-----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, D22rSVLs4NlkVkoX/g4giou+TFzm3VbiDeOyzR9vERkVnLn9ZU8f9Lti8KbRAQM/ KgUnnMxvzSCXPE5EjBDMWA== 0000950123-97-009252.txt : 19971110 0000950123-97-009252.hdr.sgml : 19971110 ACCESSION NUMBER: 0000950123-97-009252 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19971107 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 SEC ACT: SEC FILE NUMBER: 333-39767 FILM NUMBER: 97710346 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 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997 REGISTRATION STATEMENT NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 HERLEY INDUSTRIES, INC. (AND WITH RESPECT TO CERTAIN WARRANTS, LEE N. BLATT AND GERALD I. KLEIN) (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 EXECUTIVE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR OFFICES) 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] ------------------------ CALCULATION OF REGISTRATION FEE
================================================================================================================= PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) SECURITY(2)(3) PRICE REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------- Common Stock, $.10 par value............. 1,610,000 $13.53 $21,783,300 $6,601 - ----------------------------------------------------------------------------------------------------------------- Common Stock Purchase Warrants(4)........ 1,610,000 -- -- -- - ----------------------------------------------------------------------------------------------------------------- Common Stock, $.10 par value underlying Common Stock Purchase Warrants(5)...... 1,610,000 $13.53 $21,783,300 $6,601 - ----------------------------------------------------------------------------------------------------------------- Total.................................... -- -- -- $13,202 =================================================================================================================
(1) Includes up to 210,000 shares of Common Stock and 210,000 Common Stock Purchase Warrants that may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended. (3) Pursuant to Rule 457(c) under the Securities Act of 1933, as amended, the proposed maximum offering price of each share of the Registrant's Common Stock is estimated to be the average of the high and low sale prices of a share as of a date not more than five business days before the filing of this Registration Statement. Accordingly, the Registrant has used $13.53 as such price per share, which is the average of the high sale price of $13 7/8 and the low sale price of $13 5/16 reported on the Nasdaq National Market for a share on November 4, 1997. (4) Pursuant to Rule 457(g), there is no separate registration fee for the Common Stock Purchase Warrants because the Registrant also is registering the issuance of the shares of Common Stock issuable upon exercise of the Common Stock Purchase Warrants in this Registration Statement. (5) Reserved for issuance upon exercise of the Common Stock Purchase Warrants. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 7, 1997 PRELIMINARY PROSPECTUS [LOGO] HERLEY INDUSTRIES, INC. 1,400,000 SHARES OF COMMON STOCK AND 1,400,000 COMMON STOCK PURCHASE WARRANTS Of the 1,400,000 shares (the "Shares") of Common Stock (the "Common Stock") and 1,400,000 Common Stock Purchase Warrants (the "Warrants") offered hereby, 700,000 shares of Common Stock and 1,050,000 Warrants are being offered by Herley Industries, Inc. ("Herley" or the "Company") and 700,000 shares of Common Stock and 350,000 Warrants 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 or exercise of Securities sold by the Selling Stockholders. See "Principal and Selling Stockholders." Each Warrant entitles the holder to purchase one share of Common Stock at $ per share for thirteen months from the date of issuance and thereafter at $ 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 November , 1997 the closing sale price of the Company's Common Stock as reported by the Nasdaq National Market was $ per share. See "Price Range of Common Stock." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 7 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............... $ $ $ $ - ------------------------------------------------------------------------------------------------- Per Warrant............. $ $ $ $ - ------------------------------------------------------------------------------------------------- Total(3)................ $ $ $ $ =================================================================================================
(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 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. See "Underwriting." (2) Before deducting other offering expenses payable by the Company estimated at $ . See "Use of Proceeds." (3) The Company has granted to the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 210,000 additional shares of Common Stock and 210,000 additional Warrants 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 and Proceeds to Company will be $ , $ and $ , 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 , 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 , 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 and the Selling Stockholders have 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. 2 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 is expected to 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, representing 10% of fiscal 1997 revenues, 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 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 Information". With these acquisitions, the 3 6 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. The new products and systems that the Company plans to design, manufacture and sell are data link systems, which encompass telemetry data encoders. Data link systems and data encoders are currently being sold by others to the Company's existing customers. To date, the Company's products for commercial and military applications have represented approximately 5% to 10% and approximately 30% to 40%, respectively, of data-link systems. The Company may now offer commercial and military 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 approximately 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. 4 7 THE OFFERING Securities Offered by: The Company................................ 700,000 Shares of Common Stock and 1,050,000 Warrants. Selling Stockholders....................... 700,000 Shares of Common Stock and 350,000 Warrants. 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 $ per share for thirteen months from date of issuance and thereafter at $ 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........................ 4,539,729 Shares(1) After the Offering......................... 5,239,729 Shares(1) Use of Proceeds.............................. The $ 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 up to 210,000 shares of Common Stock and 210,000 Warrants from the Company, (ii) the 1,050,000 Warrants offered by the Company in this offering, (iii) the 280,000 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." 5 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 Current liabilities............................ 9,974 7,559 9,813 Long-term liabilities net of current portion... 10,525 11,021 2,890 Shareholders' equity........................... $18,988 $21,032 $23,371
- --------------- (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." 6 9 RISK FACTORS This Prospectus contains forward-looking statements that involve risk 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, 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. 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 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." 7 10 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 and copyright laws afford the Company limited protection. 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. 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 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 may enter into letters of intent and other agreements. After performing due diligence on the acquisition or investment candidate, the Company may determine that the acquisition or investment is not in the Company's best interests. In such a case, the Company will not proceed with such acquisition or investment. No assurance exists that the Company's failure 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 future acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 8 11 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 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 9 12 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 5,239,729 shares of Common Stock. The shares sold in this offering generally will be freely transferable without restriction. Of the remaining 4,539,729 shares, 3,804,946 shares are freely transferable, including 313,193 shares previously registered for approximately 85 former stockholders of Metraplex Corporation ("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 180 days after the date of this offering with respect to the Selling Stockholders and 120 days after the date of this offering with respect to the Company's directors and certain of the Company's officers and key employees who are not Selling Stockholders. After such periods, 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 557,943 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. 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 issued by the Company, (ii) the stock options issued under the Company's stock option plans, 10 13 (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 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. 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 11 14 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 $ , excluding the proceeds from the exercise of any Warrants sold by the Company. 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 acquisition. See "Risk Factors -- Broad Discretion of Management to Allocate Offering Proceeds." If the Underwriters exercise the over-allotment option in full, the Company will realize additional net proceeds of $ , which will be added to the Company's working capital. The exercise price that the Company receives upon the exercise of any Warrants issued by the Company 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 or exercise of the Securities sold by the Selling Stockholders. 12 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 November 4, 1997)................................ 13.88 13.13
The closing price on November 4, 1997 was $13.63. As of November 4, 1997, there were approximately 370 record holders and 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 on September 30, 1997. The Company does not intend to pay cash dividends in the foreseeable future. 13 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 ======= ======= Current portion of long-term debt................................... 335 Long-term debt...................................................... 2,890 Note payable to related party....................................... 846 Shareholders' equity: Common stock, $.10 par value; 10,000,000 shares authorized, 4,209,365 shares issued and outstanding and shares, as adjusted(2)(3).............................................. 421 Additional paid-in capital........................................ 8,857 ------- Retained earnings................................................. 14,093 ------- ------- Total shareholders' equity..................................... 23,371 ------- ------- Total capitalization...................................... $27,442 ======= =======
- --------------- (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 $2,100,193 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 210,000 shares of Common Stock and the 210,000 shares of Common Stock issuable upon the exercise of the Warrants issuable upon exercise of the Underwriters' over-allotment option, (ii) the 140,000 shares of Common Stock and the 140,000 shares of Common Stock issuable upon the exercise of the Warrants issuable upon exercise of the Managing Underwriters' Warrant, (iii) the 1,050,000 shares of Common Stock issuable upon the exercise of the Warrants issued by the Company 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." 14 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........ 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. 15 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 $30,000,000 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 16 19 its effective income tax rate. The Company anticipates that its effective income tax rate for fiscal 1998 will be approximately 34%. 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 $52,000 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. 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 17 20 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 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. 18 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 ====== ====== ====== ====== ====== ====== ====== ======
19 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 and 1996 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. 20 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. 21 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, 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. 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 Information." 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 an exclusive license agreement for the manufacture, marketing and sale of the Multiple Aircraft GPS Integrated Command & Control ("MAGIC(2)") systems. In July 1995, the Company acquired certain assets and the business of Stewart Warner Electronics Corp. of Chicago, Illinois, a manufacturer of high frequency radio and IFF interrogator systems. In August 1997, the Company acquired Metraplex 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 22 25 defenders will fire an instrumented defense weapon, such as a missile, at the target as it is commanded through 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 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. 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 conversations over long distances were recognized. Organizations such as the Communications Satellite Corporation 23 26 ("COMSAT") and the International Telecommunications Satellite Organization ("INTELSATF") 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 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, and sub-orbital launch vehicles 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. At present, the space business represents approximately 10% of the Company's annual revenues. 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 a FCC license to build 288 LEO satellites which is scheduled to be in operation by the year 2002. As a result, Motorola 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. 24 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 "state-of-the-art" systems and products. With the 1997 acquisition of Metraplex, the Company has acquired the digital expertise necessary to manufacture and design additional "state of the art" 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. 25 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 many 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 reliable 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. 26 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-2 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 world wide 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] 27 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. 28 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. The FTR can be programmed for complex combinations of audio tone frequencies so that it will not accidentally explode the vehicle, but will not fail to explode the vehicle when so commanded. 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 encompass telemetry data encoders. Data link systems and data encoders are currently being 29 32 sold by others to the Company's existing customers. To date, the Company's products for commercial and military applications have represented approximately 5% to 10% and approximately 30% to 40%, respectively, of data-link systems. The Company may now offer commercial and military 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 approximately 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 has the ability to now 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. 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 costs incurred. 30 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 $30,000,000 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 stringent 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 extensive 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 on programs, the Company is sole 31 34 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 October 12, 1997, the Company employed 286 full-time persons. A total of 203 employees were engaged in manufacturing, 38 in engineering, 20 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 "Business -- 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. 32 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 Raymond Umbarger................... 50 Vice President -- Domestic Marketing George Hopp........................ 59 Vice President -- International Marketing Glenn Rosenthal.................... 37 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 1999 annual meeting of stockholders. 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. 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 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. Raymond 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 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 33 36 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 1998 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 1997 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 1998 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 1999 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 the Director of Corporate Strategy for Resource Consultants, Inc., a member of Gilbert Associates, Inc. which is a professional services company supporting 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. 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. 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 34 37 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. 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. 35 38 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 excludes 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 $4.6425. (8) Effective December 1996, Mr. Klein ceased to serve as an executive officer of the Company. 36 39 OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1) --------------------------------------------------- POTENTIAL REALIZED VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF SECURITIES OPTIONS ISSUED STOCK PRICE APPRECIATION UNDERLYING TO EMPLOYEES EXERCISE OPTION TERM(4) OPTIONS IN PRICE EXPIRATION ----------------------------------- NAME GRANTED(2) FISCAL YEAR(3) ($/SH) DATE 0% 5% 10% - ------------------- ---------- -------------- -------- ---------- ----- ---------- ---------- Lee N. Blatt....... 133,333 9 $ 6.9375 10/08/06 $0.00 $ 255,559 $ 564,720 133,333 9 $ 6.0938 04/04/07 $0.00 $ 224,480 $ 496,042 333,333 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 $ 191,670 $ 423,541 100,000 7 $ 6.0938 04/04/07 $0.00 $ 168,360 $ 372,032 200,000 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 $ 51,111 $ 112,942 20,000 1 $ 6.0938 04/04/07 $0.00 $ 33,672 $ 74,406 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 $ 25,555 $ 56,470 20,000 1 $ 6.0938 04/04/07 $0.00 $ 33,672 $ 74,406 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 $ 8,979 $ 19,840 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 $ 56,120 $ 124,009 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. This table excludes warrants 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. 37 40 AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES The following table sets forth stock options exercised during fiscal 1997 and all unexercised stock options held by the named executive officers as of August 3, 1997. This table excludes warrants exercised and held by these individuals granted outside the stock option plans.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY SHARES YEAR-END(2) OPTIONS AT FISCAL YEAR-END(3) ACQUIRED ON VALUE ---------------------------- ------------------------------ NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------- ----------- -------------- ----------- ------------- ----------- ------------- Lee N. Blatt....... 688,886 $3,203,301 -- 177,779 $ -- $ 785,698 Myron Levy......... 264,441 1,255,128 -- 255,558 -- 969,833 Allan Coon......... -- -- 32,222 41,110 109,350 140,202 Anello Garefino.... 41,109 200,659 -- 38,889 -- 153,102 George Hopp........ 4,443 22,442 2,667 18,222 10,261 72,993 Gerald Klein....... 163,330 854,708 -- 83,335 -- 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. 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 an eight year consulting period commencing at the end of the employment period. 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. 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. 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 $110,000. 38 41 INDEMNIFICATION AGREEMENTS The Company has entered into separate indemnification agreements with the officers and directors of the Company. The Company has agreed to provide indemnification with regard to certain legal proceedings so long as the indemnified officer or director has acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company and with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The Company only provided indemnification for expenses, judgments, fines and amounts paid in settlement actually incurred by the relevant officer or director, or on his or her behalf, arising out of proceedings brought against such officer or director by reason of his or her corporate status. TABLE OF TEN-YEAR OPTION REPRICINGS The following table sets forth information concerning options of the named executive officers that were repriced during fiscal 1997.
MARKET PRICE EXERCISE LENGTH OF ORIGINAL NUMBER OF SECURITIES OF STOCK AT PRICE NEW OPTION TERM UNDERLYING OPTIONS TIME OF AT TIME OF EXERCISE REMAINING AT DATE OF REPRICED OR REPRICING OR REPRICING OR PRICE REPRICING OR NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) ($) AMENDMENT(YRS) - --------------------- ------- -------------------- ------------ ------------ ------- -------------------- 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. 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 39 42 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 666,667 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 663,997 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 1,666,667 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 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 800,665 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 officers and directors as a group. 40 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 UNDERLYING THE SHARES TO BE WARRANTS TO SOLD IN THIS BE SOLD IN OFFERING 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% 550,000 250,000 363,065(7) 6.7% Myron Levy(4)(5)(8).............. 396,687 8.5% -- -- 396,687 8.5% Gerald I. Klein(4)(5)............ 356,186 7.7% 75,000 75,000 281,186(7) 5.3% 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 -- 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% 75,000 25,000 81,309(7) 1.6% Directors and executive officers as a group (11 persons)........ 1,518,471 30.3% 550,000 250,000 968,471(7) 17.0%
- --------------- (1) No 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, Raymond 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 210,000 shares of Common Stock and 210,000 Warrants, nor exercise of all the Warrants sold in this offering. (7) Includes shares reserved for exercise of Warrants sold in this offering; Lee N. Blatt - 250,000, Gerald I. Klein - 75,000 and Kathi Thonet - 25,000. (8) Does not include 12,666 shares owned by Mr. Levy's children, Stephanie Levy and Ronnie Roth, of which Mr. Levy disclaims beneficial ownership. 41 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, 4,539,729 of which were issued and outstanding as of November 1, 1997. 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, 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 5,239,729 shares of Common Stock outstanding. Of these shares, 4,504,946, including the 1,400,000 shares sold in this offering (1,610,000 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 addition, the Company will have issued 1,050,000 Warrants (1,260,000 Warrants if the Underwriters' over-allotment option is exercised in full) that will be exercisable for 1,050,000 newly issued shares of Common Stock (1,260,000 shares if the Underwriters' over-allotment option is exercised in full) and the Selling Stockholders will have issued Warrants that will be exercisable for 350,000 outstanding shares of Common Stock. Upon 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 42 45 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 issue. 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, shares have been held for more than one year. Persons who have agreed not to sell their shares of Common Stock for a period ranging between 120 days and 180 days after the closing of this offering, however, own 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") among the Company, the Selling Stockholders 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 $ per share for thirteen months from date of issuance prior to and thereafter at $ 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 sale by the Company of shares of its Common Stock or other securities convertible into Common Stock (exclusive of shares issued upon the exercise or conversion of outstanding options, warrants and convertible securities and 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 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 43 46 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. The 350,000 shares of Common Stock underlying the 350,000 Warrants sold by the Selling Stockholders in this offering will be deposited with the Warrant Agent. Upon the exercise of any Warrants, the underlying shares of Common Stock will be satisfied from newly issued shares by the Company and the deposited shares in proportion to the number of Warrants sold by the Company and the Selling Stockholders, respectively. The Warrant Agreement provides that if for any reason the Warrant Agent cannot transfer the respective shares of Common Stock deposited by the Selling Stockholders upon the exercise of the Warrants, the Company will issue the shares of Common Stock to be sold upon the exercise of such Warrants. In such a case, the Company will receive the exercise price for such shares and the Selling Stockholders will pay to the Company the proceeds that they received in connection with the sale of the related Warrants. 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, 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 Representative. 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, 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. 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. 44 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. 45 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. .................................. Southwest Securities, Inc. .................................... --------- --------- Total................................................ 1,400,000 1,400,000 ========= =========
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 $ per Share and $ per Warrant under the initial offering price. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per Share and $ 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 has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 210,000 additional Shares and 210,000 additional Warrants 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 46 49 otherwise effect transactions in such Securities. Such market-making activity may be discontinued at any time. During the period beginning , 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 transaction 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 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 their 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 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 and the Warrants offered by them in this offering) during the period beginning on the date of the Underwriting Agreement and ending 180 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. In addition, the Company's directors, executive officers, and certain key employees who are not Selling Stockholders have agreed to similar restrictions with respect to their shares of Common Stock for the period beginning on the date of the Underwriting Agreement and ending 120 days after the date hereof. The price to the public for the Shares offered hereby was based approximately upon the closing bid price for a share of Common Stock on the Nasdaq National Market on the date of the Underwriting Agreement. The price to the public for each Warrant was based upon negotiations among the Company, the Selling Stockholders, 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. Pursuant to a letter of intent between the Representative and the Company (the "Letter of Intent"), the Company has agreed to pay the Managing Underwriters a financial advisory fee equal to 1.33% of the gross 47 50 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 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 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, the Company has agreed to sell to the Managing Underwriters a warrant to purchase from the Company 140,000 shares of Common Stock at an exercise price of $ per share and 140,000 Warrants at an exercise price of $ 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 certain events, including stock dividends, stock splits, combinations and the issuance of Common Stock for consideration less than the offering price of the Common Stock in this offering, subject to certain exceptions. The Managing Underwriters' Warrant may not be sold, transferred, assigned or hypothecated for a period of one year after the closing 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 Managing Underwriters' Warrant and the shares of Common Stock issuable upon exercise of the Managing Underwriters' Warrant. 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 Managing Underwriters' Warrant (including all divisible portions thereof) and all shares of Common Stock issuable upon the exercise of the Managing Underwriters' Warrants at the Company's expense (subject to a maximum expense of $5,000 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 two years. After such two 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 48 51 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. The Company also has granted the Managing Underwriters one demand registration right with respect to the Managing Underwriters' Warrant, the Warrants issuable upon the exercise of the Managing Underwriters' Warrant, and the shares of Common Stock issuable upon the exercise of such Warrants. 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 Managing Underwriters' Warrant (including all divisible portions thereof), all Warrants issuable upon the exercise thereof, and all shares of Common Stock issuable upon the exercise of such Warrants at the Company's expense (subject to a maximum expense of $5,000 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 two years. After such two 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 include such holder's Registrable Securities in such registration statement and maintain the effectiveness of such registration statement for at least one year. 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. 49 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 items.................................... -- -- 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 15, 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:
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 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. F-15 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 - 5.254.88 ---------- ------------- -------- -------- ------------- 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 - 5.254.83 (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 - 9.018.67 -- ---------- ------------- -------- -------- ------------- 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 29, 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 Portioning 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 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................. 2 Prospectus Summary.................... 3 Risk Factors.......................... 7 Use of Proceeds....................... 12 Price Range of Common Stock........... 13 Dividend Policy....................... 13 Capitalization........................ 14 Selected Financial Data............... 15 Management's Discussion and Analysis and of Financial Condition and Results of Operations............... 16 Business.............................. 22 Management............................ 33 Principal and Selling Stockholders.... 41 Description of Securities............. 42 Underwriting.......................... 46 Legal Matters......................... 49 Experts............................... 49 Financial Statements.................. F-1 Glossary.............................. G-1
====================================================== ====================================================== HERLEY INDUSTRIES, INC. 1,400,000 SHARES OF COMMON STOCK 1,400,000 COMMON STOCK PURCHASE WARRANTS ----------------- PROSPECTUS ----------------- JANNEY MONTGOMERY SCOTT INC. SOUTHWEST SECURITIES , 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............................................................ 2,695 NASDAQ National Market Fees................................................ * Blue Sky Fees and Expenses (including legal fees).......................... * Transfer Agent and Warrant Agent Fees...................................... * Accounting Fees and Expenses............................................... * Legal Fees and Expenses.................................................... * Printing and Engraving..................................................... * Managing Underwriters' Financial Advisory Fee............................................................. * Miscellaneous.............................................................. ------- Total.................................................................... $ * =======
- --------------- * To be filed by amendment 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 that 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, Registrant purchased all of the outstanding common stock of Metraplex Corporation, a Delaware corporation, in exchange for 313,193 shares of Registrant's 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 Registrant's Common Stock was a transaction by the issuer not involving any public offering which was exempt from the registration requirements under the Act pursuant to Section 4(2) thereof. II-2 74 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS - -------- 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.* 4.3 Form of Warrant Agreement among the Company, the Selling Stockholders, the Representative, and the Warrant Agent.* 4.4 Form of Deposit Agreement between the Selling Stockholders and the Warrant Agent.* 5.1 Form of 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
EXHIBITS - -------- 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 Managing Underwriters and the Company. 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 hereto).
- --------------- * To be filed by amendment. 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. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. II-4 76 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 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Lancaster, Pennsylvania on the 5th day of November, 1997. HERLEY INDUSTRIES, INC. By: /s/ LEE N. BLATT ------------------------------------ Lee N. Blatt Chairman of the Board (Chief Executive Officer) POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on November 5, 1997, by the following persons in the capacities indicated. Each person whose signature appears below also constitutes and appoints Lee N. Blatt and Myron Levy, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE/CAPACITY - ------------------------------------------ ------------------------------------------------- /s/ LEE N. BLATT Chairman of the Board (Chief Executive Officer) - ------------------------------------------ and Issuer of Certain Warrants 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. /s/ GERALD I. KLEIN Issuer of Certain Warrants - ------------------------------------------ Gerald I. Klein /s/ KATHI THONET Issuer of Certain Warrants - ------------------------------------------ Kathi Thonet
II-6 78 EXHIBIT INDEX
EXHIBITS - -------- 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.* 4.3 Form of Warrant Agreement among the Company, the Selling Stockholders, and the Warrant Agent.* 4.4 Form of Deposit Agreement between the Selling Stockholders and the Warrant Agent.* 5.1 Form of 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
EXHIBITS - -------- 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 Managing Underwriters and the Company. 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 hereto).
- --------------- * To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 1,400,000 SHARES OF COMMON STOCK 1,400,000 COMMON STOCK PURCHASE WARRANTS HERLEY INDUSTRIES, INC. LEE N. BLATT GERALD I. KLEIN KATHI THONET UNDERWRITING AGREEMENT _______________, 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 1,050,000 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 700,000 shares of Common Stock and 350,000 Common Stock Purchase Warrants. 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") on the date hereof 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. The 1,400,000 shares of Common Stock to be purchased by the Underwriters are hereinafter referred to as the "Firm Shares" and the 1,400,000 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 proposes 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 210,000 additional shares of Common Stock (the "Additional Shares") and 210,000 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." All the warrants included in the Securities as the "Warrants" and all of the shares of Common Stock to be issued or sold upon exercise of the Warrants as the "Warrant Shares." The Warrant Agreement, the Deposit 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-_____), 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 -2- 3 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 $_____ per Firm Share and $.0935 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 hereby also agrees 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 Company up to an aggregate of 210,000 Additional Shares and 210,000 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 $___________ entitling the holder thereof to (i) purchase up to 140,000 shares of Common Stock for five years after the Closing Date for an exercise price per share equal to 120% of the per share offering price set forth on the cover page of the Prospectus, and (ii) purchase up to 140,000 Warrants, identical to the Firm Warrants and the Additional Warrants, for an exercise price per Warrant equal to 120% of the per Warrant offering price set forth on the cover page of the Prospectus. The Managing Underwriters' Warrant shall be exercisable with respect to the Warrants for the 25 months immediately after the Closing Date. 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 date hereof (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 shares of Common Stock issuable upon the exercise of such warrant, the resale of -3- 4 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 date hereof (the "Registration Rights 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 1.33% 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 _____________ __, 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 date of the Prospectus. 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 -4- 5 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 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. Neither the Company nor any Selling Stockholder will 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 -5- 6 opportunity to review such amendment or supplement) or to which you have reasonably objected after being so advised. 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 -6- 7 will furnish to each Underwriter who has previously requested Prospectuses, without charge, a reasonable number of copies thereof. 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 date on which the Commission declares the Registration Statement effective (the "Effective Date"), 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 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 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. -7- 8 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. 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 and the Selling Stockholders, to the extent applicable, 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 and the Selling Stockholders will use their best efforts to qualify or register their respective shares of Common Stock 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 National Association of Securities Dealers, Inc. 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 -8- 9 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. 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 (i) 180 days for all Selling Stockholders, and (ii) 120 days for each such officer, director and employee who is not a Selling Stockholder, from the Effective Date, he or she will not, without the prior 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 (other than in connection with a conversion, exercise or exchange in which the holder retains the Shares of Common Stock) therefor or with respect to which such person has the power of disposition. 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 ___ 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 -9- 10 date hereof and described in the Prospectus, or (y) increase any compensation payable to any of the Executives, unless such issuance or 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 and the Selling Stockholders will enter into the Warrant Agreement with American Stock Transfer & Trust Company ("American Stock Transfer" or the "Warrant Agent"). bb. At the Closing, the Selling Stockholders will enter into the Deposit Agreement with American Stock Transfer in the form set forth as an exhibit to the Registration Statement on the date hereof (the "Deposit Agreement"), and pursuant to the Deposit Agreement the Selling Stockholders will deposit their shares of Common Stock subject to the Warrants that they sell in escrow for transfer upon the exercise of such Warrants. cc. 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 date hereof. 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: -10- 11 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. 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 -11- 12 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 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 and Additional 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 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 best 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 -12- 13 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) that the remedy of specific forms of equitable relief may be subject to equitable defenses and discretion of the court before which any 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 has 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 -13- 14 Managing Underwriters' Warrant Agreement has 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 constitutes 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 has been duly and validly authorized by the Company, and at the Closing the 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 to be issued by the Company 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 obligation 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 to be issued by the Company (including the Warrant Shares underlying the Warrants to be sold by the Selling Stockholders based upon the Company's contingent obligation to issue such shares if the Selling Stockholders fail to deliver them) and has duly and validly authorized the issuance of such Warrant Shares upon the exercise of such Warrants. Upon the exercise of such 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 Warrants to be issued by the Selling Stockholders, when issued and countersized in accordance with the terms of the Warrant Agreement and delivered against payment therefor in accordance with the terms hereof and thereof, will be the legal, valid and binding obligations of the Selling Stockholders. At the Closing, the Selling Stockholders will deposit with the Warrant Agent a sufficient number of shares of Common Stock for the transfer of the Warrant Shares upon exercise of the Warrants to be issued by the Selling Stockholders. Such Warrant Shares were duly authorized and validly issued, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights. o. 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 -14- 15 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. p. 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 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. q. 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. r. The financial statements, together with related schedules and notes, included in the Registration Statement and the Prospectus (and any amendment or -15- 16 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. s. 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 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. t. 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 -16- 17 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. u. 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. v. 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. w. 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. x. 