings required by Rules 424(b) and 430A under the Securities Act shall have been timely made. -28- 29 b. You shall be reasonably satisfied that since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there shall not have been any change in the capital stock (other than pursuant to the exercise of outstanding options disclosed in the Prospectus or granted under the stock option plans described in the Prospectus) of the Company or any of the Subsidiaries or any material change in the indebtedness (other than in the ordinary course of business) of the Company or any of the Subsidiaries, (ii) except as set forth or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company or any of the Subsidiaries that was not in the ordinary course of business or that could reasonably be expected to result in a material reduction in the future earnings of the Company and the Subsidiaries, (iii) no loss or damage (whether or not insured) to the property of the Company or any of the Subsidiaries shall have been sustained that has a Material Adverse Effect, (iv) no legal or governmental action, suit or proceeding affecting the Company or any of the Subsidiaries that is material to the Company and the Subsidiaries or that affects or could reasonably be expected to affect the transactions contemplated by this Agreement shall have been instituted or threatened, and (v) there shall not have been any material change in the condition (financial or otherwise), business, management, properties, net worth, results or operations or prospects of the Company and the Subsidiaries. c. You shall have received an opinion of Blau, Kramer, Wactlar & Lieberman, P.C., counsel for the Company and the Selling Stockholders, dated the Closing Date, in form and substance reasonably satisfactory to you and your counsel, to the effect that: (i) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with full power and authority to own, lease and operate its properties and to conduct its business as presently conducted and as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to so register or qualify does not have a Material Adverse Effect. (ii) The Company has no subsidiaries material to its operations or business other than the Subsidiaries set forth in Exhibit 21.1 to the Registration Statement; and each of the Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its organization, with full power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to so register or qualify does not have a -29- 30 Material Adverse Effect; and all of the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries, free and clear of any perfected security interest, or to the knowledge of such counsel, any other security interest, lien, adverse claim, equity or other encumbrance. (iii) The authorized capital stock of the Company, including the Common Stock and the Warrants, conforms in all material respects to the description thereof under the caption "Description of Securities" in the Prospectus and such statements present fairly the matters respecting such securities required to be set forth in the Registration Statement and the Prospectus. (iv) All of the outstanding shares of Common Stock have been, and as of the Closing Date will be, duly authorized and validly issued, are fully paid and nonassessable and free of preemptive rights; the Firm Shares to be issued and sold to the Underwriters by the Company hereunder have been duly authorized, and when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive rights; and the delivery of certificates for the Firm Shares and the Additional Shares pursuant to the terms of this Agreement and payment for the Firm Shares and the Additional Shares will pass valid title to the Firm Shares and the Additional Shares, free and clear of any claim, encumbrance or defect in title to the several Underwriters purchasing the Firm Shares and the Additional Shares, assuming that such Underwriters purchased such shares in good faith and without notice of any adverse claim. (v) The Firm Shares and Additional Shares to be sold to the Underwriters by the Selling Stockholders were duly authorized and validly issued, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights. (vi) (A) The Registration Statement has become effective under the Securities Act, and to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; (B) the Registration Statement and the Prospectus and each amendment or supplement thereto (except for the financial statements and the notes thereto, schedules, and other financial and statistical data included therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act; and (C) to the knowledge of such counsel, the descriptions in the Prospectus of statutes, regulations and governmental proceedings insofar as they purport to summarize certain of the provisions thereof, are accurate and present fairly in all material respects the information required to be presented. -30- 31 (vii) Neither the Company nor any of the Subsidiaries is in violation of its certificate or articles of incorporation or bylaws, or other organizational documents, or to the knowledge of such counsel, of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries, or to the knowledge of such counsel, in default in the performance of any obligation, agreement or condition contained in (A) any bond, debenture, note or any other evidence of indebtedness, or (B) any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound; and to the knowledge of such counsel, there does not exist any state of facts that constitutes an event of default on the part of the Company or any Subsidiary as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default. (viii) The execution and delivery of this Agreement and the performance by the Company of its obligations under this Agreement, including the issuance and sale of the Offered Securities on the terms set forth in this Agreement, have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company. (ix) The execution and delivery of the Warrant Agreement and the performance by the Company of its obligations under the Warrant Agreement have been duly and validly authorized by the Company, and the Warrant Agreement has been duly executed and delivered by the Company, and assuming due authorization, execution and delivery by each of the other parties thereto, constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms subject to the Enforceability Exceptions. (x) The execution and delivery of the Managing Underwriters' Warrant Agreement and the performance by the Company of its obligations under the Managing Underwriters' Warrant Agreement have been duly and validly authorized by the Company, and the Managing Underwriters' Warrant Agreement has been duly executed and delivered by the Company, and assuming due authorization, execution and delivery by each of the other parties thereto, constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms subject to the Enforceability Exceptions. (xi) The execution and delivery of the Registration Rights Agreement and the performance by the Company of its obligations under the Registration Rights Agreement have been duly and validly authorized by the Company, and -31- 32 the Registration Rights Agreement has been duly executed and delivered by the Company, and assuming due authorization, execution and delivery by each of the other parties thereto, constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms subject to the Enforceability Exceptions. (xii) Such counsel has reviewed all agreements, contracts, indentures, leases or other documents or instruments referred to in the Registration Statement and the Prospectus and such agreements, contracts, indentures, leases or other documents or instruments are fairly summarized and disclosed therein, and filed as exhibits thereto as required, and such counsel does not know of any agreements, contracts, indentures, leases or other documents or instruments required to be so summarized and disclosed or filed which have not been so summarized, disclosed and filed. (xiii) The Warrants have been duly and validly authorized by the Company for issuance and sale pursuant to this Agreement, and when issued and countersigned in accordance with the terms of the Warrant Agreement and delivered against payment therefor in accordance with the terms hereof and thereof, will be validly issued and the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms subject to the Enforceability Exceptions; the Company has duly reserved a sufficient number of its shares of Common Stock for the issuance of the Warrant Shares upon the exercise of the Warrants; the Company has duly and validly authorized the issuance of such Warrant Shares upon the exercise of the Warrants; upon the exercise of the Warrants and the payment of the exercise price thereof, the respective Warrant Shares will be validly issued, fully paid and nonassessable, and not issued in violation of any preemptive or similar rights. (xiv) The Managing Underwriters' Warrant has been duly and validly authorized by the Company for issuance and sale pursuant to this Agreement, and when payment is made therefor in accordance with the terms hereof and the Managing Underwriters' Warrant Agreement and assuming due authorization, execution and delivery by each other party thereto, will be validly issued and the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms subject to the Enforceability Exceptions; the Company has duly reserved a sufficient number of its shares of Common Stock for the issuance of the shares of Common Stock upon the exercise of the Managing Underwriters' Warrant, including the shares of Common Stock issuable upon the exercise of the Warrants issuable upon the exercise of the Managing Underwriters' Warrant; the Company has duly and validly authorized the issuance of the shares of Common Stock upon the exercise of the Managing Underwriters' Warrant, including the shares of Common Stock issuable upon the exercise of the Warrants issuable upon the exercise of the Managing Underwriters' Warrant; upon the exercise of the Managing Underwriters' Warrant and the shares of -32- 33 Common Stock issuable upon the exercise of the Warrants issuable upon the exercise of the Managing Underwriters' Warrant, and the payment of the exercise price thereof, the respective shares of Common Stock will be validly issued, fully paid and nonassessable, and not issued in violation of any preemptive or similar rights; and the Managing Underwriters' Warrant conforms in all material respects to the description thereof contained in the Prospectus. (xv) To the knowledge of such counsel, neither the issuance and sale of the Offered Securities, the execution, delivery or performance of this Agreement and the other Operative Documents by the Company nor the consummation by the Company of the transactions contemplated hereby or thereby (A) requires any consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official or conflicts with or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries (other than approval or consent required under the securities laws or state blue sky laws) or (B) conflicts or will conflict with or constitutes a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound, or violates any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective properties, or results in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them may be bound or to which any of the property or assets of any of them is subject. (xvi) To the knowledge of such counsel, except as described in the Prospectus, the Company does not have outstanding any options to purchase, or any warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of Common Stock or any such options, warrants or convertible securities or obligations. (xvii) Except as set forth in the Prospectus, to the knowledge of such counsel, the Company and each of the Subsidiaries has good and marketable title to all property (real and personal) described in the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances except (A) such as are described in the financial statements included in the Prospectus or (B) such as are not materially burdensome and do not interfere in any material respect with the conduct of the business of the Company and the Subsidiaries taken as a whole; to the knowledge of such counsel the property (real and personal) held under lease by each of the Company and the Subsidiaries is held by it under valid, subsisting and enforceable leases, with only such -33- 34 exceptions as in the aggregate are not material and do not interfere in any material respect with the conduct of the business of the Company and the Subsidiaries taken as a whole. (xviii) To the knowledge of such counsel, (A) there are no legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or any of their property, is subject, that are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto) that are not described as required therein, and (B) there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that are not described or filed as required, as the case may be. (xix) To the knowledge of such counsel, neither the Company nor any of the Subsidiaries is in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries. (xx) The Company is not an "investment company" under the Investment Company Act of 1940, as amended, and if the Company conducts its business and uses the proceeds of the offering as set forth in the Prospectus, will not become an "investment company" and will not be required to register under such act. (xxi) To the knowledge of such counsel, the Company and each of the Subsidiaries have all permits as are necessary to own their respective properties and to conduct their respective businesses substantially in the manner described in the Prospectus, the Company and each of the Subsidiaries have fulfilled and performed all of their obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination of any such permit or result in any other material impairment of the rights of the holder of any such permit. (xxii) The forms of certificates for the Common Stock and the Warrants conform in all material respects with the requirements of the Delaware General Corporation Law. (xxiii) To the knowledge of such counsel, no consent, approval, authorization or order has been or is required for the performance of this Agreement by each of the Selling Stockholders or the consummation of the transactions contemplated by this Agreement, in connection with the Firm Shares and Additional Shares to be sold by the Selling Stockholders hereunder, except -34- 35 consents, approvals, authorizations or orders that have been duly obtained and are in full force and effect. (xxiv) This Agreement has been duly executed and delivered by each Selling Stockholder; and the performance of this Agreement and the consummation of the transactions contemplated herein will not result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, voting trust agreement, note agreement, lease or other agreement or instrument of which such counsel is aware to which any of the Selling Stockholders is a party or by which any of the Selling Stockholders or their properties are bound, or under any order, rule or regulation, known to such counsel, of any court or governmental agency or body applicable to any of the Selling Stockholders or the business or property of any of the Selling Stockholders. (xxv) Each Selling Stockholder has good and valid title to the Firm Shares and Additional Shares to be sold by such Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities, stockholder agreements, voting trusts or claims of any nature whatsoever, and upon delivery of such Firm Shares and Additional Shares and payment therefor pursuant hereto, good and valid title to such Firm Shares and Additional Shares, free and clear of all liens, encumbrances, equities, stockholder agreements, voting trusts or claims of any nature whatsoever, will pass to the several Underwriters. In rendering such opinion, counsel may rely, to the extent such counsel deems such reliance proper, upon an opinion or opinions, each dated the Closing Date, of other counsel as to matters governed by the laws of jurisdictions other than the United States or the States of Delaware or New York, provided that (i) each such local counsel is acceptable to you and your counsel, (ii) counsel shall state in its opinion that it believes that it and you are justified in relying thereon, and (iii) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to you and is in form and substance satisfactory to you and your counsel. In rendering such opinion, counsel may rely, to the extent such counsel deems such reliance proper, as to matters of fact upon certificates of officers of the Company, the Selling Stockholders, and government officials. Copies of all such certificates shall be acceptable to you and your counsel and furnished to you and your counsel at the Closing. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, counsel for the Underwriters, representatives of the independent public accountants for the Company, and the Underwriters, at which the contents of the Registration Statement and Prospectus and related matters were discussed, and although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, on the basis of the foregoing, no facts have come to such counsel's attention that lead such counsel to -35- 36 believe (i) that the Registration Statement or any amendment or supplement thereto (other than the financial statements, schedules and reports thereon, and other financial and statistical data included therein, as to which such counsel need not comment), as of its effective date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) that the Prospectus or any amendment or supplement thereto (other than financial statements, schedules and reports thereon, and other financial and statistical data included therein, as to which such counsel need not comment), as of its issue date and as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. d. You shall have received an opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., as counsel for the Underwriters, dated the Closing Date, with respect to such matters related to this offering as you may reasonably request, and the Company and its counsel shall have furnished to your counsel such documents as your counsel may reasonably request for the purpose of enabling your counsel to pass upon such matters. e. You shall have received comfort letters addressed to you and dated the date hereof and the Closing Date from Arthur Andersen LLP, independent certified public accountants, in the forms heretofore approved by you. f. No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending, threatened or contemplated by the Commission; no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Offered Securities under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending, threatened or contemplated by the Commission or the authorities of any jurisdiction; any request for additional information on the part of the staff of the Division of Corporation Finance of the Commission or any such authorities shall have been complied with to the satisfaction of such staff or such authorities; after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to you and you did not object thereto in good faith; and all of the representations and warranties of the Company contained in this Agreement shall be true and correct in all respects on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you) to the effect set forth in this Section 10(f) and in Sections 10(b) and 10(g) hereof. g. Neither the Company nor any Selling Stockholder shall have failed in any respect at or prior to the Closing Date to have performed or complied with any of -36- 37 such person's agreements herein contained and required to be performed or complied with by such person hereunder at or prior the Closing Date. h. You shall have received a certificate, dated on and as of the Closing Date, by or on behalf of the Selling Stockholders to the effect that as of the Closing Date each Selling Stockholder's representations and warranties in this Agreement are true and correct as if made on and as of such Closing Date, and that each Selling Stockholder has performed all of his or her obligations and satisfied all the conditions on his or her part to be performed or satisfied at or prior to the Closing Date. i. The Company and each of the Selling Stockholders shall have furnished or caused to have been furnished to you such further certificates and documents as you shall have reasonably requested. j. At or prior to the Closing Date, you shall have received the written commitment of each of the individuals named on Schedule III hereto not to sell, offer to sell, contract to sell, or otherwise dispose of or transfer any shares of Common Stock or rights to purchase any shares of Common Stock (other than in connection with a conversion, exercise or exchange in which the holder retains the shares of Common Stock), directly or indirectly, except to the Underwriters pursuant to this Agreement, for a period of 120 days, after the Effective Date without the prior written consent of the Representative, provided that any time during such period after the seventh day following the Effective Date such person may sell shares of Common Stock at a price of $13.00 per share or more. k. Prior to the date of this Agreement, the issuance and sale of the Offered Securities to be sold by the Company and the Managing Underwriters' Warrant shall have been approved by all requisite corporate action of the Company. l. The NASD shall have indicated that it had no objection to the underwriting arrangements pertaining to the sale of the Firm Securities and the Additional Securities and the participation by the Underwriters in the sale thereof. m. No action shall have been taken by the Commission or the NASD the effect of which would make it improper for members of the NASD to execute transactions (as principal or agent) in any of the Offered Securities, and no proceedings for the taking of such action shall have been instituted or shall be pending or contemplated by the Commission or the NASD. n. The Company and the Warrant Agent shall have entered into the Warrant Agreement and the Representative shall have received counterparts, conformed as executed, thereof. -37- 38 o. The Company and the Managing Underwriters shall have entered into the Managing Underwriters' Warrant Agreement and the Representative shall have received counterparts, conformed as executed, thereof. p. The Company and the Managing Underwriters shall have entered into the Registration Rights Agreement and the Representative shall have received counterparts, conformed as executed, thereof. q. The Warrants shall have been approved for listing on the Nasdaq National Market. r. The Company and Lee N. Blatt, Myron Levy, and Gerald I. Klein shall have entered into the respective Employment Agreements and the Representative shall have received counterparts, conformed as executed, thereof. s. The Company shall have amended its Bylaws as set forth in the exhibit included in the Registration Statement on the Effective Date. t. Lee N. Blatt, Myron Levy, and Gerald I. Klein shall have repaid all indebtedness owed to the Company or any Subsidiary, including the indebtedness evidenced by their non-negotiable promissory notes payable to the Company set forth as exhibits to the Registration Statement on the Effective Date. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you and your counsel. The several obligations of the Underwriters to purchase Additional Securities hereunder are subject to the satisfaction on and as of each Additional Closing Date of the conditions set forth in this Section 10, except that if an Additional Closing Date is other than the Closing Date, the certificates, opinions and letters shall be as of such Additional Closing Date. If any of the conditions hereinabove provided for in this Section 10 shall not have been satisfied when and as required by this Agreement, this Agreement may be terminated by you by notifying the Company and the Selling Stockholders of such termination in writing (which you may deliver by facsimile transmission) prior to the Closing, but you shall be entitled to waive any of such conditions. 11. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective upon execution and delivery by all of the parties hereto and the release of notification of the effectiveness of the Registration Statement by the Commission; provided, however, that the provisions of Sections 8 and 9 shall at all times be effective following the execution and delivery of this Agreement by the parties hereto. -38- 39 If any one or more of the Underwriters shall fail or refuse to purchase Firm Securities that it or they have agreed to purchase hereunder, and the aggregate number of Firm Securities that such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Firm Securities, each non-defaulting Underwriter shall be obligated, severally, in the proportion that the number of Firm Securities set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Securities set forth opposite the names of all nondefaulting Underwriters or in such other proportion as you may specify in the Agreement Among Underwriters, to purchase the Firm Securities that such defaulting Underwriter or Underwriters agreed, but failed or refused to purchase. In that event, the Representative, for the accounts of the several nondefaulting Underwriters, may take up and pay for all or any part of such Firm Securities to be purchased by each nondefaulting Underwriter under this section, and may postpone the Closing Date to a time not exceeding three full business days after the Closing Date determined as provided in Section 4 of this Agreement. If any Underwriter or Underwriters shall fail or refuse to purchase Firm Securities and the aggregate number of Firm Securities with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Securities and the nondefaulting Underwriters do not purchase such Firm Securities, another person or persons to substitute for the defaulting Underwriters and purchase such Firm Securities is not found, or other arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Firm Securities are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter, the Company or the Selling Stockholders. In any such case that does not result in termination of this Agreement, either you or the Company and each of the Selling Stockholders shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 11. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. 12. TERMINATION OF AGREEMENT. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company or any of the Selling Stockholders by notice to the Company and each of the Selling Stockholders, if on or prior to the Closing Date or the Additional Closing Date (if different from the Closing Date and then only as to the Additional Securities), as the case may be, in your sole judgment, (i) trading in the Common Stock or the Warrants shall have been suspended by the Commission or the Nasdaq National Market; (ii) trading in securities generally on the New York Stock Exchange, American Stock Exchange or Nasdaq National Market shall have been suspended or materially limited, or minimum or maximum prices shall have been generally established on such exchange or market, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by any such exchange or market or by order of the Commission or any court or other governmental authority; (iii) a general moratorium on commercial banking activities shall have been declared by either federal or New York state authorities; (iv) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change -39- 40 in political, financial or economic conditions or other material event the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to market the Offered Securities or to enforce contracts for the sale of the Offered Securities; (v) except as set forth in the Prospectus, there shall be pending or threatened against the Company or any of the Subsidiaries or notification has been received by the Company or any of the Subsidiaries of the threat of any material legal or governmental proceeding or action relating generally to the business or prospects of the Company or any of the Subsidiaries which could have a Material Adverse Effect (including action with respect to credit or interest rates) or which in your reasonable judgment makes it impracticable or inadvisable to proceed with the offering; (vi) any of the certificates, opinions or other documents to be delivered on the date of this Agreement or at the Closing Date (or the Additional Closing Date with respect to any Additional Securities) are not in form reasonably satisfactory to counsel to the Underwriters; (vii) any conditions set forth in Section 10 of this Agreement shall not have been satisfied; or (viii) the Company is merged or consolidated or all or substantially all of the capital stock or assets of the Company are acquired by another company or group, or there exists a binding legal commitment for the foregoing or any other material change of ownership or control occurs. 13. INFORMATION FURNISHED BY THE UNDERWRITERS. The Company and the Selling Stockholders acknowledge that the statements set forth in the last paragraph on the cover page of the Prospectus and in the third, fifth, sixth and seventh paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you or on your behalf as such information is referred to in Sections 6(a), 6(b) and 9 hereof. 14. MISCELLANEOUS. Notice given pursuant to any of the provisions of this Agreement shall be in writing and shall be delivered (i) if to the Company or the Selling Stockholders, to the office of the Company at 10 Industry Drive, Lancaster, Pennsylvania 17603, Attention: Myron Levy, President, Facsimile Number (717) 397-9503 (with a copy to Blau, Kramer, Wactlar & Lieberman, P.C., 100 Jericho Quadrangle, Suite 225, Jericho, New York 11753, Attention: David H. Lieberman, Esquire, Facsimile Number (516) 822-5609), or (ii) if to you, as Representative of the Underwriters, to Janney Montgomery Scott Inc., 26 Broadway, New York, New York 10004-1776 Attention: Herbert M. Gardner, Senior Vice President, Facsimile Number (212) 510-0683 (with copy to Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas 75201-4675, Attention: Terry M. Schpok, P.C., Facsimile Number (214) 969-4343). This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, the Selling Stockholders, the other persons entitled to indemnification and contribution under Section 9 hereof, and their respective successors and assigns. No other person shall acquire or have any right under or by virtue of this Agreement. Neither of the terms "successor" and "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Offered Securities solely by reason of such person's status as such a purchaser. -40- 41 This Agreement constitutes the entire agreement, and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof, except for the section of the Letter of Intent, dated October 30, 1997, between the Company and you, entitled "Investment Banking Agreement," which shall remain in full force and effect. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to choice of law principles thereunder. Time is of the essence in this Agreement. All representations and warranties, covenants and agreements of the Company and the Selling Stockholders contained in this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Underwriters and shall survive delivery of and payment for the Offered Securities to and by the Underwriters. The agreements contained in Sections 5(j), 8 and 9 shall survive the termination of this Agreement, including any termination pursuant to Section 12. For purposes of this Agreement, any representation and warranty concerning the Company or any Subsidiary concerning any liabilities, obligations, or violations of the Company or such Subsidiary shall be deemed to refer to the Company and each of its predecessors or such Subsidiary and each of its predecessors, respectively. The Company, each of the Selling Stockholders and the Underwriters each hereby irrevocably waive any right they may have to a trial by jury in respect to any claim based upon or arising out of this Agreement or the transactions contemplated hereby. This Agreement may be signed in various counterparts which together shall constitute one and the same agreement. Subject to Section 11 hereof, this Agreement shall be effective when, but only when, at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] -41- 42 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, HERLEY INDUSTRIES, INC. By: ___________________________________ Name: Myron Levy Title: President Selling Stockholders: ____________________________________________ Lee N. Blatt ____________________________________________ Gerald I. Klein ____________________________________________ Kathi Thonet CONFIRMED as of the date first above mentioned, on behalf of itself and the other several Underwriters named in Schedule I hereto: JANNEY MONTGOMERY SCOTT INC. By: __________________________________ Name: Herbert M. Gardner Title: Senior Vice President -42- 43 SCHEDULE I UNDERWRITERS
Number Number of Firm of Firm Name Shares Warrants - ---- ------ -------- Janney Montgomery Scott Inc................................... 550,000 550,000 Southwest Securities, Inc..................................... 550,000 550,000 --------- --------- TOTAL....................................... 1,100,000 1,100,000 ========= =========
I-1 44 SCHEDULE II OFFERED SECURITIES
Additional Additional Firm Shares Firm Warrants Shares Warrants ----------- ------------- ------ -------- Company .................... 700,000 1,100,000 - 165,000 --------- --------- ------- ------- Selling Stockholders: Lee N. Blatt ...... 315,000 -- 129,938 -- Gerald I. Klein ... 42,500 -- 17,531 -- Kathi Thonet ...... 42,500 -- 17,531 -- --------- --------- ------- ------- Total Selling Stockholders .... 400,000 0 165,000 0 --------- --------- ------- ------- TOTAL ...................... 1,100,000 1,100,000 165,000 165,000 ========= ========= ======= =======
II-1 45 SCHEDULE III INDIVIDUALS SUBJECT TO LOCK-UP AGREEMENTS Adm. Thomas J. Allshouse (Ret.) Lee N. Blatt Adam J. Bottenfield Allan Coon Anello C. Garefino George Hopp Gerald I. Klein Myron Levy David H. Lieberman Glen Rosenthal Alvin M. Silver John A. Thonet Kathi Thonet Raymond Umbarger Adm. Edward J. Walker, Jr. (Ret.) III-1 EX-4.3 3 FORM OF WARRANT AGREEMENT 1 EXHIBIT 4.3 WARRANT AGREEMENT WARRANT AGREEMENT, dated as of this 16th day of December, 1997, by and between Herley Industries, Inc., a Delaware corporation (the "Company") and American Stock Transfer & Trust Company, as warrant agent (the "Warrant Agent"). W I T N E S S E T H WHEREAS, the Company proposes to make a public offering (the "Public Offering") of shares of its Common Stock (as defined in Section I hereof) and common stock purchase warrants (the "Warrants") of the Company, each Warrant exercisable to purchase one share of Common Stock; and WHEREAS, in relation to the Public Offering, the Company has filed a Registration Statement on Form S-1 (Registration Statement No.333-39767) (as amended or supplemented, the "Registration Statement") with the Securities and Exchange Commission ("SEC"); and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance, registration, transfer, and exchange of the Warrants, the issuance of certificates representing the Warrants (each a "Warrant Certificate"), the exercise of the Warrants, and the rights of the registered holders thereof; NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company and the Warrant Agent, the parties hereto hereby agree as follows: SECTION 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Common Stock" shall mean the Company's common stock, par value $.10 per share. (b) "Company" shall have the meaning set forth in the introductory paragraph. (c) "Convertible Securities" shall have the meaning set forth in Section 8(c) hereof. (d) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located at 40 Wall Street, New York, New York 10005 as of the date hereof. 2 (e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (f) "Exempt Securities" shall have the meaning set forth in Section 8(o) hereof. (g) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (i) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder thereof, or his attorney duly authorized in writing, with the appropriate signature guarantees, as described in the Warrant Certificate, and (ii) payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the Exercise Price plus transfer taxes, if any. (h) "Exercise Price" shall mean the purchase price to be paid upon exercise of a Warrant in accordance with the terms hereof, which price shall be $14.40 per share of Common Stock for a period of 13 months from the date hereof and $15.60 per share of Common Stock thereafter until the Warrant Expiration Date, subject to (i) adjustment from time to time pursuant to the provisions of Section 8 hereof, and (ii) the Company's right to reduce the Exercise Price, upon written notice to all Registered Holders, for a period of not less than 30 days. (i) "Managing Underwriters" shall have the meaning set forth in Section 2(c) hereof. (j) "Managing Underwriters' Warrant" shall have the meaning set forth in Section 2(c) hereof. (k) "Nasdaq National Market" shall have the meaning set forth in Section 8(f) hereof. (l) "Notice Event" shall mean (i) any authorization by the Company of the issuance to all holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or warrants, (ii) any authorization by the Company of the distribution to all holders of shares of Common Stock of evidences of its indebtedness or assets (other than cash dividends or distributions payable out of consolidated earnings or earned surplus or dividends payable in shares of Common Stock), (iii) any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the conveyance or transfer of the properties and 2 3 assets of the Company substantially as an entirety, or of any reclassification or change of Common Stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or a tender offer or exchange offer for shares of Common Stock, (iv) any voluntary or involuntary dissolution, liquidation or winding up of the Company, or (v) any proposal by the Company to take any other action that would require an adjustment of the Exercise Price or the number of Warrant Shares pursuant to Section 8. (m) "Option Issuance" shall have the meaning set forth in Section 8(c) hereof. (n) "Options" shall have the meaning set forth in Section 8(c) hereof. (o) "Prospectus" shall mean the prospectus contained in the Registration Statement, as such prospectus is amended or supplemented from time to time. (p) "Public Offering" shall have the meaning set forth in the Recitals. (q) "Registered Holder" shall mean the person in whose name any certificate representing Warrants shall be registered on the books maintained by the Warrant Agent pursuant to Section 6 hereof. (r) "Registration Rights Agreement" shall mean that certain Registration Rights Agreement, dated as of the date hereof, by and between the Company and the Managing Underwriters. (s) "SEC" shall have the meaning set forth in the Recitals. (t) "SEC Reports" shall have the meaning set forth in Section 5(g) hereof. (u) "Registration Statement" shall have the meaning set forth in the Recitals. (v) "Stock Option Plans" shall have the meaning set forth in Section 8(o) hereof. (w) "Time of Determination" shall have the meaning set forth in Section 8(f) hereof. (x) "Transfer Agent" shall mean American Stock Transfer & Trust Company, as the Company's transfer agent, or its authorized successor, as such. 3 4 (y) "Warrant Agent" shall have the meaning set forth in the introductory paragraph. (z) "Warrant Certificate" shall have the meaning set forth in the Recitals. (aa) "Warrant Expiration Date" shall mean 5:00 p.m. (New York City time) on January 16, 2000 (or as may be extended pursuant to Section 5(d)), provided that, if in New York City, such date (or extended date) shall be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York City time) on the next following day which in New York City is not a holiday or a day on which banks are authorized to close. (bb) "Warrants" shall have the meaning set forth in the Recitals. SECTION 2. Warrants and Issuance of Warrant Certificates. (a) Each Warrant Exercisable for One Share. A Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase one share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in Section 8 hereof. (b) 1,375,000 Shares. From time to time, up to the Warrant Expiration Date, the Transfer Agent shall execute and deliver stock certificates in required whole number denominations representing up to an aggregate of 1,375,000 shares of Common Stock, subject to adjustment as described herein, upon the exercise of Warrants in accordance with this Agreement. (c) Warrant Certificates. From time to time, up to the Warrant Expiration Date, the Warrant Agent shall execute and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6 hereof, (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7 hereof, (v) those issued upon exercise by Janney Montgomery Scott Inc. or Southwest Securities, Inc. (collectively, the "Managing Underwriters") or their assignees of the Managing Underwriters' Warrant (the "Managing Underwriters' Warrant") issued to the Managing Underwriters in connection with the Public Offering, and (vi) at the option of the Company, in such form as may be approved by its Board of Directors, to reflect (A) any adjustment or change in the Exercise Price or the number of shares of Common Stock purchasable upon exercise of the Warrants made pursuant to Section 8 hereof and (B) any other modifications approved by Registered Holders in accordance with Section 15 hereof. 4 5 SECTION 3. Form and Execution of Warrant Certificates. (a) Form. The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed, engraved or typed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, as may be required to comply with any law, with any rule or regulation made pursuant thereto, or with any rule or regulation of any stock exchange or securities association on which or through which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrants shall be numbered serially with the letter "W." (b) Execution. Warrant Certificates shall be executed on behalf of the Company by the Company's Chairman of the Board, President or any Vice President and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, shall have imprinted thereon a facsimile of the Company's seal and shall be countersigned by an authorized signatory of the Warrant Agent. In case any officer of the Company who shall have signed any of such Warrant Certificates shall cease to be such officer of the Company before the date of issuance of the Warrant Certificates and issue and delivery thereof, such Warrant Certificates may nevertheless be issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company. After execution by the Company and countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holders. SECTION 4. Exercise. (a) Time of Exercise. Each Warrant may be exercised by the Registered Holder thereof at any time after the date hereof and on or before the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date, and the person entitled to receive the shares of Common Stock and any unexercised Warrants deliverable upon such exercise shall be treated for all purposes as the holder of such shares of Common Stock and such unexercised Warrants upon such exercise as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant Agent shall deposit the proceeds received from the exercise of a Warrant into an account of the Company as designated in writing by the Company or as the Company may otherwise direct in writing. (b) Receipt of Payment and Issuance. The Warrant Agent shall promptly after clearance of checks received in payment of the Exercise Price, direct the Transfer Agent to issue and deliver to the person or persons entitled to receive the same, a 5 6 stock certificate or certificates for the shares of Common Stock deliverable upon such exercise and the Warrant Agent shall issue and deliver a Warrant Certificate for any remaining unexercised Warrants. Notwithstanding the foregoing, in the case of payment made in the form of a check drawn on an account of the Managing Underwriters or such other investment banks and brokerage houses as the Company shall approve, the Warrant Agent shall cause the certificates to be issued immediately without any delay. Upon the exercise of any Warrant and clearance of the funds received therefor, the Warrant Agent shall promptly remit the payment received for the Warrants to the Company or as the Company may direct in writing. SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc. (a) Issuance and Sale of Shares. The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of its authorized Common Stock, solely for the purpose of issuance upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock that shall be issuable upon exercise of the Warrants shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue or sale thereof. The Transfer Agent for the Common Stock will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from such Transfer Agent the stock certificates required to honor outstanding Warrants upon exercise 6 7 thereof in accordance with the terms of this Agreement. The Company will supply such Transfer Agent with duly executed certificates for such purposes and will provide or otherwise make available any cash which may be payable as provided in Section 9. The Company will furnish the Transfer Agent a copy of all notices of adjustments and certificates related thereto, transmitted to each Registered Holder pursuant to Section 8(p) hereof. Before taking any action which would cause an adjustment pursuant to Section 8 hereof that would reduce the Exercise Price below the then par value (if any) of the shares of Common Stock, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock at the Exercise Price as so adjusted. (b) Registration Statement. Except for the Warrants issuable upon exercise of the Managing Underwriters' Warrant, Registered Holders will be able to exercise their Warrants only if (i)(A) the Registration Statement or another registration statement relating to the sale of shares of Common Stock underlying such Warrants is then in effect, or (B) the sale of such 7 8 shares upon exercise of such Warrants is exempt from the registration requirements of the Securities Act of 1933, as amended, and (ii) such shares are qualified for sale or exempt from qualification under applicable laws of the states where the Registered Holders reside. The Company covenants to maintain the Registration Statement or another registration statement in effect at all times with respect to the sale of shares of Common Stock underlying such Warrants until the Warrant Expiration Date. The Company also covenants to maintain at all times all necessary or desireable state "blue sky" filings with respect to the sale of shares of Common Stock underlying such Warrants until the Warrant Expiration Date. (c) Managing Underwriters' Warrant. A new registration statement will be required to be filed and declared effective by the SEC before the issuance of the Warrants issuable upon exercise of the Managing Underwriters' Warrant and the shares of Common Stock issuable upon exercise of such Warrants unless such issuances are exempt from registration under the Securities Act of 1933, as amended. In addition, before the issuance of such Warrants and shares of Common Stock, such securities must also be registered or qualified under the applicable state securities laws, unless an exemption exists from such registration or qualification. Under the Registration Rights Agreement, the Company has agreed to, among other things, file and maintain the effectiveness of certain registration statements with respect to such Warrants and shares of Common Stock and register or qualify them under state securities laws. Neither such Warrants nor shares of Common Stock may be issued unless such a registration statement is in effect and such Warrants and shares of Common Stock are registered or qualified under applicable state securities laws, or an exemption from the requirements to file such a registration statement or register or qualify such Warrants and shares of Common Stock exists. (d) Notices. The Company shall give notice not less than 90, and not more than 120, days prior to the Warrant Expiration Date to the Registered Holders of all then outstanding Warrants to the effect that the Warrants will terminate and become void as of 5:00 p.m., New York City time, on the Warrant Expiration Date. If the Company fails to give such notice, the Warrants will not expire until 90 days after the Company gives such notice, provided, however, in no event will Registered Holders be entitled to any damages or other remedy for the Company's failure to give such notice other than any such extension. In addition, notwithstanding anything to the contrary in this Agreement, if the Company has not maintained an effective registration statement under the Securities Act with respect to the sale of shares of Common Stock underlying the Warrants during the 90 days immediately before the Warrant Expiration Date (and maintained the registration or qualification of such shares under applicable state securities laws during such period), the Warrants shall not expire until the Company maintains an effective registration statement (and such registrations and qualifications) for 90 consecutive days beginning with the first day after 90 days before the Warrant Expiration Date that such registration statement (and such registrations and qualifications) is effective. In the circumstances described in this paragraph, the extended Warrant Expiration Date for the Warrants shall be considered the Warrant Expiration Date for purposes of this Agreement. 