-----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, FtJiv1j3y1w+wJyCqi4QBbOT+7yUYxtaNeIy+Y8v27BWQRNSinLyqM47nDcZG8pi BUi7VFmiQRip23EteRPejg== 0001201800-07-000109.txt : 20070607 0001201800-07-000109.hdr.sgml : 20070607 20070607161608 ACCESSION NUMBER: 0001201800-07-000109 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070429 FILED AS OF DATE: 20070607 DATE AS OF CHANGE: 20070607 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERLEY INDUSTRIES INC /NEW CENTRAL INDEX KEY: 0000047035 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 232413500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05411 FILM NUMBER: 07907093 BUSINESS ADDRESS: STREET 1: 101 NORTH POINTE BOULEVARD CITY: LANCASTER STATE: PA ZIP: 17601-4133 BUSINESS PHONE: 7177358117 MAIL ADDRESS: STREET 1: 101 NORTH POINTE BOULEVARD CITY: LANCASTER STATE: PA ZIP: 17601-4133 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY INDUSTRIES INC DATE OF NAME CHANGE: 19831103 10-Q 1 hrly10q-april2007.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: April 29, 2007 -------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-5411 HERLEY INDUSTRIES, INC. ------------------------ (Exact name of registrant as specified in its charter) DELAWARE #23-2413500 -------- ----------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 101 North Pointe Boulevard, Lancaster, Pennsylvania 17601 - --------------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (717) 735-8117 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): [ ] Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- --- As of May 28, 2007 - 13,977,115 shares of Common Stock are outstanding. HERLEY INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q
PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (Unaudited): Condensed Consolidated Balance Sheets - April 29, 2007 (Unaudited) and July 30, 2006 2 Condensed Consolidated Statements of Operations (Unaudited) - For the thirteen and thirty-nine weeks ended April 29, 2007 and April 30, 2006 3 Condensed Consolidated Statement of Shareholders' Equity (Unaudited) - For the thirty-nine weeks ended April 29, 2007 4 Condensed Consolidated Statements of Cash Flows (Unaudited) - For the thirty-nine weeks ended April 29, 2007 and April 30, 2006 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17 Item 4 - Controls and Procedures 17 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 18 Item 1A- Risk Factors 18 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 18 Item 3 - Defaults Upon Senior Securities 18 Item 4 - Submission of Matters to a Vote of Security Holders 18 Item 5 - Other Information 19 Item 6 - Exhibits 19 Signatures 20
Part I - Financial Information Item 1 - Financial Statements HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
April 29, 2007 July 30, (Unaudited) 2006 ---------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 31,562 $ 22,303 Trade accounts receivable 30,843 30,600 Costs incurred and income recognized in excess of billings on uncompleted contracts and claims 13,592 13,926 Other receivables 2,079 769 Inventories, net 52,196 52,909 Deferred income taxes and other 5,815 4,932 ---------- ----------- Total Current Assets 136,087 125,439 Property, Plant and Equipment, net 30,001 30,478 Goodwill 73,964 73,612 Intangibles, net of accumulated amortization of $4,809 at April 29, 2007 and $3,468 at July 30, 2006 19,072 19,989 Other Assets 1,702 1,932 ---------- ----------- $ 260,826 $ 251,450 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 1,335 $ 630 Current portion of employment settlement agreement - (net of imputed interest of $287) (Note 2) 1,070 - Accounts payable and accrued expenses 19,039 21,503 Billings in excess of costs incurred and income recognized on uncompleted contracts 606 555 Income taxes payable 4,956 3,395 Accrual for contract losses 1,960 2,959 Accrual for warranty costs 1,129 986 Advance payments on contracts 7,525 3,323 ---------- ----------- Total Current Liabilities 37,620 33,351 Long-term Debt 6,327 5,948 Long-term Portion of Employment Settlement Agreement - (net of imputed interest of $622) (Note 2) 4,404 - Other Long-term Liabilities 1,493 1,265 Deferred Income Taxes 5,538 7,416 ---------- ----------- 55,382 47,980 ---------- ----------- Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 13,971,715 in 2007, issued 14,660,716 and outstanding 13,862,149 in 2006 1,397 1,466 Additional paid-in capital 106,364 113,418 Retained earnings 95,826 96,286 Treasury stock, 798,567 common shares at cost - (9,044) Accumulated other comprehensive income 1,857 1,344 ---------- ----------- Total Shareholders' Equity 205,444 203,470 ---------- ----------- $ 260,826 $ 251,450 ========== ===========
See notes to condensed consolidated financial statements. 2 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Thirteen weeks ended Thirty-nine weeks ended -------------------- ----------------------- April 29, April 30, April 29, April 30, 2007 2006 2007 2006 ----------- ---------- ---------- ----------- Net sales $ 44,401 $ 45,689 $ 122,514 $ 133,466 ----------- ---------- ---------- ----------- Costs and expenses: Costs of products sold 31,687 34,736 89,528 94,900 Selling and administrative expenses 8,895 8,960 25,315 25,785 Employment contract settlement costs (Note 2) - - 8,914 - ----------- ---------- ---------- ----------- 40,582 43,696 123,757 120,685 ----------- ---------- ---------- ----------- Income (loss) from operations 3,819 1,993 (1,243) 12,781 ----------- ---------- ---------- ----------- Other income (expense), net: Investment income 375 269 854 578 Interest expense (213) (68) (578) (242) Foreign exchange gain 195 170 478 273 ----------- ---------- ---------- ----------- 357 371 754 609 ----------- ---------- ---------- ----------- Income (loss) before income taxes 4,176 2,364 (489) 13,390 Provision (benefit) for income taxes 298 662 (29) 3,749 ----------- ---------- ---------- ----------- Net income (loss) $ 3,878 $ 1,702 $ (460) $ 9,641 =========== ========== ========== =========== Earnings (loss) per common share - Basic $ .28 $ .12 $ (.03) $ .67 =========== ========== ========== =========== Basic weighted average shares 13,969 14,569 13,911 14,497 =========== ========== ========== =========== Earnings (loss) per common share - Diluted $ .27 $ .11 $ (.03) $ .63 =========== ========== ========== =========== Diluted weighted average shares 14,449 15,398 13,911 15,230 =========== ========== ========== ===========
See notes to condensed consolidated financial statements. 3 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Thirty-nine weeks ended April 29, 2007 (In thousands except share date) (Unaudited)
Accumulated Common Stock Additional Other ------------ Paid-in Retained Treasury Comprehensive Shares Amount Capital Earnings Stock Income Total --------- ------- -------- -------- --------- -------------- --------- Balance at July 30, 2006 14,660,716 $ 1,466 $ 113,418 $ 96,286 $ (9,044) $ 1,344 $ 203,470 Exercise of stock options 111,230 11 1,179 1,190 Purchase of 1,664 shares of treasury stock (26) (26) Tax benefit upon exercise of stock options 235 235 Stock option compensation 326 326 Stock option modification (Note 2) 196 196 Retirement of treasury stock (800,231) (80) (8,990) 9,070 - --------- ------- -------- -------- --------- -------------- --------- Subtotal 13,971,715 1,397 106,364 96,286 - 1,344 205,391 --------- Net loss (460) (460) Other comprehensive income, net of tax: Unrealized loss on interest rate swap (20) (20) Foreign currency translation gain 533 533 --------- Comprehensive income 53 --------- ------- -------- -------- --------- -------------- --------- Balance at April 29, 2007 13,971,715 $ 1,397 $ 106,364 $ 95,826 $ - $ 1,857 $ 205,444 ========= ======= ======== ======== ========= ============== =========
See notes to condensed consolidated financial statements. 4 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Thirty-nine weeks ended ----------------------- April 29, April 30, 2007 2006 --------------- --------------- Cash flows from operating activities: Net (loss) income $ (460) $ 9,641 --------------- --------------- Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 5,271 5,266 Stock-based compensation expense 326 333 Excess tax benefit from exercise of stock options (235) (674) Employment contract settlement costs (includes $196 of stock option modification costs) 5,914 - Imputed interest related to employment settlement liability 199 - Deferred taxes (2,314) 786 Gain on sale of equipment (107) - Equity in income of limited partnership - (49) Foreign exchange gain (96) (55) Inventory valuation reserve charges 1,102 924 Reduction in accrual for contract losses (699) - Warranty reserve charges 976 345 Changes in operating assets and liabilities: Trade accounts receivable (243) (2,890) Costs incurred and income recognized in excess of billings on uncompleted contracts and claims 334 (2,436) Other receivables (1,310) 283 Inventories (389) (895) Other current assets (438) (535) Accounts payable and accrued expenses (3,297) (1,146) Billings in excess of costs incurred and income recognized on uncompleted contracts 51 (128) Income taxes payable 1,796 (133) Accrual for contract losses (300) 24 Advance payments on contracts 4,202 1,143 Other, net 457 205 --------------- --------------- Total adjustments 11,200 368 --------------- --------------- Net cash provided by operating activities 10,740 10,009 --------------- --------------- Cash flows from investing activities: Acquisition of technology license (179) (1,256) Proceeds from sale of equipment 202 - Partial distribution from limited partnership - 111 Capital expenditures (3,516) (4,525) --------------- --------------- Net cash used in investing activities (3,493) (5,670) --------------- --------------- Cash flows from financing activities: Borrowings under bank line of credit 13,000 12,000 Borrowings - other 1,746 - Proceeds from exercise of stock options 1,164 2,799 Excess tax benefit from exercises of stock options 235 674 Payments under employment contract settlement (443) - Payments of long-term debt (690) (779) Payments under bank line of credit (13,000) (12,000) --------------- --------------- Net cash provided by financing activities 2,012 2,694 --------------- --------------- Net increase in cash and cash equivalents 9,259 7,033 Cash and cash equivalents at beginning of period 22,303 20,331 --------------- --------------- Cash and cash equivalents at end of period $ 31,562 $ 27,364 =============== ===============
See notes to condensed consolidated financial statements. 5 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) 1. Principles of Consolidation and Basis of Presentation The unaudited condensed consolidated financial statements include the accounts of Herley Industries, Inc. and its wholly-owned subsidiaries, collectively referred to as the "Company." All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and note disclosures normally included in annual financial statements as required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items, as well as the recording of the employment contract settlement costs discussed in Note 2) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for interim periods are not necessarily indicative of the results of operations that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto, and the Company's description of critical accounting policies, included in the Company's 2006 Annual Report on Form 10-K for the fiscal year ended July 30, 2006, as filed with the Securities and Exchange Commission ("SEC"). The consolidated balance sheet at July 30, 2006 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management of the Company make certain estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. These judgments can be subjective and complex, and consequently actual results could differ from those estimates and assumptions. The most significant estimates include: valuation and recoverability of long-lived assets; income taxes; recognition of revenue and costs on production contracts and the valuation of inventory. Each of these areas requires the Company to make use of reasoned estimates including estimating the cost to complete a contract, the net realizable value of its inventory and the market value of its products. Changes in estimates can have a material impact on the Company's financial position and results of operations. The accrual for contract losses associated with the ICI acquisition (more fully described in Note B of Form 10-K for the fiscal year ended July 30, 2006), was reduced by $699,000 in the thirty-nine weeks ended April 29, 2007 (which is included as a reduction of costs of products sold) as a result of management changing its estimated liability for expected losses under the first two options of the contract. The accrual for contract losses includes an estimate of approximately $1,569,000 relating to the remaining two contract options not yet exercised by the customer. It is at least reasonably possible that a change in the estimate will occur in the near term. Certain prior period balances have been reclassified to conform to the current period's financial statement presentation. 2. Significant Events On June 13, 2006, in connection with the legal matter discussed in Note 7 "Litigation," the Company was notified that certain of its operations had been suspended from receiving new contract awards from the U. S. Government. The affected operations included facilities in Lancaster, Pennsylvania; Woburn, Massachusetts; Chicago, Illinois and the Company's subsidiary in Farmingdale, New York. The Chicago, Illinois location is a two-person marketing office. The result of this suspension was that these facilities were not solicited for or awarded new contracts or contract extensions without special exceptions, pending the outcome of the legal proceedings. The suspended facilities were permitted to receive contract awards or subcontracts from the Federal Government if the contracting agency stated in writing the compelling reason to do so. A significant portion of the Company's business is received under contracts where the Company is the only qualified supplier on critical defense programs. The Company's facilities which were not included in the action and who were free at all times to contract with the U.S. Government are the facilities in Whippany, New Jersey (Herley-CTI); Jerusalem (Herley-Israel); McLean, Virginia (Innovative Concepts, Inc.); Fort Walton Beach, Florida (Micro Systems, Inc. and Herley-RSS) and Farnborough, U.K. (EW Simulation Technology, Limited). Effective October 12, 2006, the Company entered into an Administrative Agreement with the Department of the Navy, on behalf of the Department of Defense that requires the Company, among other things, to implement a comprehensive program of compliance reviews, audits and reports for a period of three years or until settlement or adjudication of the legal matter referenced above, whichever is later, unless shortened or extended by written agreement of the parties. In addition, the Company was required to sever its relationship with Mr. Lee N. Blatt, former Chairman of the Board of Directors, as an employee or consultant to the Company. In return, the Navy, on behalf of the Department of Defense terminated the suspension of the Company from receiving new contract awards from the U.S. Government. Effective October 12, 2006 and as a condition to entering into the Administrative Agreement with the Department of the Navy noted above, the 6 Company entered into an agreement (the "Agreement") with Lee N. Blatt to terminate the Employment Agreement between the Company and Mr. Blatt dated as of July 29, 2002 and modified on December 9, 2003. Under the terms of the Agreement, Mr. Blatt will receive payments totaling approximately $9,462,000; payable $3,000,000 upon the effective date of the Agreement and sixty-four (64) consecutive monthly payments of $100,000 commencing on January 1, 2007 and a final payment of $61,528 on May 1, 2012 as evidenced by a non-interest bearing Promissory Note dated effective October 12, 2006 (the "Note"). The Note, which has been discounted at 6.75%, has a balance at April 29, 2007 of approximately $5,153,000. Of this amount, $1,013,000 is included in "Current portion of employment settlement agreement" net of imputed interest of $287,000 and $4,140,000 is included in "Long-term Portion of Employment Settlement Agreement" net of imputed interest of $622,000 in the accompanying balance sheet. In addition, Mr. Blatt received his bonus of $636,503 in January 2007 for fiscal year 2006, and shall be entitled to receive reimbursement for medical care and life insurance, in accordance with the original terms of his Employment Agreement. The current portion of the medical care and life insurance is estimated at $57,000 and is included in "Current portion of employment settlement agreement" and the long-term portion is estimated at $264,000 as of April 29, 2007 and is included in "Long-term Portion of Employment Settlement Agreement" in the accompanying balance sheet. The Agreement also provides that all outstanding stock options previously issued to Mr. Blatt which are all vested and fully exercisable shall continue to be exercisable by him or, following his death, by his designated beneficiaries, on or before the expiration date of the specific option. On September 26, 2006, as required under the terms of the Administrative Agreement with the Department of the Navy, Mr. Blatt entered into a voting trust agreement wherein sole voting power to 1,301,000 shares under stock options held by Mr. Blatt and 28,799 shares held in his IRA was granted to the Company's Chairman, Myron Levy. In the event of a "change of control" of the Company as defined in the Employment Agreement, all remaining payments due under the Promissory Note become immediately due and payable. Aggregate costs of approximately $8,914,000 under the Agreement, including cash payments of $3,000,000, payments due under the Note of approximately $5,354,000, medical and life insurance benefits of approximately $364,000 (both discounted at an imputed interest rate of 6.75%) and the fair value of the modification of the stock options of approximately $196,000 (using the Black-Scholes option valuation model), have been recorded in the Company's condensed consolidated financial statements in the thirty-nine weeks ended April 29, 2007. 3. Inventories The major components of inventories are as follows (in thousands):
April 29, 2007 July 30, 2006 -------------- ------------- Purchased parts and raw materials $ 28,498 $ 27,191 Work in process 28,336 29,597 Finished products 2,563 3,270 ------- ------- 59,397 60,058 Less: Allowance for obsolete and slow moving inventory 5,099 4,576 Unliquidated progress payments 2,102 2,573 ------- ------- $ 52,196 $ 52,909 ====== ======
4. Income taxes The net deferred income tax asset balance at April 29, 2007 was approximately $4,189,000, an increase of approximately $444,000 from July 30, 2006. The increase is primarily due to the tax effect on the timing of the deductions for future payments of approximately $5,153,000 as of April 29, 2007 under a promissory note and approximately $321,000 as of April 29, 2007 for estimated medical and life insurance benefits due under the employment contract settlement discussed in Note 2. The income tax provision recognized in the third quarter of fiscal 2007 was $298,000 as compared to a provision for income taxes of $662,000 in the prior year's third quarter. As of the end of the third quarter of fiscal 2007, the effective income tax rate for the full year 2007 is now estimated at 6%, versus the rate of approximately 7% that was estimated through the first six months of fiscal 2007. The decline in the estimated effective income tax rate for fiscal 2007 is primarily attributable to (a) the extension of the R&D tax credit by Congress in December 2006 retroactive to January 1, 2006 and (b) an increase in the proportion of overall earnings expected to be generated through the Company's foreign operations where earnings are taxed at lower rates than domestically. The extension of the R&D tax credit reduced the statutory income tax rate of 35% by an estimated 9% for fiscal 2007. As a result of lower domestic earnings, due primarily to the employment contract settlement costs which significantly affects domestic profitability, foreign earnings are a greater percentage of total earnings. The Company's foreign earnings are attributable primarily to our Israeli subsidiary which is taxed at an estimated rate of 12% for fiscal 2007, thereby reducing the effective income tax rate by approximately 18%. 5. Product Warranties The Company warrants its products generally for a period of one year. Product warranty costs are accrued based on historical claims expense. Accrued warranty costs are reduced as warranty repair costs are incurred. The following table presents the change in the accrual for product warranty costs for the thirteen and thirty-nine weeks ended April 29, 2007 and April 30, 2006 (in thousands): 7
Thirteen weeks ended Thirty-nine weeks ended -------------------- ----------------------- April 29, April 30, April 29, April 30, 2007 2006 2007 2006 ------------ ------------ ------------ ------------ Balance at beginning of period $ 1,150 $ 746 $ 986 $ 799 Provision for warranty obligations 342 98 976 347 Warranty costs charged to the reserve (363) (129) (833) (431) ------------ ------------ ------------ ------------ Balance at end of period $ 1,129 $ 715 $ 1,129 $ 715 ============ ============ ============ ============