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 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. y. 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 best knowledge of the Company after reasonable investigation and inquiry, is any such dispute threatened. z. 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) -17- 18 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. aa. 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. bb. 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 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, 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. cc. 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 -18- 19 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. dd. 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 that the Company will issue in this offering upon exercise of the Warrants that the Company will issue in this offering. 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 subject to the Warrants that the Selling Stockholders will sell and shares 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. ee. 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 valid extension) with the appropriate federal, state and local authorities and all such tax returns, 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. -19- 20 ff. 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. gg. 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 the date hereof and ending (i) 180 days for all Selling Stockholders and (ii) 120 days for each such officer, director and employee who is not a Selling Stockholder, after the Effective Date without the prior written consent of the Representative. hh. 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. ii. 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. jj. 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. kk. 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 -20- 21 Subsidiaries are sufficient to enable them to comply with the Foreign Corrupt Practices Act of 1977, as amended. ll. 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. mm. The Company has amended and restated the Bylaws as set forth as an exhibit to the Registration Statement on the date hereof. nn. As contemplated under Section 3.02 of the Joint Venture Agreement, dated as of August 26, 1997 (the "ATI Agreement"), between the Company 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. oo. 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. pp. 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 any of the Operative Documents. qq. The Company has applied for and obtained a CUSIP number for the Warrants. -21- 22 rr. 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. ss. The Company has terminated its agreement with Stonegate Securities, Inc., dated July 25, 1997, pursuant to its terms. 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, the Power of Attorney (the "Power of Attorney") referred to in the last paragraph of this Section 7, the Warrant Agreement and the Deposit Agreement, and for the sale and delivery of the Firm Securities 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, the Power of Attorney, the Warrant Agreement and the Deposit Agreement, and to sell, assign, transfer and deliver the Firm Securities to be sold by such Selling Stockholder hereunder. b. This Agreement and the Power of Attorney have been duly executed and delivered by such Selling Stockholder and constitute the valid and binding agreements of such Selling Stockholder, enforceable against such Selling Stockholder in accordance with their respective terms subject to the Enforceability Exceptions. c. At the Closing, the Warrant Agreement and the Deposit Agreement will be duly executed and delivered by such Selling Stockholder and constitute the valid and legally binding agreements of such Selling Stockholder, enforceable against such Selling Stockholder in accordance with their respective terms subject to the Enforceability Exceptions. d. The performance of this Agreement, the Power of Attorney, the Warrant Agreement and the Deposit Agreement and the consummation of the transactions contemplated herein and therein 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 -22- 23 any court or governmental agency or body applicable to such Selling Stockholder or his or her business or property. e. Such Selling Stockholder has, and immediately prior to the Closing Date (and any Additional Closing Date) such Selling Stockholder will have, good and valid title to the Firm Securities 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 Securities and payment therefor pursuant hereto, good and valid title to such Firm Securities, free and clear of all liens, encumbrances, equities, stockholder agreements, voting trusts or claims of any nature whatsoever, will pass to the several Underwriters. f. Such Selling Stockholder will not from the date hereof until 180 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 of Common Stock (other than a 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. g. 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. h. 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, in the Power of Attorney, the Warrant Agreement or the Deposit Agreement, 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 Securities to be sold by such Selling Stockholder. i. 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. j. 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. -23- 24 k. 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 Securities 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. l. The Firm Shares to be sold to the Underwriters by such 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. 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). Such Selling Stockholder acknowledges, represents and warrants that it has duly executed and delivered a Power of Attorney, in the form heretofore furnished to you, appointing Lee N. Blatt and Myron Levy as such Selling Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute and deliver this Agreement, the Warrant Agreement, the Deposit Agreement and any other agreements or documents related to this offering on behalf of such Selling Stockholder, authorize the delivery of the Firm Securities 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 the Warrant Shares underlying the Warrants 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 to the Underwriters and Warrant Shares to the Warrant Agent, or if this Agreement is terminated prior to such delivery, to return such Firm Shares and Warrant Shares to such Selling Stockholder. Each Selling Stockholder specifically agrees that the Firm Shares and Warrant Shares represented by the certificates held in custody with respect to such Selling Stockholder under the Power of Attorney 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 Powers of Attorney, are to that extent irrevocable. Each certificate signed by such Selling Stockholder, or by such Selling Stockholder's agent pursuant to the Powers of Attorney, and delivered to the Representative or counsel for the Representative shall be deemed to be a representation and warranty by the Company and 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 -24- 25 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 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 and the Deposit 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 -25- 26 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 therein 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 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. -26- 27 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 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 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 -27- 28 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 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 -28- 29 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. 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 (and any Additional 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 -29- 30 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 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 and Additional 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 to be sold to the Underwriters by the Selling Stockholders were duly authorized and validly issued, are fully paid and -30- 31 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. (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 has 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 -31- 32 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 has 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 has been duly and validly authorized by the Company, and 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 to be issued by the Company 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 to be issued by the Company (including the Warrant Shares underlying the Warrants to be sold by the Selling Stockholders based upon the Company's contingent obligation to issue such shares if the Selling Stockholders fail to deliver them); the Company has duly and validly authorized the issuance of such Warrant Shares upon the exercise of such Warrants; upon the exercise of such Warrants and the -32- 33 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 Warrants to be issued by the Selling Stockholders, 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 the legal, valid and binding obligation of the Selling Stockholders. The respective Warrant Shares were duly authorized and validly issued, are fully paid and nonassessable, and were not issued in violation of any preemptive or similar rights. (xv) 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 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; and the Managing Underwriters' Warrant conforms in all material respects to the description thereof contained in the Prospectus. (xvi) 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 -33- 34 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. (xvii) 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. (xviii) 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 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. (xix) 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. (xx) To the knowledge of such counsel, neither the Company nor any of the Subsidiaries is in violation of any law, ordinance, administrative or -34- 35 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. (xxi) 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. (xxii) 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. (xxiii) 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. (xxiv) To the knowledge of such counsel, no consent, approval, authorization or order has been or is required for the performance of this Agreement, the Powers of Attorney, the Warrant Agreement and the Deposit Agreement by each of the Selling Stockholders or the consummation of the transactions contemplated by this Agreement, the Powers of Attorney, the Warrant Agreement and the Deposit Agreement in connection with the Firm Securities to be sold by the Selling Stockholders hereunder, except consents, approvals, authorizations or orders that have been duly obtained and are in full force and effect. (xxv) This Agreement, the Powers of Attorney, the Warrant Agreement and the Deposit Agreement have been duly executed and delivered by each Selling Stockholder; the Powers of Attorney, the Warrant Agreement and the Deposit Agreement constitute the valid and binding agreements of such Selling Stockholders and assuming due authorization, execution, and delivery by each other party thereto, are enforceable against the Selling Stockholders in accordance with their respective terms subject to the Enforceability Exceptions; and the performance of this Agreement, the Powers of Attorney, the Warrant Agreement and the Deposit Agreement and the consummation of the transactions contemplated herein and therein 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 -35- 36 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. (xxvi) Each Selling Stockholder has good and valid title to the Firm Securities 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 Securities and payment therefor pursuant hereto, good and valid title to such Firm Securities, 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 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 -36- 37 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 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. -37- 38 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 (i) 180 days for each Selling Stockholder, and (ii) 120 days for the officers, directors and employees who are not Selling Stockholders, after the Effective Date without the prior written consent of the Representative. 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, the Selling Stockholders, the Representative and the Warrant Agent shall have entered into the Warrant Agreement and the Representative shall have received counterparts, conformed as executed, thereof. 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 Selling Stockholders and American shall have entered into the Deposit Agreement and the Representative shall have received counterparts, conformed as executed, thereof. -38- 39 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. 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 date hereof. 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 the Additional Closing Date of the conditions set forth in this Section 10, except that if the Additional Closing Date is other than the Closing Date, the certificates, opinions and letters shall be as of the 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. 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 -39- 40 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 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 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 -40- 41 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. 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 -41- 42 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] -42- 43 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 -43- 44 SCHEDULE I UNDERWRITERS
Number Number of Firm of Firm Name Shares Warrants - ---- ------ -------- Janney Montgomery Scott Inc......... Southwest Securities, Inc .......... --------- --------- TOTAL............. 1,400,000 1,400,000 ========= =========
I-1 45 SCHEDULE II OFFERED SECURITIES
Additional Additional Firm Shares Firm Warrants Shares Warrants ----------- ------------- ---------- ---------- Company ............. 700,000 1,050,000 210,000 210,000 --------- --------- ------- ------- Selling Stockholders: Lee N. Blatt .... 550,000 250,000 -- -- Gerald I. Klein . 75,000 75,000 -- -- Kathi Thonet .... 75,000 25,000 -- -- --------- --------- ------- ------- Total Selling Stockholders .... 700,000 350,000 0 0 --------- --------- ------- ------- TOTAL ............... 1,400,000 1,400,000 210,000 210,000 --------- --------- ------- -------
II-1 46 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-2.4 3 PURCHASE AND SALE AGREEMENT 1 Exhibit 2.4 PURCHASE AND SALE AGREEMENT Between STEWART WARNER ELECTRONICS CORPORATION, as Seller and STEWART WARNER ELECTRONICS CO., as Purchaser Dated as of July 28, 1995 2 TABLE OF CONTENTS ARTICLE I - DEFINITIONS 1.1 Assets ........................................................... 1 1.2 Business Day ..................................................... 2 1.3 Closing .......................................................... 2 1.4 Closing Date ..................................................... 2 1.5 Code ............................................................. 2 1.6 Contracts ........................................................ 2 1.7 ERISA ............................................................ 2 1.8 Environmental Laws ............................................... 2 1.9 Excluded Assets .................................................. 3 1.10 Intellectual Property Rights ..................................... 3 ARTICLE II - PURCHASE AND SALE OF ASSETS 2.1 Transfer of Assets ............................................... 3 2.2 Purchase Price ................................................... 4 2.3 Purchase Price Adjustment ........................................ 4 2.4 Assumption of Liabilities ........................................ 4 2.5 Taxes ............................................................ 6 ARTICLE III - CLOSING; TERMINATION 3.1 Closing .......................................................... 6 3.2 Termination ...................................................... 6 3.3 Deliveries of Seller ............................................. 7 3.4 Deliveries of Purchaser .......................................... 8 3.5 Further Assurances ............................................... 8 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SELLER 4.1 Status Authority ................................................. 9 4.2 Execution; Valid and Binding Agreements .......................... 9 4.3 Absence of Conflicts ............................................. 9 4.4 Title to Properties .............................................. 10 4.5 Litigation ....................................................... 10 4.6 Brokerage Commissions ............................................ 10 4.7 Patents and Trademarks ........................................... 10 4.8 Compliance with Laws ............................................. 10 4.9 Employee Benefit Plans ........................................... 10 4.10 Conflict of Interest ............................................. 11 4.11 Compliance with Law .............................................. 11 4.12 Disclaimers ...................................................... 11 3 4.13 Environmental Matters ............................................ 11 4.14 Accounts Receivable .............................................. 12 4.15 No Undisclosed Liabilities ....................................... 12 4.16 Government Contracts ............................................. 12 4.17 Labor Matters .................................................... 12 ARTICLE V - REPRESENTATIONS AND WARRANTIES OF PURCHASER 5.1 Status; Authority ................................................ 12 5.2 Execution; Valid and Binding Agreements .......................... 12 5.3 Brokerage ........................................................ 13 5.4 Consents; Approval ............................................... 13 5.5 Litigation ....................................................... 13 5.6 Absence of Conflicts ............................................. 13 ARTICLE VI - INDEMNIFICATION 6.1 Indemnification by Seller ........................................ 14 6.2 Indemnification by Purchaser ..................................... 15 6.3 Notice and Payment of Claims ..................................... 15 6.4 Defense of Third-Party Claims .................................... 16 6.5 Survival of Representations and Warranties ....................... 16 6.6 Limitations on Indemnification ................................... 16 ARTICLE VII - EMPLOYEES 7.1 Purchaser's Obligations .......................................... 17 7.2 Employee Benefit Plans ........................................... 17 7.3 Severance ........................................................ 17 ARTICLE VIII - CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER 8.1 Accuracy of Representations and Warranties and Performance of Obligations ....................................... 17 8.2 Consents ......................................................... 17 8.3 No Litigation or Contrary Judgment ............................... 17 8.4 Deliveries ....................................................... 18 ARTICLE IX - CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER 9.1 Accuracy of Representations and Warranties and Performance of Obligations ....................................... 18 9.2 Consents ......................................................... 18 9.3 No Litigation or Contrary Judgment ............................... 18 9.4 Deliveries ....................................................... 18 9.5 Letters of Credit, etc. .......................................... 18 ii 4 ARTICLE X - ADDITIONAL COVENANTS 10.1 Intercompany Accounts ............................................ 18 10.2 Access Pending Closing ........................................... 19 10.3 Books and Records ................................................ 19 10.4 Confidentiality .................................................. 19 10.5 Filings; Cooperation ............................................. 21 10.6 Risk of Loss ..................................................... 21 10.7 Conflicting Proprietary Right; Assignment; License ............... 21 10.8 Transitional Use of Trademarks ................................... 21 10.9 Contracts ........................................................ 22 10.10 Stewart Warner South Wind Contract ............................... 22 10.11 Letters of Credit ................................................ 23 ARTICLE XI - MISCELLANEOUS 11.1 Expenses ......................................................... 23 11.2 Notices .......................................................... 23 11.3 Entire Agreement ................................................. 24 11.4 Severability ..................................................... 24 11.5 Assignability .................................................... 24 11.6 Captions ......................................................... 24 11.7 Governing Law .................................................... 24 11.8 Counterparts ..................................................... 24 11.9 Remedies Cumulative .............................................. 24 iii 5 PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement (together with all Schedules and Exhibits referred to herein, the "Agreement") made and entered into as of July 28, 1995, among Stewart Warner Electronics Corporation, a Delaware corporation, (hereinafter referred to as "Seller"), and Stewart Warner Electronics Co., a Pennsylvania corporation, (hereinafter referred to as "Purchaser"), WITNESSETH: WHEREAS, Seller is engaged in the business of manufacturing and selling electronic equipment for military applications (the "Business"); and WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, certain of the assets of Seller related to the Business, all on the terms and conditions hereinafter set forth; NOW, THEREFORE, for and in consideration of the mutual covenants and agreements hereinafter set forth, and intending to be legally bound hereby, Seller and Purchaser hereby agree as follows: ARTICLE I - DEFINITIONS 1.1 "Assets" shall mean all of the assets, properties and rights (other than the Excluded Assets) that are used in or arise out of the Business as of the Closing Date, whether owned, leased or licensed by Seller, including, but not limited to, the following: (a) all accounts, notes and other receivables; (b) all inventories of supplies, merchandise, packaging, advertising and promotional materials, and other materials and products, including raw materials, work in process and finished goods; (c) all tangible personal property, including but not limited to, all fixtures, furnishings, furniture, office supplies, computers and computer software, vehicles, rolling stock, machinery, equipment, tools, leasehold improvements, goods, spare parts and other similar personal property; (d) all right, title and interest to and under the Contracts; (e) all research and development and commercially practiced processes, and manufacturing, engineering, computer software (including source codes) and other technical information, and all notebooks, records, reports and data relating thereto, subject to existing licenses; 6 (f) all Intellectual Property Rights (as hereinafter defined); (g) all of the books, records and data including, but not limited to, all books, records and data relating to the purchase of materials, supplies and services, sale of products, customers, invoices, records of employees, commercial data, research done by or for Seller, credit information, catalogues, brochures, training and other manuals, sales literature, advertising and other sales and promotional materials, maintenance records and drawings except for the 1995 general ledger and related journals and records necessary to prepare Seller's tax returns or filings, which may be copied by Purchaser upon request; and (h) all rights or choses in action arising out of occurrences before of after the Closing, including, without limitation, all rights under express or implied warranties relating to the Assets. 1.2 "Business Day" shall mean any day other than a Saturday or Sunday on which commercial banks in the Chicago, Illinois are open for business. 1.3 "Closing" shall mean the act of completing the transactions contemplated by this Agreement. 1.4 "Closing Date" shall mean July 28, 1995, or such other date as shall be agreed upon by the parties. 1.5 "Code" shall mean the Internal Revenue Code of 1986, as amended, and all regulations promulgated thereunder. 1.6 "Contracts" shall mean all contracts, subcontracts, leases, options, purchase orders, sales orders, guarantees, arrangements, undertakings, agreements, understandings, obligations and other commitments of any kind, written or oral, relating to the Business other than the Agreement dated December 2, 1993 between Seller and the United Electrical, Radio and Machine Workers of America and the United Workers Association - UE Local 1154 (the "Union Contract"). 1.7 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and all regulations promulgated thereunder. 1.8 "Environmental Laws" shall mean all U.S., federal, state, and local laws, ordinances, regulations, orders, judgments, and injunctions relating to pollution or protection of the environment, including, but not limited to, laws relating to emissions, discharges, releases of pollutants, contaminates, chemicals, toxic or hazardous substances, wastes or other substances or materials into the environment (land, water or air) or otherwise relating to the manufacturing, processing, distribution, use, treatment, burial, storage, disposal, transport or handling of 2 7 pollutants, contaminants, chemicals, or toxic or hazardous substances or wastes and all permits, approvals, consents or other authorizations by or pursuant to any of the foregoing laws. 1.9 "Excluded Assets" shall mean; (a) all trademarks and trade names now or previously used in connection with the Business other than those expressly included in Schedule 4.7; (b) all cash, bank balances, moneys in possession of banks and other depositories and similar cash property of, owned or held by or for the account of Seller as at the Closing; (c) non-trade balances with affiliates of Seller (set forth on Schedule 1.9(c) hereto); (d) the Seller's leased vehicles; (e) proprietary financial management software of BTR, Inc. or its affiliates; (f) assets specifically related to the commercial line tracing and cutting systems business of Seller (the "Line Tracing Business"); (g) the corporate records of Seller; (h) any tax refunds due to Seller; and (i) all real property of Seller including, without limitation, the real property located at 1300 North Kostner Avenue, Chicago, Illinois (the "Facility"). 1.10 "Intellectual Property Rights" shall mean the patents, trademarks and other intellectual property specifically listed on Schedule 4.7 and all other inventions, know how, trade secrets, trade names, package designs, trade dress, service marks, copyrights, business names, advertisements, promotional materials, designs, models, registrations and applications and rights to apply for any of the foregoing, and all similar proprietary rights which may subsist in any part of the world, to the extent that all of the above exclusively belong to Seller and are used in the Business, along with the good will associated therewith. ARTICLE II - PURCHASE AND SALE OF ASSETS 2.1 Transfer of Assets. Subject to the terms and conditions of this Agreement and in reliance on the representations, warranties, and covenants herein, at the Closing, Seller shall sell, assign, transfer, convey and deliver the Assets to Purchaser, and Purchaser shall purchase, 3 8 acquire and accept the Assets from Seller, free and clear of all mortgages, liens, pledges, security interests, charges, claims, restrictions and encumbrances of any nature whatsoever. 2.2 Purchase Price. On the terms and subject to the conditions set forth in this Agreement, on the Closing Date Seller agrees to sell, and Purchaser agrees to purchase, all of the Assets for a total cash purchase price in the amount of $250,000 (the "Purchase Price"). 2.3 Purchase Price Adjustment. On the Closing Date, Seller shall deliver a preliminary statement to Purchaser showing the Seller's good faith estimate of the aggregate amount of (i) trade payables (other than intercompany payments to affiliates of Seller), (ii) payroll costs less payments related to accruals for periods prior to July 1, 1995 and (iii) other cash disbursements (other than intercompany payments to affiliates of Seller) made in the normal course of business paid by Seller less the accounts receivable and customer deposits received by Seller from and after July 1, 1995 (the "Effective Time") through the Closing Date (such statement not to include amounts incurred or received in connection with the Line Tracing Business). On the Closing Date the Purchase Price shall be adjusted dollar for dollar for such net amount, it being intended that Seller and Purchaser be placed in the same position on a cash basis as if the Closing Date had occurred on June 30, 1995. Promptly after the Closing Date (but no later than 10 business days after such date) Seller and Purchaser shall make a final adjustment to reflect any variation between Seller's good faith estimate and the actual cash adjustment required to effect the intent of this Section 2.3. 2.4 Assumption of Liabilities. Notwithstanding anything to the contrary set forth herein, in no event shall Purchaser assume or incur any liability or obligation under this Agreement or otherwise become responsible in respect of the following (hereinafter collectively referred to as the "Excluded Liabilities"): (a) Any liability or obligation of any nature whatsoever which arises out of or is related to any action, suit, claim or legal, administrative, arbitration, governmental or other proceeding or investigation now pending or hereafter instituted relating to the Business or Assets to the extent the principal event giving rise thereto occurred prior to the Closing Date or which results from or arises out of any action or inaction prior to the Closing Date of Seller or any affiliate, officer, director, employee, agent, representative or subcontractor of Seller; (b) Any federal, state or local income, sales, use, excise, ad valorem, intangibles or other tax and any and all penalties and interest relating thereto (i) payable with respect to the business, assets, properties or operations (including, but not limited to, the Business or Assets) of Seller, any member of any affiliated group of which Seller is a member or any other person for whose taxes Seller may be liable for any period prior to the Closing, or (ii) incident to or arising as a consequence of the negotiations or consummation by Seller or any member of any affiliated group of which Seller is a member of this Agreement and the transactions contemplated hereby; 4 9 (c) Any liability or obligation arising under or relating to any of the Excluded Assets; (d) Any liability or obligation of any nature whatsoever arising prior to or as a result of the Closing to any employee, agent or independent contractor of the Seller, whether or not employed by Purchaser after the Closing, or under any benefit plan or arrangement with respect thereto, including, but not limited to, severance obligations and accruals for vacation pay, sick pay and similar accruals other than liabilities expressly assumed by Purchaser pursuant to Section 2.4(e); (e) Any liability or obligation of Seller arising or incurred in connection with the negotiation, preparation and execution of this Agreement and the transactions contemplated hereby and any fees and expenses of counsel, accountants or other experts of Seller or any of its affiliates; (f) Any liabilities or obligations of either Seller or any subsidiary under any debts, notes, negotiable instruments and written or oral commitments to repay indebtedness, including, without limitation, any intercompany debt; or (g) Any mortgage, security interest, lien or encumbrance of Seller or any subsidiary of any kind. In addition to hiring those persons set forth on Schedule 7.1, Purchaser shall assume on the Closing Date, subject to the terms and conditions of this Agreement: (a) all duties and obligations required to be performed after the Closing Date pursuant to the Contracts (including, without limitation, all warranty liabilities); (b) all trade payables (which, for the purposes of identification only, were [$77,997] on June 30, 1995 minus any amount representing legal fees incurred by Seller in connection with the DOD subpoena referenced in Schedule 4.5 ($30,136 as of June 30, 1995)); (c) except as otherwise set forth in this Agreement, all liabilities of whatsoever type or nature arising out of or associated with the ownership of the Assets or the operation of the Business after the Closing. Without limiting the foregoing, Purchaser shall be liable for all product liability claims for products shipped after the Closing by Purchaser and workers' compensation claims relating to the Business for occurrences taking place after the Closing Date; (d) any liability associated with customer deposits to the extent accrued on Seller's books (which, for the purposes of identification only, were $360,000 on June 30, 1995); and 5 10 (e) any liability relating to accruals for vacation pay, sick pay and similar accruals for those employees listed in Schedule 7.1 arising from and after July 1, 1995 and, for all employees accepting employment with Purchaser, all liability for severance payments for such employees. 2.5 Taxes. (a) All sales, use, value-added, stamp duty, transfer or other similar taxes incurred in connection with the transfer and sale of the Assets to Purchaser shall be borne by Seller. All property ad valorem taxes which have accrued or have been assessed or liened against the Assets shall be paid by Seller. Any taxes on net income resulting from the sale of the Assets to Purchaser or with respect to the operation of the Business prior to Closing shall be borne by Seller. All taxes collected by Seller from third parties prior to Closing including, but not limited to, sales and use taxes and all payroll withholding taxes, including both employee and employer portions of F.I.C.A., shall be paid by Seller to the appropriate governmental authority and Purchaser shall bear no responsibility for any portion thereof. (b) Purchaser and Seller agree to furnish or cause to be furnished to each other, upon request, as promptly as practical, such information (including access to books and records) and assistance as is reasonably necessary for the filing of any tax return, the preparation for any tax audit, and for the prosecution or defense of any claim, suit or proceeding relating to any tax matter. Seller and Purchaser shall cooperate with each other in the conduct of any tax audit or other tax proceedings and each shall execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Agreement. (c) Seller and Purchaser will mutually agree to the allocation of the Purchase Price among the Assets in accordance with Section 1060 of the Code. Seller and Purchaser will each be bound by such allocation in preparing their respective tax returns. ARTICLE III - CLOSING; TERMINATION 3.1 Closing. The Closing shall take place at 12:00 noon local time on the Closing Date, at the offices of Seller, or at such other place, time and date as Seller and Purchaser may mutually agree. Such Closing shall be deemed effective at 11:59 p.m. local time on the Closing Date. 3.2 Termination. This Agreement may be terminated on written notice at any time prior to Closing: (a) by mutual consent of Seller and Purchaser; 6 11 (b) by either Purchaser or Seller if there has been a material misrepresentation or breach of warranty on the part of any party in the representations and warranties set forth in this Agreement, or if there has been a material breach of any of the covenants on the part of any party as set forth in this Agreement, which breach has not been cured within a reasonable time after notice thereof; (c) by either Purchaser or Seller if on the Closing Date any of the conditions to their respective obligations to perform has not been met or waived; (d) by either Purchaser or Seller if the Closing has not occurred on or prior to August 15, 1995. Upon any such termination, the parties shall be released from all obligations or liabilities arising hereunder except for liabilities arising out of pre-termination breaches hereof, and liabilities arising out of the failure or refusal of either party to consummate the Closing if all conditions precedent set forth in either Article VIII or Article IX, as appropriate, have been met or waived. 3.3 Deliveries of Seller. Seller shall deliver to Purchaser at or prior to the Closing the following documents: (a) certified copies of resolutions adopted by the Board of Directors and sole shareholder of Seller authorizing this Agreement and the transactions contemplated hereby; (b) an opinion of the Assistant General Counsel of Seller, addressed to Purchaser, and dated as of the Closing Date, substantially in the form of Exhibit A attached hereto; (c) such bills of sale, endorsements, assignments, deeds and other good and sufficient instruments of conveyance and transfer, in form and substance reasonably satisfactory to the Purchaser, and its counsel, as shall be necessary and effective to vest in Purchaser good and marketable title to the Assets, including, without limitation, (i) good and valid title in and to all of the Assets owned by Seller, (ii) good and valid leasehold interest in and to all of the Assets leased by Seller as lessee, and (iii) all of Seller's rights under all agreements, contracts, commitments, leases, plans, bids, quotations, proposals, instruments and other documents included in the Assets to which Seller is a party or by which it has rights on the Closing Date; (d) a lease agreement covering the Facility between Seller and Purchaser in the form of Exhibit 3.3(d) (the "Lease"); (e) such other documents, instruments or certificates as shall be reasonably requested by Purchaser; 7 12 (f) all of the agreements, contracts, commitments, leases, plans, bids, quotations, proposals, instruments, computer programs and software, data bases whether in the form of computer tapes or otherwise, related objects and sources codes, manuals and guidebooks, price books and price lists, customer and subscriber lists, supplier lists, sales records, files, correspondence, legal opinions, rulings issued by governmental entities, and other documents, books, records, papers, files, office supplies and data belonging to Seller which are part of the Assets; and (g) Guaranties of BTR Dunlop, Inc. and Stewart Warner Corporation in the form of Exhibit 3.3(f). 3.4 Deliveries of Purchaser. Purchaser shall deliver to Seller at the Closing the following: (a) $250,000 plus or minus Seller's initial estimate of the cash adjustment contemplated by Section 2.3, by wire transfer in immediately available funds; (b) an opinion of counsel to the Purchaser, addressed to Seller and dated as of the Closing Date, substantially in the form of Exhibit B attached hereto; (c) certified copies of resolutions adopted by the Board of Directors and shareholder of Purchaser authorizing this Agreement and the transactions contemplated hereby; (d) the Lease; (e) a Guaranty of Herley Industries, Inc. in the form of Exhibit 3.4(f); and (f) such other documents, instruments or certificates as shall be reasonably requested by Seller. 3.5 Further Assurances. Seller from time to time after the Closing, at Purchaser's request, will execute, acknowledge and deliver to Purchaser such other instruments of conveyance and transfer and will take such other actions and execute and deliver such other documents, certifications and further assurances as Purchaser may reasonably request in order to vest more effectively in Purchaser, or to put Purchaser more fully in possession of, any of the Assets, or to better enable Purchaser to complete, perform or discharge any of the Assumed Obligations. Each of the parties hereto will cooperate with the other and execute and deliver to the other such other instruments and documents and take such other actions as may be reasonably requested from time to time by any party hereto as necessary to carry out, evidence and confirm the intended purposes of this Agreement. 8 13 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser the following: 4.1 Status Authority. Seller is duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as is now being conducted. Seller is duly qualified to transact business, and is in good standing, as a foreign corporation in each jurisdiction where the character of its activities requires such qualification, except where the failure to so qualify would not have a material adverse effect on the assets, liabilities, results of operations, financial condition, business or prospects of the Business. Seller has all requisite corporate power and authority to execute and deliver this Agreement and each of the instruments and other documents to be executed and delivered hereunder, and to perform its respective obligations hereunder and thereunder. Seller has or will have by Closing taken all action required by law, its articles of incorporation, bylaws or otherwise to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. 4.2 Execution; Valid and Binding Agreements. The execution, delivery and performance by Seller of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized by all required corporate and shareholder action. This Agreement has been duly executed and delivered by Seller and, assuming that this Agreement is the valid and binding agreement of Purchaser, constitutes the valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, except to the extend that: (a) such enforcement may be limited by bankruptcy, insolvency, reorganizations, moratorium or other similar laws affecting the enforcement of creditors' rights generally; and (b) certain of the covenants contained herein may not be specifically enforceable and, in such event, courts may award money damages rather than specific performance of contractual provisions involving matters other than the payment of money. 4.3 Absence of Conflicts. The execution, delivery and performance of this Agreement, and any instrument or other document to be executed and delivered by Seller hereunder, does not and will not violate or conflict with, result in a breach of, constitute a default under or give rise to a right of acceleration or termination under (with or without notice, lapse of time, or both) (i) the certificate of incorporation or by-laws of Seller, (ii) any law, regulation, rule, order, arbitration award, judgement, decree or other similar restriction to which Seller is subject or by which it is bound, or (iii) any note, mortgage, indenture, bond or contract, agreement, plan, instrument, lease, waiver, license or permit to which Seller is a party or by 9 14 which it is bound, provided, however, that Seller makes no representation or warranty as to the assignability of any Contract or the need to obtain any consents to effect such assignments. 4.4 Title to Properties. (a) Seller has good and marketable title to the Facility. (b) Seller has good and marketable title to all the Assets, free and clear of all claims, security interests, liens, pledges, charges, encumbrances and restrictions of any nature whatsoever. (c) the fixed assets to be transferred to Purchaser pursuant to this Agreement constitute all the fixed assets currently used in the Business. 4.5 Litigation. Except as set forth in Schedule 4.5, there are no actions, suits, claims, proceedings or investigations pending or, to Seller's knowledge, threatened against, relating to or involving the Business or Assets before any court, arbitration or administrative or governmental body, which may have a material adverse effect on the Business or upon Seller's ability to perform this Agreement or consummate the transactions contemplated hereby, and no order, injunction, decree or unsatisfied judgment which is outstanding against or relating to the Business or which could reasonably be expected to interfere with Seller's ability to consummate the transactions contemplated by this Agreement. 4.6 Brokerage Commissions. There are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Seller. 4.7 Patents and Trademarks. Schedule 4.7 attached hereto sets forth a list of patents, patent applications and trademarks (whether registered or applied for) owned by Seller. Immediately following the Closing, Purchaser will own all right, title and interest in and to, and will enjoy the unencumbered exclusive right to use, the Intellectual Property Rights, including all goodwill associated therewith, except for licenses retained by Seller or Seller's affiliates. 4.8 Compliance with Laws. Except as disclosed on Schedule 4.5, Seller has not received notice of any violation of any federal, state, local or foreign law, ordinance or regulation relating to the Business and, to the best of Seller's knowledge, Seller is not in violation of any such law, ordinance or regulation, the violation of which has had or could reasonably be expected to have a material adverse effect on the Business. 4.9 Employee Benefit Plans. Schedule 4.9 attached hereto sets forth all of the employee benefit plans and programs of Seller applicable to employees of the Business under which Seller is or may become obligated to provide benefits to such employees including, without limitation, pension, retirement, profit-sharing, savings, bonus, deferred or incentive compensation, hospitalization, medical, life or disability insurance plans, vacation and paid 10 15 holiday benefits, termination or severance pay benefits, and restricted stock, stock option, stock appreciation rights or similar plan (the "Plans"). Seller has not made any written or oral statements or representations that would give rise to an obligation on the part of Purchaser to offer the employees any benefits other than those listed in Schedule 4.9. The Plans have been maintained and administered in compliance with applicable federal and state laws, regulations and rules, including, but not limited to, ERISA and the Code and all applicable laws and regulations. All contributions required by law or contract to be made to each Plan have been timely made. Neither Seller nor any of its directors, officers, or agents have been involved in any prohibited transactions with respect to such Plans. 