8 9 (e) Stamp Taxes. The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares of Common Stock upon exercise of the Warrants; provided, however, that if shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (f) Listings. The Company will from time to time take all action which may be necessary so that the Warrants and the shares of Common Stock issuable upon the exercise of the Warrants will be listed on the principal securities exchanges and markets (including, without limitation, the Nasdaq National Market) within the United States of America, if any, on which any of the Company's shares of Common Stock are then listed. (g) SEC Reports. So long as any of the Warrants remain outstanding, the Company shall cause copies of all quarterly and annual financial reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act ("SEC Reports") to be filed with the Warrant Agent and mailed to the Registered Holders at their addresses appearing in the register of the Registered Holders maintained by the Warrant Agent, in each case, within 15 days after filing with the SEC. If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company shall nevertheless continue to cause SEC Reports, comparable to those which it would be required to file pursuant to Section 13 or 15(d) of the Exchange Act if it were subject to the requirements of either such section, to be so filed with the SEC (but only if the SEC permits such filings) and with the Warrant Agent and mailed to the Registered Holders, in each case, within the same time periods as would have applied (including under the preceding sentence) had the Company been subject to the requirements of Section 13 or 15(d) of the Exchange Act. The Company shall provide the Warrant Agent with a sufficient number of copies of all SEC Reports to enable the Warrant Agent to deliver to each Registered Holder at least one copy and to each nominee Registered Holder at least one copy for each beneficial holder for whom such nominee Registered Holder holds Warrants. SECTION 6. Exchange and Registration of Transfer. Subject to the restrictions on transfer contained herein or in the Warrant Certificates: (a) Exchange of Warrant Certificates. Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction of the terms and provisions herein, the Company shall execute, and the Warrant Agent shall countersign, issue and deliver in 9 10 exchange therefor, the Warrant Certificate or Certificates that the Registered Holder making the exchange shall be entitled to receive. (b) Warrant Register. The Warrant Agent shall keep books at its office, in which it shall register Warrant Certificates and transfers thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at its office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) Exercise Form. With respect to all Warrant Certificates presented for registration of transfer, or for exchange or exercise, the exercise form attached thereto must be duly endorsed, or be accompanied by a written instrument or instruments of transfer and exercise in form satisfactory to the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) Service Charge. A service charge may be imposed by the Warrant Agent upon the Registered Holder for any exchange or registration of transfer of Warrant Certificates. The Warrant Agent may require payment by a Registered Holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) Registered Holder Treated as Absolute Owner. Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby for all purposes and shall not be affected by any notice to the contrary. (f) Separately Transferable. The Warrants will be separately transferable from the Common Stock that they were issued with immediately following the completion of the Public Offering. SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership and loss, theft, destruction or mutilation of any Warrant Certificate and, in case of loss, theft or destruction, of indemnity satisfactory to them, and in the case of mutilation, upon surrender and cancellation thereof, in the absence of notice that the Warrant Certificate has been acquired by a bona fide purchaser the Company shall execute and the Warrant Agent shall countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Registered Holders requesting a substitute Warrant Certificate will be required to comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. 10 11 SECTION 8. Adjustment of Exercise Price and Number of Shares of Common Stock. The number of shares of Common Stock purchasable upon the exercise of the Warrants and the Exercise Price shall be subject to adjustment from time to time as follows: (a) Stock Splits, Combinations, etc. In case the Company shall hereafter (i) pay a dividend or make a distribution on its Common Stock in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of its shares of Common Stock any shares of capital stock of the Company, the Exercise Price in effect and the number of shares of Common Stock issuable upon exercise of each Warrant immediately prior to such action shall be adjusted so that the Registered Holder of any Warrant thereafter exercised shall be entitled to receive the number of shares of capital stock of the Company at the same aggregate Exercise Price that such Registered Holder would have owned immediately following such action had such Warrant been exercised immediately prior thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this paragraph, the Registered Holder of any Warrant thereafter exercised shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. (b) Reclassification, Combinations, Mergers, etc. In case of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrants (other than as set forth in paragraph (a) above and other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation or entity (other than a merger in which the Company is the continuing corporation and which does not result in any reclassification or change of the then outstanding shares of Common Stock or other capital stock issuable upon exercise of the Warrants), or in the case of any sale or conveyance of all or substantially all of the assets of the Company followed by a related distribution to holders of shares of Common Stock of cash, securities or other property, then as a condition of such reclassification, change, consolidation, merger, or sale of assets, the Company or such a successor corporation or entity, as the case may be, shall forthwith make lawful and adequate provision whereby the Registered Holder of each Warrant then outstanding shall have the right thereafter to receive on exercise of such Warrant the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, or sale of assets, by a holder of the number of shares of Common Stock issuable upon exercise of such Warrant immediately prior to such reclassification, change, consolidation, merger, or sale of assets, and enter into a supplemental warrant agreement so providing. Such provisions shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 8. If the issuer of securities deliverable upon exercise of the Warrants under the supplemental warrant agreement is an affiliate of the formed or surviving corporation or other entity, that issuer shall join in the 11 12 supplemental warrant agreement. The above provisions of this paragraph (b) shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations or mergers. (c) Issuance of Options or Convertible Securities. In the event the Company shall, at any time or from time to time after the date hereof, issue, sell, distribute or otherwise grant in any manner (including by assumption) any rights to subscribe for or to purchase, or any warrants or options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (any such rights, warrants or options being herein called "Options" and any such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the rights to convert or exchange such Convertible Securities are immediately exercisable, and the price per share at which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the aggregate amount, if any, received or receivable by the Company as consideration for the issuance, sale, distribution or granting of such Options or any such Convertible Security, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options or upon conversion or exchange of all such Convertible Securities, plus, in the case of Options to acquire Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange of all such Convertible Securities, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of all such Options or upon the conversion or exchange of all such Convertible Securities or upon the conversion or exchange of all Convertible Securities issuable upon the exercise of all such Options) shall be less than the current market price per share of Common Stock on the date that the Company becomes obligated to make such issuance, sale, distribution or granting of such Options or Convertible Securities (any such event being herein called an "Option Issuance"), then, effective upon such Option Issuance, (I) the Exercise Price shall be reduced to the price (calculated to the nearest 1/1,000 of one cent) determined by multiplying the Exercise Price in effect immediately prior to such Option Issuance by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately prior to such Option Issuance multiplied by the current market price per share of Common Stock on the date of such Option Issuance plus (ii) the consideration, if any, received by the Company upon such Option Issuance, and the denominator of which shall be the product of (A) the total number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately after such Option Issuance multiplied by (B) the current market price per share of Common Stock on the date of the Option Issuance and (II) the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be increased to a number determined by multiplying the number of shares of Common Stock so purchasable immediately prior to the date of the Option Issuance by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment required by clause (I) of this sentence and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. For purposes of the foregoing, the total maximum number of shares of Common Stock issuable upon exercise of all such Options or upon conversion or exchange of all such Convertible Securities or upon the conversion or exchange of the total maximum amount of the Convertible Securities issuable upon the exercise of all such Options shall be deemed to have been issued as of the date of such 12 13 Option Issuance and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration therefor such price per share, determined as provided above. Except as provided in paragraphs (j) and (k) below, no additional adjustment of the Exercise Price shall be made upon the actual exercise of such Options or upon conversion or exchange of the Convertible Securities or upon the conversion or exchange of the Convertible Securities issuable upon the exercise of such Options. (d) Dividends and Distributions. In the event the Company shall, at any time or from time to time after the date hereof, distribute to all the holders of Common Stock any dividend or other distribution of cash, evidences of its indebtedness, other securities or other properties or assets (in each case other than (i) dividends payable in Common Stock, Options or Convertible Securities and (ii) any cash dividend that, when added to all other cash dividends paid in the one year prior to the declaration date of such dividend, does not exceed 5% of the current market price per share of Common Stock on such declaration date), or any options, warrants or other rights to subscribe for or purchase any of the foregoing, then (A) the Exercise Price shall be decreased to a price determined by multiplying the Exercise Price then in effect by a fraction, the numerator of which shall be the current market price per share of Common Stock on the record date for such distribution less the sum of (X) the cash portion, if any, of such distribution per share of Common Stock outstanding (exclusive of any treasury shares) on the record date for such distribution plus (Y) the then fair market value (as determined in good faith by the Board of Directors of the Company) per share of Common Stock outstanding (exclusive of any treasury shares) on the record date for such distribution of that portion, if any, of such distribution consisting of evidences of indebtedness, other securities, properties, assets, options, warrants or subscription of purchase rights, and the denominator of which shall be such current market price per share of Common Stock and (B) the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be increased to a number determined by multiplying the number of shares of Common Stock so purchasable immediately prior to the record date for such distribution by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment required by clause (A) of this sentence and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. The adjustments required by this paragraph (d) shall be made whenever any such distribution occurs retroactive to the record date for the determination of stockholders entitled to receive such distribution. (e) Sale of Common Stock Below its Current Market Price. In the event the Company shall, at any time or from time to time after the date hereof, issue or sell any shares of Common Stock and the price per share at which such shares were issued or sold shall be less than the current market price per share of Common Stock on the date the Company becomes obligated to make such issuance or sale, then, effective upon such issuance or sale (i) the Exercise Price shall be reduced to the price (calculated to the nearest 1/1,000 of one cent) determined by multiplying the Exercise Price in effect immediately prior to such issuance or sale by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately prior to such issuance or sale multiplied by the current market price per share of Common Stock on the date of such issuance or sale plus (B) the consideration received by the Company upon such issuance or sale and the 13 14 denominator of which shall be the product of (X) the total number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately after such issuance or sale multiplied by (Y) the current market price per share of Common Stock on the date of such issuance or sale and (ii) the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be increased to a number determined by multiplying the number of shares of Common Stock so purchasable immediately prior to the date of such issuance or sale by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment required by clause (i) of this sentence and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. (f) Current Market Price. For the purpose of any computation of current market price under this Section 8 and Section 9, the current market price per share of Common Stock at any date shall be (x) for purposes of Section 9 and any Options granted to the Company's directors and officers under the Stock Option Plans, the closing price on the business day immediately prior to the exercise of the applicable Warrant or the grant of any such Options, and (y) in all other cases, the average of the daily closing prices for the shorter of (i) the 20 consecutive trading days ending on the last full trading day on the exchange or market described below prior to the Time of Determination (as defined below) and (ii) the period commencing on the date next succeeding the first public announcement of the issuance, sale, distribution or granting in question through such last full trading day prior to the Time of Determination. The term "Time of Determination" as used herein shall be the time and date of the earlier to occur of (A) the date as of which the current market price is to be computed and (B) the last full trading day on such exchange or market before the commencement of "ex-dividend" trading in the Common Stock relating to the event giving rise to the adjustment. The closing price for any day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in each case (1) on the principal national securities exchange on which the shares of Common Stock are listed or to which such shares are admitted to trading or (2) if the Common Stock is not listed or admitted to trading on a national securities exchange, in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq National Market") or any comparable system or (3) if the Common Stock is not listed on Nasdaq National Market or a comparable system, as furnished by two members of the NASD selected from time to time in good faith by the Board of Directors of the Company for that purpose. In the absence of all of the foregoing, or if for any reason the current market price per share cannot be determined pursuant to the foregoing provisions of this paragraph (f), the current market price per share shall be the fair market value thereof as determined in good faith by the Board of Directors of the Company. (g) Change in Number of Warrants. The Company may elect, upon any adjustment of the Exercise Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the 14 15 numerator of which shall be the Exercise Price in effect immediately prior to such adjustment and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 8, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates, on the date of such adjustment, Warrant Certificates evidencing, subject to Section 9 hereof, the number of additional Warrants to which such Registered Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Registered Holder in substitution and replacement for the Warrant Certificates held by such Registered Holder prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of Warrants to which such Registered Holder shall be entitled after such adjustment. (h) Consideration Received. If any shares of Common Stock, Options or Convertible Securities shall be issued, sold or distributed for a consideration other than cash, the amount of the consideration other than cash received by the Company in respect thereof shall be deemed to be the then fair market value of such consideration (as determined in good faith by the Board of Directors of the Company). If any Options shall be issued in connection with the issuance and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. If the Company shall pay a dividend or make any other distribution payable in Options or Convertible Securities, then such Options or Convertible Securities shall be deemed to have been issued or sold without consideration. (i) Deferral of Certain Adjustments. No adjustment to the Exercise Price (including the related adjustment to the number of shares of Common Stock purchasable upon the exercise of each Warrant) shall be required hereunder unless such adjustment, together with other adjustments carried forward as provided below, would result in an increase or decrease of at least one percent of the Exercise Price; provided that any adjustments which by reason of this paragraph (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. No adjustment need to be made for a change in the par value of the Common Stock. All calculations under this Section 8 shall be made to the nearest 1/1,000 of one cent or to the nearest 1/1000 of a share, as the case may be. (j) Changes in Options and Convertible Securities. If the exercise price provided for in any Options referred to in paragraph (c) above, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph (c) above, or the rate at which any Convertible Securities referred to in paragraph (c) above are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution upon an event which results in a related adjustment pursuant to this Section 8), the Exercise Price then in effect and the number of shares of Common Stock purchasable upon the exercise of each Warrant shall forthwith be readjusted (effective only with respect to any exercise of any Warrant after such readjustment) to the Exercise Price and number of shares of Common Stock so purchasable that would then be in effect had the adjustment made upon the issuance, sale, distribution or granting 15 16 of such Options or Convertible Securities been made based upon such changed purchase price, additional consideration or conversion rate, as the case may be, but only with respect to such Options and Convertible Securities as then remain outstanding. (k) Expiration of Options and Convertible Securities. If at any time after any adjustment to the number of shares of Common Stock purchasable upon the exercise of each Warrant shall have been made pursuant to paragraph (c) or (j) above or this paragraph (k), any Options or Convertible Securities shall have expired unexercised, the number of such shares so purchasable with respect to any then outstanding Warrants shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had all of the Warrants outstanding at the time of the original adjustment been adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only shares of Common Stock deemed to have been issued in connection with such Options or Convertible Securities were the shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or Convertible Securities and (ii) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance, sale, distribution or granting of all such Options or Convertible Securities, whether or not exercised; provided that no such readjustment shall have the effect of decreasing the number of such shares so purchasable by an amount (calculated by adjusting such decrease to account for all other adjustments made pursuant to this Section 8 following the date of the original adjustment referred to above) in excess of the amount of the adjustment initially made in respect of the issuance, sale, distribution or granting of such Options or Convertible Securities. (l) Other Adjustments. In the event that at any time, as a result of an adjustment made pursuant to this Section 8, the Registered Holders shall become entitled to receive any securities of the Company other than shares of Common Stock, thereafter the number of such other securities so receivable upon exercise of the Warrants and the Exercise Price applicable to such exercise shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in this Section 8. (m) Common Stock. As used in this Section 8, the term "Common Stock" shall mean and include the Common Stock authorized on the date of the original issue of the shares of Common Stock and Warrants in connection with the Public Offering and shall also include any capital stock of any class of the Company thereafter authorized that is not limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Company's Certificate of Incorporation as Common Stock on the date of the original issue of the shares of Common Stock and Warrants in connection with the Public Offering or (i) in the case of any reclassification, change, consolidation, merger, or sale of assets of the character referred to in Section 8(b) hereof, the stock, securities or property provided for in such section or (ii) in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value 16 17 to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (n) Determination of Gross Sales Price. In case of the sale for cash of any shares of Common Stock, Options, or Convertible Securities, the consideration received by the Company therefor shall be deemed to be the gross sales price therefor without deducting therefrom any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. (o) Events Resulting in No Adjustments. No adjustment to the Exercise Price of the Warrants or to the number of shares of Common Stock purchasable upon the exercise of each Warrant, however, will be made upon (i) the sale of any shares of Common Stock or Warrants in the Public Offering (including the exercise of the over-allotment option granted to the underwriters), (ii) the exercise of any stock options issued under the Company's 1997 Stock Option Plan, 1996 Stock Option Plan, 1992 Non-Qualified Stock Option Plan or 1988 Non-Qualified Stock Option Plan (the "Stock Option Plans") to officers, directors and employees of the Company under the terms of such plans as they exist on the date hereof, (iii) the exercise of any warrants by officers and directors of the Company, (iv) the sale of any shares of Common Stock or Warrants pursuant to the exercise of any Managing Underwriters' Warrant, or (v) the sale of any shares of Common Stock upon the exercise of any Warrants (collectively, the "Exempt Securities"). (p) Notice of Change in Exercise Price. Upon any adjustment of the Exercise Price pursuant to Section 8, the Company shall promptly thereafter (i) cause to be prepared a certificate of the President and Chief Executive Officer of the Company setting forth the Exercise Price after such adjustment and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of shares of Common Stock (or portion thereof) issuable after such adjustment in the Exercise Price upon exercise of a Warrant and payment of the adjusted Exercise Price, which certificate shall be conclusive evidence of the correctness of the matters set forth therein absent manifest error, provided that if the Warrant Agent reasonably requests, the Company shall engage a firm of independent public accountants of recognized standing selected by the Board of Directors of the Company (who may be the regular auditors of the Company) to prepare and file such certificate in lieu of the certificate of the President and Chief Executive Officer, in which case such certificate shall be conclusive evidence of the matters set forth therein absent manifest error, and (ii) deliver the Warrant Agent at its Corporate Office and to each of the Registered Holders of the Warrant Certificates at the address appearing on the registry books maintained by the Warrant Agent written notice of such adjustments by first-class mail, postage prepaid. The Warrant Agent shall be entitled to rely on the above-referenced certificate and shall be under no duty or responsibility with respect to any such certificate, except to exhibit the same from time to time to any Registered Holder desiring an inspection thereof during reasonable business hours. The Warrant Agent shall not at any time be under any duty or responsibility to any Registered Holder to determine whether any facts exist that may require any adjustment of the number of shares of Common Stock or other stock or property issuable on exercise of the Warrants or the Exercise Price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making such adjustment or the validity or value (or the kind or amount) of any shares of Common Stock or other stock or property which may be issuable on exercise of the Warrants. 