6. Long Term Debt In connection with the implementation of an ERP software package, the Company entered into an additional financing agreement in August 2006 with De Lage Landen Financial Services, Inc. through Microsoft Capital Corporation providing for loans not to exceed an aggregate of $2,000,000. Amounts borrowed under the agreement are payable in thirty-six equal monthly installments with interest at 5.354% per annum. The Company has borrowed an aggregate of $1,400,000 as of April 29, 2007 with monthly payments totaling approximately $42,750. No additional amounts will be borrowed under this agreement. In addition, the Company financed the purchase of capital equipment through its bank in the amount of $346,000 in connection with a major long-term contract. 7. Litigation On June 6, 2006, in connection with a continuing investigation by the U.S. Attorneys' Office in Pennsylvania which, inter alia, involves pricing under contracts with the U.S. Department of Defense relating to voltage control oscillators and powerheads, an indictment was returned against the Company and Lee Blatt, its former Chairman. No other officer or director of the Company was named in the indictment. The contracts aggregate approximately $3.9 million in total revenue. The indictment alleges 29 counts of violations of the wire fraud statute (18 U.S.C. Section 1343); 2 counts of violations of the obstruction of a federal audit statute (18 U.S.C. Section 1516); 1 count of violating the major fraud against the United States statute (18 U.S.C. Section 1031); 3 counts of violating the false statements to the government statute (18 U.S.C. Section 1001) and a notice of forfeiture. The Company believes that no criminal conduct has occurred and will vigorously contest the charges. If convicted, Mr. Blatt and the Company could be fined up to approximately $13 million each and the Company could be required to forfeit approximately $2.9 million paid under the contracts. Under the terms of an indemnification agreement with Mr. Blatt, the Company has agreed to provide indemnification with regard to certain legal proceedings so long as he has acted in good faith and in a manner believed to be in, or not opposed to, the Company's best interest with respect to any criminal proceeding and had no reasonable cause to believe his conduct was unlawful. In June and July 2006, the Company was served with several class-action complaints against the Company and certain of its officers in the United States District Court for the Eastern District of Pennsylvania. The claims are made under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. All defendants in the class-action complaints filed motions to dismiss on April 6, 2007. Oral arguments on the motions to dismiss have been scheduled for June 19, 2007. In July and August 2006, the Company and certain of its current and former officers and directors were also served with two separate derivative complaints for breach of fiduciary duty brought pursuant to Rule 23.1 of the Federal Rules of Civil Procedure. The complaints relate to the Company's indictment in the matter discussed above. All defendants in the derivative complaints filed motions to dismiss on February 26, 2007. Oral arguments on the motions to dismiss have been scheduled for June 6, 2007. In addition, in June 2006, the Company was notified by representatives of the United States Attorney's Office for the Eastern District of Pennsylvania, Civil Division, that they intended to file a civil lawsuit against the Company pursuant to inter alia, the False Claims Act, 31 U.S.C. ss. 3729 et. seq. The Company entered into a Tolling Agreement on June 21, 2006, and does not anticipate any further activity related to this potential claim until after the trial of the criminal matter mentioned above which is currently scheduled for January 2008. The Company believes it has substantial defenses to the charges alleged in the indictment and intends to vigorously defend against these allegations. The Company believes it is entitled to recovery of certain legal fees associated with the above matters under its D&O insurance policy. Accordingly, as of April 29, 2007, the Company has recorded a receivable of $1,556,000 (net of a deductible of $500,000) in anticipation of recoveries. The amount is included in other receivables in the accompanying consolidated balance sheet at April 29, 2007. The insurance carrier may contest the claim in whole or in part. In addition, the Company has entered into an agreement dated January 11, 2007 with the insurance carrier whereby if it is determined by final decision of an arbitration panel, or by final judgment of a court, or other final decision of a tribunal having jurisdiction thereof, that any amount paid by the insurance carrier was not a loss, as that term is defined in the policy, the Company shall repay to the insurance carrier any such uncovered sums previously advanced to the Company. The Company received a partial payment of approximately $684,000 on June 1, 2007. On April 10, 2007, EADS Deutschland GmbH ("EADS"), a German corporation, filed a lawsuit against Herley Industries, Inc., General Microwave Corporation and General Microwave Export Corporation d/b/a Herley Power Amplifier Systems (collectively the "Company") in the United States District Court for the Eastern District of New York. EADS claims that the Company breached a Transfer of Technology Agreement entered into on May 30, 2001 under which the Company was granted the right to use certain technology owned by EADS in performing under an exclusive sales and marketing agreement entered into on May 30, 2001. EADS has asserted claims for breach of contract and conversion, claiming that the Company is wrongfully in possession of the intellectual property that was transferred to the Company. EADS also seeks a preliminary injunction. The Company has denied any wrongdoing and filed counterclaims against EADS. The parties are now engaging in expedited discovery and awaiting a hearing date from the court relating to the request for a preliminary injunction. The Company is involved in various other legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such other litigation will not have a material adverse effect on the Company's financial position or results of operations. 8 8. Comprehensive Income, net of income taxes Comprehensive income for the periods presented is as follows (in thousands):
Thirteen weeks ended Thirty-nine weeks ended ------------------------ --------------------------- April 29, April 30, April 29, April 30, 2007 2006 2007 2006 ----------- ----------- ------------ ------------ Net income (loss) $ 3,878 $ 1,702 $ (460) $ 9,641 Unrealized (loss) gain on interest rate swap (11) 15 (20) 33 Foreign currency translation gain 118 152 533 158 ----------- ----------- ------------ ------------ Comprehensive income $ 3,985 $ 1,869 $ 53 $ 9,832 =========== =========== ============ ============
The foreign currency translation gain relates to the Company's investment in its U.K. subsidiary and fluctuations in exchange rates between its local currency and the U.S. dollar. The components of accumulated other comprehensive income are as follows (in thousands):
April 29, 2007 July 30, 2006 -------------- ------------- Unrealized loss on interest rate swap $ (42) $ (22) Foreign currency translation gain 1,899 1,366 -------------- ------------- Accumulated other comprehensive income $ 1,857 $ 1,344 ============== =============
9. Stock-Based Compensation The Company has various fixed stock option plans which are described in Note M of the Company's July 30, 2006 Annual Report on Form 10-K that provide for the grant of stock options to eligible employees and directors. As of April 29, 2007, there were 3,241,350 stock options outstanding. No stock options were issued during the thirteen or thirty-nine weeks ended April 29, 2007. The aggregate value of unvested options as of April 29, 2007, as determined using a Black-Scholes option valuation model was approximately $490,000 (net of estimated forfeitures). Options for 111,230 shares of common stock were exercised during the thirty-nine weeks ended April 29, 2007 at an average exercise price of $10.70 per share and options for 137,500 shares of common stock were cancelled. 10. Earnings (Loss) Per Common Share ("EPS") The following table shows the components used in the calculation of basic earnings (loss) per share and earnings (loss) per share assuming dilution (in thousands):
Thirteen weeks ended Thirty-nine weeks ended ------------------------------ ------------------------------- April 29, April 30, April 29, April 30, 2007 2006 2007 2006 -------------- -------------- --------------- -------------- Numerator: Net Income (Loss) $ 3,878 $ 1,702 $ (460) $ 9,641 ============== ============== =============== ============== Denominator: Basic weighted-average shares 13,969 14,569 13,911 14,497 Effect of dilutive securities: Employee stock options 480 829 - 733 -------------- -------------- --------------- -------------- Diluted weighted-average shares 14,449 15,398 13,911 15,230 ============== ============== =============== ============== Stock options not included in computation 1,673 376 3,241 1,015 ============== ============== =============== ============== Exercise price range per share $15.78 - $21.18 $17.11 - $20.85 $4.31 - $21.18 $17.11 - $20.85
The number of stock options not included in the computation of diluted EPS for the thirteen weeks ended April 29, 2007 and the thirteen and thirty-nine weeks ended April 30, 2006 relates to stock options having exercise prices which are greater than the average market price of the common shares during the period, and therefore, are anti-dilutive. No employee stock options were considered in the computation of diluted net loss per share for the thirty-nine weeks ended April 29, 2007 as their effect is anti-dilutive. The options which were outstanding as of April 29, 2007 and excluded from the computation in the table above expire at various dates through May 2, 2015. 9 11. Geographic Information Net sales to the U.S. Government in the thirty-nine weeks ended April 29, 2007 and April 30, 2006 accounted for approximately 22% of net sales. No other customer accounted for 10% or more of net sales. The Company operates as a single integrated business and as such has one operating segment. Geographic net sales for the third quarter and year to date, based on place of contract performance, were as follows (in thousands):
Thirteen weeks ended Thirty-nine weeks ended ------------------------- ------------------------- April 29, April 30, April 29, April 30, 2007 2006 2007 2006 ----------- ----------- ----------- ------------ United States $ 38,252 $ 40,069 $ 103,490 $ 117,677 Israel 5,132 3,887 15,040 10,307 England 1,017 1,733 3,984 5,482 ----------- ----------- ----------- ------------ $ 44,401 $ 45,689 $ 122,514 $ 133,466 =========== =========== =========== ============
Net property, plant and equipment by geographic area was as follows (in thousands):
April 29, 2007 July 30, 2006 -------------- ------------- United States $ 24,600 $ 25,243 Israel 5,058 4,654 England 343 581 -------- -------- $ 30,001 $ 30,478 ====== ======
12. Supplemental cash flow information is as follows (in thousands):
Thirty-nine weeks ended ----------------------- April 29, 2007 April 30, 2006 -------------- -------------- Net cash paid during the period for: Interest $ 357 $ 219 Income taxes - 2,960
13. New Accounting Pronouncements In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (the Company's 2009 fiscal year). The Company will evaluate the impact of adopting SFAS 159 but does not expect that it will have a material impact on the Company's consolidated financial position, results of operations or cash flows. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires an entity to recognize in its statement of financial position an asset for a defined benefit pension or postretirement plan's overfunded status or a liability for a plan's underfunded status and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. SFAS 158 will not change the amount of net periodic benefit expense recognized in an entity's results of operations. SFAS 158 is effective for fiscal years ending after December 15, 2006. The Company will evaluate the impact of adopting SFAS 158 but does not expect that it will have a material impact on the Company's consolidated financial position, results of operations or cash flows. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It codifies the definitions of fair value included in other authoritative literature; clarifies and, in some cases, expands on the guidance for implementing fair value measurements; and increases the level of disclosure required for fair value measurements. Although SFAS 157 applies to (and amends) the provisions of existing authoritative literature, it does not, of itself, require any new fair value measurements, nor does it establish valuation standards. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This statement will be effective for the Company's fiscal year beginning August 2008. The Company will evaluate the impact of adopting SFAS 157 but does not expect that it will have a material impact on the Company's consolidated financial position, results of operations or cash flows. 10 In September 2006, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 ("SAB 108") which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 becomes effective for fiscal 2007. Adoption of SAB 108 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes (as amended) - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes", and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of analyzing the impact of FIN 48, which is required to be adopted by the first quarter of fiscal 2008. 14. Subsequent Events On April 30, 2007, the Company replaced its existing credit facility with a new $40 million Revolving Credit Loan Agreement with two banks on an unsecured basis which may be used for general corporate purposes, including business acquisitions and stand-by letters of credit. The revolving credit facility requires the payment of interest only on a monthly basis and payment of the outstanding principal balance on March 31, 2009. The Company may elect to borrow with interest based on the bank's prime rate of interest minus 0.50% or based on LIBOR plus a margin of 1.35% to 1.65%. The applicable incremental margin is based on the ratio of total liabilities to tangible net worth, as those terms are defined in the agreement. There is a fee of 20 basis points per annum on the unused portion of the credit facility payable quarterly. Stand-by letters of credit were outstanding in the amount of approximately $11.7 million at April 29, 2007. If at any time the Company's backlog of orders falls below $50 million, the bank may obtain a security interest in eligible accounts receivable, as defined, and if the outstanding advances are greater than 100% of eligible receivables, a lien on all inventory. The agreement contains various financial covenants, including, among other matters, minimum tangible net worth, total liabilities to tangible net worth, debt service coverage and restrictions on other borrowings. The Company is in compliance with all such financial covenants at April 29, 2007. The Company entered into an employment agreement with Jeffrey L. Markel dated as of May 30, 2007 (the "Employment Agreement") pursuant to which Mr. Markel has been appointed Chief Operating Officer. The Employment Agreement has an initial term through July 31, 2010 and provides for (i) a base salary at the rate of $350,000 per annum together with cost of living increases; (ii) an annual bonus at the discretion of the Board of Directors, with a minimum first year bonus of $300,000; (iii) a ten-year consulting period at the end of the employment term at an annual rate of $100,000; (iv) certain perquisites including an automobile allowance and medical benefits; and (v) certain rights in the event of a change in control of the Company, as defined in the Employment Agreement. To induce Mr. Markel to enter into the Employment Agreement, the Company also granted him options (the "Options") to purchase 250,000 shares of its common stock at a price of $15.77 per share, which was the closing price of its common stock on the day prior to execution of the Employment Agreement. Twenty percent (20%) of the options vest immediately with the remaining options vesting at the rate of twenty percent (20%) per year over a four year period. 11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Certain statements contained in this report are "forward-looking statements" that involve various important assumptions, risks, uncertainties and other factors which could cause the Company's actual results to differ materially from those expressed in such forward-looking statements. Forward-looking statements can be identified by terminology such as "may", "will", "should" , "expects", "intends", "anticipates", "believes", "estimates", "predicts", "continue", or the negative of these terms or other comparable terminology. These important factors include, without limitation, a large percentage of sales are under government contracts, cost overruns under fixed price contracts, doing business in foreign markets, customer concentration, competitive factors and pricing pressures, effective integration of acquired businesses, management of future growth, recruiting and retaining qualified technical personnel, general economic conditions, as well as other risks previously disclosed in the Company's securities filings and press releases. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, performance or achievements. Further, the Company is under no duty to update any of the forward-looking statements after the date of this quarterly report to conform such statements to actual results. Explanatory Note The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes thereto, the other unaudited financial data included elsewhere in this 10-Q and our 2006 Form 10-K. Critical Accounting Policies Our significant accounting policies are described in Note A of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 30, 2006. A discussion of our critical accounting policies and estimates are included in Management's Discussion and Analysis of Results of Operations and Financial Condition in our Annual Report on Form 10-K for the fiscal year ended July 30, 2006. Management has discussed the development and selection of these policies with the Audit Committee of the Company's Board of Directors, and the Audit Committee of the Board of Directors has reviewed the Company's disclosures of these policies. There have been no material changes to the critical accounting policies or estimates reported in Management's Discussion and Analysis section of the audited financial statements for the fiscal year ended July 30, 2006 as filed with the Securities and Exchange Commission. Significant Events On June 13, 2006, in connection with the legal matter discussed in Note 7 "Litigation", we were notified that certain of our operations had been suspended from receiving new contract awards from the U. S. Government. The affected operations included facilities in Lancaster, Pennsylvania; Woburn, Massachusetts; Chicago, Illinois and our subsidiary in Farmingdale, New York. The Chicago, Illinois location is a two-person marketing office. The result of this suspension was that these facilities were not solicited for or awarded new contracts or contract extensions without special exceptions, pending the outcome of the legal proceedings. The suspended facilities were permitted to receive contract awards or subcontracts from the Federal Government if the head of the agency stated in writing the compelling reason to do so. A significant portion of our business is received under contracts where we are the only qualified supplier on critical defense programs. Our facilities which were not included in the action and who were free at all times to contract with the U.S. Government are the facilities in Whippany, New Jersey (Herley-CTI); Jerusalem (Herley-Israel); McLean, Virginia (Innovative Concepts, Inc.); Fort Walton Beach, Florida (Micro Systems, Inc. and Herley-RSS) and Farnborough, U.K. (EW Simulation Technology, Ltd.). Effective October 12, 2006, we entered into an Administrative Agreement with the Department of the Navy, on behalf of the Department of Defense that requires us, among other things, to implement a comprehensive program of compliance reviews, audits and reports for a period of three years or until settlement or adjudication of the legal matter referenced above, whichever is later, unless shortened or extended by written agreement of the parties. In addition, we were required to sever our relationship with Mr. Lee N. Blatt, former Chairman of the Board of Directors, as an employee or consultant to the Company. In return, the Navy, on behalf of the Department of Defense, terminated the suspension of the Company from receiving new contract awards from the U.S. Government. Effective October 12, 2006 and as a condition to entering into the Administrative Agreement with the Department of the Navy noted above, we entered into an agreement (the "Agreement") with Lee N. Blatt to terminate the Employment Agreement between us and Mr. Blatt dated as of July 29, 2002 and modified on December 9, 2003. Under the terms of the Agreement Mr. Blatt will receive payments totaling $9,461,528; payable $3,000,000 upon the effective date of the Agreement and sixty-four (64) consecutive monthly payments of $100,000 commencing on January 1, 2007 and a final payment of $61,528 on May 1, 2012 as evidenced by a non-interest bearing Promissory Note dated effective October 12, 2006 (the "Note"). In addition Mr. Blatt was paid his bonus of $636,503 in January 2007 for fiscal year 2006, and shall be entitled to receive reimbursement for medical care and life insurance, in accordance with the original terms of his Employment Agreement. The Agreement also provides that all outstanding stock options previously issued to Mr. Blatt which are all vested 12 and fully exercisable shall continue to be exercisable by him or, following his death, by his designated beneficiaries, on or before the expiration date of the specific option. On September 26, 2006, as required under the terms of the Administrative Agreement with the Department of the Navy, Mr. Blatt entered into a voting trust agreement wherein sole voting power to 1,301,000 shares under stock options held by Mr. Blatt and 28,799 shares held in his IRA was granted to our Chairman, Myron Levy. In the event of a "change of control" of the Company, as defined in the Employment Agreement, all remaining payments due under the Note become immediately due and payable. Aggregate costs of approximately $8,914,000 under the Agreement, including cash payments of $3,000,000, payments due under the