4.10 Conflict of Interest. No officer, director or employee of Seller: (a) has any interest in any property, asset or right which is used by Seller in the conduct of the Business or in any entity which does any business with Seller, or (b) has any contractual relationship with Seller other than as an officer, director or employee. 4.11 Compliance with Law. Seller has all material authorizations, approvals, licenses and orders of and from all governmental and regulatory officers and bodies necessary to carry on the Business as it is currently being conducted, to own or hold under lease the properties and assets it owns or holds under lease and to perform all of its obligations under all agreements to which it is a party, and Seller has been and is in compliance with all applicable laws, regulations and administrative orders of any country, state or municipality or of any subdivision thereof to which its business and its employment of labor or its use or occupancy of properties or the violation of which would have a material adverse effect upon the Assets, liabilities, results of operations, financial condition, business or prospects of the Business. 4.12 DISCLAIMERS. EXCEPT AS EXPRESSLY PROVIDED HEREIN, SELLER MAKES NO REPRESENTATIONS OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, REGARDING THE BUSINESS OR THE ASSETS INCLUDING, WITHOUT LIMITATION, AS TO THE PHYSICAL CONDITION, VALUE, QUANTITY OR QUALITY OF THE INVENTORY, MACHINERY AND EQUIPMENT AND RECEIVABLES, AND SELLER SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY, USAGE OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OF THE ASSETS. 4.13 Environmental Matters. The operations of the Business are in compliance in all material respects with all statutes, regulations and ordinances relating to the protection of human health and the environment. There has been no release of a hazardous substance into the environment at any property owned, leased or used by the Seller (the "Premises") including, without limitation, any such release in the soil or groundwater underlying the Premises. The Seller has not received notice of any violation of any environmental statute or regulation nor has it been advised of any claim or liability pursuant to any environmental statute or regulation 11 16 brought by any governmental agency or private party with respect to the Assets or the operation of the Business. 4.14 Accounts Receivable. The accounts receivable as set forth on Schedule 4.14 are valid and genuine; have arisen solely out of bona fide sales and performance of services and other business transactions in the ordinary course of business consistent with past practices of the Business. 4.15 No Undisclosed Liabilities. The Seller does not have any liabilities or obligations which are not adequately reflected or provided for in the Agreement or the Exhibits hereto (including the balance sheet dated June 30, 1995 attached as Schedule 4.14 hereto) except liabilities and obligations incurred since June 30, 1995 in the ordinary course of business and consistent with past practices of the Business. 4.16 Government Contracts. With respect to government contracts or OEM subcontracts included in the Contracts, there are not (i) any outstanding written cure notices or show causes, (ii) any written notices of contract termination or stop work orders, (iii) any written final decision assessing a penalty or damages, (iv) any outstanding written assertion of a formal claim based on violation of government cost accounting standards or government pricing, (v) any outstanding formal notice of proposed disallowance of indirect cost claims, or (vi) except as provided in this Agreement, any subpoena or written notice signifying government investigation. 4.17 Labor Matters. There is no pending unlawful employment practice or discrimination charge involving the Seller. There is no pending unfair labor practice charge or complaint against Seller. There is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Seller executives, threatened against or involving or affecting the Seller. No grievance or arbitration proceeding relating to the employees of the Seller is pending. ARTICLE V - REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller the following: 5.1 Status; Authority. Purchaser is duly incorporated, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. Purchaser has all requisite corporate power and authority to execute and deliver this Agreement and each of the instruments and other documents to be executed and delivered by it hereunder, and to perform its obligations hereunder and thereunder. Purchaser has or will have by Closing taken all action required by law, its articles of incorporation, bylaws or otherwise to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. 5.2 Execution; Valid and Binding Agreements. The execution, delivery and performance by Purchaser of this Agreement and the consummation by it of the transactions 12 17 contemplated hereby have been duly authorized by Purchaser's board of directors. This Agreement has been duly executed and delivered by Purchaser and, assuming that this Agreement is the valid and binding agreement of Seller, constitutes the valid and binding agreement of Purchaser, enforceable against Purchaser in accordance with its terms, except to the extent that: (a) such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally; and (b) certain of the covenants contained herein may not be specifically enforceable and in such event, courts may award money damages rather than specific performance of contractual provisions involving matters other than the payment of money. 5.3 Brokerage. There are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Purchaser. 5.4 Consents; Approval. No permit, consent, approval or authorization of, or declaration to or filing or registration with, any governmental or regulatory authority (including, without limitation, U.S. or foreign government security clearances) is required in connection with the execution, delivery or performance of this Agreement by Purchaser or the consummation of any other transaction contemplated hereby. 5.5 Litigation. Except as set forth in Schedule 5.5, there are no actions, suits, claims, proceedings or investigations pending or, to Purchaser's knowledge, threatened against Purchaser, before any court, arbitration or administrative or governmental body, which may have a material adverse effect on Purchaser's ability to perform this Agreement or consummate the transactions contemplated hereby, and no order, injunction, decree or unsatisfied judgment which is outstanding against Purchaser which could reasonably be expected to interfere with Purchaser's ability to consummate the transactions contemplated by this Agreement. 5.6 Absence of Conflicts. The execution, delivery and performance of this Agreement, and any instrument or other document to be executed and delivered by Purchaser hereunder, does not and will not violate or conflict with, result in a breach of, constitute a default under or give rise to a right of acceleration or termination under (with or without notice, lapse of time, or both) (i) the articles of incorporation or by-laws of Purchaser, (ii) any law, regulation, rule, order, arbitration award, judgment decree or other similar restriction to which Purchaser is subject or by which it is bound, or (iii) any note, mortgage, indenture, bond or contract, agreement, plan instrument lease, license or permit to which Purchaser is a party or by which it is bound. 13 18 ARTICLE VI- INDEMNIFICATION 6.1 Indemnification by Seller. Except as set forth elsewhere in this Agreement, and except for the negligence of Purchaser, Seller agrees to indemnify and hold harmless Purchaser against and in respect of any and all claims, liabilities, obligations, losses, costs deficiencies, litigation, taxes, assessments, demands, damages, or judgments of any kind or nature whatsoever ("Claims") related to, arising from, or associated with: (a) any breach or violation of the covenants made in this Agreement by Seller; (b) any breach or violation of the unexpired representations and warranties made in this Agreement by Seller; (c) the liabilities and obligations not expressly assumed by Purchaser pursuant to this Agreement; (d) any investigation, cleanup, remedial or removal activity, damage to natural resource, personal injury or property damage of any nature whatsoever arising out of or relating to the use of any substance, waste, airborne particles, contaminate, hazardous substance or pollutant considered to be hazardous under any applicable federal, state or local law, rule, regulation or ordinance in effect as of the Closing Date (collectively, "Hazardous Materials") to the extent that such use occurred on or prior to the Closing Date, and such activity took place on, or Hazardous Materials were produced at, or originated from, property owned or leased by Seller associated with the operation of the Business; provided, however, that in the event of any environmental remediation actions, Seller shall have the right to undertake and control, at its expense, such remediation and to accomplish such remediation at the lowest cost practicable so long as to grant Seller such rights is permitted by applicable law and so long as Seller accomplished such remediation in accordance with any applicable requirements imposed by any law regulation or ordinance or by any court or governmental authority; (e) any tax liability relating to periods prior to the Closing; (f) any employment related liability or claim relating to any period prior to the Closing, including, without limitation, claims for medical payments, severance or other employee benefits, and claims arising out of the Union Contract; (g) any claims for workers' compensation based on occurrences prior to the Closing; (h) any product liability claims relating to occurrences prior to the Closing; (i) non-compliance by Seller with bulk sales laws or similar common law in connection with this transfer; and 14 19 (j) any and all direct liability including damages or losses under the Contracts to Purchaser or its parents and affiliates (including costs, disbursements and reasonable legal fees) associated with the Department of Defense subpoena received by the Seller on March 29, 1995 and any ensuing investigation and proceeding, but expressly excluding indirect or consequential losses including, but not limited to, loss of business from existing or future customers of Purchaser or its affiliates (other than work under the Contracts). 6.2 Indemnification by Purchaser. Except as set forth elsewhere in this Agreement or in any Schedule or Exhibit hereto, Purchaser shall indemnify and hold harmless Seller against and in respect of all Claims related to, arising from, or associated with: (a) any breach or violation of the covenants made in this Agreement by Purchaser; (b) any breach or violation of the unexpired representations or warranties made in this Agreement by Purchaser; (c) all product liability claims relating to occurrences involving products shipped by Purchaser after the Closing, (d) any claims for workers' compensation based on occurrences after the Closing, (e) any acts, omissions, events, occurrences, circumstances or transactions of whatsoever type or nature associated with, arising out of or relating to the ownership, use or possession of the Assets by Purchaser, or the conduct or operation of the Business by Purchaser, after the Closing; (f) the liabilities and obligations assumed by Purchaser pursuant to Section 2.4 hereof; and (g) the failure to obtain consents or approvals from parties to any Contracts in connection with the transactions contemplated herein or the termination, placing in default or any other action that might be taken by any customer under the Contracts as a result of the transactions contemplated by this Agreement. 6.3 Notice and Payment of Claims. Upon obtaining knowledge of any Claims, the party entitled to indemnification (the "Indemnitee") shall promptly notify the party liable for such indemnification (the "Indemnitor") in writing of such Claims which the Indemnitee has determined has given or could give rise to a Claim under Section 6.1 or Section 6.2 hereof (such written notice being hereinafter referred to as a "Notice of Claim"); provided, however, that failure of an Indemnity timely to give a Notice of Claim to the Indemnitor shall not release the Indemnitor from its indemnity obligations set forth in this Article VI except to the extent that 15 20 such failure adversely affects the ability of the Indemnitor to defend such Claims or materially increase the amount of indemnification which the Indemnitor is obligated to pay hereunder, in which event the amount of indemnification which the Indemnitee shall be entitled to receive shall be reduced to an amount which the Indemnitee would have been entitled to receive had such Notice of Claim been timely given. In addition, if the Indemnitee settles or compromises any third party claims prior to giving a Notice of Claim to Indemnitor, the Indemnitor shall be released from its indemnity obligations to the extent that such settlements or compromises were not made in good faith and were not commercially reasonable. A Notice of Claim shall specify in reasonable detail the nature and estimated amount of any such Claim giving rise to a right of indemnification. The Indemnitee shall satisfy its obligations under Section 6.1 or Section 6.2 as the case may be, within sixty days of its receipt of a Notice of Claim; provided, however, that for so long as the Indemnitor is defending a Claim in good faith pursuant to Section 6.4 below, its obligations to indemnify the Indemnitee with respect thereto shall be suspended. The Indemnitor shall have thirty days after receipt of a Notice of Claim to notify the Indemnitee whether or not it disputes its liability to the Indemnitee with respect to such Notice of Claim. 6.4 Defense of Third-Party Claims. With respect to any action or any claim set forth in a Notice of Claim relating to a third-party claim, the Indemnitor shall defend, in good faith and at its expense, any such claim or demand, and the Indemnitee, at its expense, shall have the right, but not the obligation, to participate in the defense of any such third-party claim, with counsel of its own choosing. So long as the Indemnitor is defending in good faith any such third-party claim, the Indemnitee shall not settle or compromise such third-party claim. The Indemnitee shall make available to the Indemnitor or its representatives all records and other materials reasonably required for use in contesting any third-party claim and shall cooperate fully with the Indemnitor in the defense of all such claims. In the event the Indemnitor shall fail timely to defend, contest or otherwise protect against any such suit, action, investigation, claim or proceeding, the Indemnitee shall have the right, but not the obligation, to defend, contest or otherwise protect against the same, and make any compromise or settlement thereof and recover the entire cost thereof from the Indemnitor including reasonable attorneys' fees, disbursements, and all amounts paid as a result of such suit, action, investigation, claim or proceeding or the compromise or settlement thereof. 6.5 Survival of Representations and Warranties. All of the representations and warranties made by any party in Article IV and Article V of this Agreement shall survive for a period of one year from the Closing Date. No party shall be entitled to indemnification for breach of any representation and warranty set forth in Article IV or Article V of this Agreement unless a Notice of Claim of such breach has been given to the breaching party within the period of survival of such representation and warranty as set forth herein. Nothing contained herein shall affect the obligations of the parties as set forth elsewhere in this Article 6 and in this Agreement. 6.6 Limitations on Indemnification. Notwithstanding anything to the contrary contained herein, no indemnification obligation shall arise hereunder except to the extent that all Claims asserted by a party hereto exceeds $50,000 in the aggregate, it being understood that such 16 21 $50,000 is a deductible and not a threshold, provided, however, that such deductible shall not apply to Claims relating to taxes or to the indemnification obligations of Seller in Sections 6.1(g) and 6.1(k) or of Purchaser in Sections 6.2(f). ARTICLE VII - EMPLOYEES 7.1 Purchaser's Obligations. Effective as of 12:01 a.m. on the day after Closing Date, Purchaser shall offer employment to all employees of Seller identified in Schedule 7.1. Purchaser agrees that for purposes of eligibility and vesting in those benefit plans of Purchaser in which he or she is otherwise eligible to participate, each employee will be credited with the length of service and/or seniority accumulated by such employee with Seller. 7.2 Employee Benefit Plans. Seller shall retain all liabilities for the Plans and Purchaser shall have no responsibility therefor. 7.3 Severance. Any employees set forth on Schedule 7.1 terminated by Purchaser after Closing shall be entitled only to such severance benefits as Purchaser may provide under its plans, policies and practices and shall have no claim on Seller. ARTICLE VIII - CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER The obligations of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions precedent, any of which may be waived in writing by Purchaser: 8.1 Accuracy of Representations and Warranties and Performance of Obligations. All representations and warranties made by Seller in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same effect as if such representations and warranties had been made on and as of the Closing Date and Seller shall have performed or complied with all covenants, agreements and conditions contained in this Agreement on its part required to be performed or complied with at or prior to the Closing. 8.2 Consents. All authorizations, consents or approvals of any and all governments, governmental authorities, and quasi-governmental authorities necessary in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect. 8.3 No Litigation or Contrary Judgment. On the Closing Date there shall exist no lawsuit or other claim or action in regard to any foreign, federal, state or local law or regulation (or administrative proceeding or investigation) which could interfere with the consummation of the transactions contemplated by this Agreement or which could materially adversely affect the Business or the financial condition or results of operations of the Business, except as previously 17 22 disclosed in this Agreement or any of the Schedules hereto. The Closing shall not violate any order, decree or judgment of any court or governmental body having competent jurisdiction. 8.4 Deliveries. Seller shall have made or tendered, or caused to be made or tendered, delivery to Purchaser of the documents set forth in Section 3.3. ARTICLE IX - CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions precedent, any of which may be waived in writing by Seller: 9.1 Accuracy of Representations and Warranties and Performance of Obligations. All representations and warranties made by Purchaser in this Agreement shall be true and correct on and as of the Closing Date with the same effect as if such representations and warranties had been made on and as of the Closing Date; and Purchaser shall have performed or complied with all covenants, agreements and conditions contained in this Agreement on its part required to be performed or complied with at or prior to the Closing. 9.2 Consents. All authorizations, consents or approvals of all governments, governmental authorities and quasi-governmental authorities necessary in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained on terms reasonably satisfactory to Seller and shall be in full force and effect. 9.3 No Litigation or Contrary Judgment. On the Closing Date there shall exist no lawsuit or other claim or action in regard to foreign or U.S. federal, state, or local law or regulation (or any administrative proceeding or investigation) which could adversely affect the transfer of the Assets to Purchaser or interfere with the consummation of the transactions contemplated by this Agreement except as previously disclosed in this Agreement or the Schedules hereto. The Closing shall not violate any order, decree or judgment of any court or governmental body having competent jurisdiction. 9.4 Deliveries. Purchaser shall have made or tendered, or caused to be made or tendered, delivery to Seller of the Purchase Price and the documents set forth in Section 3.4. ARTICLE X - ADDITIONAL COVENANTS 10.1 Intercompany Accounts. Through the Closing, Seller shall continue to employ cash management practices consistent with those employed immediately prior to the date of this Agreement. All collection, concentration, imprest and disbursement bank accounts used in the Business and the balances therein existing as of Closing, shall be retained by Seller, provided that all monies received by Seller relating to the Assets or the Business purchased hereunder after 18 23 the Closing shall promptly be remitted to Purchaser. Seller shall also retain liability with respect to all checks or other drafts or withdrawals written on all such disbursement accounts prior to the Closing and shall either retain balances in such accounts at Closing to cover such checks, drafts or withdrawals or shall reimburse Purchaser as soon as practicable after Closing for such checks, drafts or withdrawals paid by Purchaser. This Section shall not affect the purchase price adjustment contemplated by Section 2.3 hereof. 10.2 Access Pending Closing. Seller shall, at all reasonable times prior to Closing, make the plants, properties, inventories, contracts, commitments, books and records (including computer files, retrieval programs and related documentation) of Seller (to the extend pertinent to the Business) fully available during normal business hours to Purchaser, its representatives, financial advisors, lenders and auditors, and Seller shall furnish or cause to be furnished to Purchaser and its representatives during such period all such information and data concerning the same as Purchaser or such representatives may reasonably request. 10.3 Books and Records. From and after the Closing, Purchaser shall provide Seller and its representatives with reasonable access (for the purpose of examining and copying) during normal business hours, to the books and records of the Business pertaining to periods or occurrences prior to the Closing Date. Without limiting the foregoing, Purchaser shall preserve and keep any such books and records it may retain with respect to the Business for a period of seven (7) years after the Closing or for any longer period: (a) as may be required by any federal, state or other governmental body or agency or any contract or agreement; (b) as may be reasonably necessary in respect of the prosecution of defense of any suit, action, litigation or administrative, arbitration or other proceeding or investigation that is then pending or threatened; or (d) that is equivalent to the period established by any applicable statute of limitations (or any extension or waiver thereof) with respect to matters pertaining to taxes. If Purchaser wishes to destroy any records referred to herein after that time, it shall first give 60 days prior written notice to the other, and Seller shall have the option, upon written notice given to Purchaser within such 60 day period, to take possession of such records within 30 days after the date of its notice requesting the same. 10.4 Confidentiality. (a) In addition to the terms, provisions and covenants of any and all confidentiality agreements that Purchaser has executed or made pertaining or relating to the transactions contemplated hereby (the "Confidentiality Agreement"), which Confidentiality Agreement shall remain in full force and effect until Closing, Purchaser acknowledges that, in the course of its investigations of the Business, Purchaser and its representatives ("Purchaser's Representatives") have and will become aware of confidential information and documents of the Business, and that its use of such confidential information and documents, or communication of such information to third parties, could be detrimental to the Business. Purchaser covenants that prior to Closing all information and documents concerning the Business reviewed by Purchaser or its Representatives in connection with this Agreement or the transactions contemplated 19 24 hereby shall be maintained in confidence and shall not be disclosed or used by Purchaser or Purchaser's Representatives without Seller's prior consent, unless such information is either (i) otherwise publicly available, (ii) required to be disclosed pursuant to judicial order or law, or (iii) the transactions contemplated herein have been consummated with Purchaser and such use or disclosure will not materially adversely affect Seller's use or sale of the Excluded Assets. In the event that the transactions contemplated herein are not consummated, (i) Purchaser shall return, all information and documents concerning the Business received by Purchaser (including any copies thereof or extracts therefrom), (ii) Purchaser shall keep confidential and shall not use any such information or documents unless required to disclose such information or documents pursuant to judicial order, regulation or law. In the event that Purchaser or any of Purchaser's Representatives becomes legally compelled to disclose any such information or documents, Purchaser will provide Seller with prompt written notice before such disclosure, sufficient to enable Seller either to seek a protective order, at their sole expense, or other appropriate remedy preventing or prohibiting such disclosure, or to waive compliance with the provisions of this Agreement or both, and (iii) neither Purchaser nor Seller shall disclose to any third party the reasons why the transactions contemplated herein were not consummated. (b) In addition to the terms, provisions and covenants of any and all confidentiality agreements that Seller has executed or made pertaining or relating to the transactions contemplated hereby (the "Confidentiality Agreement"), which Confidentiality Agreement shall remain in full force and effect until Closing, Seller acknowledges that, in the course of its negotiations with Purchaser concerning the sale of the Business, Seller and its representatives ("Seller's Representatives") have and will become aware of confidential information and documents relating to Purchaser and its affiliates, and that its use of such confidential information and documents or communication of such information to third parties, could be detrimental to Purchaser and its affiliates. Seller covenants that all information and documents concerning Purchaser and its affiliates disclosed to Seller or any Seller Representative in connection with this Agreement or the transactions contemplated hereby shall be maintained in confidence and shall not be disclosed or used by Seller or any Seller Representative without Purchaser's prior consent, unless such information is either (i) otherwise publicly available, or (b) required to be disclosed pursuant to judicial order or law. In the event that Seller or any Seller Representative becomes legally compelled to disclose any such information or documents, Seller will provide Purchaser with prompt written notice before such disclosure, sufficient to enable Purchaser either to seek a protective order, at its sole expense, or other appropriate remedy preventing or prohibiting such disclosure, or to waive compliance with the provisions of this Agreement or both. (c) The parties agree that no press release or other public statement concerning the negotiation, execution and delivery of this Agreement or the transactions contemplated hereby shall be issued or made without the prior approval of both Seller and Purchaser (which approval shall not be unreasonably withheld), except as required by the rules of any Stock Exchange or applicable law or regulation. Without limiting the foregoing, the 20 25 parties agree that the terms of the transaction contemplated herein will be kept strictly confidential and shall not be disclosed to Purchaser's customers or competitors. 10.5 Filings: Cooperation. Prior to the Closing, the parties shall proceed with due diligence and in good faith to make such filings and take such other actions as may be necessary to satisfy the conditions to Closing set forth herein. On or after the Closing Date, the parties shall, on request, cooperate with one another by furnishing any additional information, executing and delivering any additional documents and instruments, including contract assignments, providing access to personnel, and doing any and all such other things as may be reasonably required by the parties or their counsel to consummate or otherwise implement the transactions contemplated by this Agreement and to allow the orderly transition of the Business to the Purchaser. In connection with the liabilities assumed by Purchaser pursuant to this Agreement, and the retention by Seller of all other liabilities not specifically assumed by Purchaser, each of the parties hereto shall, and shall cause their affiliates and employees to, cooperate with and assist the other party or parties in their defense of such assumed or retained litigation or liabilities, by, among other things, providing such other party or parties with full access to pertinent records at such times as such other party or parties may reasonably request, and making available for depositions, testimony, interviews or other consultation, such officers, employees, or agents as such party or parties may reasonably request without cost to such party or parties except for reimbursement by it or them of reasonable out-of-pocket expenditures incurred in connection with such cooperation and assistance. Without limiting the foregoing, Purchaser shall make available at no cost to Seller a segregated area within the facility to collect and organize documents relating to the matters disclosed in Schedule 4.5. 10.6 Risk of loss. All risk of loss with respect to the Assets shall remain with Seller until the Closing Date. If at any time after the date of this Agreement and prior to the Closing Date, the Assets, or any material portion thereof, are damaged by fire or other casualty or are taken or appropriated by virtue of eminent domain or similar proceedings, Purchaser may at its option terminate this Agreement. If Purchaser elects to keep this Agreement in full force and effect, Purchaser shall be entitled to receive all insurance or condemnation proceeds payable to Seller or an affiliate of Seller with respect to such damaged, taken or appropriated Assets. 10.7 Conflicting Proprietary Rights; Assignment; License. Except as required by existing licenses, on or before Closing Seller will permanently discontinue, and will cause all their affiliates permanently to discontinue, all use of any Intellectual Property Rights to be assigned to Purchaser pursuant to this Agreement. Without limiting the foregoing, Seller shall take all appropriate action to change its corporate name to remove all reference to the word "Stewart Warner Electronics". 10.8 Transitional Use of Trademarks. Seller recognizes that certain inventory, labels, containers, stationery and promotional material relating to such inventory, being assigned to Purchaser under this Agreement may bear trademarks and trade names not being assigned or licensed to Purchaser. Seller agrees that Purchaser will be permitted to sell such inventory and use such labels, containers, stationery and promotional material for a reasonable period not to 21 26 exceed six (6) months after the Closing. Neither Seller nor any of its affiliates shall have any liability for products manufactured or sold by Purchaser containing or utilizing such labels, containers, stationery or promotional materials. 10.9 Contracts. Purchaser agrees that, except as expressly provided herein, Seller has made no representations or warranties regarding the Contracts whatsoever, which, except as expressly provided herein, are being purchased "as is". Purchaser acknowledges that there can be no assurance that the parties to the Contracts will consent to assignments or novation or otherwise cooperate so as to allow Purchaser to perform the Contracts and all such risks are to be borne by Purchaser. Furthermore, the parties agree that, notwithstanding the contemplated Closing or the other transactions contemplated hereby, the parties will take no action that would violate any U.S. or foreign law, rule or regulation (including, without limitation, relating to security clearances) and to the extent necessary the actions contemplated by this Agreement shall be postponed or amended to prevent any such violation. In no event, however, shall such postponement or amendment result in a claim by Purchaser or any of its affiliates against Seller, the risks and costs of such actions being borne solely by Purchaser. Seller and Purchaser shall cooperate fully with each other to obtain any required consents, approvals or security clearances necessary or desirable in connection with the transactions contemplated hereby. [10.10 Stewart Warner South Wind Contract. One of the Contracts is a contract with an affiliate of Seller, Stewart Warner South Wind Corporation ("South Wind"). Pursuant to this Contract, Seller is performing work as a subcontractor to South Wind, with South Wind being the prime contractor under a contract with the U.S. Army. In connection with the South Wind contract, and without limiting Purchaser's other obligations in connection with the Contracts, Purchaser agrees that all design rights (including, but not limited to parts lists, drawings, specifications, software codes, acceptance test procedures, supplier lists, etc.) relating to Seller's work shall be consistent with South Wind's obligations under its contract with the Army. Promptly after the Closing, Purchaser shall meet with South Wind to discuss the status of the South Wind Contract and the steps necessary to improve performance of the product and prepare a proposal for Phase II production (the "Project"). At any time thereafter until the award of a contract by South Wind to Purchaser, South Wind or Purchaser may elect to terminate Purchaser's further involvement with the Project. In the event of such termination, Purchaser shall promptly transfer to South Wind all intellectual property (including, without limitation, know-how, drawings, parts lists, specifications, software costs, acceptance test procedures and supplier lists in Purchaser's possession or control) that South Wind may be obligated to deliver under its contract with the Army and, at no cost to South Wind or Seller, provide all reasonable cooperation and assistance to allow South Wind to transition to another Supplier to allow completion of the Project and the same reasonable cooperation to allow South Wind to competitively bid and perform Phase II production. 10.11 Letters of Credit. Seller and certain affiliates of Seller have certain reimbursement obligations in connection with the letters of credit set forth on Schedule 10.11 (the "Letters of Credit"). Purchaser shall, with thirty (30) days after the Closing, replace the Letters of Credit 22 27 with corresponding letters of credit satisfactory to the customer under the Contracts requiring such Letters of Credit. Neither Seller nor any of its affiliates shall have any liability under the replacement Letters of Credit. In the event that, prior to such replacement, any Letter of Credit is partially or wholly drawn down, Purchaser shall fully indemnify and hold harmless Seller and its affiliates for any loss, cost or expense of whatsoever nature arising in connection with such draw-down. ARTICLE XI - MISCELLANEOUS 11.1 Expenses. Except as otherwise provided in this Agreement, each party shall pay all of its costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby. (a) All notices, requests, demands, and other communications under this Agreement shall be in writing and delivered in person, sent by certified or registered mail, postage prepaid, or sent by reputable courier service or telecopy, and properly addressed as follows: If to Purchaser, to: Stewart Warner Electronics Co. 10 Industry Drive Lancaster, PA 17603 Attn: Mr. Myron Levy cc: Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle Jericho, NY 11753 Attn: David Lieberman, Esq. If to Seller, to: BTR Aerospace Group 200 1780 Wellington Avenue Winnipeg, Manitoba R3H 1B3 Attn: Mr. David Unruh With a copy to: BTR Inc. Stamford Harbor Park 333 Ludlow Street Stamford, Connecticut 06902 Attn: Peter M. Kent, Esq. (b) Any party from time to time may change its address and/or the designated individual for the purpose of notices to that party by a similar notice specifying a new 23 28 address and/or designated individual, but no such change shall be deemed to have been given until it is actually received by the party sought to be charged with its contents. (c) All notices and other communications required or permitted under this Agreement which are addressed as provided in this Schedule 11.2 shall, in the case of personal delivery, be effective upon delivery; in the case of registered or certified mail shall be effective four (4) business days following deposit in the mail, postage prepaid; and in the case of courier or telecopy, when delivery is confirmed in person. 11.3 Entire Agreement. This Agreement (including the Exhibits and Schedules hereto) and the Confidentiality Agreement contain the entire agreement between the parties with respect to the transactions contemplated hereby, and supersedes all written or oral negotiations, representations, warranties, commitments, offers, bids, bid solicitations, and other understandings prior to the date hereof. 11.4 Severability. If any provision hereof shall be held invalid or unenforceable by any court of competent jurisdiction or as a result of future legislative action, such holding or action shall be strictly construed and shall not affect the validity or effect of any other provision hereof. 11.5 Assignability. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto; provided, that, except as otherwise provided for herein, neither this Agreement nor any right hereunder may be assigned by Seller or Purchaser without the prior written consent of the other party. 11.6 Captions. The captions of the various Articles and Sections of this Agreement have been inserted only for convenience of reference, and shall not be deemed to modify, explain, enlarge or restrict any provision of this Agreement or affect the construction hereof. 11.7 Governing Law. The validity, interpretation and effect of this Agreement shall be governed exclusively by the laws of the State of New York, without giving effect to the conflict of laws provisions thereof. 11.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute a single agreement 24 29 11.9 Remedies cumulative. Except as otherwise expressly limited herein, the rights, powers and remedies given to any party by this Agreement shall be in addition to all rights, powers and remedies given to that party by any statute or rule of law. Any forbearance or failure or delay in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right, power or remedy, and any single or partial exercise of any right, power of remedy shall not preclude the further exercise thereof or be deemed to be a waiver of any other right, power or remedy. STEWART WARNER ELECTRONICS CORPORATION By: ---------------------------------- Name: Title: STEWART WARNER ELECTRONICS CO. By: /s/ [Illegible] ---------------------------------- Name: Title: SEC'Y. 25 30 SCHEDULE 1.9(c) BALANCES WITH AFFILIATES See attached. 31 SCHEDULE 4.5 LITIGATION On or about March 29, 1995, Seller received a subpoena from the Office of Inspector General, U. S. Department of Defense, for the production of a large volume of Seller's documents relating to airplane guidance devices produced by Seller for the U. S. Navy relating to Seller/Navy contracts for 1988, 1989, 1991 and 1993. The DOD has not informed Seller of the focus of the DOD'S investigation. Seller, through its counsel, is working with Seller's staff to respond to the subpoena and is simultaneously conducting its own investigation into Seller's activities to determine the subject(s) of the DOD'S investigation. Seller's investigation is ongoing and will continue after the Closing. During Seller's investigation, Seller's counsel was informed of allegations that staff intentionally falsified time entries. It is reported that such purported deliberate falsifications stopped in early 1991 but resumed early last year and, therefore, if true, should be assumed to affect time on current contracts. 32 SCHEDULE 4.7 INCLUDED INTELLECTUAL PROPERTY 1. Tradenames Stewart Warner Electronics Corporation 2. Patents [None] 3. Trademarks None 33 SCHEDULE 4.8 COMPLIANCE WITH LAWS See Schedule 4.5 34 SCHEDULE 4.9 EMPLOYEE BENEFIT PLANS See attached 35 SCHEDULE OF EMPLOYEE BENEFIT PLANS EMPLOYEES OF STEWART-WARNER ELECTRONICS PARTICIPATE Stewart-Warner Corporation Group Insurance Plan - Plan Number 501 Stewart-Warner Corporation Retirement Income Plan - Plan Number 001 36 SCHEDULE 4.14 ACCOUNTS RECEIVABLE See attached 37 - -------------------------------------------------------------------------------- **MR4** OPERATING UNIT: Stewart Warner Electronics - Local - 0875 SCHEDULE: MR4 B A L A N C E S H E E T CURRENCY: USD PERIOD ENDED : JUN 1995 - = CREDIT - --------------------------------------------------------------------------------
ACTUAL PLAN PREVIOUS CURRENT ACTUAL CURRENT PERIOD *** BALANCE SHEET *** YEAR YEAR ---------------------------------------------------------------------------- END END JAN FEB MAR APR MAY JUN PLAN PRIOR YR - ------------------------------------------------------------------------------------------------------------------------------------ Inventories 3012 2422 3044 3035 3052 3063 2978 3012 2735 3232 Trade - Accts Receivable 1260 1583 1182 706 774 962 869 1104 795 1901 Trade - Accts Payable -360 -300 -236 -112 -92 -36 -37 -89 -300 -264 Trade - Deposits (Rec'd)/Paid -706 -942 -664 -624 -757 -760 -756 -360 -1043 -680 Trade - Fellow Subs Receivable 104 Trade - Fellow Subs Payable -218 -163 -206 -244 -120 -158 -130 -104 -160 -136 ------------------------------------------------------------------------------------------------- Trade Working Capital 2988 2600 3120 2761 2857 3071 2924 3563 2067 4237 Other Accounts Rec'le/Prepayments 2479 1721 2483 2608 2067 2201 2080 1425 1790 2515 Other Accounts Pay'le/Accruals -1101 -210 -354 -335 -323 -297 -325 -312 -78 -970 Other Fellow Subs Receivable Other Fellow Subs Payable ------------------------------------------------------------------------------------------------- Trade Working Capital 4366 4111 5247 5034 5001 4975 4679 4676 3779 5774 Petty Cash Land & Buildings 20 20 Other Fixed Assets 266 240 262 270 265 261 260 256 219 270 Investments Intangibles ------------------------------------------------------------------------------------------------- Net Assets Employed 4632 4371 5509 5304 5266 5236 4939 4932 4018 6044 Taxation 622 -206 718 819 299 405 504 556 211 96 Dividends Post Retirement Benefits -809 -809 -809 -827 -827 -827 -827 -825 Profits Levy Paid ------------------------------------------------------------------------------------------------- Total 5254 3356 5418 5314 4738 4814 4616 4661 3404 6140 ================================================================================================= Share Capital -11923 -11923 -11923 -11923 -11923 -11923 -11923 -11923 -11923 -11923 Funding Loan Int-co - Region 5605 8141 5274 5515 5694 5506 5497 5354 7537 5437 Funding Loan Int-co - Ex Region Share in Subsidiaries Goodwill on Consolidation Reserves -1083 -713 -181 -167 -167 -167 -167 -167 -713 -1050 Retained Profit-Current Year 902 189 137 283 430 583 725 975 545 126 Deferred Tax / FITH 1208 945 1208 1194 1194 1194 1194 1154 1145 1306 Minority Interests Short Term Deposits Loan Capital Bank Loans. O/D & Cash Balances 37 5 67 -216 34 -7 58 -54 5 -36 ------------------------------------------------------------------------------------------------- Total -5254 -3356 -5418 -5314 -4738 -4814 -4626 -4661 -3404 -6140 - ------------------------------------------------------------------------------------------------------------------------------------