17 18 (q) Notice of Certain Events. With respect to any Notice Event, the Company shall cause to be filed with the Warrant Agent and shall cause to be given to each of the Registered Holders of the Warrant Certificates at such Registered Holder's address appearing on the registry books maintained by the Warrant Agent, at least 20 days prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first class mail, postage prepaid, a written notice stating (i) the date as of which the holders of record of shares of Common Stock entitled to receive any such rights, options, warrants or distribution is to be determined, (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. The failure to give the notice required by this Section 8(q) or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, consolidation, merger, conveyance, transfer, dissolution, or liquidation or winding up, or the vote upon any action, provided that the Registered Holders shall retain any right to damages from the Company with respect to such failure. SECTION 9. Fractional Warrants and Fractional Shares. Regardless of whether or not the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 8 hereof, the Company shall nevertheless not be required to issue or sell fractions of shares upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon the exercise of any Warrants, the Company shall pay to the Registered Holder an amount in cash equal to such fraction multiplied by the current market price per share as determined pursuant to Section 8(f) hereof. To the extent possible, upon a Registered Holder's exercise of more than one Warrant the shares issuable or transferable shall be aggregated so that the Company shall only be required to pay for the value of one fractional share. SECTION 10. Warrant Holders Not Deemed Stockholders. No Registered Holder shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable or transferable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Registered Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. 18 19 SECTION 11. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, on his or her own behalf and for his or her own benefit, enforce against the Company his or her right to exercise the Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificate and this Agreement. SECTION 12. Agreement of Warrant Holders. Every holder of a Warrant, by his or her acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that: (a) Transfer of Warrants. The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his attorney-in-fact duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent in its sole discretion, together with payment of any applicable transfer taxes; and (b) Registered Holder Treated as Absolute Owner. The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the Registered Holder thereof and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and the Company and the Warrant Agent shall not be affected by any notice or knowledge to the contrary. SECTION 13. Cancellation of Warrant Certificates. If the Company shall acquire any Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be cancelled by the Warrant Agent, and the Company shall retire such Warrants. The Warrant Agent shall also cancel Warrant Certificates surrendered to the Warrant Agent following exercise of any or all of the Warrants represented thereby or delivered to it for transfer, splitup, combination or exchange. SECTION 14. Concerning the Warrant Agent. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder, be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently deposit all moneys received by 19 20 the Warrant Agent upon the exercise of Warrants into an account of the Company as designated in writing by the Company or as the Company may otherwise direct in writing. The Warrant Agent shall, upon request of the Company from time to time, deliver to the Company such complete reports of registered ownership of the Warrants and such complete records of transactions with respect to the Warrants as the Company may request. The Warrant Agent shall also make available to the Company for inspection by their agents or employees, from time to time as they may request, such original books of accounts and record as may be maintained by the Warrant Agent in connection with the issuance and exercise of Warrants hereunder, such inspections to occur at the Warrant Agent's Corporate Office during normal business hours. The Warrant Agent shall not at any time be under any duty or responsibility to any Registered Holder to make or cause to be made any adjustment of the Exercise Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. The Warrant Agent shall not be (i) liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) liable for any act or omission in connection with this Agreement except for its own negligence or willful misconduct. The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, the President, any Vice President, the Treasurer, any assistant Treasurer, the Secretary, or any Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine. The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder, including reasonable legal fees. The Company further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and legal fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's negligence or willful misconduct. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or willful misconduct), upon 30 days prior written notice to the Company and the 20 21 Selling Stockholders and the Company may discharge the Warrant Agent from its duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or willful misconduct) upon 30 days prior written notice to the Warrant Agent. At least 15 days prior to the date such resignation or discharge is to become effective, the Warrant Agent shall cause a copy of such notice of resignation or discharge to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation or discharge, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, or within a period of 15 days after the Warrant Agent has been notified by the Company of such discharge, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, the Warrant Agent's resignation or discharge shall be deemed to be effective and such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment, the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Company and the Registered Holder of each Warrant Certificate. Any corporation into which the Warrant Agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and the Registered Holder of each Warrant Certificate. The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. SECTION 15. Modification of Agreement. (a) Approval of Registered Holders. Subject to the provisions of Section 15(b) hereof, the Company and the Warrant Agent may by supplemental agreement make any 21 22 changes or corrections in this Agreement that (i) they deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained or (ii) they deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that except as otherwise indicated in this section and this Agreement, this Agreement shall not otherwise be modified, supplemented or altered in any respect, including the modification of the number of shares of Common Stock issuable upon exercise of the Warrants, the Exercise Price and the Warrant Expiration Date, except with the consent in writing of the Company, the Warrant Agent, and the Registered Holders of Warrant Certificates representing not less than two-thirds of the Warrants then outstanding. (b) Decrease in Exercise Price. The Company shall have the right at any time and from time to time to decrease the Exercise Price for a period of not less than 30 days on not less than 30 days prior written notice to the Registered Holders of the Warrants and the Managing Underwriters. SECTION 16. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, at 10 Industry Drive, Lancaster, Pennsylvania 17603, Attention: President (with a copy to: Blau, Kramer, Wactlar & Lieberman, P.C., 100 Jericho Quadrangle, Jericho, NY 11753, Attention: David Lieberman, Esq., Facsimile No.: (516) 822-5609); if to the Warrant Agent, at its Corporate Office. SECTION 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. SECTION 18. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and the Warrant Agent (and their respective successors and assigns) and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. SECTION 19. Termination. This Agreement shall terminate on the earliest to occur of (a) the Expiration Date, (b) the date upon which all Warrants have been exercised and (c) the date on which the Company certifies to the Warrant Agent that no Warrants are outstanding; provided however, that notwithstanding any such termination, the Warrant Agent shall be obligated to deliver funds to the Company in accordance with this Agreement. SECTION 20. Counterparts. This Agreement may be executed in counterparts, all of which taken together shall constitute a single document. 22 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. HERLEY INDUSTRIES, INC. By:_________________________________________ Myron Levy President AMERICAN STOCK TRANSFER & TRUST COMPANY By:_________________________________________ Authorized Officer 23 24 EXHIBIT A No. W __________ __________ Warrants WARRANT CERTIFICATE HERLEY INDUSTRIES, INC. This Warrant Certificate certifies that ____________, or its registered assigns is the registered holder (the "Registered Holder") of the number of Warrants set forth above, each of which represents the right to purchase one fully paid and nonassessable share of common stock, par value $.10 per share (the "Common Stock"), of Herley Industries, Inc., a Delaware corporation (the "Company"), at any time until the Expiration Date hereinafter referred to, by surrendering this Warrant Certificate, with the exercise form set forth hereon duly executed with signatures guaranteed as provided below, at the office maintained pursuant to the Warrant Agreement hereinafter referred to for that purpose by American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005, and any other offices of the Warrant Agent or its successor designated for such purpose (any such warrant agent being herein called the "Warrant Agent"), and by paying in full the sum of $14.40 per share if exercised on or before January 16, 1999, and $15.60 per share if exercised after January 16, 1999 and on or before the Expiration Date (as defined below) (the "Exercise Price"), plus transfer taxes, if any. Payment of the Exercise Price shall be made in United States currency, by certified check or money order payable to the order of the Company. Upon certain events provided for in the Warrant Agreement, the Exercise Price and the number of shares of Common Stock issuable upon the exercise of each Warrant are required to be adjusted. No Warrant may be exercised after 5:00 p.m. (New York City time) on January 16, 2000 or on such expiration date as may be extended to provide the Registered Holder at least 90 days written notice of such expiration date or to maintain an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") for at least 90 consecutive days prior to such expiration date (the "Expiration Date"). After the Expiration Date, all Warrants evidenced hereby shall thereafter become void, and the holders thereof shall have no rights hereunder. Prior to the Expiration Date, subject to any applicable laws, rules or regulations restricting transferability and to any restriction on transferability that may appear on this Warrant Certificate in accordance with the terms of the Warrant Agreement, the Registered Holder shall be entitled to transfer this Warrant Certificate in whole or in part upon surrender of this Warrant Certificate at the office of the Warrant Agent with the form of assignment set forth hereon duly executed, with signatures guaranteed by a member firm of a national securities exchange, a commercial A-1 25 bank, a savings bank or a savings and loan association or a trust company located in the United States, a member of the National Association of Securities Dealers, Inc. or other eligible guarantor institution which is a participant in a signature guarantee program (as such terms are defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended). Upon any such transfer, a new Warrant Certificate or Warrant Certificates representing the same aggregate number of Warrants will be issued in accordance with the instructions in the form of assignment. No Warrant is exercisable unless, at the time of such exercise, the Company has a registration statement in effect under the Securities Act covering the shares of Common Stock issuable or transferable upon exercise of such Warrant, and such shares have been registered or qualified under the securities laws of the state of residence of the exercising Registered Holder, or such issuance or transfer is exempt from the registration requirements of the Securities Act and such shares of Common Stock are exempt from such registration or qualification. Upon the exercise of less than all of the Warrants evidenced by this Warrant Certificate, there shall be issued to the Registered Holder a new Warrant Certificate in respect of the Warrants not exercised. Prior to the Expiration Date, the Registered Holder shall be entitled to exchange this Warrant Certificate, with or without other Warrant Certificates, for another Warrant Certificate or Warrant Certificates for the same aggregate number of Warrants, upon surrender of this Warrant Certificate at the office maintained for such purpose by the Warrant Agent. No fractional shares will be issued upon the exercise of Warrants. As to any final fraction of a share, which the Registered Holder of one or more Warrant Certificates, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, the Registered Holder shall be paid the cash value thereof determined as provided in the Warrant Agreement. This Warrant Certificate is issued under and in accordance with a Warrant Agreement between the Company and the Warrant Agent (the "Warrant Agreement") and is subject to the terms and provisions contained in said Warrant Agreement, to all of which terms and provisions the Registered Holder consents by acceptance hereof. This Warrant Certificate shall not entitle the Registered Holder to any of the rights of a stockholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to attend or receive any notice of meetings of stockholders or any other proceedings of the Company. This Warrant Certificate shall not be valid for any purpose until it shall have been countersigned by the Warrant Agent. A-2 26 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. DATED _____________________ HERLEY INDUSTRIES, INC. By:______________________________ President [SEAL] ______________________________ Treasurer COUNTERSIGNED: AMERICAN STOCK TRANSFER & TRUST COMPANY, WARRANT AGENT By:_________________________ Authorized Officer A-3 27 [REVERSE SIDE] Exercise Form The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to receive_______________ shares of Common Stock and herewith makes payment therefor. The undersigned requests that a certificate for such shares be registered in the name of___________________, whose address is ____________________and whose social security or other identifying number is _________________, and that such shares be delivered to__________________________, whose address is _________________________. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the balance of such shares be registered in the name of ____________________, whose address is_______________________ and whose social security or other identifying number is _________________, and that such Warrant Certificate be delivered to ___________________________, whose address is ___________________________________. Date:__________________________________ ______________________________ Signature Signature Guaranteed: ______________________________ The signature to the exercise form must correspond to the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to Rule 17Ad-15. A-4 28 Form of Assignment For value received, the undersigned hereby sells, assigns and transfers unto __________________________, whose address is ________________________ and whose social security or other identifying number is __________________, the Warrants represented by this Warrant Certificate (or ____ Warrants, if less than all of the Warrants represented by this certificate), and hereby irrevocably constitutes and appoints the Warrant Agent as his or her attorney-in-fact to transfer this Warrant Certificate in the books of the Warrant Agent maintained for such purpose, with full power of substitution and re-substitution in the premises. If said number of Warrants is less than all of the Warrants evidenced by this certificate, the undersigned requests that a new Warrant Certificate representing the balance of such Warrants be registered in the name of _____________________, whose address is _______________________________ and whose social security or other identifying number is ________________, and that such Warrant Certificate be delivered to ___________________, whose address is _____________________________. Date:__________________________________ ______________________________ Signature Signature Guaranteed: ______________________________ The signature to the assignment form must correspond to the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to Rule 17Ad-15. A-5 EX-5.1 4 OPINION RE LEGALITY 1 Exhibit 5.1 December 10, 1997 Securities and Exchange Commission 450 Fifth Avenue, N W. Washington, D.C. 20549 Re: HERLEY INDUSTRIES, INC. REGISTRATION STATEMENT ON FORM S-1 Gentlemen: Reference is made to the filing by Herley Industries, Inc. (the "Company") of a Registration Statement on Form S-1 (the "Registration Statement"), as amended, with the Securities and Exchange Commission pursuant to the provisions of the Securities Act of 1933, as amended, covering the registration of (a) 2,530,000 shares of the Company's common stock, par value $.001 per share (the "Common Stock"); and (b) 1,265,000 common stock purchase warrants (the "Warrants"). As counsel for the Company, we have examined its corporate records, including its Certificate of Incorporation, By-Laws, its corporate minutes, the form of its Common Stock certificate and Warrant certificate and such other documents as we have deemed necessary or relevant under the circumstances. Based upon our examination, we are of the opinion that: 1. The Company is duly organized and validly existing under the laws of the State of Delaware. 2 Securities and Exchange Commission December 10, 1997 Page -2- 2. The shares of Common Stock and the Warrants covered by the Registration Statement have been duly authorized and, when issued in accordance with their terms, as more fully described in the Registration Statement, will be validly issued, fully paid and non-assessable. 3. The shares of Common Stock reserved for issuance upon the exercise of the Warrants when issued in accordance with the terms and conditions of such Warrants, will be validly issued, fully paid and non-assessable. We hereby consent to be named in the Registration Statement and in the Prospectus which constitutes a part thereof as counsel to the Company, and we hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. Very truly yours, BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C. EX-10.15 5 FORM OF MANAGING UNDERWRITERS' WARRANT AGREEMENT 1 EXHIBIT 10.15 MANAGING UNDERWRITERS' WARRANT AGREEMENT MANAGING UNDERWRITERS' WARRANT AGREEMENT, dated as of this 16th day of December 1997, by and between Herley Industries, Inc. (the "Company"), Janney Montgomery Scott Inc. ("JMS") and Southwest Securities, Inc. ("Southwest") (JMS and Southwest, collectively, the "Managing Underwriters"). W I T N E S S E T H WHEREAS, the Company proposes to make a public offering (the "Offering") of shares of Common Stock (as defined in Section 1) and common stock purchase warrants (the "Warrants"), each Warrant exercisable to purchase one share of Common Stock; and WHEREAS, in relation to the Offering, the Company has filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (the "SEC"); and WHEREAS, in connection with the Offering, the Company desires to sell and the Managing Underwriters desire to purchase Managing Underwriters' Warrants (as defined in Section 1), each of which shall be represented by a certificate (each such certificate, a "Managing Underwriters' Warrant Certificate"), which the Managing Underwriters may exercise to purchase Underlying Shares (as defined in Section 1) and Underlying Warrants (as defined in Section 1) pursuant to the terms of this Agreement and such certificates; WHEREAS, pursuant to this Agreement, each of the Managing Underwriters shall receive initially the right to purchase 55,000 Underlying Shares and 55,000 Underlying Warrants; NOW, THEREFORE, in consideration of $10 paid by the Managing Underwriters to the Company and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and for the purpose of defining the terms and provisions of the Managing Underwriters' Warrants and the Managing Underwriters' Warrant Certificates and the respective rights and obligations thereunder of the Company, the Managing Underwriters and the Managing Underwriters' Warrant Holders (as defined in Section 1), the parties hereto hereby agree as follows: SECTION 1. Definitions. The following terms as used in this Agreement shall have the meanings set forth below: (a) "Business Day" means a day other than a Saturday, Sunday or other day on which banks in the State of New York are authorized by law to remain closed; 2 (b) "Common Stock" shall mean the Company's common stock, par value $.10 per share; (c) "Company" shall have the meaning set forth in the introductory paragraph; (d) "Convertible Securities" shall have the meaning set forth in Section 4(c); (e) "Exempt Securities" shall have the meaning set forth in Section 4(o); (f) "Exercise Date" shall mean the date on which the Company shall have received both (i) the Managing Underwriters' Warrant Certificate representing the Managing Underwriters' Warrant, with the exercise form thereon duly executed by the Warrant Holder, or his attorney-in-fact duly authorized in writing, and (ii) payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the Underlying Share Purchase Price and/or the Underlying Warrant Purchase Price, as the case may be, plus transfer taxes, if any; (g) "JMS" shall have the meaning set forth in the introductory paragraph; (h) "Managing Underwriters" shall have the meaning set forth in the introductory paragraph; (i) "Managing Underwriters' Warrant" shall mean the right to purchase the Underlying Shares and the Underlying Warrants pursuant to this Agreement, together with any divisions thereof; (j) "Managing Underwriters' Warrant Certificate" shall have the meaning set forth in the recitals hereto; (k) "Managing Underwriters' Warrant Holder" means a person or entity in whose name a Managing Underwriters' Warrant shall be registered upon the books to be maintained by the Company for such purpose. (l) "Nasdaq National Market" shall have the meaning set forth in Section 4(f); (m) "Notice Event" shall mean (i) any authorization by the Company of the issuance to all holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or 2 3 warrants, or (ii) any authorization by the Company of the distribution to all holders of shares of Common Stock of evidences of its indebtedness or assets (other than cash dividends or distributions payable out of consolidated earnings or earned surplus or dividends payable in shares of Common Stock), (iii) any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety, or of any