Note of approximately $5,354,000, medical and life insurance benefits of approximately $364,000 (both discounted at an imputed interest rate of 6.75%) and the fair value of the modification of the stock options of approximately $196,000 (using the Black-Scholes option valuation model), have been recorded in our condensed consolidated financial statements in the nine months ended April 29, 2007. Business Overview We are a leader in the design, development and manufacture of microwave technology solutions for the defense, aerospace and medical industries worldwide. Our primary customers include large defense prime contractors (including Raytheon, Northrop Grumman, General Dynamics, Lockheed Martin and Boeing), the U.S. Government (including the Department of Defense, NASA and other U.S. Government agencies), international customers (including the German, Japanese, Turkish, British, Norwegian, Finnish and South Korean militaries, and suppliers to international militaries) and commercial medical customers (including Siemens Medical Solutions, Varian NMR System and G E Healthcare). We are a leading provider of microwave technologies for use in command and control systems, flight instrumentation, weapons sensors, high power amplifiers, electronic warfare systems, wireless data communications products and services, and radar threat and electronic countermeasure simulation systems. We have served the defense industry since 1965 by designing and manufacturing microwave devices and systems for use in high technology defense electronics applications. Our products and systems are currently deployed on a wide range of high profile military platforms, including the F-16 Falcon, the F/A-18E/F Super Hornet, the EA-6B Prowler, the EA-18 Growler, the AH-64D Apache Longbow, AEGIS class destroyers, the AMRAAM missile, unmanned aerial vehicles (UAVs), as well as high priority national security programs such as National Missile Defense, the Trident II D-5 missile, ICAPIII, and Sensor Fuzed Weapon. Results of Operations Thirty-nine weeks ended April 29, 2007 and April 30, 2006 - --------------------------------------------------------- The four-month suspension (June-October 2006) from receiving new contract awards from the U.S. Government at some of our operations caused disruption in our business in several respects which cannot be easily measured, but certainly has had an impact on the results of operations in fiscal 2007 both in terms of sales and profitability. While the effects of the suspension were evident during the first quarter, they continued during the second quarter and in the third quarter to a lesser degree due to delays in bookings. Net sales for the thirty-nine weeks ended April 29, 2007 were approximately $122.5 million compared to $133.5 million in the first nine months of fiscal 2006, a decrease of $11 million (8.2%). The decrease in net sales is partly related to the recording of a $2.2 million claim receivable on a major program during the first quarter of the prior year. In addition, there was a decline in microwave systems and assemblies primarily due to the completion of certain contracts and the timing of shipments, some of which was due to the delays in bookings during the suspension period. Offsetting these decreases were higher sales related primarily to sales of both microwave systems and microwave products at Herley-Israel. Domestic and foreign sales were 72% and 28% respectively of net sales in the thirty-nine weeks ended April 29, 2007, versus 77% and 23% respectively in the prior year comparable period. The gross profit margin in the thirty-nine weeks ended April 29, 2007 was 26.9% compared to 28.9% in the first nine months of fiscal 2006, a decrease of 2%. Contributing to the reduction in gross profit during the first nine months of fiscal 2007 are the following items: o The booking of the $2.2 million claim receivable in fiscal 2006. o Disruptions caused by the four-month suspension from receiving new contract awards from the U. S. Government at some of our operations. o Startup production costs on certain programs. o Product mix of contracts domestically and internationally. Offset by o Revisions in the accrual for contract losses on existing contracts based on current estimates. The accrual for contract losses associated with the ICI acquisition (more fully described in Note B of Form 10-K for the fiscal year ended July 30, 2006), was reduced by $699,000 in the thirty-nine weeks ended April 29, 2007 (which is included as a reduction of costs of products sold) as a result of management changing its estimated liability for expected losses under the first two options of the contract. 13 Selling and administrative expenses for the thirty-nine weeks ended April 29, 2007 were 21% of net sales as compared to 19% in the first nine months of fiscal 2006. The increase in costs as a percentage of sales is due to the lower net sales in fiscal 2007. We believe we are entitled to recovery of certain legal fees associated with the recent indictment and class-action complaints under our D&O insurance policy. Accordingly, as of April 29, 2007, we have recorded a receivable of $1,556,000 (net of a deductible of $500,000) in anticipation of recoveries. The amount is included in other receivables in the accompanying consolidated balance sheet at April 29, 2007. The insurance carrier may contest the claim in whole or in part. In addition, we have entered into an agreement dated January 11, 2007 with the insurance carrier whereby if it is determined by final decision of an arbitration panel, or by final judgment of a court, or other final decision of a tribunal having jurisdiction thereof, that any amount paid by the insurance carrier was not a loss, as that term is defined in the policy, we shall repay to the insurance carrier any such uncovered sums previously advanced to us. The Company received a partial payment of approximately $684,000 on June 1, 2007. Employment contract settlement costs of approximately $8.9 million relate to an agreement effective October 12, 2006 with Lee N. Blatt, our co-founder and former Chairman, to terminate his employment agreement with us after 41 years of service. Settlement costs include a cash payment of $3.0 million paid upon the effective date of the settlement agreement, payments due under a Promissory Note and estimated medical and life insurance benefits discounted at an imputed interest rate of 6.75%, plus the fair value of a modification to the stock options held by Mr. Blatt using the Black-Scholes option valuation model. We had an operating loss for the first nine months of fiscal 2007 of $1.2 million compared to operating income of $12.8 million in the comparable period of fiscal 2006. Excluding the employment contract settlement costs of $8.9 million recorded in the first quarter of fiscal 2007, operating income for the first nine months of fiscal 2007 would have been $7.7 million or 6.3% of net sales, as compared to $12.8 million or 9.6% of net sales in the first nine months of fiscal 2006. The decrease in operating income as a percentage of net sales is primarily attributable to the 2% decrease in gross margin percentage as discussed above and the increase in selling and administrative expenses as a percentage of net sales due to the lower sales volume. Our foreign operations contributed approximately $3.3 million in operating income for the first nine months of fiscal 2007 as compared to $2.4 million in fiscal 2006. Investment income was $854,000, an increase of $276,000 in the first nine months of fiscal 2007 as compared to the comparable prior year period because of interest earned on higher cash balances. Interest expense was $578,000, an increase in the first three quarters of $336,000 as compared to the comparable prior year period primarily due to the imputed interest expense related to the employment settlement agreement, as well as interest expense relating to financing the implementation of the ERP software package. We recognized a net foreign exchange gain of $478,000 through the third quarter of fiscal 2007, versus a gain of $273,000 in the prior fiscal year comparable period. These foreign exchange gains are attributable to fluctuations in exchange rates between the U.S. dollar and the local currency of our U.K. subsidiary primarily in connection with temporary advances we have made to them in U.S. dollars. The benefit for income taxes for the first nine months of fiscal 2007 was $29,000 representing an effective tax rate of 6%, as compared to an effective tax rate of 28% in the first nine months of fiscal 2006. The decline in the estimated effective income tax rate for fiscal 2007 is primarily attributable to (a) the extension of the R&D tax credit by Congress in December 2006 retroactive to January 1, 2006 and (b) an increase in the proportion of overall earnings expected to be generated through the Company's foreign operations where earnings are taxed at lower rates than domestically. The extension of the R&D tax credit reduced the statutory income tax rate of 35% by an estimated 9% for fiscal 2007. As a result of lower domestic earnings, due primarily to the employment contract settlement costs which significantly affects domestic profitability, foreign earnings are a greater percentage of total earnings. The Company's foreign earnings are attributable primarily to our Israeli subsidiary which is taxed at an estimated rate of 12% for fiscal 2007 thereby reducing the effective income tax rate by approximately 18%. Basic and diluted loss per common share for the thirty-nine weeks ended April 29, 2007 were $.03 per common share each as compared to basic and diluted earnings per common share of $.67 and $.63, respectively, for the thirty-nine weeks ended April 30, 2006. Excluding the impact of the employment contract settlement costs, basic and diluted earnings per common share would have been $.46 and $.44, respectively, for the thirty-nine weeks ended April 29, 2007 as compared to basic and diluted earnings per common share of $.67 and $.63, respectively, for the thirty-nine weeks ended April 30, 2006. A reconciliation of the Non-GAAP earnings per common share calculation is as follows (in thousands except share data): 14
Thirty-nine weeks ended ----------------------- Non-GAAP Measure As Reported Under GAAP April 29, April 29, April 30, 2007 2007 2006 ------ ------ ------- (Loss) income before income taxes $ (489) $ (489) $13,390 Employment contract settlement costs 8,914 - - ------ ------ ------- Income (loss) before income taxes 8,425 (489) 13,390 Provision (benefit) for income taxes 2,081 (29) 3,749 ------ ------ ------- Net income (loss) $6,344 $ (460) $ 9,641 ====== ====== ======= Earnings (loss) per common share - Basic $ 0.46 $ (0.03) $ 0.67 ====== ====== ======= Basic weighted average shares 13,911 13,911 14,497 ====== ====== ======= Earnings (loss) per common share - Diluted $ 0.44 $ (0.03) $ 0.63 ====== ====== ======= Diluted weighted average shares 14,369 13,911 15,230 ====== ====== =======
Thirteen weeks ended April 29, 2007 and April 30, 2006 Net sales for the thirteen weeks ended April 29, 2007 were approximately $44.4 million, as compared to $45.7 million in the thirteen weeks ended April 30, 2006, a decrease of $1.3 million (2.8%). The net decrease in sales is attributable to a decline in domestic shipments of microwave systems and assemblies primarily due to the completion of certain contracts and the timing of shipments, some of which was due to delays in bookings during the four-month suspension from receiving new contract awards from the U. S. Government at some of our operations. Offsetting this were increased shipments of both microwave systems and microwave products through our Israeli subsidiary. Domestic and foreign sales were 77% and 23% respectively of net sales in the quarter, versus 75% and 25% respectively in the prior year comparable quarter. The gross profit margin in the thirteen weeks ended April 29, 2007 was 28.6% compared to 24.0% in the third quarter of fiscal 2006, an increase of 4.6%. Contributing to the improvements in gross profit for the quarter are (a) the non-recurrence of startup production costs on certain programs from the prior year and (b) the product mix of contracts. Selling and administrative expenses for the thirteen weeks ended April 29, 2007 was nearly equal to the prior year comparable quarter and were 20.0% of net sales as compared to 19.6% of net sales in the third quarter of fiscal 2007 and 2006, respectively. Operating income for the third quarter of fiscal 2007 was $3.8 million or 8.6% of net sales, as compared to $2.0 million or 4.4% of net sales in the prior year. The improvement in operating income as a percentage of net sales is primarily attributable to the increase in gross margins discussed above. In the thirteen weeks ended April 29, 2007, we recognized a foreign exchange gain of $195,000 versus a gain of $170,000 in the third quarter of fiscal 2006. These foreign exchange gains are attributable to fluctuations in exchange rates between the U.S. dollar and the local currency of our U.K. subsidiary primarily in connection with temporary advances we have made to them in U.S. dollars. The income tax provision recognized in the third quarter of fiscal 2007 was $0.3 million as compared to a provision for income taxes of $0.7 million in the prior year's third quarter. As of the end of the third quarter of fiscal 2007, the effective income tax rate for the full year 2007 is now estimated at 6%, versus the rate of approximately 7% that was estimated in the second quarter. Liquidity and Capital Resources - ------------------------------- As of April 29, 2007 and July 30, 2006, working capital was $98.5 million and $92.1 million, respectively, and the ratio of current assets to current liabilities was 3.6 to 1 and 3.8 to 1, respectively. As is customary in the defense industry, inventory is partially financed by progress payments. In addition, it is customary for us to receive advanced payments from customers on major contracts. The unliquidated balance of progress payments was approximately $2.1 million at April 29, 2007 and $2.6 million at July 30, 2006. The balance of advanced payments was approximately $7.5 million at April 29, 2007 and $3.3 million at July 30, 2006. 15 Net cash provided by operating activities during the thirty-nine weeks ended April 29, 2007 was approximately $10.7 million as compared to $10.0 million during the comparable period in the prior year; a net increase of approximately $0.7 million. Net income (Net (loss) income adjusted for the following non-cash items: depreciation and amortization, employment contract settlement costs, including imputed interest, and foreign exchange gain) was $10.9 million in the first nine months of the current fiscal year versus $14.9 million in the prior year, a decrease of approximately $4.0 million. Significant changes in sources and uses of cash include the following offsetting items: Sources: 1. An increase in accounts receivable of $0.2 million versus an increase of $2.9 million in fiscal 2006 resulting in an improvement in cash flow of approximately $2.7 million. 2. An increase in advanced payments on contracts of $3.1 million including $2.5 million on a new foreign contract. 3. A reduction of approximately $2.8 million in the amount of cash invested in costs incurred and income recognized in excess of billings on uncompleted contracts which included $2.2 million of estimated costs incurred and income recognized in connection with a claim due to customer delays and changes in specification and designs under a major program in fiscal 2006. 4. An increase in income taxes payable of approximately $1.9 million. Offset primarily by the following uses of cash: 1. An increase in deferred tax assets of $2.0 million related to the timing of the deduction for tax purposes of the non-cash portion of the employment contract settlement costs. 2. An increase in other receivables of $1.6 million for an insurance claim for legal fees incurred in connection with the matter previously discussed under "Significant Events." 3. A decrease of approximately $2.1 million generated through amounts due to vendors and accrued expenses. 4. The reduction of $1.0 million in the accrual for contract losses related to product shipped during the nine months of fiscal 2007, as well as revisions to estimated loss reserves on existing contracts. Net cash used in investing activities includes capital expenditures of $3.5 million and a final milestone payment of $0.2 million in connection with the Xytrans license agreement for millimeter wave technology for military applications. Proceeds from the sale of demonstration equipment in the United Kingdom amounted to $0.2 million. In connection with the implementation of an ERP software package, we entered into an additional financing agreement in August 2006 with De Lage Landen Financial Services, Inc. through Microsoft Capital Corporation providing for loans not to exceed an aggregate of $2.0 million. Amounts borrowed under the agreement are payable in thirty-six equal monthly installments with interest at 5.354% per annum. We have borrowed an aggregate of $1.4 million as of April 29, 2007 with monthly payments totaling approximately $42,750. No additional amounts will be borrowed under this agreement. In addition, we financed the purchase of capital equipment through our bank in the amount of $0.3 million in connection with a major long-term contract. The proceeds from the exercises of stock options during the first nine months of fiscal 2007 were $1.2 million. During the first nine months of fiscal 2007, we borrowed and we paid $13.0 million under our current revolving credit facility for short-term working capital needs. On April 30, 2007, we replaced our existing credit facility with a new $40 million Revolving Credit Loan Agreement with two banks on an unsecured basis which may be used for general corporate purposes, including business acquisitions and stand-by letters of credit. The revolving credit facility requires the payment of interest only on a monthly basis and payment of the outstanding principal balance on March 31, 2009. We may elect to borrow with interest based on the bank's prime rate of interest minus 0.50% or based on LIBOR plus a margin of 1.35% to 1.65%. The applicable incremental margin is based on the ratio of total liabilities to tangible net worth, as those terms are defined in the agreement. There is a fee of 20 basis points per annum on the unused portion of the credit facility payable quarterly. Stand-by letters of credit were outstanding in the amount of approximately $11.7 million at April 29, 2007. If at any time our backlog of orders falls below $50 million, the bank may obtain a security interest in eligible accounts receivable, as defined, and if the outstanding advances are greater than 100% of eligible receivables, a lien on all inventory. Funded backlog as of April 29, 2007 was approximately $145 million. The agreement contains various financial covenants, including, among other matters, minimum tangible net worth, total liabilities to tangible net worth, 16 debt services coverage, and restrictions on other borrowings. We are in compliance with all covenants at April 29, 2007. We believe that presently anticipated future cash requirements will be provided by internally generated funds, our existing unsecured credit facility, and existing cash reserves. A significant portion of our revenue for fiscal 2007 will be generated from our existing backlog of sales orders. The funded backlog of orders at April 29, 2007 was approximately $145 million. In the event of the cancellation of a significant amount of government contracts included in our backlog, we will be required to rely more heavily on cash reserves and our existing credit facility to fund operations. We are not aware of any events which are reasonably likely to result in any cancellation of our government contracts. As of April 29, 2007, we have approximately $28.3 million available under our new credit facility, net of outstanding stand-by letters of credit of approximately $11.7 million, and cash reserves of approximately $31.6 million. New Accounting Pronouncements - ----------------------------- In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (our 2009 fiscal year). We will evaluate the impact of adopting SFAS 159 but we do not expect that it will have a material impact on our consolidated financial position, results of operations or cash flows. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires an entity to recognize in its statement of financial position an asset for a defined benefit pension or postretirement plan's overfunded status or a liability for a plan's underfunded status and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. SFAS 158 will not change the amount of net periodic benefit expense recognized in an entity's results of operations. SFAS 158 is effective for fiscal years ending after December 15, 2006. We will evaluate the impact of adopting SFAS 158 but we do not expect that it will have a material impact on our consolidated financial position, results of operations or cash flows. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. It codifies the definitions of fair value included in other authoritative literature; clarifies and, in some cases, expands on the guidance for implementing fair value measurements; and increases the level of disclosure required for fair value measurements. Although SFAS 157 applies to (and amends) the provisions of existing authoritative literature, it does not, of itself, require any new fair value measurements, nor does it establish valuation standards. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This statement will be effective for our fiscal year beginning August 2008. We will evaluate the impact of adopting SFAS 157 but we do not expect that it will have a material impact on our consolidated financial position, results of operations or cash flows. In September 2006, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 ("SAB 108") which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 becomes effective for fiscal 2007. Adoption of SAB 108 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes (as amended) - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes", and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are in the process of analyzing the impact of FIN 48, which is required to be adopted by the first quarter of fiscal 2008. Item 3: Quantitative and Qualitative Disclosures About Market Risk The Company's exposures to market risk have not changed significantly since July 30, 2006. Item 4: Controls and Procedures (a) Evaluation of disclosure controls and procedures. The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the "Exchange Act"). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. The Company's management, with participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the design, operation and effectiveness of the Company's disclosure controls and procedures and have concluded, based on such evaluation, that such controls and procedures were effective at providing reasonable assurance that required information will be disclosed in the Company's reports filed under the Exchange Act as of April 29, 2007. 17 (b) Changes in internal controls. There were no changes in the Company's internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended April 29, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1 - Legal Proceedings: As previously reported, there has been a continuing investigation by the U.S. Attorneys' Office in Pennsylvania which, inter alia, involves pricing under contracts with the U.S. Department of Defense relating to voltage control oscillators and powerheads. The contracts aggregate approximately $3.9 million in total revenue. On June 6, 2006 an indictment was returned against the Company and Lee Blatt, its former Chairman. No other officer or director of the Company was named in the indictment. The indictment alleges 29 counts of violations of the wire fraud statute (18 U.S.C. Section 1343); 2 counts of violations of the obstruction of a federal audit statute (18 U.S.C. Section 1516); 1 count of violating the major fraud against the United States statute (18 U.S.C. Section 1031); 3 counts of violating the false statements to the government statute (18 U.S.C. Section 1001) and a notice of forfeiture. The Company believes that no criminal conduct has occurred and will vigorously contest the charges. If convicted, Mr. Blatt and the Company could be fined up to approximately $13 million each and the Company could be required to forfeit approximately $2.9 million paid under the contracts. Under the terms of an indemnification agreement with Mr. Blatt, the Company has agreed to provide indemnification with regard to certain legal proceedings so long as he has acted in good faith and in a manner believed to be in, or not opposed to, the Company's best interest with respect to any criminal proceeding and had no reasonable cause to believe his conduct was unlawful. In June and July 2006, the Company was served with several class-action complaints against the Company and certain of its officers in the United States District Court for the Eastern District of Pennsylvania. The claims are made under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. All defendants in the class-action complaints filed motions to dismiss on April 6, 2007. Oral arguments on the motions to dismiss have been scheduled for June 19, 2007. In July and August 2006, the Company and certain of its current and former officers and directors were also served with two separate derivative complaints for breach of fiduciary duty brought pursuant to Rule 23.1 of the Federal Rules of Civil Procedure. The complaints relate to the Company's indictment in the matter discussed above. All defendants in the derivative complaints filed motions to dismiss on February 26, 2007. Oral arguments on the motions to dismiss have been scheduled for June 6, 2007. In addition, in June 2006 the Company was notified by representatives of the United States Attorney's Office for the Eastern District of Pennsylvania, Civil Division, that they intended to file a civil lawsuit against the Company pursuant to inter alia, the False Claims Act, 31 U.S.C. ss. 3729 et. seq. The Company entered into a Tolling Agreement on June 21, 2006, and does not anticipate any further activity related to this potential claim until after the trial of the criminal matter mentioned above which is currently scheduled for January 2008 . The Company believes it has substantial defenses to the charges alleged in the indictment and intends to vigorously defend against these allegations. On April 10, 2007, EADS Deutschland GmbH ("EADS"), a German corporation, filed a lawsuit against Herley Industries, Inc., General Microwave Corporation and General Microwave Export Corporation d/b/a Herley Power Amplifier Systems (collectively the "Company") in the United States District Court for the Eastern District of New York. EADS claims that the Company breached a Transfer of Technology Agreement entered into on May 30, 2001 under which the Company was granted the right to use certain technology owned by EADS in performing under an exclusive sales and marketing agreement entered into on May 30, 2001. EADS has asserted claims for breach of contract and conversion, claiming that the Company is wrongfully in possession of the intellectual property that was transferred to the Company. EADS also seeks a preliminary injunction. The Company has denied any wrongdoing and filed counterclaims against EADS. The parties are now engaging in expedited discovery and awaiting a hearing date from the court relating to the request for a preliminary injunction. The Company is involved in various other legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such other litigation will not have a material adverse effect on the Company's financial position or results of operations. Item 1A - Risk Factors In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed under Part 1 -"Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended July 30, 2006, which could materially adversely affect our business, financial condition, operating results and cash flows. The risks and uncertainties described in our Form 10-K for the year ended July 30, 2006 are not the only ones we face. Risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, operating results or cash flows. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds: None Item 3 - Defaults Upon Senior Securities: None Item 4 - Submission of Matters to a Vote of Security Holders: None 18 Item 5 - Other Information: None Item 6 - Exhibits 10.1 Revolving Credit Loan Agreement dated April 30, 2007 among the Registrant, Manufacturers and Traders Trust Company and Bank of Lancaster County, N.A. 31. Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32. Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 19 FORM 10-Q SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HERLEY INDUSTRIES, INC. ----------------------- Registrant BY: /S/ Myron Levy ----------------------------------- Myron Levy, Chief Executive Officer BY: /S/ Kevin J. Purcell ----------------------------------------- Kevin J. Purcell, Chief Financial Officer DATE: June 7, 2007 EX-10.1 2 hrly10q-ex101.txt AGREEMENT EXHIBIT 10.1 LOAN AGREEMENT -------------- THIS LOAN AGREEMENT is made this 30th day of April, 2007 by and among HERLEY INDUSTRIES, INC. (the "Borrower"), MANUFACTURERS AND TRADERS TRUST COMPANY and BANK OF LANCASTER COUNTY, N.A. (each a "Lender" and, collectively, the "Lenders," as further defined herein), and MANUFACTURERS AND TRADERS TRUST COMPANY, as agent (in such capacity, the "Agent"). 1. DEFINITIONS. 1.1 Defined Terms. As used in this Agreement the following terms have the following meanings: "Account": shall mean and include all accounts, accounts receivable, contact rights, instruments (including those evidencing indebtedness owed to Affiliates), documents, chattel paper (including electronic chattel paper), general intangibles relating to accounts, drafts and acceptances, credit card receivables and all other forms of obligations owing to such Person arising out of or in connection with the sale or lease of Inventory or the rendition of services, all supporting obligations, guarantees and other security therefor, whether secured or unsecured, now existing or hereafter created, and whether or not specifically sold or assigned to Agent hereunder. "Acquisition": the acquisition of (i) a controlling equity or other ownership interest in another Person (including the purchase of an option, warrant or convertible or similar type security. to acquire such a controlling interest at the time it becomes exercisable by the holder thereof), whether by purchase of such equity or other ownership interest or upon exercise of an option or warrant for, or conversion of securities into, such equity or other ownership interest, or by merger or consolidation, or (ii) assets of another Person that constitute all or any material part of the assets of such Person or of a line or lines of business conducted by such Person. "Advance": a Base Rate Advance or a LIBOR Advance, as the case may be. "Aggregate Revolving Credit Commitments": on any date, the sum of the Revolving Credit Commitments on such date. "Agreement": this Loan Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Applicable Margin": with respect to the unpaid principal amount of LIBOR Advances, the percentage set forth below under the heading "LIBOR Margin" next to the applicable period: Period - ------ LIBOR Margin ------------ when the Ratio of Total Liabilities to Tangible 1.35% Net Worth is less than 0.40:1.0 when the Ratio of Total Liabilities to Tangible 1.50% Net Worth is equal to or greater than 0.40:1.0 but not greater than 1.0:1.0 when the Ratio of Total Liabilities to Tangible 1.65% Net Worth is greater than 1.0:1.0 Changes in the Applicable Margin resulting from a change in the Ratio of Total Liabilities to Tangible Net Worth, as set forth in a Compliance Certificate delivered pursuant to Section 5.1(c) evidencing such a change, shall become effective upon the forty-fifth (45th) day after each fiscal quarter of the Borrower. If the Borrower shall fail to deliver a Compliance Certificate within 45 days after the end of each fiscal quarter, then for purposes of determining the Applicable Margin, the Ratio of Total Liabilities to Tangible Net Worth from and including the date by which such Compliance Certificate was to have been delivered to the actual date of delivery shall be conclusively presumed to be greater than 1.0:1.0. "Assignment and Acceptance Agreement": an assignment and acceptance agreement executed by an assignor and an assignee pursuant to which the assignor assigns to the assignee all or any portion of such assignor's Notes and Revolving Credit Commitment, as contemplated by Section 9.9(a), in form and content satisfactory to the Agent. "Authorized Signatory": the chief executive officer, the president or the chief financial officer. "Base Rate": the rate of interest announced by the Agent as its prime rate of interest ("Prime") minus 0.50%. "Base Rate Advance": collectively, the Loans (or any portions thereof) at such times as they (or such portions) are made and/or being maintained at the Base Rate. "Borrowing Date": any Business Day on which a Loan is made. "Borrowing Request": a written request for Loans in the form supplied or specified by the Agent. "Business Day": any day of the year on which banking institutions in New York, New York are not authorized or required by law or other governmental action to close and, to the extent the LIBOR Rate is applicable, on which dealings are carried on in the London Interbank Market. "Collections": all payments (including payments made by or on behalf of the Borrower or received by the Agent on account of the Borrower's obligations under the Loan Documents or pursuant to enforcement proceedings thereunder) received 2 by the Agent in respect of the Notes and/or the Loan Agreement including, without limitation, late fees and charges, the Unused Facility Fee and other fees collected by the Agent pursuant to the terms of the Loan Agreement; provided, however, that the term "Collections" shall not include any sums (or accrued interest thereon) paid to the Agent on account of the costs of closing, administering or enforcing the, Loan Documents, transaction and service expenses, issuance fees, processing fees, inspection fees, legal fees and costs or late charges, to the extent a Lender has not shared in the payment of such expenses, fees, costs or charges. "Compliance Certificate": a written certificate made by the Borrower and delivered to the Agent pursuant to Section 5.1(c). "Conversion Date": as the case may be, the date on which a Base Rate Advance is converted to a LIBOR Advance, the date on which a LIBOR Advance is converted to a Base Rate Advance, or the date on which a LIBOR Advance is renewed for a successive one (1) month Interest Period as contemplated by Section 2.1.4(b). "Cost of Acquisition": with respect to any Acquisition, as at the date of entering into any agreement therefor, the sum of the following (without duplication) (i) the value of the capital stock, warrants or options to acquire capital stock of the Borrower or any subsidiary to be transferred in connection therewith, (ii) the amount of any cash and fair market value of other property (excluding property described in clause (i) and the unpaid principal amount of any debt instrument) given as consideration, (iii) the amount (determined by using the face amount or the amount payable at maturity, whichever is(.) greater) of any Indebtedness incurred, assumed or acquired by the Borrower or any subsidiary in connection with such Acquisition, (iv) all additional purchase price amounts in the form of earnouts and other contingent obligations that should be recorded on the financial statements of the Borrower and its subsidiaries in accordance with GAAP, (v) all amounts paid in respect of covenants not to compete, consulting agreements that should be recorded on financial statements of the Borrower and its subsidiaries in accordance with GAAP, (vi) the aggregate fair market value of all other consideration given by the Borrower or any subsidiary in connection with such Acquisition, and (vii) out-of-pocket transaction costs for the services and expenses of attorneys, accountants and other consultants incurred in effecting such transaction, and(.) other similar transaction costs so incurred and capitalized in accordance with GAAP. "Debt": for any date of determination, the aggregate of all amounts outstanding on the Loans and all other indebtedness for which the Borrower is liable, whether as borrower, maker, guarantor or endorser (excluding payment instruments endorsed for deposit or collection in the ordinary course of business). "Debt Service Coverage Ratio": with respect to Borrower, Borrower's Net Profit After Tax for its four (4) most recently completed fiscal quarters, less dividends to stockholders with respect to such period, plus non-cash charges (such as depreciation and amortization) for such period, divided by scheduled principal payments on Borrower's Debt for such period. "Default": any event or condition which constitutes an Event of Default or which, with the giving of notice, the lapse of time, or any other condition, would, unless cured or waived, become an Event of Default. 3 "Eligible Account": shall mean (1) an Account that arose in the ordinary course of business of Borrower from or in connection with a bonafide sale of goods or rendition of services, performed in accordance with an order or contract, oral or written, wherein all obligations of Borrower regarding the shipment or delivery of such goods to the customer have been satisfied or the services have been performed for the customer; (2) the rights of Borrower in and to the Account and the proceeds thereof are not subject to any assignment, claim, lien, security interest or other encumbrance; (3) to the best of Borrower's knowledge, the account is not disputed or subject to offset, credit allowance or adjustment by the customer, except discounts customarily offered in Borrower's business; and (4) the Account has been due and payable for one hundred twenty (120) days or less from the invoice date. "Environmental Laws": any and all federal, state and local laws relating to the environment, the use, storage, transporting, manufacturing, handling, discharge, disposal or recycling of hazardous substances, materials or pollutants or industrial hygiene and including, without limitation, (i) the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 USCA ss.9601 et seq.; (ii) the Resource Conservation and Recovery Act of 1976, as amended, 42 USCA 0901 et seq.; (iii) the Toxic Substance Control Act, as amended, 15 USCA ss.2601 et seq.; (iv) the Water Pollution Control Act, as amended, 33 USCA ss.1251 et seq.; (v) the Clean Air Act, as amended, 42 USCA ss.7401 et seq.; (vi) the Hazardous Material Transportation Act, as amended, 49 USCA ss.1801 et seq.;.; and (vii) all rules, regulations, judgments, decrees, injunctions and restrictions thereunder and any similar state law. "Event of Default": any of the events specified in Section 8.1, provided that any requirement for the giving of notice, the lapse of time or any other condition has been satisfied. "GAAP": generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other statement by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination, consistently applied. "Governmental Authority": any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator. "Guarantor" and "Guarantors": one or more of General Microwave Corporation, a New York corporation, Micro-El Patent Corporation, a Delaware corporation, General Microwave Israel Corporation, a Delaware corporation, Herley-CTI, Inc., a Delaware corporation, Herley-RSS, Inc., a Delaware corporation, Micro Systems, Inc., a Florida corporation, Innovative Concepts, Inc. a Virginia corporation, Stapor Research, Inc., a Virginia corporation, HMS Investments. Inc., a Delaware corporation, HMS Trading, Inc., a Delaware corporation, MSI Acquisition Corp., a Delaware corporation, ICI Acquisition Corp., a Delaware corporation, and any additional U.S. - domiciled operating subsidiaries which Borrower or any Guarantor may create or acquire at any time a Loan remains outstanding and unpaid or any other amount is owing under any Loan Document. The terms "Guarantor" and "Guarantors" do not include General Microwave Israel, Ltd. and EW Simulation Technology Ltd. 4 "Hazardous Substance": any hazardous or toxic substance, material or waste, including, but not limited to, (i) those substances, materials and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto and replacements therefor and (ii) any substance, pollutant or material defined as, or designated in any Environmental Law as a "hazardous substance," "toxic substance," "hazardous material," "hazardous waste," "restricted hazardous waste," "pollutant," "toxic pollutant" or words of similar import. "Highest Lawful Rate" : with respect to a Lender, the maximum rate of interest, if any, that at any time or from time to time may be contracted for, taken, charged or received by the Lender on the Notes or which may be owing to a Lender pursuant to this Agreement under the laws applicable to the Lender and this Agreement. "Indictment": the indictment which was filed in the United States District Court for the Eastern District of Pennsylvania on June 6, 2006 at Criminal Not. 06-CR268. "Interest Period": with respect to any LIBOR Advance requested by the Borrower, the period commencing on, as the case may be, the Borrowing Date or the Conversion Date with respect to such LIBOR Advance and ending on the date that is one month thereafter, provided, however: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day and (ii) no Interest Period shall end, in the case of a Revolving Credit Loan, after the Revolving Credit Maturity Date. "Inventory": shall mean and include all now owned or hereafter acquired goods, merchandise and other personal property, wherever located, to be furnished under any consignment arrangement, contract of service or held for sale or lease, all raw materials, work in process, finished goods and materials and supplies of any kind, nature or description which are or might be used or consumed in such Person's business or used in selling or furnishing such goods, merchandise and other personal property, and all documents of title or other documents representing them. "Lender" and "Lenders": one or more of Manufacturers and Traders Trust Company, in its capacity as a Lender, Bank of Lancaster County, N.A. and each Person that becomes a Lender pursuant to the provisions of Section 9.9(a) of this Agreement. "LIBOR": shall mean the rate per annum obtained by dividing (i) the one-month interest period London Interbank Offered Rate as fixed by the British Bankers Association for United States dollar deposits in the London Interbank Eurodollar Market at approximately 11:00 a.m. London, England time (or as soon thereafter as practicable) as determined by the Bank from any broker, quoting service or commonly available source utilized by the Bank by (ii) a percentage equal to 100% minus the stated maximum rate of all reserves required to be maintained against "Eurocurrency Liabilities" as specified in Regulation D (or against any other category of liabilities which includes deposits by reference to which the interest rate on LIBOR Rate Loan or Loans is determined or any category of extensions of credit or other assets which includes loans by a 5 non-United States' office of a bank to United States' residents) on such date to any member bank of the Federal Reserve System. Notwithstanding any provision above, the practice of rounding to determine LIBOR may be discontinued at any time in the Bank's sole discretion. If LIBOR shall become unavailable, a per annum rate of interest equal to the Base Rate shall be substituted for LIBOR. "LIBOR Advances": collectively; the Loans (or any portions thereof) at such time as they (or such portions) are made and/or being maintained at a rate of interest based upon LIBOR. "Lien": any mortgage, pledge, hypothecation, assignment, deposit or preferential arrangement, encumbrance, lien (statutory or other), or other security agreement or security interest of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement and any capital or financing lease having substantially the same economic effect as any of the foregoing. "Loans": the Revolving Credit Loans. "Loan Documents": collectively, this Agreement, the Notes and all other documents executed and delivered in connection with the Loans, and any future or additional loan documents executed and delivered in connection with the Loans, and any amendments or modifications thereof. "Note": a Revolving Credit Note. "Notes": the Revolving Credit Notes. "Permitted Liens": any of the liens described in clauses (i) through (v) of Section 6.3 of this Agreement: "Person": an individual, a partnership, a corporation, a business trust, a joint stock company, a trust, a limited liability company, an unincorporated association, a joint venture, a Governmental Authority or any other entity of whatever nature. "Required Lenders": Lenders having Revolving Credit Commitments equal to at least 66-2/3 % of the Aggregate Revolving Credit Commitments of all the Lenders. "Revolving Credit Commitment": in respect of any Lender having a Revolving Credit Commitment, such Lender's undertaking during the Revolving Credit Commitment Period to make Revolving Credit Loans to the Borrower, subject to the terms and conditions hereof, in an aggregate outstanding principal amount not exceeding the amount set forth next to the name of such Lender in Exhibit A under the heading "Revolving Credit Commitments." "Revolving Credit Commitment Percentage": in respect of any Lender having a Revolving Credit Commitment, the percentage that the amount of such Lender's Revolving Credit Commitment comprises of the Aggregate Revolving Credit Commitments, as set forth next to the name of such Lender in Exhibit A under the heading "Revolving Credit Commitment Percentage." 