DATE ISSUED: 19/07/95 - 11:26:08 38 SCHEDULE 4.16 GOVERNMENT CONTRACTS 39 SCHEDULE 7.1 EMPLOYEES 40 Stewart Warner Electronics Corp. Employees Retained Schedule 7.1 - -------------------------------------------------------------------------------- LAST FIRST MI SALARY TITLE - -------------------------------------------------------------------------------- Bast Edwin L 48,528 Section Engineer - -------------------------------------------------------------------------------- Boyer Bradley X 51,024 Section Engineer - -------------------------------------------------------------------------------- Brand Larry D 47,112 Mgr. Contract Administration - -------------------------------------------------------------------------------- Bronswick Leonard 50,436 Section Engineer - -------------------------------------------------------------------------------- Culver Martin L 34,200 Manufacturing Engineer - -------------------------------------------------------------------------------- DelValle Isidore 32,160 Engineer - -------------------------------------------------------------------------------- Duszak Gary L 42,480 Project Engineer - -------------------------------------------------------------------------------- Ferrari Francis E 54,984 Section Engineer - -------------------------------------------------------------------------------- Itter William T 48,756 Dir. Quality Control - -------------------------------------------------------------------------------- McKay Robrt 32,052 Foreman (Assembly) - -------------------------------------------------------------------------------- Miotke Leon B 42,276 Project Engineer (ARA63) - -------------------------------------------------------------------------------- Nair Shashi K 37,896 Manager, Accounting - -------------------------------------------------------------------------------- Ozers Ziedonis 36,312 Manager, Technical Documentation - -------------------------------------------------------------------------------- Rounsaville George D 62,100 Director, Military & Aircraft - -------------------------------------------------------------------------------- Walkup Ronald D 39,600 Engineer - -------------------------------------------------------------------------------- Corcoran Theresa M 22,360 Jr. Accountant, Part Time - -------------------------------------------------------------------------------- Jaworsky Adam 27,690 Assistant Engineer - -------------------------------------------------------------------------------- Krawczyk Robert P 27,914 Assistant Engineer - -------------------------------------------------------------------------------- Lu Lac 22,714 Assistant Engineer - -------------------------------------------------------------------------------- Symanek Robert C 26,688 Assistant Engineer - -------------------------------------------------------------------------------- Wojtanek Mitchell 32,864 Sr. Eng. Mechanic - -------------------------------------------------------------------------------- Whelan John T 36,528 Mgr. Systems & Programming - -------------------------------------------------------------------------------- 41 SCHEDULE 9.5 LETTERS OF CREDIT, ETC. 42 [Letterhead of NationsBank] July 28, 1995 NationsBank BTR Inc. 750 Main St. Stamford, CT 06902 Attn: Ms. Christel Stracke Phone/Fax.: (203) 352-0028/824-7852 Dear Ms. Stracke: Re: Stewart Warner Electronics Corporation Per your request, we hereby confirm that the up-to-date outstanding Letter(s) of Credit balance for account of BTR Inc./Stewart Warner Electronics Corporation is US $1,454,228.79; details as follow (all Standby Letter of Credit):
LC No Amount (USD) Issued Date Expiry Date Remarks - ----- ------------ ----------- ----------- ------- 39148 273,986.00 12/30/82 10/28/95 39147 39,000.00 12/30/92 10/30/95 39539 12,850.00 05/10/93 12/15/95 39745 38,066.00 07/16/93 09/27/95 39746 48,800.00 07/16/93 01/27/96 Auto-Renew till Final 11/30/99 39747 16,650.00 07/16/93 11/20/95 40275 13,509.00 01/13/94 05/15/96 40276 3,919.00 01/13/94 06/15/96 40841 168,540.00 08/05/94 12/28/95 41184 90,678.00 12/01/94 05/28/96 41185 18,645.00 01/01/94 10/31/96 Auto-Renew till Final 10/31/98 41321 16,550.00 01/19/95 05/31/96 Auto-Renew till Final 05/31/99 41322 187,304.68 01/19/95 11/27/96 41710 8,604.20 06/14/95 10/01/96 41711 9,728.00 06/14/95 04/12/96 41712 105,034.86 06/14/95 03/27/96 41713 215,651.00 06/14/95 08/29/96 Auto-Renew till Final 08/29/97 41714 18,936.70 06/14/95 12/31/96 Auto-Renew till Final 12/31/99 41715 105,411.00 06/14/95 03/30/96 Auto-Renew till Final 03/30/97 41716 9,468.40 06/14/95 12/31/96 Auto-Renew till Final 12/31/99 41772 58,400.00 07/07/95 05/28/96 ------------ Total: 1,454,228.79 (21 Letters of Credit)
If you have any questions, please feel free to call us, Very truly yours, [Illegible] ------------------------ Authorized Signature USA [Logo] Official Sponsor 1994/199[Illegible] 43 GUARANTY THIS GUARANTY dated July 28, 1995 by BTR Dunlop, Inc., a Delaware corporation ("Guarantor"). WITNESSETH: WHEREAS, Stewart Warner Electronics Corporation, a Delaware corporation and a subsidiary of Guarantor ("Seller"), and Stewart Warner Electronics Co., a Pennsylvania corporation ("Purchaser"), have concurrently herewith entered into a Purchase and Sale Agreement pursuant to which Purchaser has agreed to acquire certain assets of Seller and assume certain liabilities (the "Asset Purchase Agreement"); and WHEREAS, it is a condition to Purchaser's obligations under the Asset Purchase Agreement that Guarantor shall have executed and delivered this Guaranty; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, and in order to induce Purchaser to enter into the Asset Purchase Agreement, Guarantor covenants and agrees as follows: 1. Subject to Section 4 hereof:. (a) Guarantor hereby unconditionally and irrevocably guarantees to Purchaser and its successors and assigns the due, punctual and full satisfaction, payment and performance when and as due of each of the representations, warranties, covenants, conditions, agreements and obligations of Seller (the "Obligations") set forth in the Asset Purchase Agreement. If Seller shall fail to satisfy any part or all of the Obligations when due, Guarantor will promptly satisfy and discharge all such obligations in full. (b) The Obligations and the liability of Guarantor under this Guaranty are continuing, irrevocable, absolute and unconditional without regard to the liability of any other person under all circumstances and (i) are not conditioned or contingent upon, and are irrespective of the pursuit by Purchaser of whatsoever remedies there may be against Seller (or any other obligor upon the Obligations, any other guarantor or any security for any or all of the Obligations) and (ii) will not be discharged or affected by any circumstance (other than complete satisfaction of the Obligations) which might constitute a legal or equitable discharge. Guarantor's guarantee made pursuant to this Guaranty shall be a continuing guarantee of any and all instruments given in extension or renewal or substitution for the Obligations. (c) Guarantor agrees that, in the event that any of the Obligations are paid, Guarantor's liability under this Guaranty shall continue and remain in full force and effect in the event that all or any part of said payment is recovered from Purchaser or any other payee under any applicable bankruptcy or insolvency or other law affecting or available to creditors or their representatives. 44 2. Guarantor hereby represents and warrants that this Guaranty has been duly authorized and approved by all necessary corporate action of Guarantor, has been duly executed and delivered by Guarantor, and constitutes a valid and binding obligation of Guarantor enforceable against Guarantor in accordance with its terms. 3. (a) This Guaranty may not be assigned by Guarantor without the prior written consent of Purchaser. This Guaranty shall be binding upon Guarantor and its successors and assigns. (b) This Guaranty constitutes the entire understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, whether oral or written, relating to the subject matter hereof. No amendment or modification of the terms of this Guaranty shall be binding or effective unless expressed in writing and signed by both Guarantor and Purchaser. (c) The waiver by Purchaser of the breach of any of the terms and conditions of, or any right under, this Guaranty shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition or of any similar right. No such waiver shall be binding or effective unless expressed in writing and signed by Purchaser. (d) This Guaranty shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and performed wholly within the State of New York. 4. Notwithstanding anything to the contrary contained herein, the obligations of Guarantor hereunder shall in no event exceed $250,000, and when and if Guarantor has paid such amount, all obligations hereunder shall cease and be of no further effect provided, however, that Guarantor's obligations shall be unlimited with respect to the obligations of Seller contained in Section 6.1(i) (Bulk Sales) and Section 6. 1(j) (DOD Subpoena). IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the day and year first above written. BTR DUNLOP, INC. BY: /s/ [Illegible] ----------------------------- 45 GUARANTY THIS GUARANTY dated July 28, 1995 by Herley Industries, Inc., a Delaware corporation ("Guarantor"). WITNESSETH: WHEREAS, Stewart Warner Electronics Co., a Pennsylvania corporation and a subsidiary of Guarantor ("Purchaser"), and Stewart Warner Electronics Corporation ("Seller") have concurrently herewith entered into a Purchase and Sale Agreement pursuant to which Purchaser has agreed to acquire certain assets of Seller and assume certain liabilities (the "Asset Purchase Agreement"); WHEREAS, the terms used in this Guaranty shall be as defined in the Asset Purchase Agreement; and WHEREAS, it is a condition to Seller's obligations under the Asset Purchase Agreement that Guarantor shall have executed and delivered this Guaranty; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, and in order to induce Seller to enter into the Asset Purchase Agreement, Guarantor covenants and agrees as follows: 1. (a) Guarantor hereby unconditionally and irrevocably guarantees to Seller and its successors and assigns the due, punctual and full satisfaction, payment and performance when and as due of each of the representations, warranties, covenants, conditions, agreements and obligations of Purchaser (the "Obligations") set forth in Sections 2.4(a), 2.4(b) and 2.4(d) and Section 10.11 of the Asset Purchase Agreement. If Purchaser shall fail to satisfy any part or all of the Obligations when due, Guarantor will promptly satisfy and discharge all such obligations in full. (b) The Obligations and the liability of Guarantor under this Guaranty are continuing, irrevocable, absolute and unconditional without regard to the liability of any other person under all circumstances and (i) are not conditioned or contingent upon, and are irrespective of the pursuit by Seller of whatsoever remedies there may be against Purchaser (or any other obligor upon the Obligations, any other guarantor or any security for any or all of the Obligations) and (ii) will not be discharged or affected by any circumstance (other than complete satisfaction of the Obligations) which might constitute a legal or equitable discharge. Guarantor's guarantee made pursuant to this Guaranty shall be a continuing guarantee of any and all instruments given in extension or renewal or substitution for the Obligations. (c) Guarantor agrees that, in the event that any of the Obligations are paid, Guarantor's liability under this Guaranty shall continue and remain in full force and effect in the event that all or any part of said payment is recovered from Seller or any other payee under any applicable bankruptcy or insolvency or other law affecting or available to creditors or their representatives. 46 2. Guarantor hereby represents and warrants that this Guaranty has been duly authorized and approved by all necessary corporate action of Guarantor, has been duly executed and delivered by Guarantor, and constitutes a valid and binding obligation of Guarantor enforceable against Guarantor in accordance with its terms. 3. (a) This Guaranty may not be assigned by Guarantor without the prior written consent of Seller. This Guaranty shall be binding upon Guarantor and its successors and assigns. (b) This Guaranty constitutes the entire understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, whether oral or written, relating to the subject matter hereof. No amendment or modification of the terms of this Guaranty shall be binding or effective unless expressed in writing and signed by both Guarantor and Seller. (c) The waiver by Seller of the breach of any of the terms and conditions of, or any right under, this Guaranty shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition or of any similar right. No such waiver shall be binding or effective unless expressed in writing and signed by Seller. (d) This Guaranty shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and performed wholly within the State of New York. IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the day and year first above written. HERLEY INDUSTRIES, INC. BY: /s/ [Illegible] CEO ------------------------------ 47 LEASE THIS LEASE is made as of the 28th day of July, 1995, by and between STEWART WARNER CORPORATION ("Landlord") and STEWART WARNER ELECTRONICS CO. ("Tenant"), who hereby mutually covenant and agree as follows: I. GRANT, TERM, DEFINITIONS AND BASIC PROVISIONS 1.0 Grant. Landlord, for and in consideration of the rents and other sums herein reserved and of the covenants and agreements herein contained on the part of the Tenant to be performed, hereby leases to Tenant, and Tenant hereby lets from Landlord, the improved real estate described in Exhibit A attached hereto, together with all real property improvements and appurtenances belonging to or in any way pertaining to the same (collectively, the "Leased Premises"). 1.1 Lease Term. The term of this Lease shall commence on the date hereof (the "Commencement Date") and shall terminate ninety (90) days from the date hereof (the "Initial Period"); provided, however, that Tenant may elect to extend the term for three additional periods of 30 days (each such period an "Option Period"), with time of the essence, by delivering notice of such election to extend no later than 20 days prior to the end of the Initial Period or the then current Option Period. 1.2 Basic Lease Provisions. (a) Purpose (See Section 3.0): (b) Base Rent (See Section 4.0): Base Rent: $0 during the Initial Period $25,000 for each Option Period (c) Payee (See Section 4.0): Stewart Warner Electronics Corporation (d) Payee's Address: Stewart Warner Electronics Corporation c/o BTR Inc. 333 Ludlow Street Stamford Harbor Park Stamford, CT 06902 (e) Form of Insurance (See Article VI): The insurance specified in Section 6.0 of this Lease shall insure Landlord, in addition to Tenant. 48 (f) Tenant's Address: c/o Herley Industries, Inc. 10 Industry Drive Lancaster, PA 17603 (h) Landlord's Address: 333 Ludlow Street Stamford Harbor Park Stamford, CT 06902 II. POSSESSION Tenant hereby accepts the Leased Premises in its "AS IS" condition. Neither Landlord nor any agents or employees of Landlord have made any representations or warranties, direct or indirect, oral or written, express or implied, to Tenant or any agents or employees of Tenant with respect to the condition of the Leased Premises, its fitness for any particular purposes, or its compliance with any laws, and Tenant is not aware of and does not rely upon any such representation to any other party. Tenant acknowledges that no representation as to the condition an repair of the Leased Premises has been made by or on behalf of Landlord prior to or at the execution of this Lease that is not herein expressed. Tenant's taking possession shall be conclusive evidence that the Leased Premises were suitable for Tenant's intended purposes as of the date thereof and that Tenant has waived all claims relating to the condition of the Leased Premises. III. PURPOSE The Leased Premises shall be used and occupied only for purposes similar to the uses of the Leased Premises immediately prior to the Commencement Date, except that no such use shall (a) constitute a public or private nuisance or waste, (b) render the insurance on the Leased Premises void or the insurance risk more hazardous, or (c) be unlawful. IV. RENT 4.0 Base Rent. Beginning with the Commencement Date, Tenant shall pay base rent as set forth in Section 1.2(b) hereof, payable in advance, as set forth in said Section, without any prior demand therefor and without any offset or deduction whatsoever. Base Rent shall be prorated for partial months within the term. All charges, costs and sums required to be paid by Tenant to Landlord under this Lease in addition to Base Rent shall be deemed additional rent ("Additional Rent") , and Base Rent and Additional Rent shall hereinafter be collectively called "Rent". Tenant's covenant to pay Rent shall be independent of every other covenant in this Lease. Rent shall be paid to or upon the order of Payee at the Payee's Address. Landlord shall have the right to change the Payee or the -2- 49 Payee's Address by giving written notice thereof to Tenant. All payments of rent shall be made without deduction, set off, discount or abatement in lawful money of the United States 4.1 Interest on Late Payments and Late Charges. Each and every payment of charges due hereunder, which shall not be paid when due shall bear interest at the rate of ten percent (10%) per annum or the maximum rate of interest permitted by law whichever is less, from the date when same is payable under the terms of this Lease until the same shall be paid. Additionally, a late charge of two percent (20%) of all delinquent Rent shall be paid to Landlord by Tenant. V. INTENTIONALLY OMITTED VI. INSURANCE 6.0 Kinds and Amounts. During the term of this Lease, Tenant shall procure and maintain policies of insurance, at its sole cost and expense, insuring Landlord and Tenant from all liability, claims, demands or actions for bodily injury or property damage in an amount of not less than $1,000,000, combined single limit made by, or on behalf of, any person or persons, firm or corporation arising from, related to or connected with the Leased Premises. Landlord shall be responsible for maintaining casualty insurance on the Leased Premises at its own cost and expense. 6.1 Form of Insurance. The aforesaid insurance shall be issued by companies qualified to do business in the state in which the Leased Premises are located and shall be in form, substance an amount reasonably satisfactory to Landlord, and shall contain standard loss payee clauses satisfactory to Landlord. The aforesaid insurance shall not be subject to cancellation or non-renewal by either the insurance carrier or the insured except after at least thirty (30) days prior written notice to Landlord. Prior to the Commencement Date, certificates of insurance shall be deposited with Landlord, naming Landlord as additional insured. 6.2 Fire Protection. Tenant shall take no action which would result in a violation of all applicable fire codes of any governmental authority. 6.3 Mutual Waiver of Subrogation Rights. Whenever (a) an loss, cost, damage or expense resulting from fire, explosion or an other casualty or occurrence is incurred by either of the parties to this Lease, or anyone claiming by, through, or under it in connection with the Leased Premises, and (b) such party is then covered in whole or in part by insurance with respect to such loss, cost, damage or expense or is required under this Lease to be so insured, then the party so insured (or so required) hereby releases the other party from any liability said other party may have on account of such loss, cost, damage or expense to the extent of any amount recovered by reason of such insurance (or which could -3- 50 have been recovered had such insurance been carried as so required) and waives any right of subrogation which might otherwise exist in or accrue to any person on account thereof, provided that such release of liability and waiver of the right of subrogation shall not be operative in any case where the effect thereof is to invalidate such insurance coverage. VII. DAMAGE OR DESTRUCTION If the Leased Premises are damaged or destroyed and rendered partially or wholly untenantable for their accustomed use by fire or other casualty, the term of this Lease shall terminate as of the date of said casualty. VIII. CONDEMNATION In the event that any portion of the Leased Premises is taken by any public authority under power of eminent domain or is conveyed under threat of such taking (or any part of the Lease Premises is so taken or conveyed which would necessitate a reduction of square footage in the improvements on the Lease Premises which are occupied by Tenant) , the term of this Lease shall terminate as of the date of the taking or conveyance and the Landlord shall be entitled to the entire condemnation award. IX. MAINTENANCE AND ALTERATIONS 9.0 Maintenance. Tenant shall keep and maintain the improvements at any time situated upon the Leased Premises, the entire parking area on the Leased Premises and all sidewalks and areas adjacent thereto, safe, secure, clean and sanitary (including without limitation, snow and ice clearance), and in compliance in all material respects with all lawfully promulgated health, safety and police regulations in force provided, however, that Tenant shall not be responsible for any repair obligations in excess of $1,000 in any one instance or $10,000 in the aggregate. 9.1 Alterations. Tenant shall make no additions, improvements or alterations to the Leased Premises. X. ASSIGNMENT AND SUBLETTING Tenant will not sell, assign, mortgage, pledge or in any manner transfer any of its interest in this Lease or sublet any portion of the Leased Premises. -4- 51 XI. LIENS AND ENCUMBRANCES 11.0 Encumbering Title. Tenant shall not do any act which shall in any way encumber Landlord's interest or in and to the Leased Premises, nor shall the interest or estate of Landlord in the Leased Premises in any way become subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by Tenant. Any claim to, or lien upon, the Leased Premises arising from any act or omission of Tenant other than a claim by Landlord, shall accrue only against the leasehold estate of Tenant and shall be subject and subordinate to the paramount title and rights of Landlord in and to the Leased Premises. 11.1 Liens and Right to Contest. Tenant shall not permit the Leased Premises to become subject to any mechanics', laborers', or materialmen's lien on account of labor or material furnished to Tenant or claimed to have been furnished to Tenant in connection with work of any character performed or claimed to have been performed for the Leased Premises by, or at the direction or sufferance of, Tenant; provided, however, that Tenant shall have the right to contest, in good faith and with reasonable diligence, the validity of any such lien or claimed lien if Tenant shall give to Landlord such security as may be reasonably satisfactory to Landlord to assure payment thereof and to prevent any sale, foreclosure, or forfeiture of Landlord's interest in the Lease Premises by reason of non-payment thereof; provided further, however, that on final determination of the lien or claim for lien, Tenant shall immediately pay any judgment rendered, with all proper costs and charges, and shall have the lien released and any judgment satisfied. XII. UTILITIES Landlord shall purchase all utility services, including without limitation, fuel, water, sewerage and electricity, from the utility or municipality providing such service, and shall pay for such services when such payments are due. Tenant shall take no action that would cause the use of such service to increase materially over recent historical levels. XIII. INDEMNITY AND WAIVER 13.0 Tenant's Indemnity. Tenant will protect, indemnify and save harmless Landlord, and its agents, employees, officers an directors, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys, fees an expenses) imposed upon or incurred by or asserted against Landlord by reason of (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Premises or any part thereof, or resulting from any act or omission of Tenant or anyone claiming by, through, or under Tenant during the Lease Term; (b) any failure on the part of Tenant to perform or comply with any of the terms of this Lease; (c) the performance of any labor or services or the -5- 52 furnishing of any materials or other property in respect of the Leased Premises or any part thereof performed by or on behalf of Tenant during the Lease Term; or (d) claims, losses, damages, response costs, clean-up costs and expenses arising out of or in any way relating to the introduction by Tenant of Hazardous Materials, as defined hereinbelow, over, beneath, in or upon the Leased Premises, including, without limitation, (i) claims of third parties (including governmental entities) for damaged, penalties, response costs, clean-up costs, injunctive or other relief; (ii) costs and expenses of removal and restoration including fees and costs of attorneys and experts, and costs of reporting the existence of Hazardous Materials to any governmental agency; and (iii) any and all expenses or obligations, including, without limitation, reasonable attorneys' fees and costs, witness fees, deposition costs, copying and telephone charges and other expenses, all of which shall be paid by the Tenant when incurred. For purposes of this Lease, the term "Hazardous Materials" shall mean and include any hazardous, toxic or dangerous waste substance or material defined as such in or for purposes of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 USC Section 9601, et. seq.), the Hazardous Materials Transportation Act (49 USC Section 1802, et. seq.) and the Resource Conservation and Recovery Act (42 USC Section 6901, et. seq.) or any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material as now or at any time hereafter in effect (collectively, the "Environmental Laws") Landlord and Tenant agree that the obligations of Tenant provided herein and elsewhere in this Lease shall survive expiration of the Lease Term. 13.1 Waiver of Certain Claims. Tenant waives all claims it may have against Landlord for damage or injury to property sustained by Tenant or any persons claiming through Tenant or by any occupant of the Leased Premises, or by any other person, resulting from any part of the Leased Premises or any of its improvements, equipment or appurtenances becoming out of repair, or resulting from any accident on or about the Leased Premises or resulting directly or indirectly from any act of neglect of any person, including Landlord, to the extent permitted by law. This Section 13.1 shall include, but not by way of limitation, damage caused by water, snow, frost, steam, excessive heat or cold, sewage, gas, odors, or noise, or caused by bursting or leaking of pipes or plumbing fixtures, and shall apply equally whether an such damage results from the act or neglect of Tenant or any other person, including Landlord, to the extent permitted by law, and whether such damage be caused by or result from any thing or circumstance above mentioned or referred to, or to any other thing or circumstance whether of a like nature or of wholly different nature. All personal property belonging to Tenant or any occupant of the Leased Premises that is in or on any part of the Leased Premises shall be at the risk of Tenant or of such other person only, and Landlord shall not be liable for any damage thereto or for the theft or misappropriation thereof. 13.2 Landlord's Indemnity. Landlord will protect, indemnify and save harmless Tenant and its agents, employees, officers and directors, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including -6- 53 without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Tenant by reason of claims, losses, damages, response costs, clean-up costs and expenses arising out of or in any way relating to the introduction by parties other than Tenant of Hazardous Materials, as defined herein below, over, beneath, in or upon the Leased Premises, including, without limitation, (i) claims of third parties (including governmental entities) for damages, penalties, response costs, clean-up costs, injunctive or other relief; (ii) costs and expenses of removal and restoration, including fees and costs of attorneys and experts, and costs of reporting the existence of Hazardous Materials to any governmental agency; and (iii) any and all expenses or obligations, including without limitation, reasonable attorneys' fees and costs, witness fees, deposition costs, copying and telephone charges and other expenses, all of which shall be paid by the Landlord when incurred. For purposes of this Lease, the term "Hazardous Materials" shall mean and include any hazardous, toxic or dangerous waste, substance or material defined as such in or for purposes of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 USC Section 9601, et. seq.), the Hazardous Material Transportation Act, (49 USC Section 1802, et. seq.), and the Resource Conservation and Recovery Act (42 USC Section 6901, et. seq.) or any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability or standards or conduct concerning any hazardous, toxic or dangerous waste, substance or material as now or at any time hereinafter in effect (collectively, the "Environmental Laws"). Landlord and Tenant agree that the obligations of Landlord provided herein and elsewhere in this Lease shall survive expiration of the Lease Term. XIV. RIGHTS RESERVED TO LANDLORD Without limiting any other rights reserved or available to Landlord under this Lease, at law or in equity, Landlord reserves the following rights to be exercised at Landlord's election: (a) To enter and/or inspect the Leased Premises and to make repairs, remediations, additions or alterations to the Lease Premises; and (b) To show the Leased Premises to persons having legitimate interest in viewing the same. (c) To use and occupy, or allow others to use and occupy, the Leased Premises to the extent necessary to permit continued operation of, or removal from the Leased Premises of, the so-called line tracing business provided, however, that such use and occupancy shall not materially affect Tenant's ability to conduct its operations in the Leased Premises. Landlord may enter upon the Leased Premises for any and all of said purposes and may exercise any and all of the foregoing rights hereby reserved, so long as such exercise does -7- 54 not result in an significant interference in the conduct of Tenant's business, without being deemed guilty of any eviction or disturbance of Tenant's use or possession of the Leased Premises, and without being liable in an manner to Tenant. XV. QUIET ENJOYMENT So long as Tenant is not in default under the covenants an agreements of this Lease, Tenant's quiet and peaceable enjoyment of the Leased Premises shall not be disturbed or interfered with by Landlord or by an person claiming by, through or under Landlord. XVI. SUBORDINATION OR SUPERIORITY This Lease and Tenant's rights are and shall be subject to any mortgages or trust deed(s) executed by Landlord against the Leased Premises and to any amendments, modifications or renewals thereof. Tenant shall execute and deliver within fifteen (15) days of the request of Landlord or its mortgagee such acknowledgments or documents as may be requested from time to time in connection with the financing of the Leased Premises including, without limitation, subordination and attornment instruments, and estoppel certificates. Tenant hereby consents in advance to any collateral assignment of this Lease which Landlord elects, in its sole discretion, to execute, provided that every such collateral assignment shall provide that the same shall not become operative except in the event of a default under the note collateralized by this Lease or under any mortgage securing such note. XVII. SURRENDER 17.0 Surrender. Upon termination of this Lease, Tenant will at once surrender and deliver up the Leased Premises, together with all improvements thereon, to Landlord, in the same condition and repair as at commencement, reasonable wear and tear excepted. All alterations, temporary or permanent, made in or upon the Leased Premises by Tenant shall become Landlord's property on any such termination an shall remain upon the Leased Premises without compensation, allowance or credit to Tenant; provided, however, that Landlord shall have the right to require Tenant to remove any alterations (including signage) and restore the Leased Premises to their condition prior to the making of such alterations, repairing any damage occasioned by such removal or restoration. If Landlord requires removal of any alterations and Tenant does not make such removal in accordance with this Section 17.0 at the time of such termination, Landlord may remove the same (and repair any damage occasioned thereby), and dispose thereof or, at its election, deliver the same to any -8- 55 other place of business of Tenant or warehouse the same. Tenant shall pay the costs of such removal, repair, delivery and warehousing to Landlord on demand. 17.1 Removal of Tenant's Property. Upon termination of this Lease, Tenant shall remove Tenant's articles of personal property incidental to Tenant's business ("Trade Fixtures"); provided, however, that Tenant shall repair any injury or damage to the Leased Premises which may result from such removal, and shall restore the Leased Premises to the same condition as prior to the installation thereof. If Tenant does not remove Tenant's Trade Fixtures from the Leased Premises, as aforesaid, Landlord may, at its option, remove the same (and repair any damage occasioned thereby) and dispose thereof or deliver the same to any other place of business of Tenant or warehouse the same, and Tenant shall pay the cost of such removal, repair, delivery and warehousing to Landlord on demand, or Landlord may treat such Trade Fixtures as having been conveyed to Landlord with this Lease as a bill of sale, without further payment or credit by Landlord to Tenant. Notwithstanding the foregoing, provided that no later than 20 days before the end of the term hereof (including any Option Period exercised by Tenant), Tenant provides Landlord a list of machinery and equipment (but not inventory) that Tenant does not intend to remove from the Leased Premises and provided further that such list includes only machinery and equipment conveyed pursuant to that certain Purchase and Sale Agreement dated of even date herewith between Landlord and Tenant, Tenant shall not be required to pay the cost of removal, repair, delivery or warehousing as contemplated in this Section 17.1. 17.2 Holding Over. Tenant shall have no right to occupy the Leased Premises or any portion thereof after the termination of Tenant's right to possession pursuant to Section 18.0 hereof. In the event Tenant shall continue to occupy the Leased Premises or any portion thereof as aforesaid, Tenant shall be liable for double Rent for said holdover period. XVIII. REMEDIES 18.0 Defaults. Tenant agrees that any one or more of the following events shall be considered events of default as said term is used herein: (a) Tenant shall be adjudged an involuntary bankrupt, or a decree or order approving, as properly filed, a petition or answer filed against Tenant asking reorganization of Tenant under the Federal bankruptcy laws as now or hereafter amended, or under the laws of any state, shall be entered, and any such decree or judgment or order shall not have been vacated or set aside within sixty (60) days from the date of the entry or granting thereof; or (b) Tenant shall file or admit the jurisdiction of the court and the material allegations contained in any petition in bankruptcy or any petition pursuant or purporting to be pursuant to the Federal bankruptcy laws as now or hereafter amended, or Tenant shall institute any proceedings for any relief of Tenant under any -9- 56 bankruptcy or insolvency laws or any laws relating to the relief of debtors, readjustment or indebtedness, reorganization, arrangements, composition or extension; or (c) Tenant shall make any assignment for the benefit of creditors or shall apply for consent to the appointment of a receiver for tenant or any of the property of Tenant; or (d) The Leased Premises are levied upon by any revenue officer or similar officer as the result of any act or omission of Tenant; or (e) A decree or order appointing a receiver of all or substantially all of the property of Tenant shall be made an such decree or order shall not have been vacated or set aside within sixty (60) days from the date of entry or granting thereof; or (f) Tenant shall abandon the Leased Premises or vacate the same during the term hereof; or (g) Tenant shall default in any payment of rent or in an other payment required to be made by Tenant hereunder when due and for five days thereafter; or (h) Tenant shall fail to contest the validity of any lien or claimed lien and give security to Landlord to assure payment thereof, or, having commenced to contest the same and having given such security, shall fail to prosecute such contest wit diligence, or shall fail to have the same released and satisfy any judgment rendered thereon, and such default continues for ten (10) days after notice thereof in writing to Tenant; or (i) Tenant shall default in keeping, observing or performing any of the other covenants or agreements herein contained to be kept, observed and performed by Tenant, and such default shall continue for ten (10) days after notice thereof in writing to Tenant. Upon the occurrence of any one or more of such events of default, Landlord may, at its election, terminate this Lease or terminate Tenant's right to possession only, without terminating the Lease. Upon termination of the Lease, or upon any termination of the Tenant's right to possession without termination of the Lease, the Tenant shall surrender possession and vacate the Leased Premises immediately, and deliver possession thereof to the Landlord, an hereby grants to the Landlord the full and free right, without demand or notice of any kind to Tenant (except as hereinabove expressly provided for) , to enter into and upon the Lease Premises, with or without process of law, and to repossess the Leased Premises as the Landlord's former estate and to expel or remove the Tenant and any others who may be occupying the Leased Premises, without being deemed in any manner guilty -10- 57 of trespass, eviction, or forcible entry or detainer, without incurring any liability for any damage resulting therefrom and without relinquishing the Landlord's rights to rent or any other right given to the Landlord hereunder or by operation of law. Upon termination of the Lease, Landlord shall be entitled to recover as damages all Rent and other sums due and payable by Tenant on the date of termination, plus (1) an amount equal to the value of the rent and other sums provided herein to be paid by Tenant for the residue of the stated term hereof, less the fair rental value of the Leased Premises for the residue of the stated term (taking into account the time and expenses necessary to obtain a replacement tenant or tenants, including expenses hereinafter described relating to recovery of the Leased Premises, preparation for reletting and for reletting itself) and (2) the cost of performing any other covenants to be performed by the Tenant. If the Landlord elects to terminate the Tenant's right to possession only without terminating the Lease, the Landlord may, at the Landlord's option, enter into the Leased Premises, remove the Tenant's signs, if any, and other evidences of tenancy, and take and hold possession thereof as hereinabove provided, without such entry and possession terminating the Lease or releasing the Tenant, in whole or in part, from the Tenant's obligations to pay the rent hereunder for the full term or from any other of its obligations under this Lease. Landlord may, but (except as required by statute) shall be under no obligation so to do, relet all or any part of the Leased Premises for such rent and upon such terms as shall be satisfactory to Landlord (including the right to relet the Leased Premises as part of a larger area and the right to change the character or use made of the Leased Premises). For the purpose of such reletting, Landlord may decorate or make any repairs, changes, alterations or additions in or to the Leased Premises that may be necessary or convenient, All expenses of decorating, changing, altering an adding to the Leased Premises shall be borne solely by Landlord. If Landlord does not relet the Leased Premises, Tenant shall pay to Landlord on demand damages equal to the amount of the rent an other sums provided herein to be paid by Tenant for the remainder of the Lease Term as the same shall become due and payable. If the Leased Premises are relet and a sufficient sum shall not be realized from such reletting after paying all of the expenses of such reletting and the collection of the rent accruing therefrom (including, but not by way of limitation, reasonable attorneys' fees and brokers, commissions), to satisfy the rent and other charges herein provided to be paid for the remainder of the Lease Term, Tenant shall pay to Landlord on demand any deficiency as the same shall become due and payable. Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section 18.0 from time to time. Tenant shall pay all costs and expenses, including attorneys, fees and costs, incurred by Landlord in recovering such sums due hereunder. 18.1 Remedies Cumulative. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered to exclude or suspend any other remedy but the same shall be cumulative and shall be in addition to every other remedy given hereunder, or now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Lease to Landlord may be exercised from time to time and so often as occasion may arise or as may be deemed expedient. -11- 58 18.2 No Waiver. No delay or omission of either party to exercise any right or power arising from any default shall impair any such right or power or be construed to be a waiver of any such default or any acquiescence therein. No waiver of any breach of any of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach, or as a waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. The acceptance by Landlord of any payment of rent or other sums due hereunder after the termination by Landlord of this Lease or of Tenant's right to possession hereunder shall not, in the absence of agreement in writing to the contrary by Landlord, be deemed to restore this Lease or Tenant's rights hereunder, as the case may be, but shall be construed as a payment on account, and not in satisfaction of damages due from Tenant to Landlord. XIX. MISCELLANEOUS 19.0 Right to Cure. Following any notice of default to Tenant and opportunity for cure provided by Article XVIII, Landlord may, but shall not be obligated to, cure any default by Tenant (specifically including, but not by way of limitation, Tenant' failure to obtain insurance, make repairs, or satisfy lien claims) ; and whenever Landlord so elects, all costs and expenses paid by it in curing such default, including, without limitation, reasonable attorneys' fees and costs, shall be so much Additional Rent due on the next rent date after such payment, together with interest at the rate of ten percent (10%) per annum, or such lesser rate equal to the maximum rate of interest permitted by law, from the date of the advance to the date of repayment. 19.1 Amendments Must Be in Writing. None of the covenants, terms or conditions of this Lease to be kept and performed by either party, shall in any manner be altered, waived, modified, changed or abandoned except by a written instrument, duly signed and delivered by the other part. 19.2 Notices. All notices to or demands upon Landlord or Tenant desired or required to be given under any of the provisions hereof shall be in writing. Any notices or demands from Landlord to Tenant shall be deemed to have been duly and sufficiently give if delivered personally or mailed by United States certified mail in an envelope properly stamped and addressed to Tenant at Tenant's Address or at such other address as Tenant may heretofore have designated by written notice to Landlord, and any notices or demands from Tenant to Landlord shall be deemed to have been duly and sufficiently given if delivered personally or mailed by United States certified mail in an envelope properly stamped and addressed to Landlord at Landlord's Address, or at such other address or to such other agent as Landlord may heretofore have designated by written notice to Tenant, with a copy to any first mortgagee of the Leased Premises, the identity and address of which Tenant shall have received written notice. The effective date of any notice shall be the date of personal delivery or, in the case of mailing, one (1) day after delivery of the same to the United States Postal Service. -12- 59 19.3 Short Form Lease. Tenant shall neither record this Lease nor record a memorandum hereof without the Landlord's prior written consent. If Landlord requests, the parties shall execute and acknowledge a short form of Lease for recording purposes at Landlord's expense. 19.4 Time of Essence. Time is of the essence of this Lease and all provisions herein relating thereto shall be strictly construed. 19.5 Relationship of Parties. Nothing contained herein shall be deemed or construed by the parties hereto, or by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture, by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create an relationship other than the relationship of Landlord and Tenant. 19.6 Captions. The captions of this Lease are for convenience only and are not to be construed as part of this Lease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. 19.7 Severability. If any term or provision of this Lease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Lease shall not be affected thereby, but each term and provision of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. 19.8 Law Applicable. This Lease shall be construed an enforced in accordance with the laws of the State in which the Leased Premises are located. 19.9 Covenants Binding on Successors. All of the covenants, agreements, conditions and undertakings contained in this Lease shall extend and inure to and be binding upon the permitted heirs, executors, administrators, successors and assigns of the respective parties hereto. 19.10 Brokerage. Landlord and Tenant warrant to the other that neither of them has had any dealings with any broker or agent in connection with the transactions contemplated hereby. Landlord and Tenant covenant to pay, hold harmless and indemnify the other from and against any and all costs, expenses or liability for any compensation, commissions and charges claimed by any broker or agent with respect to the transactions contemplated hereby or the negotiation thereof and arising by virtue of the acts of the indemnifying party. 19.11 Landlord's Expenses. Tenant agrees to pay on demand Landlord's expenses, including, without limitation, reasonable attorneys' fees an costs, incurred either directly or indirectly in enforcing any obligation of Tenant under this Lease or, in curing any default by Tenant hereunder. -13- 60 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: STEWART WARNER CORPORATION By: ---------------------------------- Its:__________________________________ TENANT STEWART WARNER ELECTRONICS CO. By: /s/ [Illegible] SECY. ---------------------------------- Its:__________________________________ -14- 61 [Letterhead of BTR] July 28, 1995 Herley Industries, Inc. 10 Industry Drive Lancaster, PA 17603-4092 Gentlemen: I am Assistant General Counsel of BTR Inc., a company under common control with Stewart Warner Electronics Corporation, a Delaware Corporation ("Seller"). I have represented Seller in connection with the preparation, execution and delivery of, and the consummation of the transactions contemplated by, the Purchase and Sale Agreement dated July 28, 1995 (the "Agreement") by and between Seller and Stewart Warner Electronics Co., a Pennsylvania corporation ("Buyer"), pursuant to which Seller has agreed to sell, and Buyer has agreed to purchase, certain assets and the business of Seller on the terms and conditions described therein. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreement. In connection with such representation, I have examined the Agreement and have reviewed the corporate proceedings taken by Seller in connection with the authorization, execution and delivery of the Agreement. I have also examined originals, or copies certified to my satisfaction, of such corporate records of Seller and other instruments, certificates of public officials and such other documents as I have deemed necessary as a basis for the opinions hereinafter expressed. In such examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as copies. As to questions of fact material to this opinion, I have, when relevant facts were not independently established, relied upon certificates of officers of Seller and the representations and warranties of Seller contained in the Agreement. On the basis of the foregoing, and having regard for such legal considerations I deem relevant, I am of the opinion that: (a) Seller is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all requisite corporate power to own, lease and operate its property and carry on its business as it is now being conducted. 62 July 28, 1995 Page 2 (b) Seller has all requisite corporate power and authority to execute and deliver the Agreement to which it is a party and to consummate the transactions contemplated thereby. The execution and delivery of the Agreement and the consummation of the transactions contemplated thereby have been duly authorized and approved by all necessary and proper corporate action of Seller. The Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against each of them in accordance with its terms, except as such enforceability may be limited by: (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights in general; (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (iii) applicable limitation periods; (iv) applicable laws limiting the enforcement of any non-competition and non-solicitation covenants and rights of indemnity and/or contribution; (v) applicable bulk sales laws; and (vi) applicable laws or provisions in the Contracts prohibiting assignment of the Contracts. (c) Neither the execution and delivery of the Agreement by Seller, nor the consummation by Seller of the transactions contemplated thereby, will conflict with, result in a breach of or constitute a default under the Certificate of Incorporation or By-Laws. I express no opinion herein as to any laws other than the laws of the General Corporation Law of the State of Delaware and the Federal laws of the United States. Very truly yours, /s/ Peter M. Kent Peter M. Kent Assistant General Counsel 63 [Letterhead of BTR] July 28, 1995 Herley Industries, Inc. 10 Industry Drive Lancaster, PA 17603-4092 Gentlemen: I am Assistant General Counsel of BTR Inc., a company under common control with Stewart Warner Electronics Corporation, a Delaware Corporation ("Seller"). I have represented Seller in connection with the preparation, execution and delivery of, and the consummation of the transactions contemplated by, the Purchase and Sale Agreement dated July 28, 1995 (the "Agreement") by and between Seller and Stewart Warner Electronics Co., a Pennsylvania corporation ("Buyer"), pursuant to which Seller has agreed to sell, and Buyer has agreed to purchase, certain assets and the business of Seller on the terms and conditions described therein. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreement. In connection with such representation, I have examined the Agreement and have reviewed the corporate proceedings taken by Seller in connection with the authorization, execution and delivery of the Agreement. I have also examined originals, or copies certified to my satisfaction, of such corporate records of Seller and other instruments, certificates of public officials and such other documents as I have deemed necessary as a basis for the opinions hereinafter expressed. In such examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as copies. As to questions of fact material to this opinion, I have, when relevant facts were not independently established, relied upon certificates of officers of Seller and the representations and warranties of Seller contained in the Agreement. On the basis of the foregoing, and having regard for such legal considerations I deem relevant, I am of the opinion that: (a) Seller is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all requisite corporate power to own, lease and operate its property and carry on its business as it is now being conducted. 64 July 28, 1995 Page 2 (b) Seller has all requisite corporate power and authority to execute and deliver the Agreement to which it is a party and to consummate the transactions contemplated thereby. The execution and delivery of the Agreement and the consummation of the transactions contemplated thereby have been duly authorized and approved by all necessary and proper corporate action of Seller. The Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against each of them in accordance with its terms, except as such enforceability may be limited by: (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights in general; (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (iii) applicable limitation periods; (iv) applicable laws limiting the enforcement of any non-competition and non-solicitation covenants and rights of indemnity and/or contribution; (v) applicable bulk sales laws; and (vi) applicable laws or provisions in the Contracts prohibiting assignment of the Contracts. (c) Neither the execution and delivery of the Agreement by Seller, nor the consummation by Seller of the transactions contemplated thereby, will conflict with, result in a breach of or constitute a default under the Certificate of Incorporation or By-Laws. I express no opinion herein as to any laws other than the laws of the General Corporation Law of the State of Delaware and the Federal laws of the United States. Very truly yours, /s/ Peter M. Kent Peter M. Kent Assistant General Counsel PMK/tr EX-10.4 4 FORM OF EMPLOYMENT AGREEMENT 1 Exhibit 10.4 EMPLOYMENT AGREEMENT AGREEMENT made as of this 1st day of November 1997, by and between HERLEY INDUSTRIES, INC., a Delaware corporation (hereinafter called the "Company"), and LEE N. BLATT, residing at 471 North Arrowhead Trail Vero Beach, Fl 32963, (hereinafter called the "Employee"). WITNESSETH WHEREAS, the Employee was initially employed by the Company under an Employment Agreement, dated June 11, 1984, as amended, which agreement was superseded by a second Employment Agreement between Employee and the Company, dated January 1, 1997; and the Company desires to enter into a new employment agreement with Employee which agreement shall supersede both prior employment agreements; and, WHEREAS, Employee desires to enter into the new employment agreement with the Company; NOW THEREFORE, it is agreed as follows: 1. PRIOR AGREEMENTS SUPERSEDED. This Agreement supersedes any employment agreements, oral or written, entered into between Employee and the Company prior to the date of this Agreement including, but not limited to, the Employment Agreements between the Employee and the Company, dated June 11, 1984, as amended, and January 1, 1997, respectively. 2. RETENTION OF SERVICES. The Company hereby retains the services of Employee, and Employee agrees to furnish such services, upon the terms and conditions hereinafter set forth. 3. TERM. Subject to earlier termination on the terms and conditions hereinafter provided, the term of this Agreement shall be comprised of a three (3) year period of employment commencing November 1, 1997 and ending October 31, 2000. - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 1 of 7 - 2 4. DUTIES AND EXTENT OF SERVICES DURING PERIOD OF EMPLOYMENT. During the period of employment, Employee shall be employed as a Senior Executive of the Company. In such capacity, Employee agrees that he shall serve the Company under the direction of the Board of Directors of the Company to the best of his ability, shall perform all duties incident to his offices on behalf of the Company, and shall perform such other duties as may from time to time be assigned to him by the Board of Directors of the Company. Employee shall also serve in similar capacities of such of the subsidiary corporations of the Company as may be selected by the Board of Directors and shall be entitled to such additional compensation therefore as may be determined by the Board of Directors of the Company. Notwithstanding the foregoing, it is understood and agreed that the duties of Employee during the period of employment shall not be inconsistent with (i) his position and title as Senior Executive of the Company; or (ii) with those duties ordinarily performed by a comparable executive officer. 5. REMUNERATION. During the period of employment, Employee shall be entitled to receive the following compensation for his services: (i) The Company shall pay to Employee an annual salary at the rate of THREE HUNDRED SEVENTY-FIVE THOUSAND ($375,000) DOLLARS commencing November 1, 1997, payable in weekly installments, or in such other manner as shall be agreeable to the Company and Employee. (ii) In addition to his salary set forth in Paragraph 5(i) above, Employee shall receive an increment in an amount equal to the cumulative cost of living on his base salary as reported in the "Consumer Price Index, New York Northeastern New Jersey, all items", published by the United States Department of Labor, Bureau of Labor Statistics, using January 1,1997 as the base year for computation. Such cost of living increment with respect to the aforesaid salary of Employee shall be made semi-annually as follows: - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 2 of 7 - 3 (A) With respect to the first six months of each calendar year during the period of employment, such increment shall be calculated and payable cumulatively on or before the first day of August of such year; and (B) With respect to the last six months of each calendar year during the period of employment, such increment shall be calculated and payable cumulatively on or before the first day of February of the following calendar year. If Employee's employment shall terminate during any six-month period referred to in this Paragraph 5 (ii), then the cost of living increment provided for herein shall be prorated accordingly. (iii) Not later than one hundred twenty (120) days after the end of the fiscal year of the Company and each subsequent fiscal year of the Company ending during the period of employment, the Company shall pay to Employee, as incentive compensation an amount equal to five (5%) percent of the Consolidated Pretax Earnings of the Company in excess of the Company's Minimum Consolidated Pretax Earnings, as defined below in this clause (iii), and in no event more than Employee's annual salary set forth in clause (i) immediately above. For purposes hereof, the term "Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the consolidated income, if any, of the Company for such fiscal year as set forth in the audited, consolidated financial statements (the "Financial Statements") of the Company and its subsidiaries included in its Annual Report to stockholders for such fiscal year, before deduction of taxes based on income or of the incentive compensation to be paid to Employee for such fiscal year under this Agreement. For the purposes hereof the term "Minimum Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the amount of Consolidated Pretax Earnings of the Company equal to ten percent (10%) of (x) the Company's Stockholders' Equity, as set forth in the Financial Statements for the - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 3 of 7 - 4 beginning of such fiscal year, plus (y) the proceeds from the sale of the Company's equity securities, less (z) the purchase price from the acquisition of the Company's equity securities, on a time-proportioned basis, during such fiscal year. 6. EMPLOYEE BENEFITS - EXPENSES a) During the term of this agreement, the Company shall provide, at its expense $40,000 annually to purchase life insurance, with Employee having the right to designate the insurer, owner and beneficiary of such life insurance. b) In the event of the death of Employee, within 30 days thereafter the Company shall promptly make a lump sum payment to Employee's widow, or to such other person or persons as may be designated by Employee in his Will, or to his estate in the event of Employee's intestacy, of the salary and compensation to which Employee is entitled hereunder for the three year period from date of death and one-half of such salary for the balance of the period covered by this Agreement, (provided that no payment shall be required for any period beyond October 31, 2000), and in the year of death an additional payment equal to the pro rata amount for said year of the compensation set forth in paragraph 5 (iii), the Company's contribution to the 401(k), and the pro-rata cost of living increment, which additional payment shall be made in accordance with paragraph 5 (ii). c) Employee shall be eligible to participate in the Company's stock option and stock purchase plans and to acquire warrants to purchase the Company's stock, to the extent determined in the sole discretion of the Compensation Committee of the Company's Board of Directors. d) During the period of employment, Employee shall be furnished with office space and facilities commensurate with his position and adequate for the performance of his duties; he shall be provided with the perquisites customarily associated with the position of a Senior Executive of the Company; and he shall be entitled to six weeks regular vacation during each year. e) It is contemplated that, during the period of employment, Employee may be - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 4 of 7 - 5 required to incur out-of-pocket expenses in connection with the performance of his services hereunder, including expenses incurred for travel and business entertainment. Accordingly, the Company shall pay, or reimburse Employee, for all out-of-pocket expenses reasonably incurred by Employee in the performance of his duties hereunder in accordance with the usual procedures of the Company. Notwithstanding the foregoing, the recognition that Employee will be required during the term of this Agreement to do a considerable amount of driving in connection with his services hereunder, the Company shall provide Employee with the use of a suitable automobile and all expenses incidental throughout the term of this Agreement, including fuel, repairs, maintenance and insurance. f) All benefits to Employee specially provided for herein shall be in addition to, and shall not diminish, (i) such other benefits and/or compensation as may hereafter be granted to or afforded to Employee by the Board of Directors of the Company; and (ii) any rights which Employee may have or may acquire under any hospitalization, life insurance, pension, profit-sharing, incentive compensation or other present or future employee benefit plan or plans of the Company g) Employee currently works from offices in Lancaster, Pennsylvania and from his homes where he has created work space and his responsibilities do not require regular attendance at any Company office. These responsibilities include, among other things, conducting executive recruiting tasks and visiting customers, investment banks and potential acquisition candidates in the best interests of the Company. In recognition of these special employment conditions, disability for Employee shall occur if he becomes unable, for twelve consecutive months or more, due to ill health or other incapacity to perform the services described above. In that event, the Company may thereafter, upon at least 90 days written notice to employee, place him on disability status and terminate this agreement. If employee is so determined by the Company as disabled, he shall be entitled to his annual compensation as set forth in paragraph 5 (i) and 5 (ii) hereof payable in weekly installments for the first two years after notice of disability (provided that no payment shall be required for any period beyond October 31, 2000) and - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 5 of 7 - 6 thereafter one-half of such compensation payable in weekly installments for the balance of the period covered by this agreement. 7. NON-COMPETITION. Employee agrees that, during term of this Agreement, he will not, without the prior written approval of the Board of Directors of the Company, directly or indirectly through any other individual or entity,(a) become an officer or employee of, or render any services to, any competitor of the Company, (b) solicit, raid, entice or induce any customer of the Company to cease purchasing goods or services from the Company or to become a customer of any competitor of the Company, and Employee will not approach any customer for any such purpose or authorize the taking of any such actions by any other individual or entity, or (c) solicit, raid, entice or induce any employee of the Company to become employed by any competitor of the Company, and Employee will not approach any such employee for any such purpose or authorize the taking of any such action by any other individual or entity. However, nothing contained in this paragraph 7 shall be construed as preventing Employee from investing his assets in such form or manner as will not require him to become an officer or employee of, or render any services (including consulting services) to, any competitor of the Company. 8. TERMINATION FOR CAUSE. a) The Company has been intimately familiar with the ability, competence and judgment of Employee, which are acknowledged to be of the highest caliber. Accordingly, the Company and Employee agree that Employee's services hereunder may be terminated by the Company only (i) for an act of moral turpitude materially adversely affecting the financial condition of the Company, or (ii) breach of the terms of this Agreement which shall materially adversely affect the financial condition of the Company. b) If the Company terminates Employee's employment hereunder for any reason other than as set forth in paragraph 8 (a) hereof, Employee's compensation shall continue to be paid to him as provided in paragraph 5 hereunder for the remainder of the term of this Agreement. Employee shall have no duty to mitigate the - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 6 of 7 - 7 Company's damages hereunder. Therefore, no deduction shall be made by the Company for any compensation earned by Employee from other employment or for monies or property otherwise received by Employee subsequent to such termination of his employment hereunder. Employee and the Company acknowledge that the foregoing provisions of this paragraph 8(b) are reasonable and are based upon the facts and circumstances of the parties at the time of entering into this Agreement, and with due regard to future expectations. 9. CONSOLIDATION OR MERGER. In the event of any consolidation or merger of the Company into or with any other corporation during the term of this Agreement, or the sale of all or substantially all of the assets of the Company to another corporation during the term of this Agreement, such successor corporation shall assume this Agreement and become obligated to perform all of the terms and provisions hereof applicable to the Company, and Employee's obligations hereunder shall continue in favor of such successor corporation. 10. INDEMNIFICATION. The Company agrees to indemnify the Employee to the fullest extent permitted by applicable law consistent with the Company's Certification of Incorporation and By-Laws as in effect on the effective date of this Agreement with respect to any action or failure to act on his part while he was an officer, director and/or employee (a) of the Company or any subsidiary thereof or (b) of any other entity if his service with such entity was at the request of the Company. This provision shall survive the termination of this Agreement. 11. NOTICES. Notice is to be given hereunder to the parties by telegram or by certified or registered mail, addressed to the respective parties at the addresses herein below set forth or to such addresses as may be hereinafter furnished, in writing: TO: Lee N. Blatt 471 North Arrowhead Trail Vero Beach, FL 32963 - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 7 of 7 - 8 TO: HERLEY INDUSTRIES, INC. 10 Industry Drive Lancaster, PA 17603 Attention: Myron Levy, President 12. CHANGE OF CONTROL In the event there shall be a change in the present control of the Company as hereinafter defined, or in any person directly or indirectly presently controlling the Company, as hereinafter defined, Employee shall have the right to immediately receive as a lump sum payment an amount equal to (i) two (2) times his "base amount", within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (hereinafter "the Code"), reduced by (ii) $100.00. For purposes of this Agreement, a change in control of the Company, or in any person directly or indirectly controlling the Company, shall mean: a) a change in control as such term is presently defined in Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act"); or b) if any "person" (as such term is used in Section 13(d) and 14 (d) of the Exchange Act) other than the Company or any "person" who on the date of this Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) of the voting power of the Company's then outstanding securities; or c) if during any period of two (2) consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director who is not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period. 13. SUCCESSORS AND ASSIGNS. This agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Unless clearly inapplicable, reference herein to the Company shall be deemed to include such other successor. In addition, this - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 8 of 7 - 9 Agreement shall be binding upon and inure to the benefits of the Employee and his heirs, executors, legal representatives and assigns, provided, however, that the obligations of Employee hereunder may not be delegated without the prior written approval of Directors of the company. 14. AMENDMENTS. This agreement may not be altered, modified, amended or terminated except by a written instrument signed by each of the parties hereto. 15. GOVERNING LAW. This agreement shall be governed by and construed and interpreted in accordance with the laws of Delaware, without reference to principles of conflict of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. HERLEY INDUSTRIES, INC. BY: ______________________________ MYRON LEVY, President BY: ______________________________ LEE N BLATT, Employee - -------------------------------------------------------------------------------- Lee N. Blatt Employment Agreement 1997 - Page 9 of 7 - EX-10.5 5 FORM OF EMPLOYMENT AGREEMENT 1 Exhibit 10.5 EMPLOYMENT AGREEMENT AGREEMENT made as of this 1st day of November 1997, by and between HERLEY INDUSTRIES, INC., a Delaware corporation (hereinafter called the "Company"), and MYRON LEVY residing at 147 Deer Ford Drive, Lancaster PENNSYLVANIA 17603 (hereinafter called the "Employee"). WITNESSETH WHEREAS, the Employee has been employed by the Company under an Employment Agreement, dated October 3, 1988, as amended, which agreement was superseded by a second Employment Agreement between Employee and Company, dated January 1, 1997; and the Company desires to enter into a new employment agreement with Employee which agreement shall supersede both prior employment agreements; and, WHEREAS, Employee desires to enter into the new employment agreement with the Company; NOW THEREFORE, it is agreed as follows: 1. PRIOR AGREEMENTS SUPERSEDED. This Agreement supersedes any employment agreements, oral or written, entered into between Employee and the Company prior to the date of this Agreement, including, but not limited to, the Employment Agreements between the Employee and the Company, dated October 3, 1988, as amended and January 1, 1997, respectively. 2. RETENTION OF SERVICES. The Company hereby retains the services of Employee, and Employee agrees to furnish such services, upon the terms and conditions hereinafter set forth. 3. TERM. Subject to earlier termination on the terms and conditions hereinafter provided, the term of the Agreement shall be comprised of a five (5) year period commencing on November 1, 1997 and ending on October 31, 2002 and a "consulting period" commencing at 2 the end of such five year period and continuing for a period of five (5) years. 4. DUTIES AND EXTENT OF SERVICES DURING PERIOD OF EMPLOYMENT (a) During the five year period of active employment, Employee shall be employed as an executive of the Company. In such capacity, Employee agrees that he shall serve the Company under the direction of the Chief Executive Officer of the Company to the best of his ability, shall devote full time during normal business hours to such employment, shall perform all duties incident to his offices on behalf of the Company, and shall perform such other duties as may from time to time be assigned to him by the Chief Executive Officer of the Company. (b) Effective with the termination of the five year period of active employment, Employee shall cease to be an employee of the Company. However, in recognition of the continued value to the Company of Employee's extensive knowledge and expertise, Employee shall serve as a consultant to the Company during the consulting period. In such capacity, Employee shall consult with the Company and its respective senior executive officers with respect to its respective businesses and operations. Such consulting services shall not require more than fifty (50) days in any one year, it being understood and agreed that during the consulting period Employee shall have the right to undertake full time or part time employment with any business enterprise which is not a competitor of the Company. Employee's services as a consultant to the Company shall be required at such times and such places as shall result in the least inconvenience to Employee, having in mind his other business commitments which may obligate him to perform services prior to the performance of his services hereunder. To the end that there shall be a minimum of interference with Employees other commitments, his consulting services shall be rendered by personal consultation at his residence or office wherever maintained, or by correspondence through mail, telegram or telephone, or other similar modes of communications at times, 2 3 including weekends and evenings, most convenient to him. During the consulting period, Employee shall not be obligated to serve as a member of the Board of Directors of the Company or to occupy any office on behalf of the Employer or any of its subsidiaries or affiliates. 5. REMUNERATION (a) During the five year period of active employment, Employee shall be entitled to receive the following compensation for his services: (i) The Company shall pay to Employee an annual salary at the rate of TWO HUNDRED SEVENTY-FIVE THOUSAND ($275,000) DOLLARS commencing November 1, 1997 and terminating October 31, 2002, payable in weekly installments, or in such other manner as shall be agreeable to the Company and Employee. (ii) In addition to his salary set forth in Paragraph 5(i) above, Employee shall receive an increment in an amount equal to the cumulative cost of living on his base salary as reported in the "Consumer Price Index, New York Northeastern New Jersey, all items", published by the United States Department of Labor, Bureau of Labor Statistics, using January 1,1997 as the base year for computation. Such cost of living increment with respect to the aforesaid salary of Employee shall be made semi-annually as follows: (A) With respect to the first six months of each calendar year during the period of employment, such increment shall be calculated and payable cumulatively on or before the first day of August of such year; and (B) With respect to the last six months of each calendar year during the period of employment, such increment shall be calculated and payable cumulatively on or before the first day of February of the following calendar year. 3 4 If Employee's employment shall terminate during any six-month period referred to in this Paragraph 5 (ii), then the cost of living increment provided for herein shall be prorated accordingly. (iii) Not later than one hundred twenty (120) days after the end of the fiscal year of the Company and each subsequent fiscal year of the Company ending during the five year period of employment, the Company shall pay to Employee, as incentive compensation four (4%) percent of the Consolidated Pretax Earnings of the Company in excess of the Company's Minimum Consolidated Pretax Earnings, as defined below in this clause (iii), and in no event more than Employee's annual salary set forth in clause (i) immediately above. For purposes hereof, the term "Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the consolidated income, if any, of the Company for such fiscal year as set forth in the audited, consolidated financial statements (the "Financial Statements") of the Company and its subsidiaries included in its Annual Report to stockholders for such fiscal year, before deduction of taxes based on income or of the incentive compensation to be paid to Employee for such fiscal year under this Agreement. For purposes hereof the term "Minimum Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the amount of Consolidated Pretax Earnings of the Company equal to ten percent (10%) of (x) the Company's Stockholders' Equity, as set forth in the Financial Statements for the beginning of such fiscal year, plus (y) the proceeds from the sale of the Company's equity securities, less (z) the purchase price from the acquisition of the Company's equity securities, on a time-proportioned basis, during such fiscal year. 4 5 (b) During the consulting period, Employee shall be entitled to a consulting fee at the rate of SIXTY THOUSAND ($60,000) dollars per annum, paid on a monthly basis. 6. EMPLOYEE BENEFITS - EXPENSES a) During the period of active employment, Employee shall receive all fringe benefits in the nature of health, medical, life and/or other insurance, a Company car and related expenses as received by other officers of the Company. b) The Company shall reimburse Employee for all proper expenses incurred by him, including disbursements made in the performance of his duties to the Company; provided, however that no extraordinary expenses and/or disbursements shall be incurred by Employee without the prior approval of the Chief Executive Officer or the Board of Directors of the Company. c) Employee shall be eligible to participate in the Company's stock option and stock purchase plans and to acquire warrants to purchase the Company's stock to the extent determined in the sole discretion of the Board of Directors of the Company or a committee thereof. d) During the five year period of employment, Employee shall be furnished with office space and facilities commensurate with his position and adequate for the performance of his duties; he shall be provided with the perquisites customarily associated with the position of a Senior Executive of the Company; and he shall be entitled to six weeks regular vacation during each year. e) In the event of the death of Employee, within 30 days thereafter the Company shall promptly make a lump sum payment to Employee's widow, or to such other person or persons as may be designated by Employee in his Will, or to 5 6 his estate in the event of Employee's intestacy, of the salary and compensation to which Employee is entitled hereunder for the two year period from date of death and one-half of such salary for the balance of the period covered by this Agreement (provided that no payment shall be required for any period beyond October 31, 2002), and in the year of death an additional payment equal to the pro rata amount for said year of the compensation set forth in paragraph 5 (iii), the Company's contribution to the 401(k), and the pro-rata cost of living increment, which additional payment shall be made in accordance with paragraph 5 (ii). f) Disability for Employee shall occur if he becomes unable, for twelve consecutive months or more, due to ill health or other incapacity to perform the services described above. In that event, the Company may thereafter, upon at least 90 days written notice to employee, place him on disability status and terminate this agreement. If employee is so determined by the Company as disabled, he shall be entitled to his annual compensation as set forth in paragraph 5 (i) and 5 (ii) hereof payable in weekly installments for the first two years after notice of disability and thereafter one-half of such compensation (provided that no payment shall be required for any period beyond October 31, 2002), payable in weekly installments for the balance of the period covered by this agreement. 7. NON-COMPETITION. Employee agrees that, during term of this Agreement, he will not, without the prior written approval of the Board of Directors of the Company, directly or indirectly through any other individual or entity,(a) become an officer or employee of, or render any services to, any competitor of the Company, (b) solicit, raid, entice or induce any customer of the Company to cease purchasing goods or services from the Company or to become a customer of any competitor of the Company, and Employee will not approach any customer for any such purpose or authorize the taking of any such actions by any other individual or entity, or (c) solicit, raid, entice or induce any 6 7 employee of the Company to become employed by any competitor of the Company, and Employee will not approach any such employee for any such purpose or authorize the taking of any such action by any other individual or entity. However, nothing contained in this paragraph 7 shall be construed as preventing Employee from investing his assets in such form or manner as will not require him to become an officer or employee of, or render any services (including consulting services) to, any competitor of the Company. 8. TERMINATION FOR CAUSE. a) The Company has been intimately familiar with the ability, competence and judgment of Employee, which are acknowledged to be of the highest caliber. Accordingly, the Company and Employee agree that Employee's services hereunder may be terminated by the Company only (i) for an act of moral turpitude materially adversely affecting the financial condition of the Company, or (ii) breach of the terms of this Agreement which shall materially adversely affect the financial condition of the Company. b) If the Company terminates Employee's employment hereunder for any reason other than as set forth in paragraph 8 (a) hereof, Employee's compensation shall continue to be paid to him as provided in paragraph 5 hereunder for the remainder of the term of this Agreement. Employee shall have no duty to mitigate the Company's damages hereunder. Therefore, no deduction shall be made by the Company for any compensation earned by Employee from other employment or for monies or property otherwise received by Employee subsequent to such termination of his employment hereunder. Employee and the Company acknowledge that the foregoing provisions of this paragraph 8(b) are reasonable and are based upon the facts and circumstances of the parties at the time of entering into this Agreement, and with due regard to future expectations. 9. CONSOLIDATION OR MERGER. In the event of any consolidation or merger of the Company into or with any other corporation during the term of this Agreement, or the 7 8 sale of all or substantially all of the assets of the Company to another corporation during the term of this Agreement, such successor corporation shall assume this Agreement and become obligated to perform all of the terms and provisions hereof applicable to the Company, and Employee's obligations hereunder shall continue in favor of such successor corporation. 10. INDEMNIFICATION. The Company agrees to indemnify the Employee to the fullest extent permitted by applicable law consistent with the Company's Certification of Incorporation and By-Laws as in effect on the effective date of this Agreement with respect to any action or failure to act on his part while he was an officer, director and/or employee (a) of the Company or any subsidiary thereof or (b) of any other entity if his service with such entity was at the request of the Company. This provision shall survive the termination of this Agreement. 11. NOTICES. Notice is to be given hereunder to the parties by telegram or by certified or registered mail, addressed to the respective parties at the addresses herein below set forth or to such addresses as may be hereinafter furnished, in writing: TO: Myron Levy 147 Deer Ford Drive Lancaster, PA 17601 TO: HERLEY INDUSTRIES, INC. 10 Industry Drive Lancaster, PA 17603 Attention: Lee N. Blatt, Chairman 12. CHANGE OF CONTROL In the event there shall be a change in the present control of the Company as hereinafter defined, or in any person directly or indirectly presently controlling the Company, as hereinafter defined, Employee shall have the right to immediately receive as a lump sum payment an amount equal to (i) two (2) times his "base amount", within the meaning of Section 280G of the Internal 8 9 Revenue Code of 1986, as amended (hereinafter "the Code"), reduced by (ii) $100.00. For purposes of this Agreement, a change in control of the Company, or in any person directly or indirectly controlling the Company, shall mean: a) a change in control as such term is presently defined in Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act"); or b) if any "person" (as such term is used in Section 13(d) and 14 (d) of the Exchange Act) other than the Company or any "person" who on the date of this Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) of the voting power of the Company's then outstanding securities; or c) if during any period of two (2) consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director who is not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period. 13. SUCCESSORS AND ASSIGNS. This agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Unless clearly inapplicable, reference herein to the Company shall be deemed to include such other successor. In addition, this Agreement shall be binding upon and inure to the benefits of the Employee and his heirs, executors, legal representatives and assigns, provided, however, that the obligations of Employee hereunder may not be delegated without the prior written approval of Directors of the company. 9 10 14. AMENDMENTS. This agreement may not be altered, modified, amended or terminated except by a written instrument signed by each of the parties hereto. 15. GOVERNING LAW. This agreement shall be governed by and construed and interpreted in accordance with the laws of Delaware, without reference to principles of conflict of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. HERLEY INDUSTRIES, INC. BY: ______________________________ Lee Blatt, Chairman and CEO BY: ______________________________ Myron Levy, Employee 10 EX-10.6 6 FORM OF EMPLOYMENT AGREEMENT 1 Exhibit 10.6 EMPLOYMENT AGREEMENT AGREEMENT made as of this 1st day of November, 1997, by and between HERLEY INDUSTRIES, INC., a Delaware corporation (hereinafter the "Company") and GERALD I. KLEIN, (hereinafter called the "Employee"). W I T N E S S E T H: WHEREAS, the Company and Employee entered into Employment Agreements dated November 1, 1987, April 1, 1990 and January 1, 1992; and WHEREAS, the Employment Agreement, dated January 1, 1992 was modified by Letter Agreements, dated November 30, 1992, June 21, 1993, November 28, 1994 and October 8, 1996; and WHEREAS, the Company and Employee desire to enter into a new employment agreement (the "Employment Agreement"), which agreement shall supersede all prior employment agreements and modifications thereto. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and conditions herein contained, the parties hereto agree as follows: 1. PRIOR AGREEMENTS SUPERSEDED. This Agreement supersedes any employment or consulting agreements, or modifications or amendments thereto, oral or written, entered into between Employee and the Company or any of its subsidiaries, prior to the date of 2 this Agreement, including, but not limited to, (i) the Employment Agreements between Employee and the Company, dated November 1, 1987, April 1, 1990 and January 1, 1992 and (ii) the modifications and amendments to the January 1, 1992 Employment Agreement, dated November 30, 1992, June 21, 1993, November 28, 1994 and October 8, 1996. 2. TERM AND DUTIES. (a) Subject to earlier termination on the terms and conditions hereinafter provided, the term of the Employment Agreement shall be comprised of a four year period commencing on November 1, 1997 and ending on October 31, 2001 and a "consulting period" commencing at the end of such four year period and continuing thereafter for a period of nine years. (b) During the four year period of active employment, Employee shall be employed as an executive of the Company. In such capacity, Employee agrees that he shall serve the Company under the direction of the Chief Executive Officer of the Company to the best of his ability, shall devote full time during normal business hours to such employment, shall perform all duties incident to his offices on behalf of the Company, and shall perform such other duties as may form time to time be assigned to him by the Chief Executive Officer of the Company. (c) Effective with the termination of the four year period of active employment, Employee shall cease to be an employee of the Company. However, in recognition of the continued value to the Company of Employee's extensive knowledge and expertise, Employee shall serve as a consultant to the Company during the consulting period. In such capacity, Employee shall consult with the Company and its respective senior executive officers with 2 3 respect to its respective businesses and operations. Such consulting services shall not require more than fifty (50) days in any one year, it being understood and agreed that during the consulting period Employee shall have the right to undertake full time or part time employment with any business enterprise which is not a competitor of the Company. Employee's services as a consultant to the Company shall be required at such times and such places as shall result in the least inconvenience to Employee, having in mind his other business commitments which may obligate him to perform services prior to the performance of his services hereunder. To the end that there shall be a minimum of interference with Employee's other commitments, his consulting services shall be rendered by personal consultation at his residence or office wherever maintained, or by correspondence through mail, telegram or telephone, or other similar modes of communications at times, including weekends and evenings, most convenient to him. During the consulting period, Employee shall not be obligated to serve as a member of the Board of Directors of the Company or to occupy any office on behalf of the Employer or any of its subsidiaries or affiliates. 3. RENUMERATION. (a) During the four year period of active employment, Employee shall receive the following compensation: (i) The Company shall pay Employee a basic salary in the total sum of TWO HUNDRED SEVENTY-FIVE THOUSAND ($275,000) DOLLARS per annum during the full four year term of his active employment with the Company; which salary shall be paid in weekly installments or in such other manner as shall be agreed to by the Company and Employee. 3 4 (ii) In addition to his salary set forth in Paragraph 3(a)(i) above, Employee shall receive an increment in an amount equal to the cumulative cost of living on his base salary as set forth in paragraph 3(a) (i) hereof as reported in the "Consumer Price Index, New York Northeastern New Jersey, all items", published by the United States Department of Labor, Bureau of Labor Statistics (using January 1, 1997 as the base date for computation). Such cost of living increment with respect to the aforesaid salary of Employee shall be made semi-annually as follows: A. With respect to the first six months of each calendar year during the period of employment, such increment shall be calculated and payable on or before the first day of August of such year; and B. With respect to the last six months of each calendar year during the period of employment, such increment shall be calculated and payable on or before the first day of February of the following calendar year. If Employee's employment shall terminated during any six month period referred to in this Paragraph 3(ii), then the cost of living increment provided for herein shall be prorated accordingly. (iii) Not later than one hundred twenty (120) days after the end of the fiscal year of the Company ending July 31, 1998 and for each subsequent fiscal year of the Company ending during the four year period of active employment, the Company shall also pay to Employee, as incentive compensation, three (3%) percent of the Consolidated Pretax 4 5 Earnings of the Company in excess of the Company's Minimum Consolidated Pretax Earnings, as defined below in this clause (iii), and in no event more than Employee's annual salary set forth in clause (i) immediately above. For purposes hereof, the term "Consolidated Pretax Earnings of the Company" shall mean, with respect to any fiscal year, the consolidated income if any, of the Company for such fiscal year as set forth in the audited, consolidated financial statements (the "Financial Statements") of the Company and its subsidiaries included in its Annual Report to stockholders for such fiscal year, before deduction of taxes based on income or of the incentive compensation to be paid to Employee for such Fiscal year under this Agreement. For the purpose hereof the term "Minimum Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the amount of Consolidated Pretax Earnings of the Company equal to ten percent (10%) of (x) the Company's Stockholders' Equity, as set forth in the Financial Statements for the beginning of such fiscal year, plus (y) the proceeds from the sale or acquisition of the Company's equity securities, less (z) the purchase price from the acquisition of the Company's equity securities, on a time-proportioned basis, during such fiscal year. (b) During the consulting period, Employee shall be entitled to a consulting fee at the rate of ONE HUNDRED THOUSAND ($100,000) DOLLARS per annum payable in monthly installments or in such other manner as shall be agreeable to the Company and Employee. 