reclassification or change of Common Stock issuable upon exercise of a Managing Underwriters' Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or a tender offer or exchange offer for shares of Common Stock, (iv) any voluntary or involuntary dissolution, liquidation or winding up of the Company, or (v) any proposal by the Company to take any other action that would require an adjustment of the Underlying Share Purchase Price or the number of Underlying Shares pursuant to Section 4; (n) "Offering" shall have the meaning set forth in the recitals hereto; (o) "Option Issuance" shall have the meaning set forth in Section 4(c); (p) "Options" shall have the meaning set forth in Section 4(c); (q) "Registrable Securities" means the Managing Underwriters' Warrant and the Underlying Securities; (r) "Registration Rights Agreement" means that certain Registration Rights Agreement, dated as of the date hereof, by and between the Company and the Managing Underwriters; (s) "SEC" means the Securities and Exchange Commission; (t) "SEC Reports" shall have the meaning set forth in Section 3(d) hereof; (u) "Southwest" shall have the meaning set forth in the introductory paragraph; (v) "Stock Option Plans" shall have the meaning set forth in Section 4(o); (w) "Time of Determination" shall have the meaning set forth in Section 4(f); (x) "Transfer Agent" means American Stock Transfer & Trust Company, as transfer agent; 3 4 (y) "Underlying Securities" shall mean, collectively, the Underlying Shares, the Underlying Warrants and the Underlying Warrant Shares; (z) "Underlying Share Expiration Date" means 5:00 p.m., New York City time, on December 16, 2002 (or as may be extended pursuant to Section 3(c)), or if such expiration date is not a Business Day, at or before 5:00 p.m. New York City time on the next following Business Day; (aa) "Underlying Share Purchase Price" shall mean the purchase price to be paid upon the exercise of this Managing Underwriters' Warrant with respect to the Underlying Shares in accordance with the terms hereof, which price shall be $14.40 per Underlying Share, subject to adjustment from time to time pursuant to the provisions of Section 4; (bb) "Underlying Shares" means the 110,000 shares of Common Stock that are the subject of this Managing Underwriters' Warrant, subject to adjustment from time to time as provided herein; (cc) "Underlying Warrant Expiration Date" means 5:00 p.m. New York City time on January 16, 2000 (or as may be extended pursuant to Section 3(c)), or if such expiration date is not a Business Day, at or before 5:00 p.m. New York City time on the next following Business Day provided that such date shall not be later than the "Expiration Date" for the Warrants under the Warrant Agreement; (dd) "Underlying Warrant Purchase Price" shall mean the purchase price to be paid upon the exercise of this Managing Underwriters' Warrant with respect to the Underlying Warrants in accordance with the terms hereof, which price shall be $.12 per Underlying Warrant; (ee) "Underlying Warrants" means the 110,000 Warrants that are the subject of this Managing Underwriters' Warrant, subject to adjustment from time to time as provided in the Warrant Agreement and Section 5 hereof; (ff) "Underlying Warrant Shares" means the shares of Common Stock issuable upon exercise of the Underlying Warrants; (gg) "Warrant Agent" shall mean American Stock Transfer & Trust Company, as warrant agent; (hh) "Warrant Agreement" shall mean that certain Warrant Agreement, dated as of the date hereof, by and between the Company and the Warrant Agent; (ii) "Warrant Notice Event" shall mean (i) any authorization by the Company of the issuance to all holders of Warrants of rights, options or warrants to 4 5 subscribe for or purchase shares of Common Stock, Warrants or of any other subscription rights or warrants, (ii) any authorization by the Company of the distribution to all holders of Warrants of evidences of its indebtedness or assets (other than cash dividends or distributions payable out of consolidated earnings or earned surplus or dividends payable in shares of Common Stock), (iii) any reclassification or change of Underlying Warrants issuable upon exercise of a Managing Underwriters' Warrant, or a tender offer or exchange offer for Warrants, or (iv) any proposal by the Company to take any other action that would require an adjustment of the Underlying Warrant Purchase Price or the number of Underlying Warrants pursuant to Section 5; (jj) "Warrants" shall have the meaning set forth in the recitals hereto. SECTION 2. Duration And Exercise (a) Duration. Subject to the provisions of Section 4 hereof, a Managing Underwriters' Warrant may be exercised from time to time, upon the terms and subject to the conditions set forth herein, on or after 9:00 a.m., New York City time, on the first anniversary hereof and (a) before the Underlying Share Expiration Date to purchase the Underlying Shares, and (b) before the Underlying Warrant Expiration Date to purchase the Underlying Warrants. If a Managing Underwriters' Warrant is not exercised before the Underlying Share Expiration Date to purchase the Underlying Shares or the Underlying Warrant Expiration Date to purchase the Underlying Warrants, the Managing Underwriters' Warrant Holder shall no longer be entitled to purchase Underlying Shares or Underlying Warrants and all rights hereunder to purchase such Underlying Shares and such Underlying Warrants shall thereupon cease. (b) Exercise. (i) A Managing Underwriters' Warrant Holder may exercise a Managing Underwriters' Warrant, in whole or in part, to purchase Underlying Shares or Underlying Warrants, or both, in such amounts as may be elected upon surrender of such Managing Underwriters' Warrant Certificate with the subscription form thereon duly executed, to the Company at its corporate office at 10 Industry Drive, Lancaster, Pennsylvania 17603, together with the full Underlying Share Purchase Price for each Underlying Share to be purchased and the full Underlying Warrant Purchase Price for each Underlying Warrant to be purchased, in lawful money of the United States, or by certified check or bank draft payable in United States Dollars to the order of the Company and upon compliance with and subject to the conditions set forth herein. (ii) Upon receipt of a Managing Underwriters' Warrant Certificate with the subscription form thereon duly executed and accompanied by payment of the Underlying Share Purchase Price for the number of Underlying Shares and/or the Underlying Warrant Purchase Price for the number of Underlying Warrants for which such Managing Underwriters' Warrant is then being exercised, the Company, subject to 5 6 Section 6(b), will cause to be issued and delivered promptly to the Managing Underwriters' Warrant Holder certificates for such shares of Common Stock or Warrants, respectively, in such denominations as are requested by the Managing Underwriters' Warrant Holder. (iii) In case a Managing Underwriters' Warrant Holder shall exercise a Managing Underwriters' Warrant with respect to less than all of the Underlying Shares and/or Underlying Warrants that may be purchased pursuant to such Managing Underwriters' Warrant, the Company will execute a new Managing Underwriters' Warrant Certificate, as represented by a warrant certificate substantially in the form attached hereto as Exhibit A, exercisable for the balance of the Underlying Shares and/or Underlying Warrants that may be purchased upon exercise of such Managing Underwriters' Warrant and deliver such new Managing Underwriters' Warrant Certificate to the Managing Underwriters' Warrant Holder. Managing Underwriters' Warrant Certificates shall be executed on behalf of the Company by the Company's Chairman of the Board, President or any Vice President and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary. (iv) A Managing Underwriters' Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date, and the person entitled to receive Underlying Shares and/or Underlying Warrants and any Managing Underwriters' Warrant Certificate representing the unexercised portion of such Managing Underwriters' Warrant deliverable upon such exercise shall be treated for all purposes as the holder of such Underlying Shares, Underlying Warrants and unexercised Managing Underwriters' Warrant upon such exercise as of the close of business on the Exercise Date. (v) The Company covenants and agrees that it will pay when due and payable any and all taxes that may be payable in respect of the issue of this Managing Underwriters' Warrant or the issue of any Underlying Securities. The Company shall not, however, be required to pay any tax that may be payable in respect of any transfer of a Managing Underwriters' Warrant or of any Underlying Security to a person other than the Managing Underwriters' Warrant Holder at the time of surrender, and until the payment of such tax, shall not be required to issue such Underlying Security. SECTION 3. Covenants (a) Issuance and Sale of Underlying Shares and Underlying Warrants. The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of its authorized Common Stock, solely for the purpose of issuance upon exercise of the Managing Underwriters' Warrants, such number of shares of Common Stock as shall equal the aggregate of the Underlying Shares and the Underlying Warrant Shares. The Company covenants that all shares of Common Stock that shall be issuable upon exercise of the Managing Underwriters' Warrants shall, at the time of 6 7 delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof. The Company covenants that the Underlying Warrants that shall be issuable upon exercise of the Managing Underwriters' Warrants shall be validly issued and the legal, valid and binding obligations of the Company. The Transfer Agent for the Common Stock will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent. The Company will supply such Transfer Agent with duly executed certificates for such purposes and will provide or otherwise make available any cash which may be payable as provided in Section 6(b). The Company will furnish such Transfer Agent and the Warrant Agent a copy of all notices of adjustments and certificates related thereto, transmitted to each Managing Underwriters' Warrant Holder pursuant to Section 4(p) hereof. Before taking any action which would cause an adjustment pursuant to Section 4 hereof that would reduce the Underlying Share Purchase Price below the then par value (if any) of the shares of Common Stock, the Company will take any corporate action which may, in the opinion of its counsel (which may be counsel employed by the Company), be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock at the Underlying Share Purchase Price as so adjusted. (b) Registration Statement. A registration statement will be required to be filed and declared effective by the SEC before the sale or exercise of the Registrable Securities, unless such sale or exercise is exempt from the registration requirements of the Securities Act of 1933, as amended. In addition, before the sale or exercise of the Registrable Securities, the Registrable Securities must also be registered or qualified for such sale or exercise or exempt from such registration or qualification under the applicable state securities laws. The Company covenants to execute, deliver and perform the Registration Rights Agreement, pursuant to which the Company agrees to, among other things, file and maintain the effectiveness of certain registration statements and register or qualify the Registrable Securities under state securities laws. (c) Notices. The Company shall give notice not less than 90, and not more than 120, days prior to each of the Underlying Share Expiration Date and the Underlying Warrant Expiration Date to each Managing Underwriters' Warrant Holder to the effect that the Managing Underwriters' Warrants with respect to the Underlying Shares and with respect to the Underlying Warrants, as the case may be, will terminate and become void as of 5:00 p.m., New York City time, on each of the Underlying Share Expiration Date and the Underlying Warrant Expiration Date. If the Company fails to give such notice, the Managing Underwriters' Warrants with respect to the Underlying Shares and with respect to the Underlying Warrants, as the case may be, will not expire until 90 days after the Company gives such notice, provided, however, in no event will a 7 8 Managing Underwriters' Warrant Holder be entitled to any damages or other remedy for the Company's failure to give such notice other than any such extension. In addition, notwithstanding anything to the contrary in this Agreement, if the Company has not maintained an effective registration statement under the Securities Act with respect to the sale or issuance of the Registrable Securities during the 90 days immediately before each of the Underlying Share Expiration Date and the Underlying Warrant Expiration Date (and maintained the registration or qualification of such Registrable Securities under applicable state securities laws during such periods), the Managing Underwriters' Warrants with respect to the Underlying Shares and with respect to the Underlying Warrants, as the case may be, shall not expire until the Company maintains such effective registration statement (and such registrations and qualifications) for 90 consecutive days beginning with the first day after 90 days before the Underlying Share Expiration Date or Underlying Warrant Expiration Date, as the case may be, that such registration statement (and such registrations and qualifications) is effective. In the circumstances described in this paragraph, the extended Underlying Share Expiration Date and Underlying Warrant Expiration Date shall be considered the Underlying Share Expiration Date and Underlying Warrant Expiration Date, respectively, for purposes of this Agreement. Notwithstanding anything to the contrary in this Agreement, the Company shall issue any Underlying Shares, Underlying Warrants, or Underlying Warrant Shares to the holder of the respective right to acquire such security upon the exercise of such right and such holder's representation that such holder is a "sophisticated investor" under the federal securities laws if a registration statement is not effective with respect to such issuance. (d) SEC Reports. So long as the Managing Underwriters' Warrants remain outstanding, the Company shall cause copies of all quarterly and annual financial reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act ("SEC Reports") to be mailed to each Managing Underwriters' Warrant Holder at his or her address appearing in the register of the Managing Underwriters' Warrant Holders maintained by the Company, in each case, within 15 days of filing with the SEC. If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company shall nevertheless continue to cause SEC Reports, comparable to those which it would be required to file pursuant to Section 13 or 15(d) of the Exchange Act if it were subject to the requirements of either such section, to be so filed with the SEC (but only if the SEC permits such filings) and mailed to each Managing Underwriters' Warrant Holder, in each case, within the same time periods as would have applied (including under the preceding sentence) had the Company been subject to the requirements of Section 13 or 15(d) of the Exchange Act. (e) Restrictive Legend. Each Managing Underwriters' Warrant Certificate shall bear the following restrictive legend until such time as the transfer of such security is not restricted under the federal securities laws: "THE ISSUANCE OF THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THIS SECURITY BEEN REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF THE REGISTRATION OF SUCH 8 9 TRANSACTION UNDER THE SECURITIES ACT AND THE REGISTRATION OR QUALIFICATION OF THIS SECURITY UNDER APPLICABLE STATE SECURITIES LAWS UNLESS SUCH TRANSACTION IS EXEMPT FROM SUCH REGISTRATION AND THIS SECURITY IS EXEMPT FROM SUCH REGISTRATION OR QUALIFICATION." SECTION 4. Adjustment Of Underlying Share Purchase Price and Number of Underlying Shares. The number of Underlying Shares purchasable upon the exercise of this Managing Underwriters' Warrant and the Underlying Share Purchase Price shall be subject to adjustment from time to time as follows: (a) Stock Splits, Combinations, etc. In case the Company shall hereafter (i) pay a dividend or make a distribution on its Common Stock in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of its shares of Common Stock any shares of capital stock of the Company, the Underlying Share Purchase Price in effect and the number of Underlying Shares issuable upon exercise of a Managing Underwriters' Warrant immediately prior to such action shall be adjusted so that the Managing Underwriters' Warrant Holder of such Managing Underwriters' Warrant thereafter exercised shall be entitled to receive the number of shares of capital stock of the Company at the same aggregate Underlying Share Purchase Price that such Managing Underwriters' Warrant Holder would have owned immediately following such action had such Managing Underwriters' Warrant been exercised immediately prior thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this paragraph, the Managing Underwriters' Warrant Holder of the Managing Underwriters' Warrant thereafter exercised shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive) shall determine the allocation of the adjusted Underlying Share Purchase Price between or among shares of such classes of capital stock. (b) Reclassification, Combinations, Mergers, etc. In case of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Managing Underwriters' Warrants (other than as set forth in paragraph (a) above and other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation or entity (other than a merger in which the Company is the continuing corporation and which does not result in any reclassification or change of the then outstanding shares of Common Stock or other capital stock issuable upon exercise of the Managing Underwriters' Warrants), or 9 10 in the case of any sale or conveyance of all or substantially all of the assets of the Company followed by a related distribution to holders of shares of Common Stock of cash, securities or other property, then as a condition of such reclassification, change, consolidation, merger, or sale of assets, the Company or such a successor corporation or entity, as the case may be, shall forthwith make lawful and adequate provision whereby each Managing Underwriters' Warrant Holder of each Managing Underwriters' Warrant then outstanding shall have the right thereafter to receive on exercise of a Managing Underwriters' Warrant the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, or sale of assets, by a holder of the number of shares of Common Stock issuable upon exercise of such Managing Underwriters' Warrant immediately prior to such reclassification, change, consolidation, merger, or sale of assets, and enter into a supplemental warrant agreement so providing. Such provisions shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. If the issuer of securities deliverable upon exercise of a Managing Underwriters' Warrant under the supplemental warrant agreement is an affiliate of the formed or surviving corporation or other entity, that issuer shall join in the supplemental warrant agreement. The above provisions of this paragraph (b) shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations or mergers. (c) Issuance of Options or Convertible Securities. In the event the Company shall, at any time or from time to time after the date hereof, issue, sell, distribute or otherwise grant in any manner (including by assumption) any rights to subscribe for or to purchase, or any warrants or options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (any such rights, warrants or options being herein called "Options" and any such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the rights to convert or exchange such Convertible Securities are immediately exercisable, and the price per share at which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the aggregate amount, if any, received or receivable by the Company as consideration for the issuance, sale, distribution or granting of such Options or any such Convertible Security, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options or upon conversion or exchange of all such Convertible Securities, plus, in the case of Options to acquire Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange of all such Convertible Securities, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of all such Options or upon the conversion or exchange of all such Convertible Securities or upon the conversion or exchange of all Convertible Securities issuable upon the exercise of all such Options) shall be less than the current market price per share of Common Stock on the record date that the Company becomes obligated to make such issuance, sale, distribution or granting of such Options or Convertible Securities (any such event being herein called an "Option Issuance"), then, 10 11 effective upon such Option Issuance, (I) the Underlying Share Purchase Price shall be reduced to the price (calculated to the nearest 1/1,000 of one cent) determined by multiplying the Underlying Share Purchase Price in effect immediately prior to such Option Issuance by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately prior to such Option Issuance multiplied by the current market price per share of Common Stock on the date of such Option Issuance plus (ii) the consideration, if any, received by the Company upon such Option Issuance, and the denominator of which shall be the product of (A) the total number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately after such Option Issuance multiplied by (B) the current market price per share of Common Stock on the record date for such Option Issuance and (II) the number of Underlying Shares purchasable upon the exercise of a Managing Underwriters' Warrant shall be increased to a number determined by multiplying the number of Underlying Shares so purchasable immediately prior to the record date for such Option Issuance by a fraction, the numerator of which shall be the Underlying Share Purchase Price in effect immediately prior to the adjustment required by clause (I) of this sentence and the denominator of which shall be the Underlying Share Purchase Price in effect immediately after such adjustment. For purposes of the foregoing, the total maximum number of shares of Common Stock issuable upon exercise of all such Options or upon conversion or exchange of all such Convertible Securities or upon the conversion or exchange of the total maximum amount of the Convertible Securities issuable upon the exercise of all such Options shall be deemed to have been issued as of the date of such Option Issuance and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration therefor such price per share, determined as provided above. Except as provided in paragraphs (j) and (k) below, no additional adjustment of the Underlying Share Purchase Price shall be made upon the actual exercise of such Options or upon conversion or exchange of the Convertible Securities or upon the conversion or exchange of the Convertible Securities issuable upon the exercise of such Options. (d) Dividends and Distributions. In the event the Company shall, at any time or from time to time after the date hereof, distribute to all the holders of Common Stock any dividend or other distribution of cash, evidences of its indebtedness, other securities or other properties or assets (in each case other than (i) dividends payable in Common Stock, Options or Convertible Securities and (ii) any cash dividend that, when added to all other cash dividends paid in the one year prior to the declaration date of such dividend, does not exceed 5% of the current market price per share of Common Stock on such declaration date), or any options, warrants or other rights to subscribe for or purchase any of the foregoing, then (A) the Underlying Share Purchase Price shall be decreased to a price determined by multiplying the Underlying Share Purchase Price then in effect by a fraction, the numerator of which shall be the current market price per share of Common Stock on the record date for such distribution less the sum of (X) the cash portion, if any, of such distribution per share of Common Stock outstanding (exclusive of any treasury shares) on the record date for such distribution plus (Y) the then fair market value (as determined in good faith by the Board of Directors of the Company) per share 11 12 of Common Stock outstanding (exclusive of any treasury shares) on the record date for such distribution of that portion, if any, of such distribution consisting of evidences of indebtedness, other securities, properties, assets, options, warrants or subscription of purchase rights, and the denominator of which shall be such current market price per share of Common Stock and (B) the number of Underlying Shares purchasable upon the