6 "Revolving Credit Commitment Period": the period from the date of this Agreement through the day preceding the Revolving Credit Maturity Date. "Revolving Credit Loan" and "Revolving Credit Loans": as defined in Section 2.1. "Revolving Credit Maturity Date": March 31, 2009, or such earlier date on which the Notes shall become due and payable, whether by acceleration or otherwise. "Tangible Net Worth": with respect to any Person, at any time of determination, that amount which is equal to the excess of all of such Person's assets (excluding inter-affiliate items and any and all intangible assets, such as, but not limited to, customer lists, covenants not to compete, deferred financing costs, deferred charges, goodwill, intellectual property, licenses, organization costs, officer and stockholder advances or receivables, mineral rights and the like) over all of such Person's liabilities (except inter-affiliate items), determined in accordance with GAAP. 1.2 Other Definitional Provisions. (a) All terms defined in this Agreement shall have the meanings given such terms herein when used in the Loan Documents or any certificate, opinion or other document made or delivered pursuant hereto or thereto, unless otherwise defined therein. (b) As used in the Loan Documents and in any certificate, opinion or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof," "herein," "hereto" and "hereunder" and similar words when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, schedule and exhibit references contained herein shall refer to Sections hereof or schedules or exhibits hereto unless otherwise expressly provided herein. (d) The word "or" shall not be exclusive "may not" is prohibitive and not permissive, and an "agreement" of a Person shall include any applicable promise, covenant, representation, warranty or other undertaking of such Person. (e) Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular. (f) Unless specifically provided in a Loan Document to the contrary, references to time shall refer to the prevailing time in Lancaster, Pennsylvania. 2. AMOUNT AND TERMS OF REVOLVING CREDIT. 2.1 Revolving Credit Loans. Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans (each a "Revolving Credit Loan" and, as the context may require, collectively with. all Revolving Credit Loans of such Lender and with the Revolving Credit Loans of all other Lenders, the "Revolving Credit Loans") to the Borrower from time to time during the Revolving Credit Commitment Period, in an aggregate outstanding principal 7 amount at any one time outstanding not to exceed such Lender's Revolving Credit Commitment. At no time shall the aggregate outstanding principal amount of the Revolving Credit Loans of all Lenders exceed the Aggregate Revolving Credit Commitments. During the Revolving Credit Commitment Period, the Borrower may borrow, prepay in whole or in part and reborrow under the Revolving Credit Commitments, all in accordance with the terms and conditions of this Agreement. The Borrower covenants that it will not request any borrowing under the Revolving Credit Loans that would cause the aggregate outstanding principal amounts of the Revolving Credit Loans to exceed the aforesaid limitations. Also, in the event that HMS Investments, Inc. shall at any time(s) have total cash and cash equivalents below $5,000,000, the aggregate outstanding principal amount of the Revolving Credit Loans during any such period(s) may not exceed 100% of the Borrower's Eligible Accounts as determined by Bank, it being agreed, however, that cash held in General Microwave Israel, Ltd. may be used in calculating the required minimum cash level. Any termination of the Revolving Credit Loans, whether by expiration of the Revolving Credit Commitment Period or as a result of the existence or continuance of any Event of Default, shall relieve each Lender of the Lender's obligation hereunder to lend money or to make financial accommodations to or for the Borrower and for any of its accounts, but shall in no way release, terminate, discharge or excuse the Borrower from its absolute duty to pay or perform any or all of its obligations under this Agreement. The application of the preceding sentence is intended to apply as long as any sums remain outstanding, due or owing under any Revolving Credit Loan. 2.1.1 Revolving Credit Notes. The Revolving Credit Loans made by a Lender shall be evidenced by a Note of the Borrower (each a "Revolving Loan Note" and collectively the "Revolving Loan Notes") the terms and conditions of which are incorporated herein by reference. The (i) date and amount of each Revolving Credit Loan made by a Lender, (ii) the interest rates and periods that such rates are applicable, and (iii) each payment and prepayment of principal and/or interest, shall be recorded by such Lender on its books and records, but any failure of such Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make payment when due of any amount owing under the Loan Documents. All repayments shall be credited to the balances due under a Lender's Revolving Credit Loans in accordance with the normal and customary practices of the Lender. Interest accrued under a Lender's Revolving Credit Loans shall be computed on the outstanding balances as reflected on the Lender's books and records. 2.1.2 Procedure for Borrowing. The Borrower may borrow under the Revolving Credit Commitments on any Business Day during the Revolving Credit Commitment Period, provided, however, that the Borrower shall notify the Agent (by telephone or telecopy) no later than 11:00 A.M. on the requested Borrowing Date, specifying (A) the aggregate principal amount to be borrowed under the Revolving Credit Commitments, (B) whether the Advance is to be a Base Rate Advance or a LIBOR Advance (if no interest rate option is specified, then the Borrower shall be deemed to have specified the Base Rate Advance option) and (C) the requested Borrowing Date. Each such notice shall be irrevocable and confirmed immediately by delivery to the Agent of a Borrowing Request. The Agent and each Lender shall be authorized to rely upon any Borrowing Request made by any representative of the Borrower as constituting an authorized Borrowing Request under the Revolving Credit Loans by the Borrower. Upon receipt of each notice of borrowing from the Borrower, the Agent shall promptly notify each Lender thereof. Subject to its 8 receipt of the notice referred to in the preceding sentence, each Lender will make the amount of its Revolving Credit Commitment Percentage of each borrowing of Revolving Credit Loans available to the Borrower not later than 3:00 P.M. on the relevant Borrowing Date requested by the Borrower, in funds immediately available to the Borrower, by crediting an account of the Borrower maintained with Agent for such purpose with the amount of such borrowing. 2.1.3 Repayment. Payments of principal, interest and other amounts due and owing under each Revolving Credit Note shall be made by the Borrower to the Agent for the account of the respective Lender in immediately available funds as and when provided in Section 2.3(c) with respect to interest, and with respect to principal, as and when provided in such Revolving Credit Note or as otherwise provided in this Agreement. The Agent will promptly remit to each Lender its pro rata share of all Collections when received by the Agent, subject to the following: (a) After deduction of reasonable expenses and other charges incurred by the Agent and reimbursable by the Borrower, Collections shall be applied first to the payment of all accrued but unpaid interest then due and payable in. the order of maturity of the installments of such interest on a pro rata basis in relation to the respective aggregate amounts of accrued but unpaid interest on each Lender's Revolving Credit Loans; and (b) Second, to the repayment of all amounts of principal on a pro rata basis in relation to the respective outstanding principal balance of each Lender's Revolving Credit Loans constituting LIBOR Advances, and the balance, if any, to the payment to the Agent in its capacity as a Lender of the outstanding principal balance of Base Rate Advances; provided, however, that principal amounts constituting LIBOR Advances may be repaid only on the last day of the respective Interest Period applicable to such LIBOR Advance and, if repayment of a LIBOR Advance does not occur on the last day of the respective Interest Period and the Borrower has not otherwise provided the Agent with timely notice of the conversion of such LIBOR Advance to a Base Rate Advance in accordance with Section 2.1.4 of this Agreement, then such LIBOR Advance shall be deemed to constitute a renewed LIBOR Advance for a successive one (1) month Interest Period. Outstanding principal amounts constituting Base Rate Advances may be repaid at any time. (c) Notwithstanding the provisions of Sections 2.1.3(a) and (b) above, following the occurrence of an Event of Default and the acceleration by the Lenders of the amounts due under the Notes, the Agent shall distribute Collections, after deduction of reasonable expenses and other charges incurred by the Agent and reimbursable by the Borrower, to the Lenders on a pro rata basis in relation to the respective aggregate outstanding principal balance of each Lender's Loans to the aggregate outstanding principal balance of all Loans. 2.1.4 Conversions. The Borrower may elect from time to time to convert Base Rate Advances to LIBOR Advances by giving the Agent irrevocable notice of such election no later than 12:00 Noon, three (3) Business Days prior to the date of such conversion, specifying the amount to be so converted. In addition, the Borrower may elect from time to time to convert LIBOR Advances to Base Rate Advances by giving the Agent irrevocable notice of such election no later than 12:00 Noon, one (1) Business Day prior to such conversion, provided that any such conversion of LIBOR Advances to Base Rate Advances shall only be made on a Business Day and only on the last day of the Interest Period applicable to the LIBOR Advances which are to be converted to Base Rate Advances. The Agent shall promptly provide the Lenders with notice of any such election. LIBOR Advances and Base Rate Advances may be converted pursuant to this Section in whole or in 9 part. Notwithstanding anything in this Section to the contrary, no conversion will be effected, if the Borrower or the Agent has knowledge that a Default or Event of Default has occurred and is continuing either (i) at the time the Borrower notifies the Agent of its election to convert or (ii) on the requested Conversion Date. 2.1.5 Duration of the Revolving Credit Loans. All sums outstanding under the Loans shall be paid in full and the Revolving Credit Loans shall expire on the Revolving Credit Maturity Date. 2.2 Prepayments of the Loans. The Borrower may, at its option, prepay Base Rate Advances, in whole or in part, without premium or penalty, at any time and from time to time. The Borrower may pay a LIBOR Advance, in whole or in part, only at the end of the Interest Period applicable to such LIBOR Advance. 2.3 Interest Rate and Payment Dates. (a) Prior to Maturity. Except as otherwise provided in Section 2.3(b), prior to maturity the Loans shall bear interest on the outstanding principal balances thereof at the applicable interest rate or rates per annum set forth below. Advances Rate Base Rate Advance Base Rate LIBOR Advance LIBOR plus the Applicable Margin (b) Event of Default. After the occurrence and during the continuance of an Event of Default, the outstanding principal balance of the Loans and any overdue interest or other amount payable under the Loan Documents shall bear interest at a rate per annum equal to two percent (2%) plus the rate which would otherwise be applicable under Section 2.3(a) of this Agreement. (c) General. Interest shall be calculated on the basis of a three hundred sixty (360) days per year factor applied to the actual days on which there exists an outstanding principal balance on a Loan. Interest shall be payable in arrears on the first day of each month during the Revolving Credit Commitment Period in respect of Base Rate Advances, on the last day of the applicable Interest Period in respect of LIBOR Advances, and on the Revolving Credit Maturity Date. Any change in the interest rate on a Loan resulting from a change in the Base Rate shall become effective as of the opening of business on the day on which such change shall become effective. The Agent shall notify the Borrower of the effective date and the amount of each such change in the Base Rate, but 10 any failure to so notify shall not in any manner affect the obligation of the Borrower to pay interest on the Loans in the amounts and on the dates required. Each determination of the Base Rate and LIBOR, as the case may be, by the Agent pursuant to this Agreement shall be conclusive and binding on the Borrower absent manifest error. At no time shall the interest rate payable on the Loans of any Lender, together with all other amounts payable under the Loan Documents to the extent the same are construed to constitute interest, exceed the Highest Lawful Rate applicable to such Lender. If interest payable to a Lender on any date would exceed the maximum amount permitted by the Highest Lawful Rate applicable to such Lender, such interest payment shall automatically be reduced to such maximum permitted amount, and interest for any subsequent period, to the extent less than the maximum amount permitted for such period by the Highest Lawful Rate, shall be increased by the unpaid amount of such reduction. Any interest actually received for any period in excess of such maximum allowable amount for such period shall be deemed to have been applied as a prepayment of the Loans. The Borrower acknowledges that to the extent interest payable on a Loan is based on the Base Rate or LIBOR, such rates are only some of the bases for computing interest on loans made by the Lenders, and by basing interest payable on any of such rates, the Lenders have not committed to charge, and the Borrower has not in any way bargained for, interest based on a lower or the lowest rate at which the Lenders may now or in the future make loans to other borrowers. 2.4 Use of Proceeds. (a) The proceeds of the Loans shall be used for working capital and general corporate purposes including, without limitation, financing Acquisitions (subject, however, to the conditions of Section 6.1), and for the issuance of letters of credit as provided in Section 2.4(b). (b) To the extent that the Agent, in its sole discretion, determines that funds are available under the Revolving Credit Commitments, each Lender agrees to severally issue standby letters of credit on behalf of the Borrower upon request, subject to such terms and conditions as may be required and approved by the Agent and the Lenders .in their collective discretion, including without limitation, the terms of the letters of credit and the terms of repayment to be set forth in separate reimbursement agreements in form and substance acceptable to the Agent and the Lenders. The Agent shall attribute between or among the Lenders the amounts of letters of credit requested by the Borrower. 2.5 Fees. (a) The Borrower agrees to pay to the Agent annually in advance, for its own account, an administration fee in the amount of $5,000 and to pay Agent for the ratable benefit of Lenders an "Unused Facility Fee" equal to 20 basis points (0.20%) per annum (calculated on the basis of a 360 day year for the actual days elapsed) of the unused portion of the Aggregate Revolving Credit Commitments (such unused portion being determined by subtracting the aggregate amount of all outstanding Revolving Credit Loans on the applicable date of determination from the Aggregate Revolving Credit Commitments). For purposes of calculating the unused portion of the Aggregate Revolving Credit Commitments, Letters of Credit made under the Loans shall be deemed to be used portions of the Aggregate Revolving Credit Commitments. The Unused Facility Fee shall be paid in immediately available funds and shall be calculated on the basis of the average daily unused portion of the Aggregate Revolving Credit Commitments and shall be payable quarterly in arrears and on the Revolving Credit Maturity Date. When received, the Agent will promptly remit to each Lender its pro rata share of the Unused Facility Fee based upon such Lender's Revolving Credit Commitment Percentage. 11 (b) If the Lenders are requested to issue standby letters of credit pursuant to Section 2.4(b) of this Agreement, a separate letter of credit fee equal in amount to one percent (1.00%) of the aggregate amounts of the (.)letters of credit shall be due and payable by the Borrower to the Lender upon the issuance of the letters of credit and at each anniversary of the issuance date occurring during the terms of the letters of credit. (c) All such fees shall be the absolute property of the Lenders upon payment. Payment of such fees shall not be considered payment of any of the Lenders' expenses incurred in connection with the Loans. No portion of such fees shall be refunded in the event the Borrower prepays any Loan including, without limitation, any prepayment of the Borrower's obligations under a letter of credit reimbursement agreement, whether in whole or in part. 2.6 Agent's Records. The Agent's records with respect to the Loans, the interest rates applicable thereto, each payment by the Borrower of principal and interest on the Loans, and fees, expenses and any other amounts due and payable in connection with the Loan Documents shall be presumptively correct absent manifest error as to the amount of the Loans, the amount of principal and interest paid by the Borrower in respect of each Loan and as to the other information relating to the Loans, and amounts paid and payable by the Borrower hereunder and under the Notes and other Loan Documents. 2.7 Application of Deposits. In addition to any rights of set off arising under the Loan Documents or under law, upon the occurrence of an Event of Default, the Borrower hereby authorizes the Lenders to apply any amount on deposit in any deposit account of the Borrower now or hereafter maintained with a Lender against any of the Borrower's indebtedness under the Loan Documents. 3. CONDITIONS OF LENDING - GENERAL. In addition to the conditions precedent set forth in Section 4, the obligation of the Lenders to make the Loans shall be subject to the fulfillment of the following conditions precedent: 3.1 Evidence of Action. The Agent shall have received a certificate dated as of the closing date of the Secretary or Assistant Secretary of the Borrower (i) attaching a true and complete copy of the resolutions of the Borrower's Board of Directors and of all documents evidencing other necessary corporate action (in form and substance satisfactory to the Agent) taken by it to authorize the Loan Documents to which it is a party and the transactions contemplated thereby, (ii) attaching a true and complete copy of the Borrower's articles of incorporation and by-laws, (iii) setting forth the incumbency of the Borrower's officer or officers who may sign the Loan Documents to which it is a party, including therein a signature specimen of each such officer, and (iv) attaching certificates of good standing of the Secretaries of State of the Commonwealth of Pennsylvania and the State of Delaware. 3.2 This Agreement. The Agent shall have received counterparts of this Agreement duly executed by an Authorized Signatory of the Borrower and of each Lender party hereto. 3.3 Notes. The Agent shall have received the Revolving Credit Notes duly executed by an Authorized Signatory of the Borrower. 12 3.4 Opinion of Counsel to the Borrower. The Agent shall have received an opinion of counsel to the Borrower, addressed to the Agent and Agent's Counsel, dated the closing date, in form and substance satisfactory to the Agent and covering such matters as the Agent may reasonably request. 3.5 Litigation. There shall be no injunction, writ, preliminary restraining order or other order of any nature issued by any Governmental Authority in any respect affecting the transactions provided for herein and no action or proceeding by or before any Governmental Authority shall have been commenced and be pending or, to the knowledge of the Borrower, threatened, seeking to prevent or delay the transactions contemplated by the Loan Documents or challenging any other terms and provisions hereof or thereof or seeking any damages in connection therewith. 