4. EMPLOYEE BENEFITS; EXPENSES. (a) During the period of active employment, Employee shall receive all fringe benefits in the nature of health, medical, life, 5 6 and/or other insurance, a Company car and related expenses as received by other officers of the Company. (b) During the term of this Employment Agreement and consulting period, the Company shall reimburse Employee for all proper expenses incurred by him, including disbursements made in the performance of his duties to the Company; provided, however, that no extraordinary expenses and/or disbursements shall be incurred by Employee without the prior approval of the Chief Executive Officer of the Company; and (c) In the event of the death of Employee during the four year period of active employment, the Company shall continue to pay to Employee's widow, or to such other person or persons as may be designated by Employee in his Will, or to his estate in the event of Employee's intestacy, the salary and compensation to which Employee in entitled pursuant to Paragraph 3(a) (i) hereunder for the two (2) year period from date of death and one-half of such salary for the balance of the four year period covered by his active employment (provided that no payment shall be required for any period beyond October 31, 2001), and in the year of death a payment equal to the pro rata amount for said year of the compensation provided in Paragraph 3(a)(iii) that Employee may be entitled to. 5. NON-COMPETITION. Employee agrees that during the term of this Employment Agreement he will not directly or indirectly enter into or remain in the employ of any person, firm or corporation, or engage in or have a financial interest in any business which is then directly or indirectly competitive to the business of the Company or is then manufacturing 6 7 any article or product or performing any service which is the same as, or similar to, any articles or products manufactured, or service performed by the Company. In the event of a breach of this covenant not to compete, the parties acknowledge that the Company may be irreparably damaged and may not have an adequate remedy at law. The Company may therefore obtain injunctive relief, without the necessity of posting a bond, for any breach or threatened breach of this covenant. The parties hereto further acknowledge that this covenant not to compete is intended to conform with the laws of the State of New York. Any court of competent jurisdiction is hereby authorized to expend or contract the restrictions of this covenant not to compete in order to conform with the laws of New York so that it shall bind the parties hereto. Employee further agrees that he will not use the name Herley Industries, Inc. or any variation thereof, or otherwise allow any person to use such name or permit any member of his family to use such name, or authorize the use of such name as or in the name of any corporation, partnership, firm or venture which manufactures any article, product, special process or performs any service which is the same as, or similar or in competition with any article, product, special process or service manufactured or performed by the Company, or as in the name of any such article or product. 6. TERMINATION. Employee's employment hereunder may be terminated by the Company for a material breach of the terms of this Agreement. 7. CONFIDENTIAL INFORMATION. With respect to any patent, invention, trademark or copyright hereinafter developed by Employee, Employee shall promptly notify the 7 8 Company of any such patent, etc., and shall execute such documents as the Company may reasonably request in order to evidence the Company's title to same. In the event Employee determines to develop on his own time and expense and outside of the Company's facilities any invention, trademark or copyright not related to the Company's business, he shall notify the Company in writing of this determination and shall offer the Company an opportunity to acquire a 50% interest in same upon the Company's agreement to bear 50% of the costs (exclusive of any payments to Employee) of developing same. Employee represents and warrants that he does not now own of record or beneficially and directly or indirectly, any patent, etc. 8. ORDINARY COURSE. Employee shall not, on behalf of the Company, enter into any contract other than those in the ordinary course of business of the Company, unless approved by the Board of Directors of the Company. 9. DISABILITY. If during the term of this Employment Agreement, Employee is unable to serve the Company in accordance with the terms hereof, for a period of ninety (90) days or any aggregate of six (6) months in any one calendar year for any reason whatsoever, including, but not limited to, illness or incapacity, then the Company shall have the right, on ninety (90) days' written notice, to terminate Employee's employment and consulting services under this Agreement and, if Employee's employment and consulting services are so terminated, he shall be entitled to his annual compensation pursuant to paragraphs 3(a)(i) and 3(b) hereunder for the first year after such notice period, payable in weekly installments, and thereafter three-fourths of such compensation (provided that no payment shall be required for any period beyond October 31, 2001), payable in weekly installments for the balance of the period covered by this 8 9 Agreement. 10. CONSOLIDATION OR MERGER. In the event of any consolidation or merger of the Company into or with any other corporation during the term of this Agreement, or the sale of all or substantially all of the assets of the Company to another corporation during the term of this Agreement, such successor corporation shall assume this Agreement and become obligated to perform all of the terms and provisions hereof applicable to the Company, and Employee's obligations hereunder shall continue in favor of such successor corporation. 11. NOTICES. Notice is to be given hereunder to the parties by telegram or by certified or registered mail, addressed to the respective parties at the addresses hereinbelow set forth or to such addresses as may be hereinafter furnished, in writing: TO: GERALD I. KLEIN 845 Breneman Road Manheim, Pennsylvania 17545 TO: HERELY INDUSTRIES, INC. 10 Industry Drive Lancaster, Pennsylvania 17603 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon an inure to the benefit of the successors and assigns of the Company. Unless clearly inapplicable, reference herein to the Company shall be deemed to include such other successor. In addition, this Agreement shall be binding upon and inure to the benefit of the Employee and his heirs, executors, legal representatives and assigns, provided, however, that the obligations of Employee hereunder may not be delegated without the prior written approval of the Board of Directors of 9 10 the Company. 13. AMENDMENTS. This Agreement may not be altered, modified, amended or terminated except by a written instrument signed by each of the parties hereto. 14. CHANGE OF CONTROL. In the event there shall be a change in the present control of the Company as hereinafter defined, or in any person directly or indirectly presently controlling the Company, as hereinafter defined, Employee shall have the right to immediately receive as a lump sum payment an amount equal to (i) two (2) times his "base amount", within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (hereinafter "the Code"), reduced by (ii) $100.00. For the purpose of this Agreement, a change in control of the Company, or in any person directly or indirectly controlling the Company, shall mean: (a) a change in control as such term is presently defined in Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act"); or (b) if any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than the Company or any "person" who on the date of this Employment Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) of the voting power of the Company's then outstanding securities; or (c) if during any period of two (2) consecutive years during the term of this Employment Agreement, individuals who at the beginning of such period 10 11 constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director who is not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period. 15. GOVERNING LAW. This Employment Agreement is entered into and shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first above written. HERELY INDUSTRIES, INC. By:____________________________ LEE. N. BLATT Chairman _______________________________ GERALD I. KLEIN Employee 11 EX-10.7 7 SEVERENCE AGREEMENT 1 Exhibit 10.7 June 11, 1997 Mr. Allan Coon 5 Kiowa Road Salem, NY 03079 Dear Al: You are a valued employee of our Company and have earned the Vice Presidency to which you were appointed on December 13, 1995 by the Herley Board of Directors. In consideration of your efforts on behalf of our Company, we are pleased to offer the following Severance Agreement, which will be ratified by the Board of Directors at its next meeting: 1. If your employment is terminated at any time within two years from this date for reasons other than as stated in Paragraph 3 below, you will receive a lump-sum payment equivalent to two years base pay. 2. If your employment is terminated after two years, but less than five years from this date, for reasons other than stated in Paragraph 3 below, you will receive a lump sum payment equivalent to one year base pay. 3. If your employment is terminated for cause, which shall be for the commission of an act of moral turpitude materially adversely affecting the financial condition of the Company or a breach of your fiduciary responsibilities as an officer of the Company, which shall materially adversely affect the financial condition of the Company, the Company will be under no obligation to, nor will the Company make any payments under this severance agreement. Sincerely, HERLEY INDUSTRIES, INC. Myron Levy President ML/mmg cc: L. Blatt EX-10.12 8 FORM OF WARRANT AGREEMENT 1 Exhibit 10.12 These securities may not be publicly offered or sold unless at the time of such offer or sale, the person making such offer of sale delivers a prospectus meeting the requirements of the Securities Act of 1933 forming a part of a registration statement, or post-effective amendment thereto, which is effective under said act, or unless in the opinion of counsel to the Corporation, such offer and sale is exempt from the provisions of Section 5 of said Act. WARRANT For the Purchase of Common Stock, Par Value $.1O per Share of HERLEY INDUSTRIES, INC. (Incorporated under the Laws of the State of Delaware) VOID AFTER 5 P.M. ____________ No. ____ Warrant to Purchase _____ Shares THIS IS TO CERTIFY that, for value received, __________ is entitled, subject to the terms and conditions set forth, at or before 5 P.M., New York City Time, on ______________ , but not thereafter, to purchase the number of shares set forth above of Common Stock, par value $.10 per shares (the "Common Stock"), of HERLEY INDUSTRIES, INC., a Delaware corporation (the "Corporation"), from the Corporation at a purchase price per share of $______ if and to the extent this Warrant is exercised, in whole or in part, during the period this Warrant remains in force, subject in all cases to adjustment as provided in Section 3 hereof, and to receive a certificate or certificates representing the shares of Common Stock so purchased, upon presentation and surrender to the Corporation of this Warrant, with the form of 2 subscription attached hereto duly executed, and accompanied by payment of the purchase price of each share purchased either in cash or by certified or bank cashier's check payable to the order of the Corporation. 1. The Corporation covenants and agrees that all shares may be delivered upon the exercise of this Warrant and will, upon delivery, be fully paid and non-assessable, and, without limiting the generality of the foregoing, the Corporation covenants and agrees that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the then current Warrant purchase price per share of the Common Stock issuable upon exercise of this Warrant. 2. The rights represented by this Warrant are exercisable at the option of the holder hereof in whole at any time, or in part from time to time, within the period above specified at the prices specified in Section 1 hereof . In case of the purchase of less than all the shares as to which this Warrant is exercisable, the Corporation shall cancel this Warrant upon the surrender hereof and shall execute and deliver a new Warrant of like tenor for the balance of the shares purchasable hereunder. 3. The price per share at which shares of Common Stock may be purchased hereunder, and the number of such shares to be purchased upon exercise hereof, are subject to change or adjustment as follows: (A) In case the Corporation shall, while this Warrant remains unexercised, in whole or in part, and in force, effect a recapitalization of such character that the shares of Common Stock purchasable hereunder shall be changed into or become exchangeable for a larger or smaller number of shares, then, after the date of record for effecting such recapitalization, the number of shares of Common Stock which the holder hereof shall be entitled to purchase hereunder shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock by reason of such recapitalization, and the purchase price hereunder per share of such recapitalized Common Stock shall, in the case of an increase in the number of such shares, be -2- 3 proportionately reduced, and in the case of a decrease in the number of such shares, shall be proportionately increased. For the purpose of this subsection (A), a stock dividend, stock split-up or reverse split shall be considered as a recapitalization and as an exchange for a larger or smaller number of shares, as the case may be. (B) In the case of any consolidation of the Corporation with, or merger of the Corporation into, any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Corporation in connection with a plan of complete liquidation of the Corporation, then, as a condition of such consolidation, merger or sale or conveyance, adequate provision shall be made whereby the holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock or securities as may be issued in connection with such consolidation, merger or sale or conveyance with respect to or in exchange for the number of outstanding shares of Common Stock immediately therefore purchasable and receivable upon the exercise of the rights represented hereby had such consolidation, merger or sale or conveyance not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof shall be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise hereof. (C) In case the Corporation shall, while this Warrant remains unexercised, in whole or in part, and in force, issue (otherwise than by stock dividend or stock split-up or reverse split) or sell shares of its Common Stock (hereinafter referred to as "Additional Shares") for a consideration per share (before deduction of expenses or commissions or underwriting discounts or allowances in connection therewith) less than the purchase price hereunder per share, then, after the date of such issuance or sale, the purchase price hereunder per shall be reduced -3- 4 to a price determined by dividing (1) an amount equal to (a) the total number of shares of Common Stock outstanding immediately prior to the time of such issuance or sale multiplied by such purchase price hereunder per share, plus (b) the consideration (before deduction of expenses or commissions or underwriting discounts or allowances in connection therewith), if any, received by the Corporation upon such issuance or sale, by (2) the total number of shares of Common Stock outstanding after the date of the issuance or sale of such Additional Shares, and the number of shares of Common Stock which the holder hereof shall be entitled to purchase hereunder at each such adjusted purchase price per share, at the time such adjusted purchase price per shall be in effect, shall be the number of whole shares of Common Stock obtained by multiplying such purchase price hereunder per share before such adjustment, by the number of shares of Common Stock purchasable upon the exercise of this Warrant immediately before such adjustment, and dividing the product so obtained by such adjusted purchase price per share; provided, however, that no such adjustment of the purchase price hereunder per share or the number of shares for which this Warrant may be exercised shall be made upon the issuance or sale by the Corporation of not more than 500,000 Additional Shares reserved for issuance upon exercise of outstanding stock options or warrants. (D) In case the Corporation shall, while this Warrant remains unexercised in whole or in part, and in force, issue or grant any rights to subscribe for or to purchase, or any option (other than the employee stock options referred to in subsection (C) above) for the purchase of (i) Common Stock or (ii) any indebtedness or shares of stock convertible into or exchangeable for Common Stock (indebtedness or shares of stock convertible into or exchangeable for Common Stock being hereinafter referred to as "Convertible Securities"), or issue or sell Convertible Securities and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities at the time such Convertible Securities first become convertible or exchangeable (determined by dividing (1) in the case of an issuance or -4- 5 grant of any such rights or options, the total amount, if any, received or receivable by the Corporation as consideration for the issuance or grant of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of such rights or options, plus, in the case of such Convertible Securities, in the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange of such Convertible Securities at the time such Convertible Securities first become convertible or exchangeable, or (2) in the case of an issuance or sale of Convertible Securities other than where the same or issuable upon the exercise of any such rights or options, the total amount, if any, received or receivable by the Corporation as consideration for the issuance or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange of such Convertible Securities at the time such Convertible Securities first become convertible or exchangeable, by, in either such case, (3) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities at the time such Convertible Securities first become convertible or exchangeable) shall be less than the two purchase prices hereunder per share, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities at the time such Convertible Securities first become convertible or exchangeable, shall (as of the date of the issuance or grant of such rights or options or, in the case of the issuance or sale of Convertible Securities other than where the same are issuable upon the exercise of rights or options, as of the date of such issuance or sale) be deemed to be outstanding and to have been issued for said price per share; provided that (i) no further adjustment of the purchase price shall be made upon the actual issuance of such Common Stock upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities or upon the actual issuance of Convertible Securities where -5- 6 the same are issuable upon the exercise of such rights or options, and (ii) rights or options issued or granted pro rata to shareholders without consideration and Convertible Securities issuable by way of dividend or other distribution to shareholders shall be deemed to have been issued or granted at the close of business on the date fixed for the determination of shareholders entitled to such rights, options or Convertible Securities and shall be deemed to have been issued without consideration; and (iii) if, in any case, the total maximum number of shares of Common Stock issued upon exercise of such rights or options or upon conversion or exchange of such Convertible Securities is not, in fact, issued and the right to exercise such right or option or to convert or exchange such Convertible Securities shall have expired or terminated, then, and in any such event, the purchase price, as adjusted, shall be appropriately readjusted at the time of such expiration or termination. In such case, each purchase price hereunder per share which is greater than the price per share for which Common Stock is issuable upon conversion or exchange of such rights or options or upon conversion or exchange of such Convertible Securities at the time such Convertible Securities first become convertible or exchangeable, as determined above in this subsection (D), shall thereupon be reduced to a price determined by dividing (1) an amount equal to (a) the total number of shares of Common Stock outstanding immediately prior to the time of the issuance or grant of such rights or options or the issuance or sale of such Convertible Securities multiplied by such purchase price hereunder per share, plus (b) the total amount, if any, received or receivable by the Corporation as consideration for such issuance or grant or such issuance or sale, plus the additional amounts referred to and more fully set forth in clauses (1) and (2) of the parenthetical material above in this subsection (D), whichever clause and whichever additional amounts may be applicable, by (2) the total number of shares of Common Stock outstanding after the date of such issuance or grant or such issuance or sale, and the number of shares of Common Stock which the holder hereof shall be entitled to purchase hereunder at such adjusted purchase price per share, at the time such adjusted purchase price per shall be in effect, shall be -6- 7 the number of whole shares of Common Stock obtained by multiplying such purchase price hereunder, per share, before such adjustment, by the number of shares of Common Stock purchasable upon the exercise of this Warrant immediately before such adjustment and dividing the product so obtained by such adjusted purchase price per share. (E) For the purpose of subsections (C) and (D) above, in case the Corporation shall issue or sell Additional Shares, issue or grant any rights to subscribe for or to purchase, or any options for the purchase of (i) Common Stock or (ii) Convertible Securities, or issue or sell Convertible Securities for a consideration part of which shall be other than cash, the amount of the consideration received by the Corporation therefor shall be deemed to be the cash proceeds, if any, received by the Corporation plus the fair value of the consideration other than cash as determined by the Board of Directors of the Corporation in good faith, before deduction of commissions, underwriting discounts or allowances or other expenses paid or incurred by the Corporation for any underwriting of, or otherwise in connection with, such issuance, grant or sale. (F) Subject to the provisions of subsection (G) below, in case the Corporation shall, while this Warrant remains unexercised, in whole or in part, and in force, make any distribution of its assets to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise, then, after the date of record for determining shareholders entitled to such distribution, the holder hereof shall be entitled, upon exercise of this Warrant and purchase of any or all of the shares of Common Stock subject hereto, to receive the amount of such assets (or at the option of the Corporation, a sum equal to the value thereof at the time of such distribution to holders of Common Stock as such value is determined by the Board of Directors of the Corporation in good faith) which would have been payable to such holder had he been the holder of record of such shares of Common Stock on the record date for the -7- 8 determination of shareholders entitled to such distribution. (G) Except as otherwise provided in subsection (B) above, in the case of any sales or conveyance of all or substantially all of the assets of the Corporation in connection with a plan of complete liquidation of the Corporation, in the case of the dissolution, liquidation or winding up of the Corporation, all rights under this Warrant shall terminate on a date fixed by the Corporation, such date so fixed to be not earlier than the date of the commencement of the proceedings for such dissolution, liquidation or winding-up and not later than thirty (30) days after such commencement date. Notice of such termination of purchase rights shall be given to the registered holder hereof, as the same shall appear on the books of the Corporation, at least thirty (30) days prior to such termination date. (H) In case the Corporation shall, while this Warrant remains unexercised in whole or in part, and in force, offer to the holders of Common Stock any rights to subscribe for additional shares of stock of the Corporation, then the Corporation shall given written notice thereof to the registered holder hereof not less than thirty (30) days prior to the date on which the books of the Corporation are closed or a record date fixed for the determination of shareholders entitled to such subscription rights. Such notice shall specify the date as to which the books shall be closed or the record date fixed with respect to such offer or subscription, and the right of the holder hereof to participate in such offer or subscription shall terminate if this Warrant shall not be exercised on or before the date of such closing of the books or such record date. (I) Any adjustment pursuant to the foregoing provisions shall be made on the basis of the number of shares of Common Stock which the holder hereof would have been entitled to acquire by exercise of this Warrant immediately prior to the event giving rise to such adjustment and, as to the purchase price hereunder per share, whether or not in effect immediately prior to the -8- 9 time of such adjustment, on the basis of such purchase price immediately prior to the event giving rise to such adjustment. Whenever any such adjustment is required to be made, the Corporation shall forthwith determine the new number of shares of Common Stock which the holder shall be entitled to purchase hereunder and/or such new purchase price per share, and shall prepare, retain on file and transmit to the holder hereof within ten (10) days after such preparation a statement describing in reasonable detail the method used in calculating such adjustment(s). (J) For the purposes of this Section 3, the term "Common Stock" shall include all shares of capital stock authorized by the Corporation's Certificate of Incorporation, as from time to time amended, which are not limited to a fixed sum or percentage of par value in respect of the right of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation. (K) Whenever the price per share hereunder, initial or adjusted, and the number of shares of Common Stock to be purchased upon exercise hereof, initial or adjusted, shall be changed or adjusted pursuant to the provisions of this Section 3, the Corporation shall forthwith cause written notice setting forth the changed or adjusted price per share hereunder and number of shares to be purchased upon exercise hereof to be given to the holder of this Warrant. 4. The holder hereof agrees that the Warrants and shares of Common Stock will not be offered or sold (1) unless at the time of such offer or sale, there is delivered a prospectus meeting the requirements of the Securities Act of 1933, as amended, forming a part of an applicable post-effective amendment to the Registration Statement, or forming a part of a new registration statement with respect to such offer and sale, or (2) unless in the opinion of counsel to the Corporation satisfactory to the holder hereof, such offer and sale is exempt from the provisions of Section 5 of the Act. In connection with the preparation of any post-effective amendment to the Registration Statement or any new registration statement, the holder hereof agrees to furnish the Corporation with -9- 10 information, in writing, concerning the terms of the proposed offer. 5. The Corporation agrees at all times to reserve or hold available a sufficient number of shares of Common Stock to cover the number of shares issuable upon the exercise of this and all other Warrants of the same class. 6. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Corporation, or to any other rights whatsoever except the rights herein expressed, and no dividends shall be payable or accrue in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until or unless, and except to the extent that, this Warrant shall be exercised. 7. This Warrant is exchangeable upon the surrender hereof by the holder hereof to the Corporation for new Warrants of like tenor representing in the aggregate the right to purchase the number of shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by the holder hereof at the time of such surrender. 8. The Corporation will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to shareholders of the Corporation concurrently with the distribution thereof to such shareholders. 9. Notices to be given to the holder of this Warrant shall be deemed to have been sufficiently given if delivered or mailed, addressed in the name and at the address of such holder appearing in the records of the Corporation, and if mailed, sent first class registered or certified mail, postage prepaid. The address of the Corporation is 10 Industry Drive, Lancaster, Pennsylvania 17603, and the Corporation shall give written notice of any change of address to the holder hereof. 10. The exercise of this Warrant is subject to the approval of its issuance by the shareholders of the Corporation. -10- 11 IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by the signature of its President and its seal affixed and attested by its Secretary. Dated: HERLEY INDUSTRIES, INC. By: --------------------------------- [Corporate Seal] ATTEST: - --------------------------------- -11- EX-10.13 9 CREDIT AGREEMENT 1 Exhibit 10.13 Dauphin Deposit Bank and Trust Company 1703 OREGON PIKE LANCASTER PA 17601-4201 (717) 560-3168 FAX # (717) 560-3177 January 15, 1997 Herley Industries, Inc. Attn: Lee N. Blatt, Chairman/Chief Executive Officer Myron Levy, President 10 Industry Drive Lancaster, PA 17603 Dear Gentlemen: I am pleased to inform you that Dauphin Deposit Bank and Trust Company (hereafter "Bank") has approved the reaffirmation of your unsecured line of credit to Herley Industries, Inc. (hereafter "Borrower") as follows: A. Principal Amount of Line: $11,000,000.00 B. Expiration: January 31, 1999 C. Interest Rate: 1.0% over the FOMC Target Rate, as in effect from time to time, for borrowings up to 80% of the most recent market value of pledged marketable securities. AND Dauphin Deposit Base Rate, as in effect from time to time, for balances in excess of 80% of the most recent market value, or in the absence, of pledged marketable securities. D. Use of Proceeds: To finance inventory and accounts receivable. The line may be used to issue standby letters of credit. 2 Herley Industries, Inc. January 15, 1997 E. Repayment Schedule: Letters of Credit: To be negotiated if drawn upon Line of Credit: Interest monthly, principal at expiration of agreement. F. Commitment Fee: Letters of Credit: 1.0% per annum Line of Credit: None 1. Borrowings may bear interest at an annual rate equal to the Dauphin Deposit Base Rate or the FOMC Rate plus 1.0%, as applicable, as in effect from time to time. This interest rate will change when and as Dauphin Deposit Base Rate or the FOMC Rate changes. Interest will be calculated on the basis of the actual number of days in the current calendar year divided by 360. Interest will be payable monthly upon submission of the Bank's statement therefore. 2. The Bank's Base Rate is a reference rate which floats and is stated from time to time by Dauphin Deposit Bank for the guidance of its officers. The determination and statement of the Bank's Base Rate shall not in any way preclude the Bank from making loans to other borrowers at differing rates. 3. The Bank shall have the right to review and approve any letter of credit term exceeding two (2) years for issuance under the line of credit. 4. The line of credit shall be collateralized by the following: a. A Corporate Suretyship Agreement of: 1. Microwave Holding corporation Secured by acceptable assignment of all marketable securities in an account with Bear Stearns. 2. Stewart Warner Electronics Co. 3. Any future operating subsidiaries. 5. The Borrower shall provide the Bank with a Negative Pledge of all corporate assets other than those pledged to Bank. The Negative Pledge shall be subject to an existing mortgage with Dean Witter Inter Capital, Inc. 3 Herley Industries, Inc. January 15, 1997 6. The Borrower shall maintain the Business Loan Agreement which contains affirmative and negative covenants including, but not limited to the following: a. Minimum working capital requirement of $4,000,000 at all times. Working capital shall be determined in accordance with generally accepted accounting principles. b. Minimum Tangible Net Worth of $13,487,000 to be measured at fiscal year end. Tangible Net Worth shall be defined as total assets less total liabilities, excluding all assets which would be classified as intangible assets under generally accepted accounting principles. c. Maximum Debt to Tangible Net Worth of 1.75 to 1.0 to be measured at fiscal year end. d. Bank consent to any and all cash dividend distributions to shareholders. e. Adequate notification of anticipated acquisitions. 7. Borrower shall maintain an insurance policy providing satisfactory coverage on the buildings and their contents, including equipment, against the perils of fire, extended coverage, vandalism and malicious mischief and general liability and business interruption insurance. 8. Borrower shall maintain its primary deposit relationship with Dauphin Deposit Bank and Trust Company during the term of these loans. 9. On a monthly basis, when and if marketable securities are owned and pledged, the Borrower shall furnish the Bank with a detailed listing, including number of shares and where held, as well as, a current market valuation on all marketable securities owned by Microwave Holding Corporation. 10. On an annual basis, the Borrower shall furnish the Bank with CPA-audited consolidated financial statements and 10-K report on Herley Industries, Inc. 11. On an annual basis, the Borrower shall furnish the Bank with internally-prepared consolidating financial statements on Herley Industries, Inc. and subsidiaries. 4 Herley Industries, Inc. January 15, 1997 12. On a quarterly basis, the Borrower shall furnish Bank with consolidated financial statements and a l0-Q report on Herley Industries, Inc. 13. Borrower shall maintain insurance coverage for Directors and Officers liability in the minimum amount of $3,000,000 satisfactory to Bank. 14. Borrower shall provide the Bank with an opinion of Borrower's counsel evidencing satisfactory status of litigation proceedings. The availability of the line of credit is contingent upon the Borrowers and the Bank entering into mutually acceptable loan documentation setting forth the terms and conditions stated herein and such other terms and conditions, covenants, warranties and representations as may be required by the Bank and be mutually acceptable to the Borrowers and the Bank. All terms and conditions contained herein shall survive the execution of such loan documentation. Any and all charges, expenses, and costs incurred by the Bank relating to the preparation and completion of loan documents and/or the maintenance of the loan, including, but not limited to the Bank's attorney fees, are the responsibility of the Borrower. This commitment is contingent upon the right of the Bank at any time hereafter and from time to time to review the commitment, to adjust terms and conditions, or to discontinue the commitment should the Bank in the reasonable exercise of its sole business discretion deem it necessary to do so. Please acknowledge your concurrence with these terms and conditions by signing, dating and returning the enclosed original of this letter to the Bank on or before January 31, 1997, on which date this offer shall terminate and be of no force and effect. We thank you for your business and look forward to a mutually beneficial relationship. If we can be of any further assistance, do not hesitate to call. Sincerely, /s/ Michael R. Carper Michael R. Carper, Senior Vice President 5 Herley Industries, Inc. January 15, 1997 ACKNOWLEDGMENT: The terms and conditions of this letter are hereby accepted in full this 29 day of January, 1997. BORROWER: HERLEY INDUSTRIES, INC. Attest: [SIGNATURE ILLEGIBLE] /s/ Lee N. Blatt - -------------------------------- -------------------------------- Lee N. Blatt, Chairman/ Chief Executive Officer [SIGNATURE ILLEGIBLE] /s/ Myron Levy - -------------------------------- -------------------------------- Myron Levy, President SURETIES: MICROWAVE HOLDING CORPORATION Attest: [SIGNATURE ILLEGIBLE] By: /s/ Myron Levy - -------------------------------- ---------------------------- STEWART WARNER ELECTRONICS CO. [SIGNATURE ILLEGIBLE] By: /s/ Myron Levy - -------------------------------- ---------------------------- 6 Date 1-25-96 DAUPHIN DEPOSIT BANK AND TRUST COMPANY, a Pennsylvania banking corporation with its principal office in the city of Harrisburg, Dauphin County, Pennsylvania (hereinafter called "Bank") does hereby agree to make a loan (the "Loan") in the principal sum of $11,000,000.00 to Herley Industries, Inc., a Corporation organized under the laws of the State of Delaware, with offices at 10 Industry Drive, Lancaster, PA 17603 (hereinafter called "Borrower"), all under the following terms and conditions: 1. The Loan shall be evidenced by a note (the "Note"), dated 1-25-96 and shall be repayable as follows: Interest monthly, principal at maturity together with interest calculated on a daily basis (360 days) at the annual rate of either Fed Fund Rate plus 1.0% or Dauphin Deposit Base Rate on the unpaid balance of the principal, all as provided in the Note. The Borrower acknowledges reading all of the terms, provisions, agreements, covenants and warranties of this Agreement, the Note and any Security Documents in connection with the Loan, and, in consideration of the Bank agreeing to make the Loan, and intending to be legally bound hereby, warrants, represents, covenants and agrees that: 1. Business. The Borrower's business operations ("Business") are as follows: Flight Instrumentation Manufacturing and the Business is a Corporation. If the Borrower is a corporation, it has no subsidiaries or parent corporations except as follows: Microwave Holding Corp., Stewart Warner Electronics Co., all of which are current operating, wholly-owned subsidiaries of the Borrower. 2. Use of Proceeds. The Borrower will diligently continue the Business substantially as now being conducted. The proceeds of the Loan will be used only in connection with the Business and only for the following purposes: Working capital and general corporate purposes and to issue standby letters of credit. "General corporate purposes" shall mean expenditures arising within the ordinary course of the Borrower's business or operations, as currently conducted; but, to the extent Borrower intends to use proceeds of the Loan in connection with (i) the consolidation or merger with, or (ii) the acquisition of any of the capital stock or substantially all the assets of, any person or entity, Borrower agrees to first provide Bank with adequate prior notice thereof in accordance with paragraphs (b) and (c) of Section 6. 3. Collateral As security for the Loan, the Borrower will deliver or cause to be delivered to the Bank the following collateral and/or duly executed instruments of security or guaranty ("Security Documents"), and will comply with all terms, conditions, and provisions as set forth in such instruments: A Suretyship Agreement by Stewart Warner Electronics Co. and a Suretyship Agreement by Microwave Holding Corp., secured by an acceptable assignment of marketable securities held in an account with Bear Stearns for the benefit of Microwave Holding Corp. Negative Pledge Agreements by Herley Industries, Inc., Stewart Warner Electronics Co., and Microwave Holding Corp. 4. Reports to Bank. The Borrower will deliver to the Bank the following reports: (a) The Borrower's financial statements as follows: (1) Quarterly statements and a 10Q Report certified by the Borrower's chief financial officer within 45 days after the end of each quarter; and (2) Year-end statements and a 10-K Report within 90 days after the Borrower's year end which shall be audited by a certified public accountant. All financial statements shall be prepared in accordance with generally accepted accounting principles consistently applied. (b) Inventory reports as follows: (1) N/A within N/A days after the end of each N/A. Such reports shall be certified by the Borrower's chief financial officer. 7 (c) Such other reports, including but not limited to, the monthly detailed listing and valuation of marketable securities and annual consolidating financial statements. All of the foregoing reports shall be in form and substance satisfactory to the Bank. If reports are required to be certified by a certified public accountant, such certified public accountant shall be acceptable to the Bank. 5. Affirmative Covenants. The Borrower will: (a) Minimum Current Asset Ratio and Minimum Working Capital. Maintain the ratio of current assets (exclusive of prepaid expenses) to current liabilities of the Business at not less than N/A to 1.0. Maintain the minimum working capital of the Business at not less than Four Million and 00/100 Dollars (4,000,000.00) at all times. Minimum working capital shall mean the excess of current assets less current liabilities, as determined in accordance with generally accepted accounting principles. (b) Minimum Tangible Net Worth. Maintain a minimum tangible net worth of the Business at not less than Thirteen Million Four Hundred Eighty-Seven Thousand and 00/100 Dollars $13,487,000.00) to be measured at fiscal year end. Tangible Net Worth shall be defined as total assets less total liabilities, excluding all assets which would be classified as intangible assets under generally accepted accounting principles. (c) Debt to Tangible Net Worth Ratio. Maintain the ratio of debt to tangible net worth of the Business at no greater than 1.75 to 1 to be measured at fiscal year end. (d) Net Income to Debt Service Ratio. Maintain a ratio of net income plus non_cash charges to scheduled debt service plus capital expenditures (including capital obligations) of not less than N/A to 1. (e) Insurance. Maintain insurance coverages for the Business which are in such amounts and with such carriers as are acceptable to the Bank, and deliver to the Bank acceptable proof of such insurance. Insurance covering any collateral for the Loan shall contain a standard mortgage clause or additional insured clause in favor of the Bank. All such policies shall require no less than (10) days prior written notice of cancellation to the Bank. (f) Taxes. Duly pay and discharge all taxes or other claims which might become a lien upon any of its property except to the extent that such items are being in good faith appropriately contested with adequate reserves therefor having been set aside and with security satisfactory to the Bank. (g) Properties. Maintain, preserve, and keep its properties in good repair, working order and condition, and make all reasonable repairs, replacements, additions, betterments and improvements thereto. (h) Corporate or Partnership Existence. If the Borrower is a corporation or partnership, maintain its corporate or partnership existence and comply with all statues, rules and regulations, the non-compliance of which would materially and adversely affect its business, assets or condition, financial or otherwise. (i) Issuance Taxes. Pay all stamp or issuance taxes, if any, payable by reason of the execution, delivery or issuance of this Agreement, the Note or security Documents under any applicable ordinance or statute now existing or hereafter enacted, and the Borrower will at all times indemnify and hold harmless the Bank and its duly authorized agents to make, or cause to be made, inspections and audits of any books, records and papers of the Borrower and to make extracts therefrom should the Borrower be in default with respect to any bank agreement or should the Bank reasonably believe that a default is imminent to the extent Bank has received such reports and/or financial reports and believes a default is imminent. 8 (k) Management. Maintain the current management and executive personnel of the Borrower or other management and executive personnel reasonably satisfactory to the Bank, and furnish to the Bank within five (5) days of any election or appointment of officers or directors written notice of any change of such officers and directors. 