exercise of a Managing Underwriters' Warrant shall be increased to a number determined by multiplying the number of Underlying Shares so purchasable immediately prior to the record date for such distribution by a fraction, the numerator of which shall be the Underlying Share Purchase Price in effect immediately prior to the adjustment required by clause (A) of this sentence and the denominator of which shall be the Underlying Share Purchase Price in effect immediately after such adjustment. The adjustments required by this paragraph (d) shall be made whenever any such distribution occurs retroactive to the record date for the determination of stockholders entitled to receive such distribution. (e) Sale of Common Stock Below its Current Market Price. In the event the Company shall, at any time or from time to time after the date hereof, issue or sell any shares of Common Stock and the price per share at which such shares were issued or sold shall be less than the current market price per share of Common Stock on the date the Company becomes obligated to make such issuance or sale, then, effective upon such issuance or sale (i) the Underlying Share Purchase Price shall be reduced to the price (calculated to the nearest 1/1,000 of one cent) determined by multiplying the Underlying Share Purchase Price in effect immediately prior to such issuance or sale by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately prior to such issuance or sale multiplied by the current market price per share of Common Stock on the date of such issuance or sale plus (B) the consideration received by the Company upon such issuance or sale and the denominator of which shall be the product of (X) the total number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately after such issuance or sale multiplied by (Y) the current market price per share of Common Stock on the date of such issuance or sale and (ii) the number of Underlying Shares purchasable upon the exercise of each Managing Underwriters' Warrant shall be increased to a number determined by multiplying the number of Underlying Shares so purchasable immediately prior to the date of such issuance or sale by a fraction, the numerator of which shall be the Underlying Share Purchase Price in effect immediately prior to the adjustment required by clause (i) of this sentence and the denominator of which shall be the Underlying Share Purchase Price in effect immediately after such adjustment. (f) Current Market Price. For the purpose of any computation of current market price under this Section 4 and Section 6(b), the current market price per share of Common Stock at any date shall be (x) for purposes of Section 6(b) and any Options granted to the Company's directors and officers under the Stock Option Plans, the closing price on the business day immediately prior to the exercise of a Managing Underwriters' Warrant or the grant of any such Options and (y) in all other cases, the 12 13 average of the daily closing prices for the shorter of (i) the 20 consecutive trading days ending on the last full trading day on the exchange or market described below prior to the Time of Determination (as defined below) and (ii) the period commencing on the date next succeeding the first public announcement of the issuance, sale, distribution or granting in question through such last full trading day prior to the Time of Determination. The term "Time of Determination" as used herein shall be the time and date of the earlier to occur of (A) the date as of which the current market price is to be computed and (B) the last full trading day on such exchange or market before the commencement of "ex-dividend" trading in the Common Stock relating to the event giving rise to the adjustment. The closing price for any day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in each case (1) on the principal national securities exchange on which the shares of Common Stock are listed or to which such shares are admitted to trading or (2) if the Common Stock is not listed or admitted to trading on a national securities exchange, in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq National Market") or any comparable system or (3) if the Common Stock is not listed on Nasdaq National Market or a comparable system, as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time in good faith by the Board of Directors of the Company for that purpose. In the absence of all of the foregoing, or if for any reason the current market price per share cannot be determined pursuant to the foregoing provisions of this paragraph (f), the current market price per share shall be the fair market value thereof as determined in good faith by the Board of Directors of the Company. (g) Change in the Number of Managing Underwriters' Warrants. The Company may elect, upon any adjustment of the Underlying Share Purchase Price hereunder, to adjust the number of Managing Underwriters' Warrants with respect to the Underlying Shares outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of a Managing Underwriters' Warrant as hereinabove provided, so that each Managing Underwriters' Warrant to purchase Underlying Shares outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Managing Underwriters' Warrant to purchase Underlying Shares held of record prior to such adjustment of the number of Managing Underwriters' Warrants shall become that number of Managing Underwriters' Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Underlying Share Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Underlying Share Purchase Price in effect immediately after such adjustment. Upon each adjustment of the number of Managing Underwriters' Warrants pursuant to this Section 4, the Company shall, as promptly as practicable, cause to be distributed to each Managing Underwriters' Warrant Holder, on the date of such adjustment, a Managing Underwriters' Warrant Certificate evidencing, subject to Section 6(b) hereof, the number of additional Managing Underwriters' Warrants to purchase Underlying Shares to which such Managing Underwriters' Warrant Holder shall be entitled as a result of such 13 14 adjustment or, at the option of the Company, cause to be distributed to such Managing Underwriters' Warrant Holder in substitution and replacement for the Managing Underwriters' Warrant Certificate held by such Managing Underwriters' Warrant Holder prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Managing Underwriters' Warrant Certificates evidencing the number of Managing Underwriters' Warrants to purchase Underlying Shares to which such Managing Underwriters' Warrant Holder shall be entitled after such adjustment. (h) Consideration Received. If any shares of Common Stock, Options or Convertible Securities shall be issued, sold or distributed for a consideration other than cash, the amount of the consideration other than cash received by the Company in respect thereof shall be deemed to be the then fair market value of such consideration (as determined in good faith by the Board of Directors of the Company). If any Options shall be issued in connection with the issuance and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. If the Company shall pay a dividend or make any other distribution payable in Options or Convertible Securities, then such Options or Convertible Securities shall be deemed to have been issued or sold without consideration. (i) Deferral of Certain Adjustments. No adjustment to the Underlying Share Purchase Price (including the related adjustment to the number of Underlying Shares) shall be required hereunder unless such adjustment, together with other adjustments carried forward as provided below, would result in an increase or decrease of at least one percent of the Underlying Share Purchase Price; provided that any adjustments which by reason of this paragraph (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. No adjustment need be made for a change in the par value of the Common Stock. All calculations under this Section 4 shall be made to the nearest 1/1,000 of one cent or to the nearest 1/1000 of a share, as the case may be. (j) Changes in Options and Convertible Securities. If the exercise price provided for in any Options referred to in paragraph (c) above, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph (c) above, or the rate at which any Convertible Securities referred to in paragraph (c) above are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution upon an event which results in a related adjustment pursuant to this Section 4), the Underlying Share Purchase Price then in effect and the number of Underlying Shares purchasable upon the exercise of a Managing Underwriters' Warrant shall forthwith be readjusted (effective only with respect to any exercise of the Managing Underwriters' Warrant after such readjustment) to the Underlying Share Purchase Price and number of Underlying Shares so purchasable that would then be in effect had the adjustment made upon the issuance, sale, distribution or granting of such Options or Convertible Securities been made based upon such changed purchase price, 14 15 additional consideration or conversion rate, as the case may be, but only with respect to such Options and Convertible Securities as then remain outstanding. (k) Expiration of Options and Convertible Securities. If, at any time after any adjustment to the number of Underlying Shares purchasable upon the exercise of a Managing Underwriters' Warrant shall have been made pursuant to paragraph (c) or (j) above or this paragraph (k), any Options or Convertible Securities shall have expired unexercised, the number of Underlying Shares so purchasable with respect to any then outstanding Managing Underwriters' Warrants shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had all of the Managing Underwriters' Warrants outstanding at the time of the original adjustment been adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only shares of Common Stock deemed to have been issued in connection with such Options or Convertible Securities were the shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or Convertible Securities and (ii) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance, sale, distribution or granting of all such Options or Convertible Securities, whether or not exercised; provided that no such readjustment shall have the effect of decreasing the number of such Underlying Shares so purchasable by an amount (calculated by adjusting such decrease to account for all other adjustments made pursuant to this Section 4 following the date of the original adjustment referred to above) in excess of the amount of the adjustment initially made in respect of the issuance, sale, distribution or granting of such Options or Convertible Securities. (l) Other Adjustments. In the event that at any time, as a result of an adjustment made pursuant to this Section 4, each Managing Underwriters' Warrant Holder shall become entitled to receive any securities of the Company other than Underlying Shares, thereafter the number of such other securities so receivable upon exercise of a Managing Underwriters' Warrant and the Underlying Share Purchase Price applicable to such exercise shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in this Section 4. (m) Common Stock. As used in this Section 4, the term "Common Stock" shall mean and include the Common Stock authorized on the date of the original issue of the shares of Common Stock and Warrants in connection with the Offering and shall also include any capital stock of any class of the Company thereafter authorized that is not limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the Underlying Shares shall include only shares of such class designated in the Company's Certificate of Incorporation as Common Stock on the date of the original issue of the shares of Common Stock and Warrants in connection with the Offering or (i) in the case of any reclassification, change, consolidation, merger, or sale of assets of the character referred to in Section 4(b) hereof, the stock, securities or property provided for in such section or (ii) in the case of any reclassification or change in the number of Underlying Shares as a 15 16 result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such Underlying Shares as so reclassified or changed. (n) Determination of Gross Sales Price. In case of the sale for cash of any shares of Common Stock, Options, or Convertible Securities, the consideration received by the Company therefor shall be deemed to be the gross sales price therefor without deducting therefrom any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. (o) Events Resulting in no Adjustments. No adjustment to the Underlying Share Purchase Price or to the number of Underlying Shares, however, will be made upon (i) the sale of any shares of Common Stock or Warrants in the Offering (including the exercise of the over-allotment option granted to the underwriters), (ii) the exercise of any stock options issued under the Company's 1997 Stock Option Plan, 1996 Stock Option Plan, 1992 Non-Qualified Stock Option Plan or 1988 Non-Qualified Stock Option Plan (the "Stock Option Plans") to officers, directors and employees of the Company under the terms of such plans as they exist on the date hereof, (iii) the exercise of any warrants by officers and directors of the Company that are outstanding as of the date hereof, (iv) the sale of any shares of Common Stock or Warrants pursuant to the exercise of any Managing Underwriters' Warrant, or (v) the sale of any shares of Common Stock upon the exercise of any Warrants (collectively, the "Exempt Securities"). (p) Notice of Change in Underlying Share Purchase Price. Upon any adjustment of the Underlying Share Purchase Price pursuant to Section 4, the Company shall promptly thereafter (i) cause to be prepared a certificate of the President and Chief Financial Officer of the Company setting forth the Underlying Share Purchase Price after such adjustment and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of Underlying Shares (or portion thereof) issuable after such adjustment in the Underlying Share Purchase Price, upon exercise of a Managing Underwriters' Warrant and payment of the adjusted Underlying Share Purchase Price, which certificate shall be conclusive evidence of the correctness of the matters set forth therein absent manifest error, provided that if a Managing Underwriters' Warrant Holder reasonably requests, the Company shall engage a firm of independent public accountants of recognized standing selected by the Board of Directors of the Company (who may be the regular auditors of the Company) to prepare and file such certificate in lieu of the certificate of the President and Chief Financial Officer, in which case such certificate shall be conclusive evidence of the matters set forth therein, absent manifest error, and (ii) send to each of the Managing Underwriters' Warrant Holders at the address appearing on the registry books maintained by the Company written notice of such adjustments by first-class mail, postage prepaid. (q) Notice of Certain Events. With respect to any Notice Event, the Company shall cause to be given to each Managing Underwriters' Warrant Holder at such 16 17 Managing Underwriters' Warrant Holder's address appearing on the registry books maintained by the Company, at least 20 days prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first class mail, postage prepaid, a written notice stating (i) the date as of which the holders of record of shares of Common Stock entitled to receive any such rights, options, warrants or distribution is to be determined, (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. The failure to give the notice required by this Section 4(q) or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, consolidation, merger, conveyance, transfer, dissolution, or liquidation or winding up, or the vote upon any action, provided that each Managing Underwriters' Warrant Holder shall retain any right to damages from the Company with respect to such failure. SECTION 5. Change in Number of the Underlying Warrants and the Underlying Warrant Purchase Price. (a) Adjustment. Under the Warrant Agreement, the Company may elect, upon any adjustment of the exercise price of the Warrants, to adjust the number of Warrants outstanding in lieu of adjusting the number of shares of Common Stock purchasable upon the exercise of each Warrant, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. In such a case (i) the Underlying Warrant Purchase Price shall become that price (calculated to the nearest 1/1,000 of one cent) determined by multiplying the Underlying Warrant Purchase Price in effect immediately prior to such adjustment by a fraction, the numerator of which shall be the exercise price of the Warrants in effect immediately prior to such adjustment and the denominator of which shall be the exercise price of the Warrants in effect immediately after such adjustment and (ii) each Underlying Warrant under this Managing Underwriters' Warrant that has not been purchased pursuant to the exercise of such Managing Underwriters' Warrant prior to such adjustment of the number of Warrants shall become that number of Underlying Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the exercise price of the Warrants in effect immediately prior to such adjustment and the denominator of which shall be the exercise price of the Warrants in effect immediately after such adjustment. Upon each adjustment of such Underlying Warrants pursuant to this Section 5, the Company shall, as promptly as practicable, cause to be distributed to each Managing Underwriters' Warrant Holder, on the date of such adjustment, Managing Underwriters' Warrant Certificates evidencing, subject to Section 6(b) hereof, the number of additional Underlying Warrants to which such Managing 17 18 Underwriters' Warrant Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Managing Underwriters' Warrant Holder in substitution and replacement for the Managing Underwriters' Warrant Certificates held by such Managing Underwriters' Warrant Holder prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Managing Underwriters' Warrant Certificates evidencing the number of Underlying Warrants to which such Managing Underwriters' Warrant Holder shall be entitled after such adjustment. (b) Warrant Notice Event. With respect to any Warrant Notice Event, the Company shall cause to be given to each Managing Underwriters' Warrant Holder at such Managing Underwriters' Warrant Holder's address appearing on the registry books maintained by the Company, at least 20 days prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first class mail, postage prepaid, a written notice stating (i) the date as of which the holders of record of the Warrants entitled to receive any such rights, options, warrants or distribution is to be determined, (ii) the initial expiration date set forth in any tender offer or exchange offer for Warrants, or (iii) the date on which any such reclassification or change is expected to become effective or consummated, and the date as of which it is expected that holders of record of Warrants shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification or change. The failure to give the notice required by this Section 5(b) or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, or reclassification, or the vote upon any action, provided that each Managing Underwriters' Warrant Holder shall retain any rights to damages from the Company with respect to such failure. SECTION 6. Other Provisions Relating to Rights of a Managing Underwriters' Warrant Holder. (a) Managing Underwriters' Warrant Holders not Stockholders. The Managing Underwriters' Warrant Holders, as such, shall not be entitled to vote or receive dividends or be deemed holders of Common Stock or Warrants for any purpose, nor shall anything contained in this Agreement be construed to confer upon the Managing Underwriters' Warrant Holders, as such, any of the rights of a stockholder or holder of a Warrant of the Company or any right to vote, give or withhold consent to any action by the Company (whether upon any recapitalization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings or other action affecting stockholders or Warrant holders (except for notices provided for in this Agreement), receive dividends or subscription rights, or otherwise until the Managing Underwriters' Warrant shall have been exercised to purchase the Underlying Shares or the Underlying Warrants, at which time the person or persons in whose name or names the certificate or certificates for the shares of Common Stock or Warrants are registered shall be deemed the holder or holders of record of such shares of Common Stock or Warrants for all purposes. 18 19 (b) Fractional Shares or Warrants. Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fractional shares of Common Stock or Underlying Warrants in connection with the exercise of a Managing Underwriters' Warrant. In any case where a Managing Underwriters' Warrant Holder would, except for the provisions of this Section 6(b), be entitled under the terms of this Agreement to receive a fraction of a share of Common Stock or an Underlying Warrant upon the exercise of this Managing Underwriters' Warrant, the Company shall, upon the exercise of the Managing Underwriters' Warrant and receipt of the Underlying Share Purchase Price or the Underlying Warrant Purchase Price, as the case may be, issue the largest number of whole shares of Common Stock or Underlying Warrants, as the case may be, purchasable upon exercise of this Managing Underwriters' Warrant. The Managing Underwriters' Warrant Holder expressly waives his or her right to receive a certificate of any fraction of a share of Common Stock or an Underlying Warrant upon the exercise hereof. However, with respect to any fraction of a share of Common Stock or Underlying Warrant called for upon any exercise hereof, the Company shall pay to the Managing Underwriters' Warrant Holder an amount in cash equal to such fraction multiplied by the current market price per share of Common Stock or Underlying Warrant, as the case may be, determined pursuant to Section 4(f) hereof (substituting "Warrant" for "share of Common Stock" in the case of Underlying Warrants). (c) Absolute Owner. Prior to due presentment for registration of transfer of any Managing Underwriters' Warrant Certificate, the Company may deem and treat each Managing Underwriters' Warrant Holder as the absolute owner of its Managing Underwriters' Warrant for the purpose of any exercise thereof and for all other purposes and the Company shall not be affected by any notice to the contrary. SECTION 7. Division, Split-Up, Combination, Exchange and Transfer of Warrants (a) Request. A Managing Underwriters' Warrant may be divided, split up, combined or exchanged for another Managing Underwriters' Warrant of like tenor to purchase a like aggregate number of Underlying Shares and Underlying Warrants. If a Managing Underwriters' Warrant Holder desires to divide, split up, combine or exchange a Managing Underwriters' Warrant, he or she shall make such request in writing delivered to the Company at its office in Lancaster, Pennsylvania and shall surrender such Managing Underwriters' Warrant Certificates to be so divided, split up, combined or exchanged at said office. Upon any such surrender for a division, split-up, combination or exchange, the Company shall execute and deliver to the person entitled thereto a new Managing Underwriters' Warrant Certificate as so requested. The Company may require such Managing Underwriters' Warrant Holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any division, split-up, combination or exchange of Managing Underwriters' Warrants. 19 20 (b) Initial Issuance to JMS and Southwest. The Company initially shall issue the right to purchase 55,000 Underlying Shares and 55,000 Underlying Warrants to each of JMS and Southwest, as represented by a Managing Underwriters' Warrant Certificate issued to each of JMS and Southwest in the form attached hereto as Exhibit A, or to such officers of JMS and/or Southwest as such Managing Underwriters may direct. (c) Assignment; Replacement of Managing Underwriters' Warrant Certificate. The Managing Underwriters' Warrants may not be sold, transferred, assigned, or hypothecated by each Managing Underwriter, in whole or in part, for a period of one year from the effective date of the Offering except to the officers of such Managing Underwriter. Thereafter, the Managing Underwriters' Warrants may be sold, transferred, assigned or hypothecated, in whole or in part, subject to federal and state securities laws. Any division or assignment permitted of a Managing Underwriters' Warrant shall be made by surrender of the respective Managing Underwriters' Warrant Certificate to the Company at its principal office with the Form of Assignment attached hereto duly executed and with funds sufficient to pay any transfer tax. In such event, the Company shall, without charge, execute and deliver a new Managing Underwriters' Warrant Certificate in the name of the assignee named in such instrument of assignment and the surrendered Managing Underwriters' Warrant Certificate shall promptly be canceled. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of a Managing Underwriters' Warrant Certificate and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of such Managing Underwriters' Warrant Certificate, the Company will execute and deliver a new Managing Underwriters' Warrant Certificate of like tenor and date and any such lost, stolen or destroyed Managing Underwriters' Warrant Certificate shall thereupon become void. Any such new Managing Underwriters' Warrant Certificate executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not the Managing Underwriters' Warrant Certificate so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. SECTION 8. Other Matters. (a) Taxes and Charges. The Company will from time to time promptly pay, subject to the provisions of paragraph (v) of Section 2(b), all taxes and charges that may be imposed upon the Company in respect of the issuance or delivery, but not the transfer, of the Managing Underwriters' Warrants or the Underlying Securities. (b) Notices. Notice or demand pursuant to this Agreement to be given or made by the any Managing Underwriters' Warrant Holder to or on the Company shall be sufficiently given or made if delivered or sent by registered or certified mail, postage prepaid, return receipt requested, and addressed, until another address is designated in writing by the Company, or by facsimile transmission, as follows: 20 21 Herley Industries, Inc. 10 Industry Drive Lancaster, Pennsylvania 17603 Attention: President Facsimile No.: (717) 397-9503 with a copy to: Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle Jericho, NY 11753 Attention: David Lieberman, Esq. Facsimile No.: (516) 822-5609 Notices to the Managing Underwriters' Warrant Holders provided for in this Agreement shall be deemed given or made by the Company if delivered or sent by mail, certified or registered, return receipt requested, postage prepaid, or overnight courier or facsimile transmission addressed to each Managing Underwriters' Warrant Holder at his or her last known address or facsimile number as shall appear on the registry books of the Company and at the following addresses for JMS and Southwest: (i) if to JMS: Janney Montgomery Scott Inc. 26 Broadway New York, New York 10004 Attention: Herbert M. Gardner Phone No.: (212) 510-0600 Facsimile No.: (212) 510-0683 (ii) if to Southwest: Southwest Securities, Inc. 1201 Elm Street Suite 3500 Dallas, Texas 75270 Attention: C. William Dedmon, Jr. Phone No.: (214) 651-1800 Facsimile No.: (214) 658-9441 (c) Governing Law. The validity, interpretation and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. (d) Exclusive Benefit. Nothing in this Agreement expressed or nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company, JMS, Southwest, and the Managing Underwriters' Warrant Holders any right, remedy or claim hereunder, and all covenants, conditions, stipulations, promises and agreements contained in this Agreement shall be for the sole and exclusive benefit of such persons and their successors, survivors and permitted assigns hereunder. This Agreement is for the benefit of and is enforceable by any subsequent Managing Underwriters' Warrant Holder. 21 22 (e) Headings. The article headings herein are for convenience only and are not part of this Agreement and shall not affect the interpretation hereof. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 22 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. HERLEY INDUSTRIES, INC. By:______________________________________ Myron Levy President JANNEY MONTGOMERY SCOTT INC. By:______________________________________ Herbert M. Gardner Senior Vice President SOUTHWEST SECURITIES, INC. By:______________________________________ C. William Dedmon, Jr. Senior Vice President 23 24 EXHIBIT A THE ISSUANCE OF THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THIS SECURITY BEEN REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF THE REGISTRATION OF SUCH TRANSACTION UNDER THE SECURITIES ACT AND THE REGISTRATION OR QUALIFICATION OF THIS SECURITY UNDER APPLICABLE STATE SECURITIES LAWS UNLESS SUCH TRANSACTION IS EXEMPT FROM SUCH REGISTRATION AND THIS SECURITY IS EXEMPT FROM SUCH REGISTRATION OR QUALIFICATION. No.__________ MANAGING UNDERWRITERS' WARRANT CERTIFICATE HERLEY INDUSTRIES, INC. This warrant certificate certifies that __________________________, or its registered assigns, is the registered holder of a Managing Underwriters' Warrant representing the right to purchase ________ shares (the "Underlying Shares") of common stock, par value $.10 per share (the "Common Stock") of Herley Industries, Inc. (the "Company") and ________ Common Stock Purchase Warrants of the Company (the "Underlying Warrants") issuable under the Warrant Agreement (as defined in the Managing Underwriters' Warrant Agreement) in accordance with the terms of the Managing Underwriters' Warrant Agreement. This Managing Underwriters' Warrant with respect to the Underlying Shares expires on December 16, 2002 (the "Underlying Share Expiration Date") and with respect to the Underlying Warrants expires on January 16, 2000 (the "Underlying Warrant Expiration Date"), or on such expiration dates as may be extended pursuant to the terms of the Managing Underwriters' Warrant Agreement. This Managing Underwriters' Warrant entitles the registered holder, upon exercise from time to time from 9:00 a.m. New York City time on or after December 16, 1998 until 5:00 p.m. New York City time on the Underlying Share Expiration Date (with respect to the Underlying Shares) and the Underlying Warrant Expiration Date (with respect to the Underlying Warrants), to purchase Underlying Shares at $14.40 per Underlying Share (the "Underlying Share Purchase Price") and Underlying Warrants at $.12 per Underlying Warrant (the "Underlying Warrant Purchase Price") in lawful money of the United States of America upon surrender of this certificate and payment of the Underlying Share Purchase Price and/or the Underlying Warrant Purchase Price in accordance with the terms of the Managing Underwriters' A-1 25 Warrant Agreement. The Underlying Share Purchase Price, the number of Underlying Shares issuable upon exercise of this Managing Underwriters' Warrant, the Underlying Warrant Purchase Price, and the number of Underlying Warrants issuable upon exercise of this Managing Underwriters' Warrant are subject to adjustment upon the occurrence of certain events set forth in the Managing Underwriters' Warrant Agreement. This Managing Underwriters' Warrant with respect to the Underlying Shares may not be exercised after 5:00 p.m. on the Underlying Share Expiration Date and with respect to the Underlying Warrants may not be exercised after 5:00 p.m. on the Underlying Warrant Expiration Date, and to the extent not exercised by such time such Managing Underwriters' Warrant shall become void. This warrant certificate shall be governed by and construed in accordance with the internal laws of the State of New York. IN WITNESS WHEREOF, Herley Industries, Inc. has caused this warrant certificate to be signed by its President and its Secretary. Dated:___________ HERLEY INDUSTRIES, INC. __________________________________ President __________________________________ Treasurer A-2 26 FORM OF ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto _______________________, whose address is ______________________ and whose social security or other identifying number is _______________, the right to purchase __________ Underlying Shares and _________ Underlying Warrants evidenced by the within Managing Underwriters' Warrant, and hereby irrevocably constitutes and appoints the Secretary of the Company as his, her or its attorney-in-fact to transfer the same on the books of Herley Industries, Inc. with full power of substitution and re-substitution. If said number of Underlying Shares and/or Underlying Warrants is less than all of the Underlying Shares and/or Underlying Warrants purchasable hereunder, the undersigned requests that a new warrant certificate representing the right to purchase the balance of such Underlying Shares and/or Underlying Warrants be registered in the name of _______________, whose address is ________________________ and whose social security or other identifying number is ___________________, and that such warrant certificate be delivered to _________________, whose address is _________________. Dated:______________________ ______________________________________ Signature A-3 27 SUBSCRIPTION FORM The undersigned hereby irrevocably elects to exercise the right, represented by this warrant certificate, to purchase ______________ Underlying Shares and/or _______________ Underlying Warrants and tenders payment herewith in the amount of $________. The undersigned requests that a certificate for such Underlying Shares and/or Underlying Warrants be registered in the name of _______________, whose address is ______________ and whose social security or other identifying number is _____________________, and that such Underlying Shares and/or Underlying Warrants be delivered to _________________, whose address is ____________________. If said number of Underlying Shares and/or Underlying Warrants is less than all of the Underlying Shares and/or Underlying Warrants purchasable hereunder, the undersigned requests that a new warrant certificate representing the right to purchase the balance of such Underlying Shares and/or Underlying Warrants be registered in the name of __________________, whose address is ____________________ and whose social security or other identifying number is ____________________, and that such warrant certificate be delivered to ______________________, whose address is _____________________. Date:_______________ ______________________________________ Signature A-4 EX-10.16 6 FORM OF REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10.16 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of December 16, 1997 by and among Herley Industries, Inc., a Delaware corporation (the "Company"), Janney Montgomery Scott Inc. ("Janney Montgomery"), and Southwest Securities, Inc. ("Southwest"). Janney Montgomery and Southwest are hereafter referred to collectively as the "Managing Underwriters." W I T N E S S E T H In connection with the public offering by the Company and certain selling stockholders (the "Selling Stockholders") of the Company's common stock, par value $.10 per share (the "Common Stock"), and Common Stock Purchase Warrants (the "Warrants") under that certain Warrant Agreement (the "Warrant Agreement"), dated as of the date hereof, between the Company and the Warrant Agent (as defined in Section 1), the Managing Underwriters purchased a warrant (the "Managing Underwriters' Warrant") entitling the holder thereof to purchase up to (i) 110,000 shares of Common Stock (the "Underlying Shares") and (ii) 110,000 Warrants (the "Underlying Warrants"), which shall entitle the holder(s) thereof to purchase up to 110,000 shares of Common Stock (the "Underlying Warrant Shares"), each subject to adjustment as specified in the Managing Underwriters' Warrant Agreement (as defined in Section 1) or the Warrant Agreement, respectively. In order to induce the Managing Underwriters to purchase the Managing Underwriters' Warrant, the Company has agreed to provide the registration rights set forth in this Agreement for the benefit of (i) the Managing Underwriters, and (ii) the Persons owning the record or beneficial interest in any Registrable Securities from time to time (the "Holders"). The parties hereby agree as follows: SECTION 1. Definitions. As used in this Agreement, the following capitalized terms shall have the following meanings: (a) "Affiliate" of any specified Person means any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with such specified Person. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (b) "Agreement" shall have the meaning set forth in the introductory paragraph hereto. (c) "Business Day" shall mean any day except a Saturday, Sunday or other day in the City of New York on which banks are authorized to close. (d) "Commission" shall mean the Securities and Exchange Commission. (e) "Common Stock" shall have the meaning set forth in the recitals hereto. (f) "Company" shall have the meaning set forth in the introductory paragraph hereto. 2 (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (h) "Holders" shall have the meaning set forth in the recitals hereto. (i) "Janney Montgomery" shall have the meaning set forth in the introductory paragraph hereto. (j) "Managing Underwriters" shall have the meaning set forth in the introductory paragraph hereto. (k) "Managing Underwriters' Warrant" shall have the meaning set forth in the recitals hereto. (l) "Managing Underwriters' Warrant Agreement" shall mean the Managing Underwriters' Warrant Agreement, dated as of the date hereof, between the Company and the Managing Underwriters. (m) "Material Event" shall have the meaning set forth in Section 4(c) hereof. (n) "NASD" shall mean the National Association of Securities Dealers, Inc. (o) "Person" shall mean an individual, partnership, corporation, limited liability company, joint venture, association, trust or other organization whether or not a legal entity, or a government or agency or political subdivision thereof. (p) "Prospectus" shall mean the prospectus included in a Registration Statement, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such prospectus. (q) "Registrable Securities" shall mean the Managing Underwriters' Warrant, the Underlying Shares, the Underlying Warrants, and the Underlying Warrant Shares. All of the Registrable Securities are divisible. A Registrable Security ceases to be a Registrable Security after it has been sold pursuant to an effective registration statement under the Securities Act, provided that any underlying security shall remain a Registrable Security until such underlying security has also been sold pursuant to an effective registration statement under the Securities Act. (r) "Registration Statement" shall mean any Shelf Registration Statement pursuant to Section 2 hereof and any piggyback registration statement pursuant to Section 3 hereof (including any amendments and supplements to such registration statement, including any post-effective amendments). (s) "Securities Act" shall mean the Securities Act of 1933, as amended. (t) "Shelf Registration Statement" shall mean a shelf registration statement of the Company pursuant to Section 2 hereof filed with the Commission on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, any amendments and supplements to such registration statement, including any post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. 2 3 (u) "Southwest" shall have the meaning as set forth in the introductory paragraph hereto. (v) "Underlying Shares" shall have the meaning set forth in the recitals hereto. (w) "Underlying Warrants" shall have the meaning set forth in the recitals hereto. (x) "Underlying Warrant Shares" shall have the meaning set forth in the recitals hereto. (y) "Warrant Agent" shall mean American Stock Transfer & Trust Company, as warrant agent. (z) "Warrant Agreement" shall mean that certain Warrant Agreement, dated as of the date hereof, between the Company and the Warrant Agent. SECTION 2. Shelf Registration Statement. (a) Demand Registration Right. The Managing Underwriters have one demand registration right with respect to the Registrable Securities under this Section 2. Either Managing Underwriter may exercise this demand right during the period beginning on the first anniversary of the date hereof and ending on the fifth anniversary of the date hereof or the expiration of the Managing Underwriters' Warrant, if later. Such demand right must be exercised in writing and must satisfy the notice requirements to the Company as set forth in Section 10(d) herein. A Managing Underwriter need not be a Holder to exercise this demand right. This demand right shall continue to exist until it expires pursuant to this Section 2(a), or a Shelf Registration Statement demanded under this Section 2(a) becomes effective. (b) Filing of a Shelf Registration Statement. Upon such written demand pursuant to Section 2(a), the Company shall within 30 days following receipt of such written demand, file with the Commission a Shelf Registration Statement relating to the issuance and/or resale of the Registrable Securities from time to time in accordance with the methods of distribution set forth in such Shelf Registration Statement (including securities deemed registered pursuant to Rule 416 under the Securities Act), and thereafter use its reasonably best efforts to cause such Shelf Registration Statement to be declared effective under the Securities Act within 75 days following receipt of such written demand; provided that no Holder shall be entitled to have its Registrable Securities covered by such Shelf Registration Statement unless such Holder is in compliance with Section 5 hereof. (c) Effective Period. The Company shall use its reasonably best efforts to keep such Shelf Registration Statement continuously effective in order to permit the Prospectus forming a part thereof to be usable until the fourth anniversary of the date that such Shelf Registration Statement was declared effective (or if later, until the Warrants expire). (d) Identification of Holders. After the effectiveness of the Shelf Registration Statement, the Company shall promptly upon the request of any Holder, use its reasonably best efforts to take any action necessary to identify such Holder as a selling security holder to the extent such Holder is required but not already identified as such in the Prospectus. (e) Additional Demand Registration Rights. After the expiration of the effective 3 4 period in Section 2(c) hereof, each Managing Underwriter may make one additional demand registration for the Registrable Securities upon the terms set forth in this Section 2, provided that the demanding Managing Underwriter pay all of the Company's out-of-pocket fees and expenses, including reasonable legal fees, in connection with such filing. SECTION 3. Piggyback Registration Rights. (a) Notice to Holders. If at any time on or after the first anniversary of the date hereof and on or before the fifth anniversary of the date hereof or such later time as the Managing Underwriters Warrant expires, the Company proposes to file a registration statement with the Commission (other than on a Form S-4 or a Form S-8), it will give written notice by registered mail, at least 30 days prior to the filing of each such registration statement, to the Holders of its intention to do so. If any Holders shall notify the Company within 20 days after receipt of such notice of their desire to include any of their Registrable Securities (including any security underlying their Registrable Securities) in such proposed registration statement, the Company shall include such Registrable Securities in such registration statement, provided that if the managing underwriter, if any, of such offering delivers an opinion to the Holders that the total amount of securities that they and the holders of other piggyback rights intend to include in such registration statement could adversely affect the success of such offering, then the amount, the number or kind of securities to be offered for the account of such Holders and the holders of such other piggyback rights will be reduced pro rata among such Holders and the holders of such other piggyback rights to the extent necessary to reduce the total amount of securities to be included in such offering to the amount, number or kind recommended by the managing underwriter. (b) Effectiveness of Registration Statement. The Company shall use its reasonably best efforts to cause any registration statement filed pursuant to Section 3(a) hereof to be declared effective and shall maintain the effectiveness thereof for a period of not less than one year after such effective date. SECTION 4. Registration Procedures. In connection with each Registration Statement and any related Prospectus, the Company shall: (a) Provided Required Information. Use its reasonably best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the periods required hereunder; upon the occurrence of any event that would cause such Registration Statement or the Prospectus contained therein (i) to contain a material misstatement or omission or (ii) not to be effective and usable during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement, in the case of clause (i), correcting any such misstatement or omission, and in the case of either clause (i) or (ii), use its best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purposes as soon as reasonably practicable thereafter; (b) Amendments. Prepare and file with the Commission such amendments and post-effective amendments to such Registration Statement as may be necessary to keep such Registration Statement effective for the periods required hereunder, the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act, and to comply fully with the applicable provisions of Rules 424 and 430A under the Securities Act in a timely manner; and comply with the 4 5 provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement in accordance with the intended method or methods of distribution set forth in such Registration Statement or supplement to such Prospectus; (c) Material Events. Advise promptly the Managing Underwriters, the Holders and any underwriters involved in the offering, and if requested by such Persons, confirm such advice in writing, (i) when such Registration Statement or Prospectus supplement or post-effective amendment has been filed, and with respect to any post-effective amendment, when the same has become effective, (ii) of any request by the Commission for amendments to such Registration Statement or amendments or supplements to such Prospectus or for additional information relating thereto, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement under the Securities Act or of the suspension by any state securities commission of the qualification of the Registrable Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes or (iv) of the existence of any fact or the happening of any event that makes any statement of a material fact made in such Registration Statement, the related Prospectus, any amendment or supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in such Registration Statement or the related Prospectus in order to make the statements of material fact therein not misleading (a "Material Event"); if at any time the Commission shall issue any stop order suspending the effectiveness of such Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Registrable Securities under state securities or Blue Sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest practicable time; (d) Opportunity to Comment. Furnish to the Managing Underwriters, the Holders and any underwriters involved in the offering, before filing with the Commission, copies of such Registration Statement and the Prospectus included therein and any amendments or supplements to such Registration Statement or Prospectus (including all documents incorporated by reference), which documents will be subject to the review of such Managing Underwriters, Holders and underwriters for a period of at least three Business Days, and the Company will not file such Registration Statement or Prospectus or any amendment or supplement to such Registration Statement or Prospectus (including all documents incorporated by reference) to which any of such Managing Underwriters, Holders or underwriters reasonably object within five Business Days after the receipt thereof; such Managing Underwriters, Holders and underwriters shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains a material misstatement or omission or fails to comply with the applicable requirements of the Securities Act; (e) Opportunity to Ask Questions. Prior to the filing of such Registration Statement, any amendment thereto, or any document that is to be incorporated by reference therein, if requested by the Managing Underwriters, the Holders and any underwriters involved in the offering within three Business Days after receipt of notification thereof from the Company, make the Company's representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such Managing Underwriters, Holders and underwriters reasonably may request; (f) Opportunity to Review Documents. Make available at reasonable times for 5 6 inspection by the Managing Underwriters, the Holders and any underwriters involved in the offering, and any attorney or accountant retained by any of them, all financial and other records, pertinent corporate documents and properties of the Company and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Managing Underwriters, Holders and underwriters, attorney or accountant in connection with such Registration Statement, any amendment thereto, or any document