3.6 Search Reports. The Agent shall have received UCC, tax and judgment lien search reports with respect to each applicable public office where Liens are filed disclosing that there are no Liens of record in such official's office covering any of the Borrower's property or showing the Borrower as a debtor, except for Permitted Liens. 3.7 Property, Public Liability and Other Insurance. The Agent shall have received a certificate or certificates of all insurance maintained by the Borrower in form and substance reasonably satisfactory to the Lender, together with the endorsements described in Section 5.3. 3.8 Other Documents. The Agent shall have received such other documents as the Agent shall reasonably request. 3.9 Fees and Expenses of Agent's Counsel. The fees and expenses of Agent's Counsel in connection with the preparation, negotiation and closing of the Loan Documents shall have been paid by Borrower. 3.10 Guarantors. Each of the Guarantors shall have executed and delivered to the Agent Continuing Guaranty Agreements in form and substance acceptable to the Agent, providing joint and several suretyship for the absolute, full and timely payment and performance by the Borrower of the terms and conditions of each of the Loan Documents. 3.11 Stock Pledge(s). The Agent shall have received the pledge(s) of 66% of the stock of each foreign subsidiary. 3.12 Collateral. In the event that Borrower's backlog should, at any time, fall below $50,000,000, Borrower shall grant Agent for the ratable benefit of Lenders a perfected first priority security interest in and lien on all Accounts, now owned and hereafter acquired (the "Accounts Lien"), and shall take any and all actions as Agent may request for purposes thereof and to effect the same. Should the aggregate outstanding principal amounts of the Revolving Credit Loans (including issued letters of credit) then or at any time(s) thereafter exceed 100% of Borrower's Eligible Accounts, Borrower shall also grant Agent for the ratable benefit of Lenders a perfected first priority security interest in and lien on all Inventory, now owned and hereafter acquired (the "Inventory Lien"), and shall take any and all actions as Agent may request for purposes 13 thereof and to effect the same. Borrower authorizes Agent to file one or more financing statements in the appropriate public office(s) under the Uniform Commercial Code. So long as an Event of Default has not occurred, the Accounts Lien and the Inventory Lien will be removed (without prejudice) if and when Borrower's backlog exceeds $55,000,000. 4. CONDITIONS OF LENDING - ADVANCES. The Obligation of a Lender to make any Advance under the Loans is subject to the satisfaction of the following additional conditions precedent as of each Borrowing Date: 4.1 Compliance. On each Borrowing Date and after giving effect to the Advance to be made thereon, (a) the Borrower shall be in compliance with all of the terms, covenants and conditions of the Loan Documents, (b) the representations and warranties set forth in the various Loan Documents shall be true and correct with the same force and effect as if made on and as of each such Borrowing Date (except to the extent any such representation or warranty may expressly relate solely to an earlier date); (c) there shall exist no Default or Event of Default., and (d) the outstanding principal amounts of the Loans will not exceed the limitations as to the maximum outstanding principal amount of the Loans specified in Section 2.1 of this Agreement. Each borrowing by the Borrower shall constitute a certification by the Borrower as of the date of such borrowing that each of the foregoing matters is true and correct in all respects. 4.2 Loan Documentation. All documents required by the provisions of the Loan Documents to be executed or delivered to the Agent on or before the applicable Borrowing Date shall have been executed and shall have been delivered at the office of the Agent set forth in Section 9.6 on or before such Borrowing Date. 4.3 Documentation and Proceedings. All corporate and legal proceedings and all documents and papers in connection with the transactions contemplated by the Loan Documents shall be in form and substance reasonably satisfactory to the Agent and the Agent shall have received all information and copies of all documents which the Agent may reasonably have requested in connection therewith, such documents (where appropriate) to be certified by an Authorized Signatory of the Borrower or proper Governmental Authorities. 4.4 Required Acts and Conditions. All acts, conditions and things (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any filings, recordings or registrations) required to be done, performed and to have happened on or prior to such Borrowing Date and which are necessary for the continued effectiveness of the Loan Documents, shall have been done and performed and shall have happened in due compliance with all applicable laws. 14 4.5 Approval of Counsel. All legal matters in connection with the making of each Advance shall be reasonably satisfactory to Agent's Counsel. 4.6 Supplemental Opinions. If requested by the Agent with respect to the applicable Borrowing Date, there shall have been delivered to the Agent favorable supplementary opinions of counsel to the Borrower, addressed to the Agent and dated such Borrowing Date, covering such matters incident to the transactions contemplated herein as the Agent may reasonably request. 4.7 Other Documents. The Agent shall have received such other documents as the Agent shall reasonably request. 5. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees that, so long as this Agreement is in effect, any Loan- remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender, the Borrower shall, except as otherwise specifically provided: 5.1 Reports to Agent. Deliver to the Agent the following reports: (a) The Borrower's financial statements as follows: (i) quarterly consolidated statements certified by the Borrower's chief financial officer within forty-five (45) days after the end of each of the Borrower's first three (3) fiscal quarters in each fiscal year; and (ii) year-end consolidated statements within ninety (90) days after Borrower's fiscal year-end, which year-end statements shall be audited by an independent certified public accountant and include an unqualified opinion of such accountant, any management letter issued to the Borrower by such accountant and the Borrower's response to such management letter. All financial 'statements shall be prepared in accordance with GAAP consistently applied. (b) The Borrower's quarterly report on Form 10-Q and annual report on Form 10-K as filed with the Securities and Exchange Commission within ten (10) days after filing. (c) With the quarterly financial statements required under Section 5.1(a)(1), a certificate of compliance with the requirements set forth in Sections 6.9, 6.10 and 6.11 of this Agreement signed by the Borrower's chief financial officer. 15 (d) Monthly cash and monthly backlog reporting. (e) Such other reports as may be reasonably requested by the Agent from time to time. All of the foregoing reports shall be in form and substance reasonably satisfactory to the Agent. If the reports are required to be audited by an independent certified public accountant, such independent certified public accountant shall be reasonably acceptable to the Agent. 5.2 Certificates; Other Information. Furnish to the Agent prompt written notice if: (i) any indebtedness of the Borrower is declared or shall become due and payable prior to its stated maturity, or called and not paid when due, (ii) a default shall have occurred under any note (other than the Notes) or the holder of any such note, or other evidence of indebtedness, certificate or security evidencing any such indebtedness or any obligee with respect to any other indebtedness of the Borrower has the right to declare any such indebtedness due and payable prior to its stated maturity, or (iii) there shall occur and be continuing a Default or an Event of Default. 5.3 Insurance. (a) Borrower shall maintain insurance as follows: (i) Insurance against loss or damage to the Borrower's assets and properties by fire and any of the risks covered by insurance of the type now known as "fire and extended coverage," in an amount not less than the percentage of the full replacement cost of all such properties and assets, required to satisfy any applicable co-insurance requirement in such policy and with not more than $25,000.00 deductible from the loss payable for any casualty. The policies of insurance carried in accordance with this subparagraph (i) shall contain the "Replacement Cost Endorsement"; (ii) Comprehensive public liability insurance on an "occurrence basis" against claims for "personal injury," including without limitation bodily injury, death or property damage, such insurance to afford immediate minimum protection to a limit of not less than $1,000,000 under a primary policy of insurance together with a limit of not less than $2,000,000 under an umbrella policy of insurance with respect to personal injury or death to any one or more persons or damage to property; (iii) Worker's compensation insurance (including employer's liability insurance, if requested by Agent) for all employees of Borrower in such amount as is reasonably satisfactory to Agent, or if such limits are established by law, in such amounts; 16 (iv) Directors and Officers liability insurance to a limit of not less than $3,000,000. (v) Such other insurance, and in such amounts, as may from time to time be reasonably required by Agent against the same or other hazards. (b) All policies of insurance required by the terms of paragraph (a) shall contain an endorsement or agreement by the insurer that any loss shall be payable in accordance with the terms of such policy notwithstanding any act or negligence of Borrower which might otherwise result in forfeiture of such insurance and the further agreement of the insurer waiving all rights of set-off, counterclaim or deduction against Borrower. (c) All policies of insurance shall be, issued by companies and in amounts reasonably satisfactory to Agent. All policies of insurance shall have attached thereto a lender's clause in favor of Agent, and in form reasonably satisfactory to Agent, providing that the Agent shall not be subject to contribution, and a lender's loss payable endorsement for benefit of Agent, all of a form satisfactory to Agent. Borrower shall furnish Agent with a signed duplicate original policy with respect to all required insurance coverage. If Agent consents to Borrower providing any of the required insurance through blanket policies carried by Borrower and covering more than one location, then Borrower shall furnish Agent with a signed certificate of insurance for each such policy setting forth the coverage, the limits of liability, the name of the carrier, the policy number, and the expiration date, and listing Agent as lender or loss payee. At least twenty (20) days prior to the expiration of each such policy, Borrower shall furnish Agent with evidence satisfactory to Agent of payment of premium and the reissuance of a policy continuing insurance in force as required by this Agreement. All such policies, including policies for any amount carried in excess of the required minimum and policies not specifically required by Agent, shall be in form satisfactory to Agent, shall be maintained in force and effect, shall be assigned and delivered to Agent, with premiums prepaid as collateral security for payment of the indebtedness secured hereby, and shall contain a provision that such policies will not be canceled or materially amended which term shall include any reduction in the scope or limits of coverage, without at least ten (10) days prior written notice to Agent. If the insurance, or any part thereof, shall expire, or be withdrawn, or become void or unsafe by reason of Borrower's breach of any condition thereof, or become void or unsafe by reason of the value or impairment of the capital of any company in which the insurance may then be carried, or if for any reason whatever the insurance shall be reasonably deemed by Agent to be unsatisfactory, Borrower shall obtain new insurance reasonably satisfactory to Agent. (d) In the event the Borrower fails to provide, maintain, keep in force or deliver or furnish to Agent the policies of insurance required by this Agreement, Agent may procure such insurance or single-interests insurance for such risks covering Agent's interest, and Borrower will pay all premiums thereon promptly upon demand by Agent, and until such payment is made by Borrower, the amount of all such premiums, together with interest thereon at the rate specified in the Note. (e) In the event of loss in excess of $500,000.00, Borrower will give immediate notice thereof to Agent, and Agent may make proof of loss if not made promptly by Borrower. Each insurance company concerned is hereby authorized and directed to make payment under such insurance, including return of unearned premiums, directly to Agent, instead of to Borrower and Agent jointly, and 17 Borrower appoints Agent irrevocably, as Borrower's attorney-in-fact to endorse any draft therefor. If otherwise, such policies, including all right, title and interest of the Borrower thereunder, shall become the absolute property of the Agent. 5.4 Taxes. Duly pay and discharge all taxes or other claims which might become a Lien upon any of Borrower's properties except to the extent that such items are being in good faith appropriately contested with adequate reserves therefor having been set aside and with security satisfactory to the Agent. 5.5 Properties. Maintain, preserve and keep Borrower's properties in good repair, working order and condition, and make all reasonable repairs, replacements, additions, betterments and improvements thereto. 5.6 Corporate Existence. Maintain Borrower's corporate existence and comply with all statutes, rules and regulations, the non-compliance with which would materially and adversely affect its business, assets of condition, financial or otherwise. 5.7 Issuance Taxes. Pay all stamp or issuance taxes, if any, payable by reason of the execution, delivery or issuance of this Agreement, the Notes or Loan Documents under any applicable ordinance or statute now existing or hereafter enacted, and the Borrower will at all times indemnify and hold harmless the Lenders against any liability in respect thereof. 5.8 Audits by Agent. Upon the occurrence of an Event of Default or if the Agent reasonably believes that an Event of Default is imminent based on reports or financial reports received by Agent, permit the Agent and its duly authorized agents to make, or cause to be made, inspections of any of Borrower's properties and examinations and audits of any books, records and papers of the Borrower and to make extracts therefrom at all such reasonable times and as often as the Agent may reasonably require. 5.9 Management. Maintain the current management and executive personnel of the Borrower or other management and executive personnel reasonably satisfactory to the Agent, and furnish to the Agent within five (5) days of any election or appointment of officers or directors written notice of any change of such officers and directors. 18 5.10 Compliance With Laws. Fully comply with all applicable Laws with respect to: (a) products that the Borrower sells and services it performs, (b) the conduct of its business generally, (c) its use, maintenance and operation of the real and personal properties owned or leased by it and, without limiting the foregoing, the Borrower shall obtain and maintain all permits, licenses and approvals necessary or appropriate to engage in its business. as presently conducted and presently contemplated. 5.11 Employee Benefit Plans. Comply, and shall cause each of Borrower's employee benefit plans to comply, with all applicable provisions of law. 5.12 Environmental Matters. Comply, and shall cause Borrower's properties (whether owned or leased) to comply, with all applicable Environmental Laws without limiting the foregoing, (a) the Borrower shall: (1) promptly notify the Agent and each other Person that it is required under applicable Environmental Laws to notify upon the Borrower's acquiring knowledge of a release or threatened release of any Hazardous Substance on, from, or near any of its properties, (2) promptly notify the Agent once an environmental investigation or clean-up proceeding is instituted by any Person in connection with the Borrower or any of its properties, (3) comply in all material respects with and provide such assistance as may be reasonably required in any such environmental investigation and clean-up proceeding, (4) promptly execute and complete remedial actions necessary to ensure that no environmental liens or encumbrances are levied against or exist with respect to any of the Borrower's properties or other assets, and (5) promptly notify the Agent of any citation, notification, complaint, or written notice of violation which it receives from any Person which relates or pertains to the making, storing, handling, treating, disposing, generating, transporting or release of any Hazardous Substance; and (b) the Borrower shall not use, produce, transport, dispose of or otherwise handle any Hazardous Substances or permit any other Person to do so at or from any of the Borrower's properties except in the ordinary course of Borrower's business and in compliance with all applicable Environmental Laws. The Borrower, promptly upon the written request of the Agent from time to time after (1) the occurrence of an Event of Default, or (2) the occurrence of any release of any Hazardous Substance in, on or from any property of the Borrower in violation of any Environmental Law, shall provide the Agent with an environmental site assessment or report, all in scope, form, and content satisfactory to the Agent. Upon any such event, the Agent, or its designated agent, may interview any or all of the agents and employees of the Borrower 19 regarding environmental matters, including any consultants or experts retained by the Borrower, all of whom are directed to discuss environmental issues fully and openly with the Agent or its designated agent and to provide such information as may be requested. All of the costs and expenses incurred by the Agent with respect to the audits, tests, inspections, and examinations which the Agent may conduct pursuant to this Section, including the fees of the engineers, laboratories, and contractors, shall be paid by the Borrower. The Borrower shall indemnify and hold harmless the Agent from all loss, liability, damage, reasonable costs and expenses (including, but not limited to, reasonable legal fees), fines, or other penalties or payments, for failure of the Borrower or any of its properties to comply fully with all environmental Laws The provisions of this Section shall survive the payment and satisfaction of the Loans and the termination of this Agreement. 5.13 Deposit Relationship. Maintain a meaningful deposit relationship with the Agent. 5.14 Further Assurances And Power Of Attorney. Execute from time to time such other and further documents, which in the opinion of the Agent or the Agent's counsel, may be reasonably necessary to perfect, confirm, establish, reestablish, continue, or complete the agreements of the Borrower under the Loan Documents and the purposes and intentions of this Agreement, it being the intention of the Borrower to provide hereby a full and absolute warranty of further assurance to the Agent, provided that Borrower shall not be obligated under this Section 5.14 to execute any document that could effect an amendment or modification of any term or condition of this Agreement or any other Loan Document. If the Borrower fails to execute any document requested by the Agent pursuant to Section 3.12 or this Section 5.14, the Borrower hereby appoints the Lender or any officer of the Agent as the Borrower's attorney in fact for purposes of executing such documents in the Borrower's name, place and stead, which power of attorney shall be considered as coupled with an interest and irrevocable. 6. NEGATIVE COVENANTS. The Borrower agrees that, so long as this Agreement is in effect, any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to a Lender, the Borrower will not, directly or indirectly, without prior adequate notice to Lender with respect to Section 6.1 and without the prior written consent of the Agent for all other Sections: 6.1 Acquisitions. Enter into any agreement, contract, binding commitment or other arrangement providing for, or take any action to solicit the tender of securities or proxies in order to effect any Acquisition in excess of $20,000,000 without Agent's prior review and approval if such Acquisition is being financed in whole or in part by one or more Loans made pursuant to this Agreement. The Agent shall be deemed to have approved the Acquisition if the Agent shall not have objected to the Acquisition in writing within five (5) Business Days after receipt of 20 projections including balance sheet, income statement and cash floor projections and such other information regarding the Acquisition and its anticipated effect on the Borrower as Agent reasonably may request. 6.2 Loans and Investments. Lend or advance money, credit or property to or invest in (by capital contribution, loan, purchase or otherwise) any firm, corporation, or other person, except: (a) extensions of credit to customers in the ordinary course of business, (b) securities with maturities of 180 days or less from the date of acquisition issued or fully guaranteed or insured by the United States government or any agency thereof and backed by the full faith and credit of the United States, (c) certificates of deposit, eurodollar time deposits, overnight bank deposits and bankers' acceptances of any domestic commercial bank having capital and surplus in excess of $500,000,000 having maturities of one year or less from the date of acquisition, (d) commercial paper of an issuer rated at least A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Services, Inc., or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, in each case, with maturities of not greater than sixty (60) days from the date acquired, (e) loans to employees of the Borrower made in the ordinary course of business, and (f) joint ventures entered into by the Borrower in the ordinary course of business. 