6. Negative Covenants. Except with the prior consent in writing of the Bank with respect to items a, d, e, i, j, and k and with prior adequate notice with respect to items b and c, the Borrower will not: (a) Borrower's Indebtedness. Incur, or permit to exist, any indebtedness for borrowed money, except: (1) borrowings hereunder and of any other loans made by the Bank in its discretion to the Borrower, (2) indebtedness which is currently outstanding, as follows: Creditor Amount -------- ------ Dean Witter $3.8MM Inter Capital Inc. and (3) the Borrower may incur new indebtedness from any other financial institution in an amount up to None in the aggregate without consent of the Bank. (b) Combination. Enter into any merger, consolidation, partnership or joint venture or sell or lease or otherwise dispose of all or any substantial part of its assets, other than sales in the ordinary course of business without adequate notification to Bank. (c) Loans and Investments. Lend or advance money, credit to property to, invest in or acquire (by capital contribution, loan, purchase or otherwise) any firm, corporation, or other person without adequate notification to Bank. (d) Create Encumbrances. Create, assume or permit to exist, any mortgage, pledge, lien or encumbrance of or upon, or security interest in any of its property or assets now owned or hereafter acquired except (i) mortgages, liens, pledges and security interests in favor of the Bank; (ii) other liens, charges and encumbrances incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not materially impair the use thereof in the operation of its business (iii) liens for taxes or other governmental charges which are not delinquent or which are being contested in good faith and for which a reserve shall have been established in accordance with generally accepted accounting principles; and (iv) liens, encumbrances or security interests held by Borrower's customers in the ordinary course of business to secure progress payments or customer advances from such customers, and (v) the following: Creditor Type Amount Collateral - -------- ---- ------ ---------- Dean Witter Commercial Mtg. $3.8MM First lien mortgage on 10 Industry Drive Inter Capital Inc. Lancaster, PA 17603 (e) Guaranties. Assume, endorse, be or become liable for or guarantee the obligations of any person or entity except the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. (f) Investment in fixed assets. Make an aggregate investment in fixed assets in excess of N/A Dollars (N/A) during any twelve (12) month period ending on each N/A during the term of this Agreement. (g) Rental Payments. Enter into any arrangement as lessee if the aggregate of all rental payments made by the Borrower in any twelve (12) month period shall exceed N/A Dollars ($_______). (h) Payments to Directors, Officers or Owners. Make, pay or allow, directly or indirectly, any withdrawals, compensation or salary, in cash or otherwise, for the benefit of directors, officers, shareholders or owners of the Business except as follows: N/A 9 (i) Dividends. Pay any dividends, on any of its outstanding shares, without Bank consent. (j) Impairment of Collateral. Permit anything to be done that may impair the value of the collateral intended to be afforded by this Agreement or the Security Documents. (k) Changes in Business. Make or permit to be made any material change in the nature, character, management, ownership or conduct of the Borrower's business as conducted on the date hereof, without prior written consent of Bank. 7. Representations and Warranties. The Borrower hereby represents and warrants, on a continuing basis, to the Bank that: (a) Corporate or Partnership Organization. If the Borrower is a corporation or a partnership, the Borrower is duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite power and authority to own its property and to carry on its business as now conducted, and is in good standing and authorized to do business in the Commonwealth of Pennsylvania and in each other jurisdiction in which the nature of its business conducted therein or property owned therein make such authorization necessary. (b) Enforceability of Documents. This Agreement, the Note and the Security Documents have been duly authorized, executed and delivered and constitute the valid and legally binding obligation of the Borrower, enforceable in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally. (c) Legality of Documents. The execution and delivery of this Agreement, the Note and all Security Documents and performance thereof will not violate any provision of law or of the charter of bylaws of Borrower or any agreement, indenture or instrument to which the Borrower is a party or its properties or assets may be bound or affected or of any other agreement to which the Borrower is a party. (d) Pending or Threatened Litigation. There are no outstanding judgements, actions or proceedings pending before any court or governmental authority, bureau or agency, with respect to or threatened against or affecting the Borrower which would result in a material adverse change in the financial condition of the Borrower and its subsidiaries except as set forth in the Opinion Letter from Borrower's Counsel of even date herewith. (e) No Defaults. The Borrower is not in default under, or in violation of, nor will the execution and delivery of this Agreement, the Note, or the Security Documents constitute a default under or violation of, any term of any agreement, ordinance, resolution, decree, bond, used in the conduct of its business. The operations of the Borrower comply in all material respects with all laws, ordinances and regulations applicable to it. (f) No Onerous Agreements. The Borrower is not a party to nor bound by, nor are any of the properties or assets owned by it or used in the conduct of its business affected by, any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgement, or subject to any charter or other corporate restriction, which materially and adversely affects its business, assets or condition, financial or otherwise. (g) Financial Statements. All balance sheets, profit and loss statements and other financial information heretofore furnished to the Bank are true, correct and complete and present fairly the financial condition of the Borrower and its subsidiaries as at the dates thereof and for the periods covered thereby, including contingent liabilities of every kind which financial condition has not materially adversely changed since the date of the most recently dated balance sheet of the Borrower heretofore furnished to the Bank. 10 (h) No Margin Stock Purchases. No part of the proceeds of the Loan will be used directly or indirectly for the purpose of purchasing or carrying, or for payment in full or in part of indebtedness which was incurred for the purpose of purchasing or carrying, any margin stock as such term is defined by Regulation U of the Board of Governors of the Federal Reserve System. (i) Power and Authority. The Borrower has the power to execute and deliver this Agreement, the Note, and all Security Documents and has taken all necessary action to authorize the execution, delivery and performance of the same. (j) Properties. The Borrower has good and marketable title to all of its assets subject to no liens except as permitted under this Agreement. (k) Taxes. The Borrower has filed all necessary tax returns to date and paid all taxes heretofore due and payable. 8. Events of Default. If any one or more of the following Events of Default shall occur, the obligation of the Bank to make advances shall cease and the entire unpaid balance of the principal of and interest on the Loan shall immediately become due and payable at the option of the Bank without notice, presentment, protest or demand (all which are expressly waived by the Borrower) to the Borrower being required except as specified below. (a) Failure to make any payment of principal or interest in respect of the Loan within 10 days after it is due; or, (b) Failure by the Borrower or any Surety to perform any other term, condition or covenant of this Agreement, the Note, any Security Document or any other agreement, instrument or document delivered hereto or in connection herewith or therewith, which shall remain unremedied for the period of thirty (30) days after written notice thereof shall have been given by the Bank to the Borrower; or, (c) (i) Failure to perform any term, condition or covenant of any note, loan agreement, guaranty, mortgage or other instrument or agreement in connection with the borrowing of money or the obtaining of advances or credit to which the Borrower is a party or by which it is bound, or by which any of its properties or assets may be affected (a "Debt Instrument"), so that as result of any such failure to perform, the indebtedness included therein or secured or covered thereby may be declared due and payable prior to the date on which such indebtedness would otherwise become due and payable; or (ii) any event or condition referred to in any Debt Instrument shall occur or fail to occur, so that, as a result thereof, the indebtedness included there or secured or covered thereby may be declared due and payable prior to the date on which such indebtedness would otherwise become due and payable; or (iii) any indebtedness included in any Debt Instrument or secured or covered thereby is not paid when due; or (d) Any representation or warranty made in writing to the Bank in this Agreement, the Note or Security Documents or in connection with the making of the Loan or any certificate, statement or report made in compliance with this Agreement, shall have been false in any material respect when made or shall become false in any material respect with respect only to representations or warranties which by the express terms thereof apply to conditions arising after the date hereof; (e) The Borrower or any endorser or surety hereof shall make an assignment for the benefit of creditors, file a petition under the Federal Bankruptcy Code or any similar law, state or federal, be adjudicated insolvent or bankrupt, petition or apply to any tribunal for the appointment of a receiver, or trustee or a custodian for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment or debt, dissolution, or liquidation law or statute of any jurisdiction, whether now owned or hereafter in effect; or if there shall have been filed any such petition or application, or any such petition or application, or any such proceeding shall have been commenced against it, which 11 remains undismissed for a period of sixty (60) days or more; or the Borrower or endorser of surety by any act or omission shall indicate its consent to approval of or acquiescence in any such petition, application or proceeding or the appointment of a receiver, or trustee or a custodian for it or any substantial part of any of its properties, or shall suffer any such receivership, trusteeship, or custodianship to continue undischarged for a period of sixty (60) days or more; or (f) Any judgement against the Borrower, or any attachment, levy or execution against any of its properties for any amount shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of thirty (30) days or more; or (g) The Borrower shall be unable, or admit its inability, to meet its obligations as they come due or failure of Borrower generally to pay its debts as they become due; or (h) Occurrence, in Bank's sole and independent discretion, reasonably exercised, of a material adverse change in the business, properties or financial condition of the Borrower, or an event or condition that may result in such a material adverse change. 9. Remedies. In the event of the occurrence of any Event of Default, the Bank may, but shall not be required to (i) proceed to apply to the payment of the Loan the balance to the credit of any account or accounts maintained with the Bank by the Borrower and all property of Borrower now or at any time in Bank's possession in any capacity whatsoever (set-off) and (ii) sell all or any part of the collateral security in accordance with the Pennsylvania Uniform Commercial Code and the Security Documents, and (iii) the obligation of the Bank to make loans or otherwise extend credit to the Borrower shall immediately terminate. The Bank may exercise any other right or remedy hereby granted or allowed to it by law including but not limited to the rights and remedies of a Secured Party under the Uniform Commercial Code and each and every right and remedy hereby granted to the Bank or allowed to it by law shall be cumulative and not exclusive the one of the other, and may be exercised by the Bank from time to time and as often as may be necessary. The Bank shall have at any time, in its discretion, the right to enforce collection and payment of any of the collateral security by appropriate action or proceedings, and the net amounts received therefrom, after deduction of all costs and expenses incurred in connection therewith, shall be applied on account of the Loan and any other indebtedness or liabilities of the Borrower aforesaid, all without notice to the Borrower. The Bank shall not be required to marshall any security or guarantees or to resort to the same in any particular order. 10. General. (a) Generally Accepted Accounting Principles. Current asset, current liabilities, debt, tangible net worth, net income, non-cash charges, debt service and capital expenditures and other accounting terms used herein shall, except specifically provided herein, be determined in accordance with generally acceptable accounting principles consistently applied. (b) Survival of Warranties. All agreements, representations and warranties made herein shall survive the delivery of this Agreement. (c) Modification of Documents. No modification or waiver of any provision of this Agreement, the Note, the Security Documents or other instruments or consent to any departure by the Borrower from any of the terms or conditions thereof, shall in any event be effective unless it shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall, of itself entitle the Borrower to any other or further notice or demand in similar or other circumstances. 12 (d) Rights Cumulative. Each and every right granted to the Bank hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Bank to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. (e) Construction and Severability. This Agreement, the Note and the Security Documents and the rights and obligations of the parties shall be construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. The provisions of this Agreement are severable and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Agreement in any jurisdiction. (f) Conflict of Documents. The provisions of this Agreement are in addition to, and not in limitation of, the provisions of the Note and the Security Documents. In the event of conflict between the provisions of this Agreement and the provisions of the Note or any Security Document, the provisions of this Agreement shall prevail. (g) Notices. Notices by one party to the other shall be in writing and shall be deemed to have been validly given at the time when posted in the U.S. Mails, postage prepaid, or hand delivered to the following address or to any alternative address designated in writing by the recipient: Bank: Dauphin Deposit Bank and Trust Company 213 Market Street, P.O. Box 2961 Harrisburg, PA 17105 Borrower: Herley Industries, Inc. 10 Industry Drive Lancaster, PA 17603 (h) Expenses of Bank. The Borrower shall pay all fees and expenses reasonably incurred by the Bank in connection with the preparation, execution, delivery and performance of this Agreement, the Note, the Security Documents and all other instruments executed in connection herewith or in connection with the collection of the indebtedness hereunder, or any part thereof, or the perfection, protection and maintenance of the Bank's interest in any collateral. These fees and expenses shall include, without limitation, fees and disbursements of legal counsel for the Bank. (i) Binding Effect. This Agreement and any other documents and instruments delivered or required to be delivered pursuant hereto shall inure to the benefit of and shall be binding upon the parties hereto and their heirs, executors, administrators, personal representatives, successors and assigns of the parties hereto. Borrower may not assign its rights or obligations hereunder without the prior written consent of Bank. (j) Joint and Several Liability. If the Borrower is more than one party, they shall be liable hereunder, and under the Note and Security Documents, jointly and severally, and all remedies may be exercised against them jointly, as to all or any of them, or severally. 13 CORPORATE SIGNATURE IN WITNESS WHEREOF, Herley Industries. Inc. and Dauphin Deposit Bank and Trust Company have caused this Agreement to be duly executed by their duly authorized officers, and its corporate seal to be impressed hereon on the date first set forth above. NAME OF COMPANY (CORPORATE SEAL) Herley Industries, Inc. ATTEST: [SIGNATURE ILLEGIBLE] By: /s/ Myron Levy, Pres. - -------------------------------- ---------------------------- Title: DAUPHIN DEPOSIT BANK AND TRUST CO. By: /s/ Kenneth A. Hostetter ---------------------------- Title: CLO EX-10.14 10 FORM OF INDEMNIFICATION AGREEEMENT 1 Exhibit 10.14 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT, made and entered into this day of ("Agreement"), by and between HERLEY INDUSTRIES, INC., a Delaware corporation (the "Corporation", which term shall include any one or more of its subsidiaries where appropriate), and ("Indemnitee";) WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as directors or officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to, and activities on behalf of, such corporations; and WHEREAS, the statutes and judicial duties regarding the duties of officers and directors are often difficult to apply, ambiguous or conflicting and therefore fail to provide such directors and officers with adequate and reliable knowledge of legal risks to which they are exposed or information regarding the proper cause of action to take; and WHEREAS, the current impracticability of obtaining adequate insurance and the uncertainties relating to 2 indemnification have increased the difficulty of attracting and retaining such persons; and WHEREAS, the Board of Directors of the Corporation (the "Board of Directors") has determined that the difficulty in attracting and retaining such persons is detrimental to the best interests of the Corporation's stockholders and that the Corporation should act to assure such persons that there will be increased certainty of such protection in the future; and WHEREAS, the Corporation believes it is unfair for the directors and officers to assume the risk of huge judgments and other expenses which may occur in cases in which the director or officer acted in good faith; and WHEREAS, Section 145 of the General Corporation law of Delaware ("Section 145") under which the Corporation is organized, empowers the Corporation to indemnify its officers and directors by agreement and expressly provides that the indemnification provided by Section 145 is not exclusive; and WHEREAS, it is reasonable, prudent and necessary for the Corporation contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Corporation free from undue concern that they will not be so indemnified; and -2- 3 WHEREAS, Indemnitee is willing to serve, continue to serve and/or to take on additional service for or on behalf of the Corporation on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Corporation and Indemnitee do hereby covenant and agree as follows: 1. DEFINITIONS FOR PURPOSES OF THIS AGREEMENT: (a) "Change in Control" means a change in control of the Corporation of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A (or in response to any similar item or similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Corporation is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) the Corporation is a party to a merger, -3- 4 consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; (iii) during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors; or (iv) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation (in one transaction or a series of transactions) of all or substantially all of the Corporation's assets. (b) "Potential Change in Control" shall be deemed to have occurred if (i) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) any person (including the Corporation) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; (iii) any person, other than a trustee or other fiduciary holding securities under an employee benefit -4- 5 plan of the Corporation or a corporation owned, directly or indirectly, by the shareholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation; who is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 9.5% or more of the combined voting power of the Corporation's then outstanding Voting Securities, increases his beneficial ownership of such securities by five percentage points or more over the percentage so owned by such person; or (iv) the Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (c) "Corporate Status" describes the status of a person who is or was or has agreed to become a director of the Corporation, or is or was an officer of the Corporation. (d) "Disinterested Director" means a director of the Corporation who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (e) "Expenses" includes all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements, other out-of-pocket costs and reasonable compensation for time spent by the Indemnitee for which he is not otherwise compensated by the Corporation or any third party, provided -5- 6 that the rate of compensation and estimated time involved is approved in advance by the Board of Directors), actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement, Section 145 or otherwise, and amounts paid in settlement by or on behalf of Indemnitee, but shall not include any judgments, fines or penalties actually levied against the Indemnitee. (f) "Independent Counsel" means (i) Blau, Kramer, Wactlar & Lieberman, P.C., (ii) any other law firm or member of a law firm which the Board of Directors subsequently may designate from time to time; or (iii) any law firm or member of a law firm that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (A) the Corporation or Indemnitee in any matter material to either such party, or (B) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights under this Agreement arising on or after the date of this Agreement, regardless of when the Indemnitee's act or failure to act occurred. -6- 7 (g) "Proceeding" includes any threatened, pending or completed inquiry, action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Section 12(a) of this Agreement to enforce his rights under this Agreement. 2. SERVICES BY INDEMNITEE. Indemnitee agrees to serve or continue to serve as a officer and director of the Corporation so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the By-Laws of the Corporation or the By-Laws of any subsidiary of the Corporation or until such time as he tenders his resignation in writing. This Agreement shall not impose any obligation on the Indemnitee or the Corporation to continue the Indemnitee's position with the Corporation beyond any period otherwise applicable, nor to create any right to continued employment of the Indemnitee in any capacity. 3. GENERAL. The Corporation shall indemnify, and shall advance Expenses to Indemnitee as provided in this Agreement and to the fullest extent permitted by law. -7- 8 4. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any Proceeding, other than a Proceeding by or in the right of the Corporation. Pursuant to this Section 4, Indemnitee shall be indemnified against Expenses, judgments, fines and amounts paid in settlement actually incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, 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 Proceeding, had no reasonable cause to believe his conduct was unlawful. 5. PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. Indemnitee shall be entitled to the rights of indemnification provided in this Section 5, if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any threatened, pending or completed Proceeding brought by or in the right of the Corporation to procure a judgment in its favor. Pursuant to this Section, Indemnitee shall be indemnified against Expenses actually incurred by him or on his behalf in connection with such Proceeding if he acted -8- 9 in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation if such indemnification is not permitted by Delaware or other applicable law; provided, however, that indemnification against Expenses nevertheless shall by made by the Corporation in such event to the extent that the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine. 6. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually incurred by -9- 10 him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section, but without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal or withdrawal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 7. ADVANCE OF EXPENSES. The Corporation shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within twenty days after the receipt by the Corporation of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall evidence or reflect the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it is determined ultimately that Indemnitee is not entitled to be indemnified against such Expenses. 8. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Corporation a written request, including therein or therewith such documentation and -10- 11 information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. Promptly upon receipt of such a request for indemnification, the Secretary of the Corporation shall advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to Section 8(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee (unless Indemnitee shall request that such determination be made by the Board of Directors or the stockholders, in which case the determination shall be made in the manner provided below in clauses (ii) or (iii)); (ii) if a Change of Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors, or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, if such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; (iii) as provided in Section 9(b) of this -11- 12 Agreement; and, if it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or Expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating shall be borne by the Corporation (regardless of the determination as to Indemnitee's entitlement to indemnification) and the Corporation hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) of this Agreement, and no counsel shall have been designated previously by the Board of Directors or the Independent Counsel so designated is unwilling or unable to serve, then, (i) if no Change of Control shall have occurred, the Independent Counsel shall be selected by the Board of Directors and the Corporation shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected; (ii) if a Change of Control -12- 13 shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Corporation advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Corporation, as the case may be, may, within 7 days after such written notice of selection shall have been given, deliver to the Corporation or to Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirement of "Independent Counsel" as defined in this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, the Independent Counsel so selected may not serve as Independent Counsel unless and until a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 8(a) hereof, no Independent Counsel shall have been selected or if selected, shall have been objected to, in accordance with this Section 8(c), either the Corporation or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Corporation or Indemnitee to the -13- 14 other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom an objection is favorably resolved or the person so appointed shall act as Independent Counsel under Section 8(b) hereof. The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with the performance of his responsibilities pursuant to Section 8(b) hereof, and the Corporation shall pay all reasonable fees and Expenses incident to the implementation of the procedures of this Section 8(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 12 of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). 9. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall presume that the Indemnitee is entitled to indemnification under this Agreement if the -14- 15 Indemnitee has submitted a request for indemnification in accordance with Section 8(a) of this Agreement, and the Corporation shall have the burden of proof to overcome that presumption in connection with the making of any determination contrary to that presumption by any person, persons or entity. (b) If the person, persons or entity empowered or selected under Section 8 of this Agreement to determine whether the Indemnitee is entitled to indemnification shall not have made such determination within 30 days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and the Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by the Indemnitee of a material fact, or an omission of a material fact necessary to make the Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. Such 30 day period may be extended for a reasonable period of time, not to exceed an additional 30 days, if the person, persons or entity making the determination with respect to indemnification in good faith requires such additional time for the purpose of obtaining and evaluating information or documentaiton relating thereto. The foregoing provisions of this Section 9(b) shall not apply if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) of this Agreement. -15- 16 (c) The termination of any Proceeding or of any claim, issue or matter therein by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that his conduct was unlawful. 10. ASSUMPTION OF DEFENSE. In the event the Corporation shall be obligated to pay the Expenses of any Proceeding against the Indemnitee, the Corporation, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel reasonably acceptable to the Indemnitee, upon the delivery to the Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Corporation, the Corporation will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same Proceeding, provided that (i) the Indemnitee shall have the right to employ his counsel in such -16- 17 Proceeding at the Indemnitee's expense; and (ii) if (a) the employment of counsel by the Indemnitee has been previously authorized in writing by the Corporation, (b) the Corporation shall have reasonably concluded that there may be a conflict of interest between the Corporation and the Indemnitee in the conduct of any such defense, or (c) the Corporation shall not, in fact, have employed counsel to assume the defense of such Proceeding, the fees and Expenses of the Indemnitee's counsel shall be at the expense of the Corporation. 11. ESTABLISHMENT OF A TRUST. (a) In the event of a Potential Change in Control, the Corporation, upon written request by the Indemnitee, shall create a trust for the benefit of the Indemnitee and from time to time upon written request of the Indemnitee shall fund such trust in an amount sufficient to satisfy any and all Expenses which at the time of each such request it is reasonably anticipated will be incurred in connection with a Proceeding for which the Indemnitee is entitled to rights of indemnification under Section 4 or 5 hereof, and any and all judgments, fines, penalties and settlement amounts of any and all proceedings for which the Indemnitee is entitled to rights of indemnification under Section 4 or 5 from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The amount or amounts to be deposited in the trust -17- 18 pursuant to the foregoing funding obligation shall be determined by the party who would be required to make the determination of the Indemnitee's right to indemnification under Section 8(b) hereof (the "Reviewing Party"). The terms of the trust shall provide that upon a Change in Control (i) the trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the trustee shall advance, within two business days of a request by the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the trust under the circumstances under which the Indemnitee would be required to reimburse the Corporation under Section 7 hereof), (iii) the trust shall continue to be funded by the Corporation in accordance with the funding obligation set forth above, (iv) the trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such trust shall revert to the Corporation upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that Indemnitee has been fully indemnified under the terms of this Agreement. The trustee shall be an institutional trustee with a highly regarded reputation chosen by the Indemnitee. Nothing in this Section 11 shall relieve the Corporation of any of its obligations under this Agreement. -18- 19 (b) Nothing contained in this Section 11 shall prevent the Board of Directors of the Corporation in its discretion at any time and from time to time, upon request of the Indemnitee, from providing security to the Indemnitee for the Corporation's obligations hereunder through an irrevocable line of credit, funded trust as described in Section (a) above, or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior consent of the Indemnitee. 12. REMEDIES OF INDEMNITEE. (a) In the event that (i) a determination is made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) Expenses are not advanced timely in accordance with Section 7 of this Agreement, (iii) the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) of this Agreement and such determination shall not have been made and delivered in a written opinion within 90 days after receipt by the Corporation of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 6 of this Agreement within ten days after receipt by the Corporation of a written request therefor, (v) payment of indemnification is not made within ten days after a determination has been made that Indemnitee is entitled to -19- 20 indemnification or such determination is deemed to have been made pursuant to Section 9 of this Agreement, or (vi) the Corporation fails to comply with its obligations under Section 11(a) with regard to the establishment or funding of a trust for Expenses, Indemnitee shall be entitled to an adjudication of his entitlement to such indemnification, advancement of Expenses or the establishment and funding of the trust in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 12. The Corporation shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration. (b) In the event that a determination shall have been made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 12 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial -20- 21 proceeding or arbitration commenced pursuant to this Section 12 the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made or deemed to have been made pursuant to Section 8 of this Agreement that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 12 absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 12 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Agreement. (e) In the event that Indemnitee, pursuant to this Section 12 seeks a judicial adjudication or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to -21- 22 recover from the Corporation, and shall be indemnified by the Corporation against, any and all expenses (of the types described in the definition of Expenses in this Agreement) actually incurred by him in connection with obtaining such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. 13. NON-EXCLUSIVITY; DURATION OF AGREEMENT; INSURANCE; SUBROGATION. (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Corporation's certificate of incorporation or by-laws, any other agreement, a vote of stockholders or a resolution of directors, or otherwise. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnitee shall have ceased to serve as an officer or director of the Corporation, or (b) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of -22- 23 indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 12 of this Agreement relating thereto. This Agreement shall be binding upon the Corporation and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. (b) (i) To the extent that the Corporation maintains an insurance policy or policies providing liability insurance for directors and officers of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with the terms thereof to the maximum extent of the coverage available for any such director or officer under such policy or policies. The Corporation shall take all necessary or appropriate action to cause such insurers to pay on behalf of the Indemnitee all amounts payable as a result of the commencement of a proceeding in accordance with the terms of such policy. (ii) For a period of three years after the date the Indemnitee shall have ceased to serve as an officer or director of the Corporation, the Corporation will provide officers and directors liability insurance for Indemnitee on terms no less favorable than the terms of the liability insurance which the Corporation then provides to the current officers and directors, provided that the Corporation provides officers and directors liability insurance to its current -23- 24 officers and directors, and provided further that the annual premiums for the liability insurance to be provided to the Indemnitee do not exceed by more than 50% the premium charged for the coverage available for any of the Corporation's current officers and directors. (c) In the event of any payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. (d) The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee otherwise actually has received such payment under any insurance policy, contract, agreement or otherwise. 14. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be -24- 25 invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 15. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF EXPENSES. Except as otherwise provided specifically herein, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding, or any claim herein, brought or made by him against the Corporation. 16. HEADINGS. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 17. MODIFICATION AND WAIVER. This Agreement may be amended from time to time to reflect changes in Delaware law or for other reasons. No -25- 26 supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 18. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder; provided, however, that the failure to give any such notice shall not disqualify the Indemnitee from indemnification hereunder. 19. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: -26- 27 (a) If to Indemnitee, to: (b) It to the Corporation, to: Herley Industries, Inc. 10 Industry Drive Lancaster, Pennsylvania 17603 or to such other address as may have been furnished to Indemnitee by the Corporation or to the Corporation by Indemnitee, as the case may be. 20. GOVERNING LAW. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. 21. PRIOR AGREEMENTS SUPERCEDED. This Agreement supresedes all prior agreements or understandings between the parties relating to indemnification, whether oral or written. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. ATTEST: HERLEY INDUSTRIES, INC. - -------------------------------- -------------------------------- INDEMNITEE: -------------------------------- EX-10.17 11 LICENSE AGREEMENT 1 Exhibit 10.17 LICENSE AGREEMENT THIS AGREEMENT made as of the 1st day of March 1994, between HERLEY INDUSTRIES, INC., a corporation organized and existing under the laws of the State of Delaware, having a place of business at 10 Industry Drive, Lancaster, Pennsylvania 17603, ("Herley"), and CLEM WHITTEMORE, d/b/a ALLIED CONSULTING AND ENGINEERING SERVICES, having its principal place of business at 2441 North Main Street, Sunset, Utah 84015 ("ACES"). W I T N E S S E T H: WHEREAS, ACES owns or controls exclusive rights to certain inventions, methods, processes, elements, techniques, and manufacturing technology pertaining to a "Licensed Product," as that term is hereinafter defined; and WHEREAS, Herley wishes to enter into an agreement for ACES's grant of an exclusive license, as hereinafter described, for the manufacture, marketing and sale of the Licensed Product, 2 and ACES is willing to grant the same, subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual promises, covenants and agreements herein contained, it is agreed by and between the parties hereto, as follows: 1. DEFINITIONS. (a) The preamble to this Agreement shall form an integral part hereof. (b) Unless otherwise specified by subject and context, the words appearing in the first column of the following table whenever used in this Agreement, should bear the meaning set opposite them respectively, in the second column thereof: WORDS MEANINGS ----- -------- Manufacturing Technology (a) Parts list; (b) Manufacturing Drawings; (c) Process Documentation; (d) Schematics; (e) all drawings required for fabrication to source control drawing and (f) all other technical data, designs, plans, specifications, methods, processes, systems, and any other information and documentation, whether patentable or not, relating to the Licensed Product and owned or controlled by ACES which will, when properly utilized by one skilled in the art, enable Herley to manufacture the Licensed Product. -2- 3 Peripheral Equipment Equipment including test fixtures, prototypes, test equipment, tooling and software specified on Schedule 1 annexed hereto. Licensed Product UHF Command & Control System known as "MOTHR", including all future product enhancements and modifications. 2. GRANT. ACES grants to Herley, upon the terms and conditions hereinafter set forth, the exclusive worldwide right and privilege to manufacture and sell the Licensed Product in all industries and for all applications, and to sublicense others with the same rights and privileges. 3. WARRANTIES OF ACES. ACES warrants, represents and covenants as follows: (a) Except for completing its backlog of orders set forth on Schedule 2, during the term of this Agreement it will not manufacture or sell the Licensed Product or grant or assign to any other person, firm or entity any license right or privilege to manufacture, sell, or license the Licensed Product. (b) The Licensed Product have undergone and successfully completed Qualification Testing and Acceptance by applicable governmental agencies, and ACES shall provide to Herley such certificates or other documentation as Herley reasonably requests to confirm the foregoing. -3- 4 (c) ACES has the corporate authority to execute, deliver and perform this Agreement and to convey the License. The execution, delivery and performance of this Agreement by ACES and the consummation of the transactions contemplated hereby do not and will not conflict with, result in any breach of any of the provisions of, constitute a default under, or violate ACES's Articles of Incorporation or By-laws or any indenture, mortgage, lease, loan agreement or other agreement or instrument to which ACES is party, or any law, statute, rule or regulation to which ACES is subject. This agreement constitutes a valid and binding obligation of ACES and is enforceable in accordance with its terms. (d) All representations and warranties of ACES set forth herein are complete, accurate and true statements of all material facts stated therein and do not omit to state any material facts necessary to make the statements contained therein not misleading. (e) The representations and warranties made herein by ACES shall survive the term of this Agreement. 4. DISCLOSURE TO HERLEY. (a) Within ten (10) days after the commencement of the term hereof, ACES shall provide to Herley the Manufacturing -4- 5 Technology and Peripheral Property in the manner determined mutually by the parties. (b) During the term of this Agreement, ACES will make available to Herley, without additional charge, data relating to the use and application of the Licensed Product if and whenever the same is obtained or becomes available to ACES. 5. WARRANTIES OF HERLEY. Herley accepts the license, rights and privileges granted to it as set forth in this Agreement and covenants and warrants as follows: (a) Herley will keep full, true and accurate books of account regarding the amounts payable to ACES from time to time by way of royalties or consulting fees, as hereinafter set forth. Such books of account and memoranda and other records relating to the aforesaid shall be kept at Herley's place of business and shall, throughout the term of this Agreement, and for a period of one (1) year thereafter, be made available as reasonably requested to the inspection of ACES and its representatives, insofar as it may be necessary to determine the nature and extent of Herley's operations under the License herein granted. -5- 6 (b) Herley has the corporate authority to execute, deliver and perform this Agreement and the License conveyed hereunder. The execution, delivery and performance of this Agreement by Herley and the consummation of the transactions contemplated hereby do not and will not conflict with, result in any breach of any of the provisions of, constitute a default under, or violate Herley's Articles of Incorporation or By-laws of any indenture, mortgage, lease, loan agreement or other agreement or instrument to which Herley is party, or any law, statute, rule or regulation to which Herley is subject. This agreement constitutes a valid and binding obligation of Herley and is enforceable in accordance with its terms. (c) All representations and warranties of Herley set forth herein are complete, accurate and true statements of all material facts stated therein and do not omit to state any material facts necessary to make the statements contained therein not misleading. (d) The representations and warranties made herein by Herley shall survive the term of this Agreement. -6- 7 6. TERM. Unless sooner terminated, as hereinafter provided, this exclusive License and Herley's exclusive right to grant sublicenses hereunder shall be effective for a period of ten (10) years from the date hereof and shall terminate on 28 Feb., 2004 ("Termination Date"). Thereafter, Herley and ACES each will have the non-exclusive right to manufacture and/or sell the Licensed Product without payment of any kind by Herley or ACES to the other. 7. CONSIDERATION FOR GRANT OF LICENSE HEREUNDER. (a) Herley shall pay to ACES an initial fee of $100,000 (the "Initial Fee") on signing of contract. ACES promises to promptly furnish to Herley the Manufacturing Technology pursuant to section 4 hereof. (b) Herley shall purchase the inventory of finished products set forth on Schedule 3 at the prices set forth thereon, such purchase subject to products being usable to complete purchase order requirements that have been received from customers, even if such products are obtainable elsewhere at lower prices. (c) During the first eighteen (18) months of this agreement (the "Transition Period"), Herley will pay to ACES a -7- 8 royalty for the manufacture and sale of the Licensed Product, which royalty shall be limited to 10% of the purchase order prices for the first $3,500,000 of purchase orders on those prospective contracts set forth on Schedule 4. Payments shall be made thirty (30) days after an executed purchase order is received by Herley. (d) In addition to the payment referenced in (c) above, Herley shall pay ACES a royalty for the manufacture and sale of the Licensed Product from those prospective contracts not Bet forth on Schedule 4 at the rate of 5% for all domestic sales and 10% for all foreign sales. For purposes of this agreement, an order received from a domestic company for delivery to a foreign customer shall be considered a foreign sale. (e) With respect to the payment of the royalties set forth in (d) above: (i) Licensed Product shall be considered to be "sold" when payment in full of the purchase price is actually received by Herley. If an order is reduced in quantity or canceled, ACES shall receive the royalty only on the quantity actually delivered to the customer. (ii) The term "Net Selling Price" shall mean the price of the Licensed Product as billed to the customer, less all customs and sales taxes, transportation costs. -8- 9 (iii) If any of the Licensed Product is included or incorporated in some apparatus, device or piece of equipment, which is sold by way of a total price for the entire apparatus, device or piece of equipment, Herley shall account to ACES separately for the same Net Selling Price as would be charged by Herley for the Licensed Product sold separately. (f) Herley shall advance $40,000 to ACES, within ten (10) days after the Manufacturing Technology is furnished to Herley pursuant to Section 4 hereof, against any payments required under Sections 7 and 10 hereof. 