that is to be incorporated therein prior to the filing thereof; (g) Post-Effective Amendments. If requested by the Managing Underwriters, the Holders or any underwriters involved in the offering, promptly include in such Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Managing Underwriters, Holders or underwriters may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Registrable Securities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; (h) Copies of Registration Statement. Furnish to each Managing Underwriter, Holder and any underwriter involved in the offering, without charge, at least one copy of such Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (i) Copies of Prospectus. Deliver to each Managing Underwriter, Holder and any underwriter involved in the offering, without charge, as many copies of the Prospectus related to such Registration Statement (including each preliminary Prospectus) and any amendment or supplement thereto as such Persons may request; the Company hereby consents to the use of such Prospectus and any amendment or supplement thereto by each of the Managing Underwriters, Holders and underwriters, if any, in connection with the offering and the sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto; (j) Legal Opinion. Obtain an opinion of outside counsel to the Company and updates thereof in form and substance reasonably satisfactory to the Managing Underwriters, the Holders and any underwriters involved in the offering, addressed to such Managing Underwriters, Holders and underwriters covering the matters customarily covered in opinions requested in offerings and such other matters as may be reasonably requested by such Managing Underwriters, Holders and underwriters, including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and such other Persons as may participate in such conferences at which the contents of such Registration Statement and related Prospectus were discussed, and although such counsel has not undertaken to investigate or independently verify and does not assume any responsibility for the accuracy, completeness, or fairness of the statements therein, such counsel advises that no facts came to such counsel's attention that caused such counsel to believe that such Registration Statement and related Prospectus, at the time that such Registration Statement became effective or the date of such counsel's opinion, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; 6 7 (k) Underwriting Agreement. In connection with any underwritten offering of Registrable Securities pursuant to such Registration Statement, enter into an underwriting agreement as is customary in underwritten offerings and take all such other actions as are reasonably requested by the underwriters in such offering to expedite or facilitate the registration and disposition of such Registrable Securities, and in connection therewith make such representations and warranties to the underwriters, and provide such indemnities as are customarily made and provided by issuers to underwriters in underwritten offerings; (l) Blue Sky Filings. Prior to any public offering of Registrable Securities, cooperate with the Managing Underwriters, the Holders and any underwriters involved in the offering, and their respective counsel in connection with the registration and qualification of the Registrable Securities under the securities or Blue Sky laws of such jurisdictions as such Managing Underwriters, Holders and underwriters may reasonably request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by such Registration Statement; provided, however, that the Company shall not be required to register or qualify as a foreign corporation where it is not required to be qualified or to take any action that would subject it to service of process in suits or to taxation in any jurisdiction where it is not now so subject; (m) Certificates. Cooperate with the Managing Underwriters, the Holders and any underwriters involved in the offering to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and to register such Registrable Securities in such denominations and such names as the Managing Underwriters, the Holders and any underwriters involved in the offering may request at least two Business Days prior to such sale of Registrable Securities made by such Managing Underwriters, Holders and underwriters; (n) Approvals. Use its reasonably best efforts to cause the Registrable Securities covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Managing Underwriters, the Holders and any underwriters involved in the offering to consummate the disposition of such Registrable Securities; (o) Post-Effective Amendments. If any Material Event shall exist or have occurred, promptly prepare a supplement or post-effective amendment to such Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Registrable Securities, such Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (p) CUSIP Numbers. Provide a CUSIP number or numbers for all Registrable Securities not later than the effective date of such Registration Statement to the extent that any Registrable Security does not already have a CUSIP number; (q) NASD Filings. Cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by the Managing Underwriters, the Holders and any underwriters involved in the offering (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD; (r) Earnings Statement. Otherwise use its best efforts to comply with all applicable 7 8 rules and regulations of the Commission, and make generally available to its security holders as soon as practicable, but not later than 45 days after the end of the 12 month period beginning at the end of the fiscal quarter of the Company during which the date on which the Commission declares such Registration Statement effective, or 90 days if such 12 month period coincides with the Company's fiscal year, a consolidated earnings statement (in form complying with the provisions of Section 11(a) of the Securities Act and Rule 158 under the Securities Act), which need not be audited, covering such 12 month period; (s) Exchange Act Filings. Provide promptly to each Managing Underwriter and each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 or Section 15 of the Exchange Act; (t) Conduct Rules. In the event that any broker-dealer registered under the Exchange Act shall underwrite any Registrable Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Conduct Rules and the By-Laws of the NASD) thereof, whether as a Holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, assist such broker-dealer in complying with the requirements of such Conduct Rules and By-Laws, including, without limitation, by (i) engaging a "qualified independent underwriter" (as defined in such Conduct Rules) to participate in the preparation of such Registration Statement relating to such Registrable Securities and to exercise usual standards of due diligence in respect thereto, (ii) indemnifying any such qualified independent underwriter to the same extent as the Company indemnifies the Holders under Section 8 hereof, and (iii) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Conduct Rules of the NASD; and (u) Exchange Listing. Use its reasonably best efforts to cause all Registrable Securities covered by such Registration Statement to be listed on each securities exchange or automated quotation system on which similar securities issued by the Company are then listed. SECTION 5. Holder Information. No Holder may include any of its Registrable Securities in a Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing such information as the Company may reasonably request specified in Items 507 and 508 of Regulation S-K under the Securities Act for use in connection with such Registration Statement or Prospectus or preliminary Prospectus included therein. Each Holder agrees to furnish promptly to the Company all information required to be disclosed to make the information previously furnished to the Company by such Holder not materially misleading. SECTION 6. Restrictions On Holders. Each Holder agrees by acquisition of a Registrable Security that, upon receipt of any notice from the Company of the existence of any Material Event not adequately described in a Registration Statement, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to such Registration Statement until such Holder's receipt of the copies of the related supplemented or amended Prospectus contemplated by Section 4(o) hereof, or until such Holder is advised in writing by the Company that the use of such Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in such Prospectus. SECTION 7. Registration Expenses 8 9 (a) Company Expenses. Except as provided in Section 9 hereof, all expenses incident to the Company's performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all fees, disbursements and expenses of the Company's counsel and accountants and all other expenses in connection with the registration, printing and filing of a Registration Statement and the related Prospectus and any amendments and supplements thereto and the mailing and delivery of copies thereof and of any final Prospectus to the Managing Underwriters, Holders, and any underwriters involved in the offering, (ii) all registration and filing fees of the Commission, (iii) all printing and delivery (including, without limitation, postage, air freight charges and charges for counting and packaging) of copies of such Registration Statement, Prospectus, and each final Prospectus, Blue Sky memoranda, any agreements among underwriters, any selected dealer agreements, any ancillary agreements and documents, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering related to such Registration Statement, (iv) all expenses incurred in connection with the qualification under state securities laws or Blue Sky laws, including the reasonable fees of the counsel for the Managing Underwriters not to exceed $5,000, Holders, and any underwriters involved in the offering in connection therewith not to exceed $5,000, (v) all listing, designation and other filing fees in connection with listing the Registrable Securities on a national securities exchange or automated quotation system pursuant to the requirements hereof, (vi) all filing fees incident to securing a review of the terms of the sale of the Registrable Securities by the association or organization that supervises, oversees or regulates such exchange or system, (vii) all costs of preparing certificates for the securities, including the Registrable Securities, offered in such offering, (viii) all costs and charges of any transfer agent, warrant agent or registrar, (ix) all costs of the tax stamps, if any, in connection with the issuance and delivery of the Registrable Securities, (x) if the Company elects to make the offering related to such Registration Statement an underwritten offering, all out-of-pocket expenses in connection with "road shows" in connection with any underwritten offering, and (xi) if the Company elects to make the offering related to such Registration Statement an underwritten offering, all out-of-pocket other out-of-pocket costs and expenses incurred in the performance of the obligations of the Company hereunder that are not otherwise specifically provided for in this paragraph; provided, however, that if any Managing Underwriter makes an additional demand registration pursuant to Section 2(e), such Managing Underwriter shall bear the out-of-pocket expenses noted in this paragraph incurred in connection with such registration. The Company will bear internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company. (b) Counsel for the Managing Underwriters and the Holders. In addition to the expenses described in Section 7(a) above, in connection with a Shelf Registration Statement filed pursuant to Section 2 at the Company's expense, the Company will reimburse the demanding Managing Underwriter for the reasonable fees and disbursements of not more than one counsel; provided, however, that the Company shall not be liable for such attorneys' fees in excess of $10,000. SECTION 8. Indemnification (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless each Managing Underwriter, Holder, the respective directors, officers, partners, employees, and agents of each Managing Underwriter or Holder, and each Person, if any, who controls any Managing Underwriter or Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, 9 10 liabilities and expenses (including reasonable attorneys' fees and costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or related Prospectus, or in any amendment or supplement thereto, or in any application or other document executed by the Company, or arising out of or based upon any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of or based upon any inaccuracy in the representations and warranties of the Company contained in an underwriting agreement related to such Registration Statement or any failure of the Company to perform its obligations under such underwriting agreement, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon an untrue statement or omission or alleged untrue statement or omission that has been made in any Registration Statement or related Prospectus or omitted therefrom in reliance upon and in conformity with the information furnished in writing to the Company by or on behalf of any Managing Underwriters or Holders expressly for use in connection therewith; provided, however, that with respect to any untrue statement or omission made in any preliminary Prospectus, this indemnity shall not inure to the benefit of a Managing Underwriter or Holder (or to the benefit of any other person entitled to such indemnification) from whom the person asserting such losses, claims, damages or liabilities purchased the Registrable Securities concerned if both: (i) a copy of the final Prospectus was not sent or given to such person as required by the Securities Act, and (ii) the untrue statement or omission in such preliminary Prospectus was corrected in such final Prospectus. This indemnity will be in addition to any liability that the Company may otherwise have, including under this Agreement. (b) Indemnification by the Holders. Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, and any Person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company in Section 8(a) hereof, but only with respect to information furnished in writing to the Company by or on behalf of such Holder expressly for use in such Registration Statement or related Prospectus. This indemnity will be in addition to any liability which any Holder may otherwise have, including under this Agreement. (c) Indemnification Procedure. If any claim or action shall be brought under this Section 8(a) or Section 8(b), the indemnified party shall promptly notify in writing the indemnifying parties, and such indemnifying parties shall assume the defense thereof, including the employment of counsel reasonably acceptable to the indemnified party and payment of all fees and expenses. The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying parties have agreed to pay such fees and expenses, (ii) the indemnifying parties have failed to assume the defense and employ counsel reasonably acceptable to the indemnified party, or (iii) the named parties to any such action (including any impleaded parties) include the indemnified party and the indemnifying parties, and the indemnified party shall have been advised by its counsel that one or more legal defenses may be available to the indemnified party that may be unavailable to the indemnifying parties, or that representation of such indemnified party and any indemnifying parties by the same counsel would be inappropriate under applicable standards of professional conduct due to actual or potential differing interests between them (in which case the indemnifying parties shall not have the right to assume the defense of such action on behalf of the indemnified party (notwithstanding their obligation to bear the fees and expenses of such counsel)). The indemnifying parties shall not be liable for any settlement of any such action effected without their written consent, which may not be unreasonably withheld, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, the indemnifying parties agree to indemnify and hold harmless any indemnified party from and 10 11 against any loss, claim, damage, liability or expense by reason of such settlement or judgment, but in the case of a judgment only to the extent provided in this Section 8. (d) Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in this Section 8 is for any reason held to be unavailable or is insufficient (other than by reason of the terms thereof) to hold harmless a party indemnified hereunder, the Company, on the one hand, and the Holders for whose benefit the Company filed the subject Registration Statement, on the other hand, shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company any contribution received by the Company from Persons, other than such Holders, who may also be liable for contribution, including Persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to which the Company and such Holders may be subject, in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and such Holders, on the other hand, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company, on the one hand, and such Holders, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and such Holders, on the other hand, shall be deemed to be in the same proportion as (x) the total proceeds from the offering of the shares of Common Stock and the Warrants, which have been registered pursuant to a Registration Statement on Form S-1 (Registration Statement No. 333-39767) (net of discounts but before deducting expenses) received by the Company plus proceeds received by the Company in connection with the securities covered by the Registration Statement and (y) the total proceeds received by such Holders upon their sale of Registrable Securities covered by the Registration Statement plus the underwriting discounts and commissions received by the Managing Underwriters pursuant to the offering registered pursuant to the Registration Statement on Form S-1 (Registration Statement No. 333-39767). The relative fault of the Company and such Holders shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied or which should have been supplied by the Company, on the one hand, or to information supplied by such Holders, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by a pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to above. The amount paid or payable as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in this Section 8, any legal or other expenses reasonably incurred in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8 (i) no Holder shall be required to contribute any amount in excess of the dollar amount by which the proceeds received by such Holder with respect to the sale of its Registrable Securities covered by the subject Registration Statement exceeds the amount of any damages which such Holder has otherwise been required to pay by 11 12 reason of such untrue statement or alleged untrue statement or omission or alleged omission and (ii) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each Person, if any, who controls a Managing Underwriter or Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and the respective officers, directors, partners, employees, representatives and agents of a Managing Underwriter or Holder or any controlling Person shall have the same rights to contribution as such Managing Underwriter or Holder, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and the respective officers, directors, partners, employees, representatives and agents of the Company, or any such controlling Person shall have the same rights to contribution as the Company, subject in each case to the limitations on contribution described in this Section 8(d). Any Person entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such Person in respect of which a claim for contribution may be made against another Person under this Section 8, notify such Person from whom contribution may be sought, but the failure to so notify such Person shall not relieve the Person from whom contribution may be sought from any obligation such Person may have under this Section 8. SECTION 9. Underwritten Offering. A Managing Underwriter may require that any Shelf Registration Statement filed pursuant to Section 2 hereof be an underwritten offering; provided, however, that such Managing Underwriter shall bear those out-of-pocket expenses set forth in Section 7(a) that arise solely because such Managing Underwriter required such Shelf Registration Statement to be an underwritten offering, including underwriting discounts and commissions with respect to the Registrable Securities and fees of any "qualified independent underwriter" engaged pursuant to Section 4(t) hereof with respect to the Registrable Securities. In any such underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the demanding Managing Underwriter; provided that such investment bankers and managers must be reasonably satisfactory to the Company (it being understood that Janney Montgomery and Southwest are reasonably satisfactory). No Holder may participate in any underwritten offering hereunder unless such Holder agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements. The Company shall not bear any underwriting discounts and commissions with respect to the Registrable Securities in connection with an underwritten offering relating to a Registration Statement filed pursuant to Section 2 or 3 hereof. SECTION 10. Miscellaneous. (a) Remedies. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Managing Underwriters and Holders in this Agreement or otherwise conflicts with the provisions hereof. The Company represents and warrants that the rights 12 13 granted to the Managing Underwriters and Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless the Company has obtained the written consent of the Managing Underwriters. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), facsimile transmission, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to Janney Montgomery: Janney Montgomery Scott Inc. 26 Broadway New York, New York 10004 Attention: Herbert M. Gardner Phone No.: (212) 510-0600 Facsimile No.: (212) 510-0683 (ii) if to Southwest: Southwest Securities, Inc. 1201 Elm Street Suite 3500 Dallas, Texas 75270 Attention: C. William Dedmon, Jr. Phone No.: (214) 651-1800 Facsimile No.: (214) 658-9441 (iii) if to a Holder, at the address set forth on the records of (A) the Company with respect to a Holder of the Managing Underwriters' Warrant, (B) the Warrant Agent with respect to the Holder of any Underlying Warrants, with a copy to the Warrant Agent, or (C) the Company's stock transfer agent with respect to the Holder of any Underlying Shares or Underlying Warrant Shares, with a copy to the stock transfer agent; and (iv) if to the Company: Herley Industries, Inc. 10 Industry Drive Lancaster, Pennsylvania 17603 Attention: President Phone No.: (717) 397-2777 Facsimile No.: (717) 397-9503 with copy to: Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle Jericho, NY 11753 Attention: David Lieberman, Esq. Facsimile No.: (516) 822-5609 with a copy to: Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle Jericho, NY 11753 Attention: David Lieberman, Esq. Facsimile No.: (516) 822-5609 All such notices and communications shall be deemed to have been duly delivered: at the time delivered by hand, if personally delivered; three Business Days after being deposited in the mail, postage prepaid, if mailed; upon receipt of a confirmation notice, if sent by facsimile transmission; when answered back, if telexed; when receipt acknowledged, if telecopied; and on 13 14 the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, all subsequent Holders of any Registrable Securities, provided that only a Managing Underwriter may demand the filing of a Shelf Registration Statement under Section 2 hereof. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of laws rules thereof. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality or enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (j) Entire Agreement. This Agreement is intended by the parties as the final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter hereof. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 14 15 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. HERLEY INDUSTRIES, INC. By: Myron Levy President JANNEY MONTGOMERY SCOTT INC. By: Herbert M. Gardner Senior Vice President SOUTHWEST SECURITIES, INC. By: C. William Dedmon, Jr. Senior Vice President and Managing Director 15 EX-23.2 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Herley Industries, Inc.: As independent public accountants, we hereby consent to the use of our report dated September 17, 1997 and to all references to our Firm included in this Amendment No. 3 to Form S-1 Registration Statement (File No. 333-39767). Arthur Andersen LLP Lancaster, PA December 10, 1997 -----END PRIVACY-ENHANCED MESSAGE-----