6.3 Create Encumbrances. Create, assume or permit to exist, any mortgage, pledge, Lien or encumbrance of or upon, or security interest in, any of its property or assets now owned or hereafter acquired except (i) currently existing mortgages, Liens, pledges and security interests in favor of Manufacturers and Traders Trust Company as a lender of other loans to the Borrower; (ii) other Liens, charges and encumbrances incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not materially impair the use thereof in the operation of its business; (iii) Liens for taxes or other governmental charges which are not delinquent or which are being contested in good faith and for which a reserve shall have been established in accordance with generally accepted accounting principles; (iv) any Lien created under the Loan Documents; and (v) any purchase money security interest securing indebtedness incurred in the ordinary course of business. 6.4 Guaranties. Assume, endorse, be or become liable for or guarantee the obligations of any person or entity except (i) the endorsement of negotiable instruments for deposit or collection in the ordinary course of business, (ii) performance bonds and indemnities with bonding companies and similar entities entered into in the ordinary course of business and (iii) guarantees entered into by Borrower guarantying the performance of its subsidiaries under contracts with customers entered into in the ordinary course of business. 6.5 Impairment of Assets. Permit anything to be done that may materially impair the value of its properties and assets. 21 6.7 Articles of Incorporation and By-Laws. Amend or otherwise modify the Borrower's articles of incorporation or by-laws in any way which would adversely affect the interests of the Lenders under any of the Loan Documents. 6.8 Prepayments of Indebtedness. Prepay or obligate itself to prepay, in whole or in part, any indebtedness (other than the obligations under the Loan Documents). 6.9 Minimum Tangible Net Worth. Permit the Tangible Net Worth of the Borrower, on a consolidated basis, to be less than $90,000,000 at the time any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender, to be tested quarterly. 6.10 Maximum Total Liabilities to Tangible Net Worth Ratio. Permit a Total Liabilities to Tangible Net Worth Ratio of the Borrower at not greater than 1.50-to-1 at any time any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender, to be tested quarterly. 6.11 Minimum Debt Service Coverage Ratio. Permit the Debt Service Coverage Ratio of the Borrower to be less than 2.0-to-1 at any time any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender, to be tested quarterly on a rolling four quarter basis. 7. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders to enter into this Agreement and to make the Loans, the Borrower makes the following representations and warranties to the Agent and the Lenders and acknowledges the Agent's and each Lender's justifiable right to rely upon these representations and warranties: 7.1 Corporate Organization. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is in good standing and duly qualified to conduct business in the Commonwealth of Pennsylvania and in each other jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. 7.2 Enforceability of Documents. This Agreement, the Notes and each of the other Loan Documents to which the 22 Borrower is a party have been duly authorized, executed and delivered and constitute the valid and legally binding obligation of the Borrower, enforceable in accordance with their respective terms. 7.3 Legality of Documents. The execution and delivery of this Agreement, the Notes and all of the other Loan Documents to which the Borrower is a party and performance thereof will not violate any provision of law or of the articles of incorporation or by-laws (.)Of the Borrower or any agreement, indenture or instrument to which the Borrower is a party or its properties or assets may be bound or affected or of any other agreement to which the Borrower is a party. 7.4 Pending or Threatened Litigation. As of the date hereof, there .are no outstanding judgments, actions or proceedings pending before any court or governmental authority, bureau or agency, with respect to or threatened against or affecting the Borrower which would result in a material adverse change in the financial condition of the Borrower or its subsidiaries, except as disclosed in Schedule 7.4 attached hereto. Borrower agrees to promptly provide to Agent written notice of any and all outstanding judgments, actions or proceedings which may at any time hereafter be pending before any court or governmental authority, bureau or agency, with respect to or threatened against or affecting the Borrower which may reasonably be expected to have a material adverse effect on the Borrower, its financial condition, business, properties or prospects, or the ability of any Lender to enforce the loan Documents in accordance with their respective terms. 7.5 No Defaults. As of the date hereof the Borrower is not in material default under, or in material violation of, nor will the execution, delivery or performance of this Agreement, the Notes or any of the other Loan Documents to which the Borrower is' a party constitute a default under or violation of, any term of any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment used in the conduct of the Borrower's business or by which Borrower is bound. The operations of the Borrower comply in all material respects with all laws, ordinances and regulations applicable to it and no consents, authorizations or approvals of any Governmental Authority are required by the Borrower in connection with the Loan Documents. 7.6 No Onerous Agreements. The Borrower is not a party to nor bound by, nor are any of the properties or assets owned by it or used in the conduct of its business affected by, any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment, or subject to any charter or other corporate restriction, which materially and adversely affects its business, assets or condition, financial or otherwise. 7.7 Financial Statements. All balance sheets, profit and loss statements and other financial information heretofore furnished to the Agent by the Borrower are true, correct and complete in all material respects, and present fairly the financial condition of the Borrower and its subsidiaries, if any, as at the date thereof and for the periods covered thereby, including contingent liabilities of every 23 kind, which financial condition has not materially adversely changed since the date of the most recently dated balance sheet of the Borrower heretofore furnished to the Agent. 7.8 No Margin Stock Purchases. No part of the proceeds of .the Loans will be used directly or indirectly for the purpose of purchasing or carrying, or for payment in full or in part of indebtedness which was incurred for the purpose of purchasing or carrying, any margin stock as such term is defined by Regulation U of the Board of Governors of the Federal Reserve System. 7.9 Power and Authority. The Borrower has the power to execute and deliver this Agreement, the Notes and all other Loan Documents to which it is a party and has taken all necessary action to authorize the execution, delivery and performance of the same. 7.10 Properties. The Borrower has good and marketable title to all of its assets, subject to no Liens except Permitted Liens. 7.11 Taxes. The Borrower has filed all returns and reports that are required to be filed by it in connection with any federal, state or local tax, duty or charge levied, assessed or imposed upon it or its property or withheld by it, including unemployment, social security and similar taxes and all of such taxes have been either paid or adequate reserve or other provision has been made. 7.12 Environmental Matters. (a) The Borrower is in compliance with the requirements of all applicable Environmental Laws. (b) To the best of the Borrower's knowledge, no Hazardous Substances have been generated or manufactured on, transported to or from, treated at, stored at or discharged from any property owned or occupied by the Borrower in violation of any Environmental Laws; no Hazardous Substances have been discharged into subsurface waters under any such property in violation of any Environmental Laws; no Hazardous Substances have been discharged from any such property on or into property or waters (including subsurface waters) adjacent to any such property in violation of any Environmental Laws and any underground or above ground storage tanks situated on any such property and regulated under any Environmental Laws are in compliance with all applicable Environmental Laws. (c) The Borrower (i) has not received notice (written or oral) or otherwise learned of any claim, demand, suit, action, proceeding, event, condition, report, directive, Lien, violation, non-compliance or investigation indicating or concerning any potential or actual liability (including, without limitation, potential liability for enforcement, investigatory costs, cleanup costs, government response costs, removal 24 costs, remedial costs, natural resources damages, property damages, personal injuries or penalties) arising in connection with: (x) any non-compliance with or violation of the requirements of any applicable Environmental Laws, or (y) the presence of any Hazardous Substance on any property owned or occupied by the Borrower or the release or threatened release of any Hazardous Substance into the environment, (ii) has not received notice of any threatened or actual liability in connection with the presence of any Hazardous Substance on any property owned or occupied by the Borrower or the release or threatened release of any Hazardous Substance into the environment, (iii) has not received notice of any federal or state investigation evaluating whether any remedial action is needed to respond to the presence of any Hazardous Substance on any property owned or occupied by the Borrower or a release or threatened release of any Hazardous Substance into the environment for which the Borrower is or may be liable, or (iv) has not received notice that the Borrower is or may be liable to any Person under any Environmental Law. 7.13 Employee Benefit Plans. Each employee benefit plan as to which the Borrower may have any liability complies in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), including minimum funding requirements, and (i) no Prohibited Transaction (as defined under ERISA) has occurred with respect to any such plan, (ii) no Reportable Event (as defined under Section 4042 of ERISA) has occurred with respect to any such plan which would cause the Pension Benefit Guaranty Corporation to institute proceedings under Section 4042 of ERISA, (iii) the 'Borrower has not withdrawn from any such plan or initiated steps to do so, and (iv) no steps have been taken to terminate any such plan. 7.14 Solvency. As of the date hereof and after giving effect to the transactions contemplated by the Loan Documents, (i) the aggregate value of the Borrower's assets will exceed its liabilities (including contingent, subordinated, unmatured and unliquidated liabilities), (ii) the Borrower will have sufficient cash flow to enable it to pay its debts as they mature, and (iii) the Borrower will not have unreasonably small capital for the business in which it is engaged. 7.15 Subsidiaries. As of the date of this Agreement, the only direct or indirect subsidiaries of the Borrower are the Guarantors. 7.16 Disclosure. No representation or warranty by the Borrower set forth in this Agreement, any other Loan Document or in any other document or instrument delivered by-the Borrower to the Agent pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements made not misleading. 25 8. DEFAULT. 8.1 Events of Default. If any one or more of the following Events of Default, each constituting an "Event of Default," shall occur, the obligations of the Lenders to make Advances shall cease and the entire unpaid balance of the principal of and interest on the Loans shall immediately become due and payable in the case of (g) or at the option of the Agent in all other cases, without notice, presentment, protest or demand (all of which are expressly waived by the Borrower) to the Borrower being required except as specified below: (a) Failure of the Borrower to make any payment of principal or interest in respect of any Loan within 10 days after it is due; or (b) The failure of the Borrower to pay the amount by which the aggregate outstanding principal amount of all Loans exceeds Aggregate Revolving Credit Commitments within two (2) Business Days after written notice thereof shall have been given by the Agent to the Borrower; or (c) Failure by the Borrower or any Guarantor to perform any other term, condition or covenant of this Agreement, the Notes, any Loan Document or any other agreement, instrument or document delivered pursuant hereto or in connection herewith or therewith, which shall remain unremedied for the period of thirty (30) days after written notice thereof shall have been given by the Agent to the Borrower, provided, however, if such failure be such that it cannot be corrected within thirty(30) days, it shall not be an Event of Default if, in the reasonable discretion of the Agent, the Borrower is taking appropriate corrective action to cure the failure and such failure will not impair the ability of the Borrower to pay or perform the Borrower's obligations under the Loan Documents; or (d) Default is made, with respect to any evidence of indebtedness for borrowed money of the Borrower to any Person, whether now existing or hereafter created, if as a result of such default the maturity of such evidence of indebtedness is accelerated, or any such indebtedness, if owed to the Agent or any Lender, is not paid when due and payable; or (e) A material breach of or material default by the Borrower under the terms, covenants or conditions of any agreements, loans or other transactions of the Borrower with the Agent or any other lender, after the expiration of any applicable grace or cure period; or (f) Any representation or warranty made in writing to the Agent and/or the Lenders in this Agreement, the Notes or other Loan Documents or in connection with the making of any Loan or any certificate, statement or report made in compliance with this Agreement, shall have been false in any material respect when made; or 26 (g) The Borrower or any Guarantor or endorser or surety thereof shall make an assignment for the benefit of creditors, file a petition under the Federal Bankruptcy Code or any similar law, state or federal, be adjudicated insolvent or bankrupt, petition or apply to any tribunal for the appointment of a receiver, or trustee or a custodian for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or if there shall have been filed any such petition or application, or any such petition or application, or any such proceeding shall have been commenced against it, which remains undismissed for a period of sixty (60) days or more; or the Borrower or any endorser or surety by any act or omission shall indicate its consent to approval of or acquiescence in any such petition, application or proceeding or the appointment of a receiver, or trustee or a custodian for it or any substantial part of any of its properties, or shall suffer any such receivership, trusteeship, or custodianship to continue undischarged for a period of sixty (60) days or more; or (h) Any judgment against the Borrower in excess of $500,000.00, or any attachment, levy or execution against any of its properties in excess of $500,000.00 shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of thirty (30) days or more; or (i) The Borrower shall be unable, or admit its inability, to meet its obligations as they come due or failure of the Borrower generally to pay its debts as they become due; or (j) Occurrence, in Agent's sole and independent discretion, reasonably exercised, of a material adverse change in the business, properties or financial condition of the Borrower, or an event or condition which, in Agent's sole and independent discretion reasonably exercised would be expected to result in such a material adverse change. 8.2 Remedies. In the event of the occurrence and during the continuation of any Event of Default, the Agent may, but shall not be required to (i) proceed to apply to the payment of the Loans the balance to the credit of any account or accounts maintained with any Lender by the Borrower and all property of Borrower now or at any time in any Lender's possession in any capacity whatsoever (set-off) and (ii) the obligation of any Lender to make loans or otherwise extend credit to the Borrower shall immediately terminate. The Agent may exercise any other right or remedy provided pursuant to the Loan Documents and hereby granted or allowed to it by law, and each and every right and remedy provided pursuant to the Loan Documents and hereby granted to the Agent or any Lender or allowed to one or the 27 other by law shall be cumulative and not exclusive the one of the other, and may be exercised by the Agent from time to time and as often as may be necessary. The Agent shall have at any time, in its discretion, the right to enforce collection and payment by appropriate action or proceedings, and the net amounts received therefrom, after deduction of all costs and expenses incurred in connection therewith, shall be applied on account of the Loan and any other indebtedness or liabilities of the Borrower aforesaid, all without notice to the Borrower. The Agent shall not be required to marshall any security or guarantees or to resort to the same in any particular order. 9. THE AGENT. 9.1 Appointment. Each Lender hereby irrevocably designates and appoints Manufacturers and Traders Trust Company, as the Agent of such Lender under the Loan Documents and each such Lender hereby irrevocably authorizes Manufacturers and Traders Trust Company, as the Agent for such Lender, to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform in such duties as are expressly delegated to the Agent by the teens of the Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in any Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth therein, or any fiduciary relationship with any Lender, and no implied (or express) covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Loan Documents or otherwise exist against the Agent, whether arising under principles of agency or otherwise under applicable law. The term "Agent" is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship among independent contracting parties. 9.2 Administration. In the course of its administration of the Loans and the Loan Documents, the Agent may, without notice to or consent of the Lenders, in its sole discretion except as otherwise provided below, exercise or refrain from exercising any powers or rights vested in the Agent under the Loan Documents or any document relating thereto or which the Agent may be entitled to assert at law or in equity or otherwise enforce or refrain from enforcing the obligations of the Borrower. Notwithstanding the foregoing, the Agent will not, without the consent of all of the Lenders: (i) consent to the reduction of (A) any amount due and owing by the Borrower pursuant to the Loan Documents, (B) any rate of interest payable under the Loan Documents, or (C) the rate at which fees accrue under the Loan Documents; (ii) increase the amounts of or reinstate any Loan other than such reinstatement as is provided in the Loan Documents; (iii) extend the maturity date of any Loan; (iv) postpone the due date for any payment to be made by Borrower pursuant to the Loan Documents; (vi) consent to or waive any failure by the Borrower to pay money to the Lenders if such failure would otherwise constitute an Event of Default under the Loan Documents; (vii) release any Guarantor from Liability under its respective Guaranty Agreement; (viii) release any Guarantor from Liability under its respective Guaranty; or (ix) amend this Section 9.2 or any other provision of this Agreement providing for consent or other action by the Required Lenders; Notwithstanding any other provision to the contrary, Agent agrees to promptly provide to each Lender a copy of each report, certificate or other notice or request received from or on behalf of Borrower or any Guarantor pursuant to Sections 5.1, 5.2 and/or 5.3 of this Agreement or otherwise, as well as a copy of each notice the Agent provides to the Borrower or any Guarantor pursuant to this Agreement or any other Loan Document. 28 9.3 Delegation of Duties. The Agent may execute any of its duties under the Loan Documents by or through agents or attorneys-in-fact and shall be entitled to rely upon the advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any such agent(s) or attorney(s)-in-fact in the absence of the Agent's own gross negligence or willful misconduct. 9.4 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in- fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Loan Documents (except for its own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any Guarantor or any officer thereof contained in the Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, the Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Loan Documents or for any failure of the Borrower or any other Person to perform its obligations thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Loan Documents, or to inspect the properties, books or records of any Loan Party. The Agent shall not be under any liability or responsibility whatsoever, as Agent, to the Borrower or any other Person as a consequence of any failure or delay in performance, or any breach, by any Lender of any of its obligations under any of the Loan Documents. 