8. MANNER OF PAYMENT. Except as set forth in Section 7(c), the prescribed royalties earned hereunder shall become due and payable by Herley to ACES thirty (30) days after each Licensed Product is "sold" by Herley, as that term is defined in Section 7(c)(i) hereof. Semi-annually, on the last day of every six (6) month period during the Term of this Agreement, Herley shall furnish to ACES statements showing (i) the total number of Licensed Product manufactured by Herley during the preceding semi-annual or six-month period; and (ii) the total number of Licensed Product sold by Herley during the preceding semi-annual or six-month -9- 10 period. With respect to the royalties paid pursuant to Section 7(c), Herley shall be entitled to a credit for royalties paid to the extent the Net Selling Price for a purchase order is less than the purchase order price. Herley also shall be entitled to deduct from future payments any adjustments to the Net Selling Price or Purchase Order Price for returns, credits or allowances. 9. INSPECTION VISITS OF ACES TO HERLEY. Once every year during the term of this Agreement, but subject to Section 13, a designated, authorized representative of ACES, at ACES's own cost, shall have the right, upon ten (10) days prior written notice to Herley, to inspect Herley's facility during reasonable business hours for the purpose of observing that Herley has developed and is maintaining sufficient manufacturing capacity to produce the Licensed Product. 10. VISITS OF HERLEY to ACES & TECHNICAL ASSISTANCE; CONSULTING FEES. (a) During the term of this Agreement, Herley's authorized representatives, at Herley's cost, shall have the right, from time to time, upon reasonable notice to ACES, to visit ACES' facilities during reasonable business hours for the purpose of acquiring any and all information relative to Licensed Product that Herley deems necessary. -10- 11 (b) ACES will make available its President, Clem Whittemore and other representatives of ACES, to consult with and provide to Herley technical expertise and information and sales assistance at such times, places and in the manner requested reasonably by Herley. (c) In consideration for the services in (b) above, Herley shall pay ACES: (i) a consulting fee of $10,000 per month for the first twelve months of this Agreement, and (ii) an additional consulting fee ("Additional Consulting Fee") equal to 20% of the first $3,500,000 of Licensed Products sold during the Transition Period to those prospective customers set forth on Schedule 4. This Additional Consulting Fee, if earned, will extend the $10,000 monthly fee for up to an additional twenty-four (24) months. For example, if there is $1,000,000 in Licensed Products sold during the Transitional Period from Schedule 4, then $200,000 Additional Consulting Fees will be "earned", which will result in a twenty (20) month extension of the consulting agreement, resulting in a total consulting payment -11- 12 of $10,000 per month for thirty-two (32) months. As another example, if $2,000,000 of Licensed Products are sold during the Transitional Period from Schedule 4, then $400,000 Additional Consulting Fees will be "earned". In this event, since this payment would exceed thirty-six (36) months if paid at the rate of $10,000 per month, the consulting fee will be increased for twenty-four (24) equal payments, so that the total consulting period is thirty-six (36) months. In this case, since $400,000 will have been earned, payments in the thirteenth (13th) through the thirty-sixth (36th) month will be $16,666.67. (d) Herley agrees to advance ACES up to $100,000 against any consulting fees earned under Section 10(c) hereof but for which payment is not yet due. Such advance will bear interest at the then prevailing prime rate of interest until such time as the payment is due and owing by Herley. 11. IMPROVEMENTS. During the term of this Agreement, any improvements relating to the Licensed Product which may be conceived or discovered by either party shall be communicated to the other party without any undue delay, and Herley shall have the right to use the same without any charge. -12- 13 12. GOVERNMENT PROHIBITION. If any department or agency of the United States Government shall prohibit ACES from communicating certain data or information to Herley, then the failure to communicate such data or information because of such refusal or prohibition shall not constitute a breach of any obligation of ACES under this Agreement. Correspondingly, if Herley shall fail either to communicate any inventions or improvements subject to this License Agreement or otherwise permit ACES access to its facility as provided herein because of the interdiction or prohibition thereof by any governmental department or agency having jurisdiction thereof, then, such refusal or failure shall not constitute a breach by Herley of its incumbent obligations hereunder. 13. INFRINGEMENT. (a) Each party hereto shall promptly notify and give full information to the other party concerning any and all legal proceedings, suits, actions, controversies and claims which may be brought or made, affecting or regarding the Licensed Product or any patent, trademark, invention or improvement relative to the Licensed Product. In such event, the parties will consult with each other as to the action to be taken and each party will give the other party its full assistance and cooperation as reasonably required.p -13- 14 (b) ACES covenants and represents that the rights granted to Herley under this Agreement are free from infringement of patents and/or other proprietary rights of others. 14. EVENTS OF DEFAULT BY HERLEY. (a) In the event that (i) Herley fails to pay to ACES royalties when due in accordance with the provisions of this Agreement and for a period of thirty (30) days after written notice by ACES to Herley thereof specifying the amount claimed to be due; and/or (ii) Herley breaches any of the material terms of this Agreement and fails to remedy the same within thirty (30) days after written notice from ACES specifying the breach, then ACES may, at its option, terminate this Agreement by notice in writing to Herley. (b) Should this Agreement be terminated as provided above, Herley shall be obligated to pay to ACES all accrued royalties and such other sums then due under this Agreement. 15. EVENTS OF DEFAULT BY ACES. (a) Subject to (b) below, in the event that ACES shall breach or fail to perform any of the terms and conditions, covenants or representations in this Agreement and fails to remedy the same for a period of thirty (30) days after written -14- 15 notice from Herley specifying such breach or non-performance, Herley may elect to terminate this Agreement by written notice to ACES and/or to avail itself of any and all rights it may have to redress the same, at law or in equity, on a non-mutually exclusive basis. (b) In the event that Herley's rights to manufacture and/or sell the Licensed Product hereunder are impaired, restricted or enjoined and/or Herley becomes liable for damages as the result of any interlocutory or final determination that the manufacture or sale by Herley of the Licensed Product infringes upon a patent or violates the superior proprietary rights of a third party; that ACES does not have paramount title to the Licensed Product; and/or that ACES did not have the right to grant a License to Herley to manufacture and sell the Licensed Product, then Herley shall have the right to terminate this Agreement immediately by written Notice to ACES and shall be entitled to recover damages from ACES in an amount equal to one-half of all damages which Herley is required to pay to any third party, including legal fees, whether by judgment or settlement, but not to exceed the sum of the Initial Fee and all royalties paid by Herley to ACES hereunder. -15- 16 16. CONFIDENTIALITY. During the term and after the termination of this Agreement for any reason whatsoever, Herley will not reveal or disclose to any third party, without the written authorization of ACES, any confidential information or data relating to the Licensed Product, processes and methods of production of same, or the Manufacturing Technology, provided, however, that Herley may employ subcontractors for the manufacture of parts, which subcontractors shall have the same obligations of nondisclosure as Herley. Herley agrees to refrain from publishing articles containing any confidential information relating to the Licensed Product without consulting ACES prior to such publication and obtaining the written consent of ACES, which shall not be unreasonably withheld. 17. PROCEDURE UPON TERMINATION. (a) Should this Agreement be terminated by reasons of Herley default as provided for in Section 15 hereof, Herley agrees that it will not manufacture or sell for a period of two (2) years after the effective date of such termination, any device which is the same as, similar to, or in competition with, the Licensed Product. (b) Should notice of termination of this Agreement be given by either party under any of its provisions, ACES, from -16- 17 the date of such notice, shall not be under any obligation to supply or make available to Herley, the Manufacturing Technology, or any other data or information whatsoever relating to the Licensed Product, nor shall Herley, in such event, be authorized to visit the facilities of ACES. 18. PARTNERSHIP, JOINT VENTURE OR AGENCY. Nothing contained in this Agreement shall be deemed or construed to constitute or create between the parties hereto a partnership, association, joint venture or agency. 19. NOTICES. All notices required to be sent by either party to this Agreement to the other shall be sent by air mail, registered to the respective addresses of the parties hereto, as above set forth, or to such other addresses as may hereafter be designated in writing by one party to the other. 20. CONTROLLING LAW. This Agreement shall be construed and interpreted according to the laws of the State of New York without regard to its conflicts of laws provisions. Any suit, action or proceeding arising out of this Agreement shall be instituted in the state or federal courts in the State of New York. -17- 18 21. WAIVER The failure of either party to exercise any right hereunder or to take any action permitted on a breach by the other party shall not be deemed a waiver of such right or of any other rights for any prior or subsequent breaches of a like or different nature. 22. ENTIRE UNDERSTANDING. This Agreement contains the entire understanding of the parties and supersedes all oral or written representations or written agreements of license, rights, and privileges or understandings between the parties; it shall not be modified except by an agreement in writing signed by both of the parties hereto. 23. ASSIGNMENT. This Agreement and/or the rights, entitlements or obligations hereunder shall not be assigned by either party without the written consent of the other except that Herley shall be entitled to assign this Agreement to any of Herley's subsidiaries on prior notice to, but without obtaining the consent of ACES. Any assignment in violation of this section shall be void and of no legal effect. -18- 19 24. BINDING EFFECT. This Agreement shall be binding upon and enure to the benefit of the successors and assigns of the respective parties hereto. 25. DUPLICATE ORIGINALS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be executed by their respective duly authorized officers the day and year first above written. Attest: HERLEY INDUSTRIES, INC. /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] - ----------------------- ---------------------------- Asst. Secretary Title: CHMN ------------------------- CLEM WHITTEMORE d/b/a ALLIED CONSULTING AND ENGINEERING SERVICES Witnessed by: /s/ Tammy E. Mumma /s/ CLEM WHITTEMORE - ----------------------- ---------------------------- -19- 20 SCHEDULE 1 Peripheral Equipment 1. ACES Acceptance Test Set, Part Number TS001 21 SCHEDULE 2 ACES Existing Backlog 1. Northrop Corporation Point Of Contact: Ed Delaney P0 # 110-28 1026AK, Two (2) Airborne Transponders, $40,000 P0 # 1 10-281025AK, Flight Test, $7,500 2. Teledyne Ryan Aeronautical Point Of Contact: Gordon Boyer Description of Purchase Order: Ground Station and two (2) Airborne Transponders. Engineering and consulting hours. P0 # 90534002F, $195,400 ($83,318.09 total invoiced as of 1/1/94) 22 SCHEDULE 3 Inventory of Finished Products 1. Components- Duplexers, Mixers, Amplifiers, Oscillators, Connectors, etc. 2. WIP (work in process) assemblies, such as Enclosures, Printed Circuit Boards, etc. Total of items I and 2 are approximately $21,000. 3. Ground RF Module, part number 30100, $30,000 4. Relay, part number AC1001R01, $25,000 23 SCHEDULE 4 Prospective Contracts 1. Northrop Corp./NAVSEA (AEGIS Program) Chukar, BQM-74E POC: Ed Delaney (301) 322-8442 2. PMTC AQM-34L/M and BQM-34A/S Retrofit Chukar NAVSEA/NAVAIR POC: Harry Lee, (805) 989-5926 3. PMRF, Ballistic Re-Entry BQM-345, BQM-74E, etc. POC: Rick Daly, (808) 335-4416 4. Teledyne Ryan Aeronautical 410/435, BQM-345/Commercial version POC: Norm Sakamoto, (619) 291-7311, est 4366 5. Gamma International/REBA-J MQM 107 POC: Bob Jones, (410) 472-4732 6. Moller International AMGSS Program POC: Al Ellis, (410) 363-6216 24 HERLEY INDUSTRIES INC - -------------------------------------------------------------------------------- July 27, 1995 Mr. Clem Whittemore 2441 N. Main Suite #8 Sunset, UT 84015 Dear Clem: This letter will serve as an amendment to the agreement between yourself and Herley Industries, Inc. of March 1,1994. As we have agreed, the Technical Assistance/Consulting portion of the agreement will be extended, so that Paragraph 10(c) (i) should be changed to read: (i) "a consulting fee of $10,000 per month for the first 18 months of this Agreement, and" Paragraph 1. (b), the "licensed Product" description, should be updated and read: "Licensed Product MAGIC(2) (Multiple Aircraft GPS Integrated Command and Control), previously referred to as MOTHR. The MAGIC(2) product includes all software for both Ground and Airborne System for all vehicles. This includes all future product enhancements and modifications. Future product enhancements include, but are not limited to: o New Frequency Bands o New vehicle types - Different Drones - UAVs - Land Vehicles - Tanks - Surveillance - Water Vehicles - Boats - Ships o New data link formats - Different Data Rates - Different Message formats o Telemetry only systems, providing GPS position information o Range Instrumentation" 25 Mr. Clem Whittemore July 27, 1995 Page 2 of 2 All other terms and conditions of the agreement will remain in effect. If you are in agreement with this arrangement, please so indicate by signing one copy of this letter and returning it to Herley Industries, Inc. If you have any questions or comments, please do not hesitate to contact me. Sincerely, HERLEY INDUSTRIES, INC. By: /s/ Myron Svoy President - -------------------------------- /csb Enclosure Accepted: /s/ Clem Whittemore 7-27-95 ---------------------------------------- Clem Whittemore Date EX-10.19 12 AGREEMENT FOR SALE OF REAL ESTATE 1 Exhibit 10.19 Executed in 3 Dated April 11, 1996 Counterparts Agreement for Sale of Real Estate LEE N. BLATT, 10 Industry Drive, Lancaster, PA 17603, hereinafter called "SELLER", agrees to sell and convey to HERLEY INDUSTRIES, INC., hereinafter called "BUYER", and BUYER agrees to purchase, on the terms hereafter stated, the following real estate to Lancaster County, Pennsylvania (hereafter called the "premises"): 20.4 acres, more or less, located along Running Pump Road, East Hempfield Township. Recorded title source: Record (Deed) Book _____, Vol. 4932, Page 255 PRICE 1. The price shall be Nine Hundred Forty Thousand Dollars ($940,000,000), payable in funds acceptable to SELLER, as follows: (a) "Down payment" consisting of -- X Cash $ 94,000.0 --- ---------- --- Non-interest-bearing non-negotiable note payable at settlement $ ---------- or on BUYER'S default ---furnished herewith to, and receipt of which is acknowledged by, --- SELLER -- ____ Seller's listing broker or other escrow agent named in Escrow Agent's Agreement at end hereof. $ ---------- ( ) (X) Balance at settlement $846,000.0 ---------- Total $940,000.0 ==========
Financing Contingency 2. This Agreement, and BUYER'S obligation to make settlement-- (a) X Are NOT CONTINGENT upon BUYER'S obtaining financing of any kind or receiving settlement for any other real estate. (b) ___ ARE CONTINGENT upon BUYER'S procuring by ________ a commitment for _______ mortgage financing for at least $ ________________, with interest not exceeding ________% per annum, amortized over at least _______ years, with total monthly payments of principal and interest (but not including taxes or insurance) not exceeding $ _______. BUYER will seek the above mortgage financing--______ without aid of a broker--______ through the broker, and on the terms stated in Brokers' Financing Assistance Agreement at end hereof. 2 Condensed Special Provisions 3. The following condensed special terms printed on this page for convenience, are amplified or restricted by, and are to be construed with, the more detailed general provisions on subsequent pages in Paragraphs indicated in left margin below: Read w/paragraph 4(a) (a) Settlement date: March 31, 1998 8(a) (b) State & local realty transfer tax to be paid equally by buyer and Seller. 8(a) (c) Real Estate taxes to be apportioned on a fiscal year basis. 6(b) (d) Seller's Insurance: $ _________ __ Standard fire -- _____ Extended Coverage -- _____ Homeowner's -- ________ -- _______ Vandalism -- _______ Malicious Mischief -- ____ $____________ Flood 5(b) (e) Special fixture inclusions: None 5(b) (f) Special fixture exclusions: None 7(a) (g) Zoning is Light Industrial. 12 (h) Deadline for complete signing: ________, 1996 4(b) (I) Possession to be given subject to the following existing tenancies: None SETTLEMENT, TENDER & POSSESSION 4. (a) Settlement shall be made on or before the date stated in Par. 3(a) at such attorney's or title company's office in Lancaster County, Pa, as BUYER may designate (unless some later time or other place shall hereafter be mutually agreed upon). Formal tender of deed and purchase money are waived. (b) Possession shall be given by SELLER to BUYER at settlement, subject to any existing tenancies listed in Par. 3(I). TITLE 5. (a) SELLER shall convey to BUYER, by special (or "fiduciary", if applicable) warranty deed, good and marketable for simple title to the premises or title insurable at regular rates by title insurance company of BUYER'S choice, free of all liens and encumbrances not expected herein, but SUBJECT TO existing zoning and land subdivision ordinances and other governmental regulations, wall rights, building or use restrictions, encroachments on public highways, encroachments of cornices, trim or spouting over property boundaries, easements within utility reserve strips or in developments or within legal limits of highways, easements for utility for utility services to these premises and other easements which reasonable physical examination would disclose. 3 INCLUSIONS IN SALE (b) This sale (and the above-stated price) -- except for any exclusions stated in Par. 3(f) -- INCLUDES all-- (I) Buildings, improvements, rights, privileges, appurtenances and damages due or to become due from exercise of any power of eminent domain either prior to the date hereof or prior to settlement; (II) Gas, electric, heating, plumbing, lighting, water, water softening and central air conditioning -fixtures and systems, cook stoves, built-in ovens, laundry tubs, roller and venetian blinds, curtain and drapery rods and hardware, radiator covers, cabinets, radio and television aerials, masts and rotor equipment, storm doors and windows, screen doors and fitted window screens, awnings, and any articles permanently affixed to the property. (III) Trees and shrubbery, and flowers or plants in ground -- - -- now on or pertaining to the premises; (IV) Heating and cooking fuel (including fireplace wood) on the premises at time of settlement or earlier delivery of possession; and (V) Any special inclusions listed in Par. 3(e). SELLER warrants title, free of liens or security agreements, to the foregoing personal property or "fixture" items, which warranty shall not be extinguished by settlement. RISK & INSURANCE 6. (a) At settlement, the premises and all appurtenant property (except fuel) mentioned in Par. 5(b) shall be in substantially the same condition as at present, except for (I) ordinary reasonable wear and tear, (II) damage of any kind for which full or partial recovery may be had under the SELLER'S or BUYER'S insurance, (III) damage which occurs after possession has been given to BUYER, or (IV) any taking by eminent domain. (b) Neither damage by any casualty insured against by BUYER or SELLER nor any taking by eminent domain shall avoid, impair or delay BUYER'S obligation to make settlement hereunder unless BUYER'S financing provided for in Par. 2(b) shall become unobtainable because thereof; but in partial mitigation of this risk to BUYER, SELLER agrees to continue in force his present insurance of amounts and type stated in Par. 3(d) until delivery of deed or possession to BUYER (whichever shall first occur), and in case of loss will credit on account of the purchase price at settlement any insurance collected or collectible (--either by Seller or any mortgagee or other loss-payee--) therefore BUYER accepts notice that if he considers SELLER'S insurance inadequate in amount or type, or it he takes possession before settlement, he should, at his own expense, procure such additional amounts, types and/or/policy/ies of insurance as he may deem prudent to protect his risk. SELLER'S REPRESENTATIONS 7. SELLER represents to BUYER that -- (a) Zoning is as stated in Par. 3(g); and that, EXCEPT as may be noted to the contrary at the end of this paragraph -- 4 (b) There are no pending unsettled eminent domain proceedings and no appropriations by filing of State Highway plans in the Recorder's Office affecting the premises, of which the SELLER has knowledge; (c) No part of the premises, except within utility reserve strips in developments or within legal limits of highways, is, or at settlement will be, subject to any currently-used or enforceable easement for any underground electric or telephone cable or sever, gas or water pipe serving other than these premises, any petroleum products pipeline or public storm sewer, or any other easement which is not apparent upon reasonable physical inspection; (d) No present use or condition of the premises violates any enforceable building or use restriction in the chain of title; and (e) No assessment for any public improvement has been made against the premises which remains unpaid and no work has been commenced on any public improvement being financed on an assessment basis on, adjacent to or benefiting the premises, of which SELLER has knowledge, and no notice or order has been received by SELLER or his agent from any governmental authority requiring the doing of work or correction of conditions on the premises which has not been complied with, or with respect to which agreement is not made in a subsequent Paragraph hereof as to time, cost and/or burden (as between SELLER and BUYER) of compliance, or as to non-compliance, appeal procedures, etc. EXCEPTIONS TO REPRESENTATIONS (IF ANY) APPORTIONMENTS, ASSESSMENTS, GOVT. ORDERS 8. (a) Sewer and water rents shall be apportioned to date of settlement or prior delivery of possession. Any rentals of tenants to whose possession BUYER is taking subject shall be apportioned to date of settlement, at which time all written leases shall be assigned and delivered to BUYER. Realty transfer taxes annual real estate taxes shall be paid or apportioned as stated in Pars. 3(b) and (c). (b) Legally-adequate description, acknowledgments to deed, and preparing, obtaining and/or recording releases, other documents, or surveys reasonably required by BUYER'S attorney or title insurer to make SELLER'S title good and marketable or insurable at regular rates, shall be provided and/or paid for by SELLER. (c) Preparation of deed (and mortgage and bill of sale for personal property, if any), examination of title insurance at regular rates, title company service or settlement fees (whether purported to be billed against BUYER or SELLER), and any surveys desired by BUYER (but not necessary for furnishing legally-adequate description) shall be paid by BUYER. Any escrow fees shall be paid by the party for whose account the escrow is required. (d) BUYER will be responsible for assessments for public improvements commenced, and for connection fees and installation charges for any municipally-required sewer or water connections to or on the premises made, after the date of this agreement. Work or correction of conditions required by any governmental authorities by orders issued after the date of this agreement shall be performed by, and at the cost of, SELLER if of minor and/or temporary nature; but if of substantial nature, and of longer-term benefit to the premises continuing after settlement date, SELLER and BUYER shall negotiate concerning compliance or appeal proceedings and by whom, when (--within times permitted by the governmental orders or appeal procedures--) and at whose cost, required work 5 shall be performed. If SELLER does not fully comply with such orders, and the parties fail to agree on these matters to be negotiated, prior to settlement date, either party, by at least 14 days' written notice to the other, may rescind this agreement, and in such case BUYER shall be entitled to return of his down payment upon his surrendering to SELLER for cancellation of his copy/ies of this agreement -- after which all further obligation of this agreement on both parties shall terminate. RESCISSION, DEFAULTS: MAKING TIME OF ESSENCE 9. (a) If Par. 2(b) is marked as applicable, BUYER shall promptly apply for and use his best efforts to obtain the mortgage commitment therein provided for, and promptly notify SELLER when it has been obtained. If BUYER fails to obtain this commitment by the date specified in Par. 2(b), or if any other contingency specified in Par. 2 is not fulfilled, either party may rescind this agreement by written notice to the other, and in such case the down payment in Par. 1(a) shall be returned to BUYER upon his surrendering to SELLER for cancellation his copy/ies hereof. (b) If either party shall default in performing any act herein required of him by the date(s) specified therefor, the other party, by written notice to him at or after such default, may fix a deferred time, not less than 14 days distant, for performance of the defaulted act, and may make performance by such deferred date "of the essence of the contract". (c) If BUYER shall fail to make any payment due under Par. 1 by any time which has been made of the essence of the contract under Par. 9(b), his entire down payment and any subsequent payments hereunder (whether required or not) may be retained (and any note/s included therein may be collected) by SELLER, and shall be applied by SELLER either on account of the purchase price or as liquidated damages for the breach, as SELLER may elect; and if applied as liquidated damages, SELLER shall be released from all further liability to convey to BUYER. (d) If SELLER is unable to give title as provided in Par. 5(a), BUYER may elect either (I) to take such title as SELLER on can give, or (II) to require SELLER to return to BUYER all payments including any note/s theretofore made to SELLER on account of the purchase price, and to reimburse BUYER for all costs of searching title, appraisals, inspections, and preparation of deed, mortgage and other settlement papers which BUYER reasonably may have incurred, upon which return and payment all further obligation of this agreement on both parties shall terminate. (e) If BUYER shall acquire possession of the premises before payment of the entire purchase price and shall default in completing payment at any time made "of the essence" under Par. 9(b) or other wise, or if SELLER shall have received the entire purchase price and shall have failed to deliver possession to BUYER, the Prothonotary or any attorney of any court is hereby authorized, to the extent and under the conditions, if any , then permitted or prescribed by law, to appear for and confess judgment in ejectment against the defaulting party and in favor of the party who is not in default, for the premises, and to direct the issuing of a writ of possession, with accompanying money execution for costs. RECORDING 10. This agreement may be recorded only if acknowledged by SELLER. NOTICE 11. Mailing of any notice provided for herein to a party at his above-stated address shall be 6 as effectual as personal service thereof. 12. If this agreement is not signed by both SELLER and BUYER at the same time, it shall constitute merely an offer by the first-signing party which shall be subject to acceptance by the other party (--by his signature and procuring actual delivery of a fully-executed counterpart to the first-signing party--) only on the date stated in par 3(h), unless this time is extended by the first-signing party. If not so accepted, all tendered copies of this agreement, and any tendered down payment, shall be immediately returned to the first-signing party. IN WITNESS WHEREOF the parties, intending to be legally bound, have executed this agreement on the date above stated. SELLER: BUYER: HERLEY INDUSTRIES INC. _____________________________ (SEAL) By:______________________ (SEAL) Myron Levy, President 7 COMMONWEALTH OF PENNSYLVANIA : : SS: COUNTY OF LANCASTER : On this 11 day of April, 1996, before me, the undersigned officer, personally appeared LEE N. Blatt, known to me to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. _____________________________________ Notary Public #70015 EX-10.20 13 LETTER OF INTENT 1 Exhibit 10.20 [LETTERHEAD OF JANNEY MONTGOMERY SCOTT INC.] October 30, 1997 Mr. Lee N. Blatt Chairman of the Board and Chief Executive Officer Herley Industries, Inc. 10 Industry Drive Lancaster, Pennsylvania 17603 Re: Proposed Equity Offering Dear Mr. Blatt: You have shown us, among other things, draft audited financial statements for fiscal 1997 and audited financial statements for prior years for Herley Industries, Inc. ("HRLY" or the "Company") as well as projections for the fiscal years ending approximately July 31, 1998 through 2000. The signing of this letter will represent that nothing has come to your attention since the preparation of this information which would adversely change the business prospects of the Company. Janney Montgomery Scott Inc. ("JMS") has indicated that upon execution of this letter of intent JMS will continue its due diligence investigation into the Company's business and prospects. Based upon the foregoing, satisfactory completion of our due diligence investigation, our favorable evaluation of the Company's business and our favorable assessment of general conditions in the securities markets, we have discussed with you a proposed financing as detailed below. Co-Manager: Southwest Securities, Inc. will co-manage the transaction with JMS, together the "Managing Underwriters". Securities to be Common Stock: 700,000 from the Company. Offered: 700,000 from Selling Shareholders. Warrants: 1,050,000 from the Company. 350,000 from Selling Shareholders. Estimated The Common Stock at approximately the bid price Offering Price: immediately preceding the execution of the Underwriting Agreement ("Offering Price") and the Warrant at $.10 each. 2 Herley Industries, Inc. Page 2 Warrant Terms: The Warrants will expire, unless extended by the issuer, 25 months from the date of issuance. Each Warrant will entitle a holder to purchase one Common share initially and for a period of 13 months at an exercise price of 120% of the Offering Price of the Common Stock and subsequently for 12 months at 130% of the Offering Price of the Common Stock. Overallotment: Solely for the purpose of covering their short position in the offering, the Managing Underwriters will have an overallotment option from the Company which would allow for the purchase of up to 15% of the Common shares and Warrants offered at their net offering prices for a 30-day period after the offering. As currently contemplated, the overallotment would be for 210,000 Common Shares and 210,000 Warrants. Use of Proceeds: Working capital and expansion including potential acquisitions. Form of Offering: A firm commitment underwriting. Underwriters' The Underwriters will be paid 6.5% of the gross proceeds Fees: of the offering and a 1.33% financial advisory fee based on gross proceeds to the Company. Managing For $.01 per Managing Underwriters' Warrant, on 10% of Underwriters' the securities offered, priced in accordance with NASD Warrants: regulations (i.e., not exercisable in the first year and thereafter at 120% above the Offering Price). Managing Underwriters' Common Stock-Purchase Warrants will have a five- year term and the Managing Underwriters' Warrant-Purchase Warrants will have a two-year term. Registration The Company agrees that, to the extent permitted under Rights for the applicable rules, regulations and policies of the Common Stock SEC and the NASD: and Warrants: (a) At the Company's expense for one time, the Company will, upon the request of holders of at least 50% of the Managing Underwriters' Warrants and/or underlying Common Stock (the "Request"), file and maintain an effective registration statement for up to 24 months on any qualifying form (either as a post effective registration statement to the original offering or otherwise) and file applications and other documents as shall be required to qualify under state securities laws of such jurisdictions as shall be reasonably requested, in order to permit the offer and sale to the 3 Herley Industries, Inc. Page 3 public of the Managing Underwriters' Warrants and/or underlying Common Stock or Warrants. At the Company's expense, the Managing Underwriters' Warrants and/or underlying Common Stock or Warrants will be entitled to unlimited piggy-back registrations. (b) In addition to the registration rights in paragraph (a) above, the registration statement will be kept effective for the public Warrants. (c) The expense to be borne by the Company relating to any offering of Common Stock or Warrants under paragraph (a) above, shall not include underwriting commissions, if any. Fees of the sellers' counsel will be paid by the Company which fee shall not exceed $10,000. Expenses: The Company will pay the expenses of the issue, including but not limited to all fees and expenses of its counsel, all original issue and transfer taxes, NASD filing fees, postage and printing costs, advertising costs, the costs of the "road shows", accounting fees and the cost of Blue Sky qualification, including related counsel fees. In the event that the proposed offering does not proceed after the signing of this letter of intent because the Company or Selling Shareholders are unwilling to proceed, or in the event of a materially adverse change in the financial condition of the Company or similar Company event, the Company shall pay the Managing Underwriters' accountable out-of-pocket expenses which will include the Managing Underwriters' reasonable legal fees. In the event the Company or Selling Shareholders are unwilling to proceed because of market conditions, the Company shall pay the Managing Underwriters' accountable out-of-pocket expenses, including their reasonable legal fees, provided that such payment shall not exceed $100,000. If the Managing Underwriters are unable to market the securities for reasons unrelated to a market decline, materially adverse change or similar Company event, no out-of-pocket expenses will be due. If the proposed offering is canceled because the Company has made, or proposes to make, a private placement within six months from the date hereof which will provide it with substantial alternative funding through another investment banker or agent, the Managing Underwriters shall be entitled to a cash fee equal to 1% of the 4 Herley Industries, Inc. Page 4 gross amount of such funding, whether effectuated by the Company before or after such cancellation of the proposed offering. Investment Pre Offering: If this proposed offering is canceled Banking Agree- because the Company, or any subsidiary or affiliate ment: thereof, is to be sold, whether by merger (in which the Company is not the survivor), sale of stock, sale of assets or otherwise ("Sale Transaction"), the Managing Underwriters shall be paid a cash fee of 2% of the Sale Transaction value on the closing date(s) of the Sale Transaction. The Company agrees to choose JMS as its investment banker in connection therewith and agrees to enter into an engagement agreement whereby, among other provisions, JMS will be retained to render a fairness opinion, relative to the Transaction, from a financial point of view for which JMS will be paid a cash fee of $200,000 in addition to any other fees relating to our engagement hereunder. Post Offering: For a period of 6 months after the offering, if the Company enters into a Sale Transaction, the Managing Underwriters will be retained as the Company's joint investment bankers and be paid an aggregate cash fee at the closing date(s) equivalent to 1.0% of the Sale Transaction value. At the time negotiations are initiated, the Managing Underwriters and Company will enter into an engagement agreement providing for the payment of the fee provided above and other provisions generally found in such agreements, including appropriate indemnification from the Company to the Managing Underwriters. Further, if the Sale Transaction Value is less than $10 million and the Company's Board of Directors seeks a fairness opinion for the Sale Transaction, JMS will be retained for such purpose at a fee to be mutually agreed upon, but not less than $100,000. In addition, if the Sale Transaction Value exceeds $10 million, JMS will be retained for a cash fee of $200,000, in addition to any other fees relating to our engagement hereunder, to render its fairness opinion, relative to the Sale Transaction, as to whether such Sale Transaction is fair to the Company's shareholders from a financial point of view. For a 12-month period beginning upon completion of the offering, if either Managing Underwriter is instrumental in introducing an acquisition candidate to the Company and the transaction ("Acquisition Transaction") is consummated within 24 months from the date of the offering, the introducing Managing Underwriter will receive a cash fee from the Company equivalent to 1 % of the Acquisition Transaction value (to be mutually agreed upon in 5 Herley Industries, Inc. Page 5 writing) and the "Other Managing Underwriter", provided the Acquisition Transaction value exceeds $10.0 million, shall be retained by the Company, for a cash fee to be mutually agreed upon but in no instance to be less than $100,000, to render a fairness opinion as to whether the Acquisition Transaction is fair from a financial point of view to the Company and its shareholders. For Acquisition Transaction values less than $10 million and if the Board of Directors seeks an Acquisition Transaction fairness opinion, the Company agrees to retain the Other Managing Underwriter for a fee to be mutually agreed upon to render an opinion as to the fairness of the Acquisition Transaction from a financial point-of-view. Disposition of The Selling Shareholders will agree not to dispose of Securities: securities of the Company (except in response to an offer to shareholders generally) for a period of 180 days after the offering without JMS' approval. The Company will obtain an agreement from its officers and directors not to dispose of securities of the Company (except in response to an offer to shareholders generally) for a period of 120 days after the offering without JMS' approval to insure an orderly disposition. Corporate The Company, as a condition to this proposed Governance: underwriting, will implement certain corporate governance and officer compensation provisions as outlined in Exhibit A attached hereto. Directors: Two independent directors will be appointed to the Company's Board of Directors ("Board") prior to the offering and the two independent directors, together with Admiral Allshouse, shall be the members of both the Company's Compensation Committee and the Board's Audit Committee. Registration The Company will promptly prepare a registration Statement: statement relating to the proposed offering satisfactory to the Managing Underwriters. The Company will register or apply for an exemption under such state securities laws as the Managing Underwriters shall designate. Indemnification: The underwriting agreement will contain customary indemnification clauses acceptable to the Managing Underwriters. Finder's Fee: The Company hereby agrees to indemnify the Managing Underwriters against any finder's fee that may be owed to any other broker/dealers or third parties. 6 Herley Industries, Inc. Page 6 Southwest The Company hereby confirms that all prior agreements Agreement: with Southwest Securities, Inc. have been terminated by mutual consent of the parties thereto. Stonegate The Company agrees to terminate its agreement with Agreement: Stonegate Securities Inc., dated July 25, 1997 upon signing of this agreement. This letter is a statement of mutual intention to effect the proposed transaction along the lines indicated. It does not constitute a binding contract on the part of the Managing Underwriters or the Company, except as to the commitments of the Company to make certain payments to the Managing Underwriters as provided under the captions "Expenses" and "Investment Banking Agreement", which commitments are binding. A binding contract will come into existence upon execution of the underwriting agreement to be entered into between JMS and the Company when the offering is declared effective by the SEC. If the foregoing adequately reflects our understanding, kindly sign the duplicate copy of this letter and return it to the undersigned. Very truly yours, JANNEY MONTGOMERY SCOTT INC. By: /s/ Herbert M. Gardner ------------------------- Herbert M. Gardner Senior Vice President Accepted and Agreed to: HERLEY INDUSTRIES, INC. By: /s/ Lee N. Blatt -------------------- Lee N. Blatt Chairman of the Board and Chief Executive Officer 7 EXHIBIT A Governance: The following policies will be implemented by the Company: 1. Investments policy shall provide for cash to be invested only in high quality short term securities. 2. Two new outside directors to be appointed and appear in prospectus giving the Company three independent outside directors. 3. Three outside directors to be on the Compensation Committee and Audit Committee. 4. No "Certain Transactions" going forward, except with the unanimous consent of the outside (non-employee) disinterested directors. 5. All loans to or from officers repaid at closing. 6. No stock options granted to either Lee Blatt or Myron Levy for two years from the date of the offering. 7. No future repricing of stock options. 8. Compensation including issuance of options to Company executive officers and directors shall be based on standards relating to similar-sized public companies. 9. Employment agreements with Chairman, Chief Operating Officer and Gerald I. Klein to be modified as follows: Chairman: Principal Terms: a. Base salary reduced by $100,000 to $375,000. b. Bonus of 5% of pro-forma pre-tax earnings (as defined in c below) not to exceed base salary. c. Bonus based on pre-tax income in excess of a 10% pre-tax return on starting shareholders' equity plus proceeds from sale of equity securities on a time proportioned basis. d. Base salary only to increase for inflation. e. No option or warrant grants for two years. f. Employment Agreement to be reduced to three years. 8 President: Principal Terms: a. Bonus of 4% of pro-forma pre-tax earnings not to exceed base salary. b. Base salary only to increase for inflation. c. Employee Agreement reduced to five years plus existing consulting arrangement. d. No option or warrant grants for two years. e. Bonus calculation based on formula identical to that used for Chairman. Gerald I. Klein: Principal Terms: a. Bonus calculation based on current contract percentage but applied to pro-forma pre-tax earnings as defined above. EX-11.1 14 STATEMENT REGARDING COMPUTATION OF EARNINGS 1 Exhibit 11.1 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
52 Weeks ended 53 Weeks ended ----------------------------- August 3, 1997 July 28, 1996 July 30,1995 -------------- ------------- ------------ Net Income (loss) $ 4,803,659 $ 3,668,956 $(4,890,166) =========== =========== =========== Weighted average shares outstanding: Shares outstanding from beginning of period 3,914,829 4,021,317 5,567,585 Shares issued for options exercised 371,696 96,363 27,223 Treasury shares acquired (223,020) (331,504) (679,016) Common equivalents - options and warrants 670,177 467,609 63,076 ----------- ----------- ----------- Weighted average common and common equivalent shares outstanding 4,733,682 4,253,785 4,978,868 =========== =========== =========== Earnings (loss) per common and common equivalent share $ 1.01 $ .86 $ (.98) =========== =========== ===========
EX-21.1 15 SUBSIDIARIES OF REGISTRANT 1 Exhibit 21.1 Subsidiaries of the Registrant Metraplex Corporation Stewart Warner Electronics Corp Mission Design, Inc. Microwave Holding Corp. HMS Global Ltd. Carlton Industries, Inc. Undersea Systems Technology Corporation Sayco, Ltd. (direct subsidiary of Undersea Systems Technology Corporation) EX-23.2 16 CONSENT OF ARTHUR ANDERSON 1 EXHIBIT 23.2 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 Form S-1 Registration Statement. /s/ Arthur Andersen LLP ------------------------------------- Arthur Andersen LLP Lancaster, PA. November 6, 1997 -----END PRIVACY-ENHANCED MESSAGE-----