9.5 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, opinion, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent may treat each Lender, or the Person designated in the last notice filed with it under this Section, as the holder of all of the interests of such Lender in its Loans and in its Notes until written notice of transfer, signed by such Lender (or the Person designated in the last notice filed with the Agent) and by the Person designated in such written notice of transfer, in form and substance satisfactory to the Agent, shall have been filed with the Agent. The Agent shall not be under any duty to examine or pass upon the validity, effectiveness or genuineness of the Loan Documents or any instrument, document or communication furnished pursuant thereto or in connection therewith, and the Agent shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be. The Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents .in accordance with a request or direction of 29 the Required Lenders, and such request or direction and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. Where this Agreement expressly permits or prohibits an action unless the Required Lenders otherwise determine, the Agent shall, and in-all other instances, the Agent may, but shall not be required to, initiate any solicitation for the consent or a vote of the Lenders. 9.6 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default, except with respect to default in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent has received written notice thereof from a Lender or the Borrower referring to this Agreement, describing such Event of Default and stating that such notice is a "notice of default." In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders, provided, however, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem to be in the best interests of the Lenders. 9.7 Non-Reliance on Agent and Other Lenders. Each Lender expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates ("Agent-Related Persons") has made any representations or warranties to it and that no act by the Agent or any Agent-Related Person hereinafter, including any review of the affairs of the Borrower or any other Person, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own evaluation of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and the Guarantors and made its own decision to enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, evaluations and decisions in taking or not taking action under any Loan Document, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower and the Guarantors. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrower and the Guarantors which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 30 9.8 Indemnification. Each Lender agrees to indemnify and reimburse the Agent in its capacity as such (to the extent not promptly reimbursed by the Borrower and without limiting the obligation of the Borrower or any Guarantor) upon demand, pro rata according to its Revolving Credit Commitment, from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever (including, without limitation, any amounts paid to the Lenders (through the Agent) by the Borrower pursuant to the terms of the Loan Documents, that are subsequently rescinded or avoided, or must otherwise be restored or returned) which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal ,advice in respect of rights or responsibilities under, the Loan Documents or any other documents contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing to the extent the Agent is not reimbursed for such expenses by or on behalf of the Borrower, provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting solely from the gross negligence or willful misconduct of the Agent. The agreements in this Section shall survive the payment of all amounts payable under the Loan Documents, the termination of the Aggregate Revolving Credit Commitments and the resignation of the Agent. 9.9 Agent in Its Individual Capacity. Manufacturers and Traders Trust Company and its respective affiliates may make loans to, accept deposits from, issue letters of credit for the account of, and generally engage in any kind of business with, the Borrower, and/or any Guarantor as though Manufacturers and Traders Trust Company was not Agent hereunder, and without notice to or consent of any Lender. The Lenders acknowledge that pursuant to such activities, Manufacturers and Traders Trust Company or its affiliates may receive information regarding the Borrower or a Guarantor (including information that may be subject to confidentiality obligations in favor of the Borrower or such Guarantor) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to Manufacturers and Traders Trust Company's Revolving Credit Commitment and the Notes issued to Manufacturers and Traders Trust Company hereunder, Manufacturers and Traders Trust Company shall have the same rights and powers under the Loan Documents as any Lender and may exercise the same as though it was not the Agent, and the terms. "Lender" and "Lenders" shall in each case include Manufacturers and Traders Trust Company in its individual capacity. 9.10 Successor Agent. If at any time the Agent deems it advisable, in its sole discretion, it may submit to each of the Lenders a written notice, of its resignation as Agent under this Agreement, such resignation to be effective upon the earlier of (i) the written acceptance of the duties of the Agent under the Loan Documents by a successor Agent and (ii) on the 30th day after the date of such notice. Upon any such resignation, the Required Lenders shall have the right to appoint from among the Lenders a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and accepted such appointment in writing 31 within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which successor Agent shall be a commercial bank organized under the laws of the United States of America or any State thereof. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent's rights, powers, privileges and duties as Agent under the Loan Documents shall be terminated. The Borrower and the Lenders shall execute such documents as shall be necessary to effect such appointment. After any retiring Agent's resignation hereunder as Agent, the provisions of the Loan Documents shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. If at any time hereunder there shall not be a duly appointed and acting Agent, the Borrower agrees to make each payment due under the Loan Documents directly to the Lenders entitled thereto during such time. 10. GENERAL. 10.1 Survival of Warranties. All agreements, representation and warranties made herein shall survive the delivery of this Agreement. 10.2 Modification of Documents. No modification or waiver of any provision of this Agreement, the Notes, the other Loan Documents or other instruments or consent to any departure by the Borrower from any of the terms or conditions thereof, shall in any event be effective unless it shall be in writing and signed by the Agent (and, but only to the extent specifically required by Section 9.2 each Lender) and the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrower in any case shall, of itself, entitle the Borrower to any other or further notice or demand in similar or other circumstances. 10.3 Rights Cumulative. Each and every right granted to the Agent or a Lender hereunder or under any other document delivered hereunder or in connection herewith, or allowed one or the other by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Agent to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. 10.4 Construction and Severability. This Agreement, the Notes and the other Loan Documents and the rights and obligations of the parties shall be construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. The provisions of this Agreement are severable and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in 32 such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Agreement in any jurisdiction. 10.5 Conflict of Documents. The provisions of this Agreement are in addition to, and not in limitation of, the provisions of the Notes and the other Loan Documents. In. the event of conflict between the provisions of this Agreement and the provisions of the Notes or any Loan Document, the provisions of this Agreement shall prevail. 10.6 Notices. Notices by one party to the other shall be in writing and shall be deemed to have been validly given at the time when posted in the U.S. Mail, postage prepaid, or hand delivered to the following address or to any alternate address designated in writing by the recipient: The Borrower: Herley Industries, Inc. 3061 Industry Drive Lancaster, Pennsylvania 17603 Attn: Myron Levy, CEO The Agent: Manufacturers and Traders Trust Company 1703 Oregon Pike Lancaster, Pennsylvania 17601-4201 Attn: Jane E. Kline, Vice President The Lenders: Manufacturers and Traders Trust Company 1703 Oregon Pike Lancaster, Pennsylvania 17601-4201 Attn: Jane E. Kline, Vice President The Lenders: Bank of Lancaster County, N.A. 101 North Pointe Boulevard Lancaster, PA 17601 Attn: Susan S. Carson 10.7 Expenses of the Agent. The Borrower shall pay all fees and expenses reasonably incurred by the Agent in connection with the preparation, execution, delivery and performance of this Agreement, the Notes, the other Loan Documents and all other instruments executed in connection herewith or in connection with the collection of the indebtedness hereunder, or any part thereof. These fees and expenses shall include, without limitation, fees and disbursements of Agent's Counsel. 10.8 Binding Effect. This Agreement and any other documents and instruments delivered or required to be delivered pursuant hereto shall inure to the benefit of and shall 33 be binding upon the parties hereto and their heirs, executors, administrators, personal representatives, successors and permitted assigns of the parties hereto. The Borrower may not assign its rights or obligations hereunder without the prior written consent of Agent and all of the Lenders. 10.9 Participations and Assignments. (a) Each Lender with the prior written consent of the Agent shall have the right to assign all or any part of such Lender's Loans, Revolving Credit Commitment and Notes, on a pro rata basis, to any other Lender, provided, however, notwithstanding the foregoing, that any such assignment by Bank of Lancaster County and each Bank of Lancaster County Affiliate (as hereinafter defined) shall be permitted without such consent if made to a Bank of Lancaster County Affiliate. For the purposes of this Section 10.9, the term "Bank of Lancaster County Affiliate" shall mean any commercial bank organized under the laws of the United States of America or any State thereof that is, directly or indirectly., wholly-owned by the entity that is Bank of Lancaster County's "ultimate parent entity" as such term is defined in 16 CFR ss.801.1. For each assignment, the parties to such assignment shall execute and deliver to the Agent for its acceptance and recording an Assignment and Acceptance Agreement. Upon such execution, delivery, acceptance and recording by the Agent, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, the assignor Lender thereunder shall be released from its obligations under the Loan Documents. The Borrower agrees upon written request of the Agent and at the Borrower's expense to execute and deliver (1) to such assignee, Notes, dated the effective date of such Assignment and Acceptance Agreement, in an aggregate principal amount equal to the Loans assigned to, and Revolving Credit Commitment assumed by, such assignee and (2) to such assignor Lender, Notes, dated the effective date of such Assignment and Acceptance Agreement, in an aggregate principal amount equal to the balance of such assignor Lender's Loans and Revolving Credit Commitment, if any, and each assignor' Lender shall cancel and return to the Borrower its existing Notes. Upon any such assignment, the applicable Revolving Credit Commitment and Revolving Credit Commitment Percentages set forth in Exhibit A shall be adjusted accordingly by the Agent and a new Exhibit A shall be distributed by the Agent to the Borrower and each Lender. (b) Each Lender may grant participations in all or any part of its Loans, its Notes and its Revolving Credit Commitment to one or more lenders, provided that (i) such Lender's obligations under the Loan Documents shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties to the Loan Documents for the performance of such obligations, (iii) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents, (iv) no sub-participations shall be permitted and (v) the voting. rights of any holder of any participation shall be limited to decisions that only do any of the following: (A) subject the participant to any additional obligation (B) reduce the principal of, or interest on the Notes or any fees or other amounts payable hereunder to the extent such participant has an interest therein (C) postpone any date fixed for the payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder to the extent such participant has an interest therein, provided, however, notwithstanding the foregoing, that any such participation granted by Bank of Lancaster County and each Bank of Lancaster County Affiliate shall require the prior written consent of the Agent if made to any lender other than a Bank of Lancaster County Affiliate. 34 10.10 Indemnification by the Borrower. In addition to all amounts payable hereunder, the Borrower shall protect, indemnify, and save harmless the Agent, each Lender and their respective officers, employees and agents (collectively, the "Indemnitees") against and from any and all liabilities, suits, actions, claims, demands, losses, expenses and costs of every kind and nature incurred by, or asserted or imposed against any Indemnitee by reason of (a) any accident, injury (including death) or damage to any person or property, however caused (other than the gross negligence or willful misconduct of such Indemnitee), resulting from, connected with or growing out of any act of commission or omission of the Borrower, or any officers, employees, agents, assignees, contractors or subcontractors of the Borrower, or (b) any untrue statement by the Borrower or any of its officers, employees or agents of a material fact or any omission by the Borrower or any of its officers, employees or agents to state a material fact necessary in order to make any statements made, in light of the circumstances under which they were made, not misleading and made in connection with the Loans and the transactions contemplated by this Agreement and, in any such case, regardless of whether such liabilities, suits, actions, claims, demands, damages, losses, expenses and costs be against, or be suffered or sustained by, any Indemnitee, or be against, or be suffered or sustained by, legal entities, officers, agents, or other persons to whom an Indemnitee may become liable therefor. The Borrower may, and if so requested by the Indemnitee shall, undertake to defend, at its sole cost and expense, any and all suits, actions and proceedings brought against such Indemnitee in connection with any of the matters indemnified against in this Section. The Agent and each Lender agree to give the Borrower timely notice of and shall forward to the Borrower every demand, notice, summons or other process received with respect to any claim or legal proceeding within the purview hereof, but the failure to give such notice shall not affect an Indemnitee's rights to indemnification hereunder unless the failure to give notice shall have deprived the Borrower of a reasonable opportunity to contest any such matter. If the indemnification provided for herein is held by a court to be unavailable or is insufficient to hold harmless the Indemnitees in respect of any losses, claims, damages or liabilities (or actions in respect thereof), then the Borrower shall contribute to the amount paid or payable by the Indemnitees as a result of the losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Borrower on the one hand and the Indemnitees on the other hand, as well as any other relevant equitable considerations. The provisions of this Section shall survive the expiration of the Revolving Credit Commitment Period, the repayment, satisfaction or discharge of the Loans, and the Resignation of the Agent or replacement of any Lender. 10.11 Integration. All Exhibits to a Loan Document shall be deemed to be a part thereof. The Loan Documents embody the entire agreement and understanding among the Borrower, the Agent, the Lenders and the other parties thereto with respect to the subject matter thereof and supersede all prior agreements and understandings among the Borrower, the Agent, the Lenders and the other parties with respect to the subject matter thereof. This Agreement amends and restates that certain Loan Agreement dated June 19, 2002, by and among Herley Industries, Inc., Allfirst Bank (a predecessor to Manufacturers and Traders Trust Company), Fulton Bank and Manufacturers and Traders Trust Company, as Agent, as the same has been amended and supplemented from time to time. 35 10.12 Waiver of Trial by Jury. THE AGENT, EACH LENDER AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREIN. FURTHER, THE BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE AGENT OR ANY LENDER, OR COUNSEL THERETO, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT OR ANY LENDER WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES THAT THE AGENT AND THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION. 10.13 Jurisdiction and Venue. The Borrower hereby irrevocably consents to the exclusive jurisdiction of any state or federal court for the county or judicial district where the Agent's office indicated in Section 10.6 of this Agreement is located, and consents that all service of process be sent by nationally recognized overnight courier service directed to the Borrower at the Borrower's address set forth herein and service so made will be deemed to be completed on the business day after deposit with such courier, provided that nothing contained in this Agreement will prevent the Agent or any Lender from bringing any action, enforcing any award or judgment or exercising any rights against the Borrower individually, against any security or against any property of the Borrower within any other country, state or other foreign or domestic jurisdiction. The Agent and the Borrower agree that the venue provided above is the most convenient forum for both the Agent and the Borrower. The Borrower waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Agreement. 10.14 Indictment. The advance formula set forth in Section 2.1 that applies in the event that HMS Investments, Inc. shall at any time(s) have total cash and cash equivalents below $5,000,000 and the collateral requirement contained in Section 3.12 will cease and terminate if and when the Indictment is actually resolved to Agent's reasonable satisfaction. The Borrower acknowledges that it has read and understands all the provisions of this Agreement, including Waiver, of Trial by Jury, and has been advised by counsel as necessary or appropriate. 36 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Agreement to be duly executed on its respective behalf on the date first set forth above. WITNESS: HERLEY INDUSTRIES, INC. /S/ /S/ - ----------------------------- By: ----------------------------------- PRESIDENT Title: -------------------------------- ATTEST: BANK OF LANCASTER COUNTY, N.A. /S/ /S/ - ---------------------------- By: ----------------------------------- VICE PRESIDENT SENIOR VICE PRESIDCENT Title: --------------------- Title: -------------------------------- WITNESS: MANUFACTURERS AND TRADERS TRUST COMPANY /S/ /S/ - ---------------------------- By: ----------------------------------- Title: -------------------------------- 37 REVOLVING CREDIT COMMITMENTS AND REVOLVING CREDIT COMMITMENT PERCENTAGES
Revolving Credit Revolving Credit Lender Commitment Commitment Percentage - -------------------------------------------------------------------------------- Manufacturers and Traders $30,000,000.00 75 % Trust Company Bank of Lancaster County, $10,000,000.00 25 % N.A. Aggregate Revolving Credit $40,000,000.00 100 % Commitment
38 EX-31 3 hrly10qapril07-ex31.txt CERTIFICATIONS EXHIBIT 31 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) I, Myron Levy, Chairman of the Board and Chief Executive Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Herley Industries, Inc. ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fiscal quarter ended April 29, 2007 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 7, 2007 By: /S/ Myron Levy ------------------------- Name: Myron Levy Title: Chairman of the Board and Chief Executive Officer CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) I, Kevin J. Purcell, Chief Financial Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Herley Industries, Inc. ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fiscal quarter ended April 29, 2007 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 7, 2007 By: /S/ Kevin J. Purcell ------------------------------ Name: Kevin J. Purcell Title: Chief Financial Officer EX-32 4 hrly10qapril07-ex32.txt CERTIFICATIONS EXHIBIT 32 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Herley Industries, Inc. (the "Company") on Form 10-Q for the quarter ended April 29, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Myron Levy, Chairman of the Board and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) Such Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 7, 2007 By: /S/ Myron Levy ------------------------------- Name: Myron Levy Title: Chairman of the Board and Chief Executive Officer CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Herley Industries, Inc. (the "Company") on Form 10-Q for the quarter ended April 29, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin J. Purcell, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) Such Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 7, 2007 By: /S/ Kevin J. Purcell ---------------------------------------- Name: Kevin J. Purcell Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----