-----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, I0SGk5DB4+HX8mybGxB2nAUuQiVytPM0kgVXhBQMG0ToLDz3KPO5NlgbczYXcQc5 8s3zDqVAj1Vv8DEay9nT6g== 0000950149-96-000730.txt : 19960621 0000950149-96-000730.hdr.sgml : 19960621 ACCESSION NUMBER: 0000950149-96-000730 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19960619 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIGA TRONICS INC CENTRAL INDEX KEY: 0000719274 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 942656341 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-06337 FILM NUMBER: 96583188 BUSINESS ADDRESS: STREET 1: 4650 NORRIS CANYON ROAD CITY: SAN RAMONN STATE: CA ZIP: 94583 BUSINESS PHONE: 5103284650 MAIL ADDRESS: STREET 1: 4650 NORRIS CANYON ROAD CITY: SAN RAMON STATE: CA ZIP: 94583 S-4 1 GIGATRONICS FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1996 REGISTRATION NO. 33- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- GIGA-TRONICS, INCORPORATED (Exact name of Registrant as specified in its charter) CALIFORNIA 38252 94-2656341 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
4650 NORRIS CANYON ROAD SAN RAMON, CALIFORNIA 94583 (510) 328-4650 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- GEORGE H. BRUNS, JR. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER GIGA-TRONICS, INCORPORATED 4650 NORRIS CANYON ROAD SAN RAMON, CALIFORNIA 94583 (510) 328-4650 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- With copies to: WILLIAM L. HUDSON, ESQ. JON C. PERRY, ESQ. BROBECK, PHLEGER & HARRISON ONE MARKET SPEAR STREET TOWER SAN FRANCISCO, CALIFORNIA 94105 (415) 442-0900 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As promptly as practicable after this Registration Statement becomes effective and the effective time of the proposed merger (the "Merger") of a wholly owned subsidiary of Giga-tronics, Incorporated ("Giga-tronics") with and into ASCOR, Inc. ("ASCOR"), as described in the Agreement and Plan of Reorganization, dated as of May 2, 1996, as amended (the "Reorganization Agreement"), attached as Appendix C to the Joint Proxy Statement/Prospectus forming a part of this Registration Statement. ---------------- If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ---------------- CALCULATION OF REGISTRATION FEE
======================================================================================================================= TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(3) FEE(4) - ----------------------------------------------------------------------------------------------------------------------- Common Stock, no par value per share .................. 724,986 $0.33-1/3 $4,409,356 $1,521 =======================================================================================================================
(1) Represents the maximum number of shares of common stock, no par value per share of Giga-tronics ("Giga-tronics Common Stock") issuable in connection with the Merger in exchange for all outstanding securities of ASCOR. (2) Estimated pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended (the "Securities Act"), based on the par value per share of the stock of ASCOR outstanding on June 11, 1996, to be received by Giga-tronics in the Merger. (3) Calculated as the total number of shares of ASCOR stock outstanding on June 11, 1996, which was 13,228,069 multiplied by one-third of the (deemed) par value per share of $1.00. (4) The Registration Fee has been calculated pursuant to Rule 457(f) under the Securities Act as follows: 1/29th of one percent of the proposed aggregate maximum offering price. A filing fee of $1,197 was paid in connection with the filing of Giga-tronics preliminary proxy statement. The difference of $324 between the amount referenced above and $1,197 is paid herewith. 2 CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN FORM S-4
FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS ------------------------------------------------ ---------------------- (Information About the Transaction) 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus.......................................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus........................................................ Inside Front and Outside Back Cover Pages 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information................................................. Summary; Risk Factors; Summary Historical and Pro Forma Financial Information; Comparative Per Share Data; Comparable Market Price Data; Information Concerning Giga-tronics, Incorporated; Information Concerning ASCOR, Inc. 4. Terms of the Transaction............................................ Summary; The Merger; Description of the Merger; The Reorganization Agreement and Related Agreements; Description of Giga-tronics Capital Stock; Comparison of Rights of Shareholders of Giga-tronics and ASCOR Securities 5. Pro Forma Financial Information..................................... Summary; Summary Historical and Pro Forma Financial Information--Pro Forma Combined Financial Information 6. Material Contacts with the Company Being Acquired................... The Merger; Background of the Merger 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters..................... Not Applicable 8. Interests of Named Experts and Counsel.............................. Legal Matters; Experts 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................................... Not Applicable (Information About the Registrant) 10. Information with Respect to S-3 Registrants......................... Not Applicable
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FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS ------------------------------------------------ ---------------------- 11. Incorporation of Certain Information by Reference................... Not Applicable 12. Information with Respect to S-2 or S-3 Registrants.................. Not Applicable 13. Incorporation of Certain Information by Reference................... Not Applicable 14. Information with Respect to Registrants Other than S-2 or S-3 Registrants................................................ Information Concerning Giga-tronics, Incorporated; Summary; Risk Factors; The Merger; Voting and Proxies--Giga-tronics; Background of the Merger; Interests of Certain Persons in the Merger; Employee Benefit Plan; Summary Historical and Pro Forma Financial Information; Pro Forma Combined Financial Information; Description of Giga- tronics and ASCOR Securities; Comparison of Rights of Shareholders of Giga-tronics and ASCOR (Information About the Company Being Acquired) 15. Information with Respect to S-3 Companies........................... Not Applicable 16. Information with Respect to S-2 or S-3 Companies.................... Not Applicable 17. Information with Respect to Companies Other than S-2 or S-3 Companies.................................................. Information Concerning ASCOR, Inc.; Summary; Risk Factors; The Merger; ASCOR Shareholder Consent Solicitation--Vote Required; Background of the Merger; Interests of Certain Persons in the Merger; Employee Benefit Plan; Summary Historical and Pro Forma Financial Information; Pro Forma Combined Financial Information; Description of Giga-tronics and ASCOR Securities; Comparison of Rights of Shareholders of Giga-tronics and ASCOR
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FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS ------------------------------------------------ ---------------------- (Voting and Management Information) 18. Information if Proxies, Consents or Authorizations Are to be Solicited................................................... Summary; Voting and Proxies--Giga- tronics; ASCOR Shareholder Consent Solicitation--Vote Required; The Merger; The Reorganization Agreement and Related Agreements; Interests of Certain Persons in the Merger; Compensation of Directors and Executive Officers by Giga-tronics and ASCOR; Structure of Board of Directors After the Merger; Management and Security Ownership After the Merger; Stock Ownership of Certain Beneficial Owners and Management; Description of Giga- tronics and ASCOR Securities 19. Information if Proxies, Consents or Authorizations Are Not to be solicited in an Exchange Offer.......................... Not Applicable
5 AVAILABLE INFORMATION Giga-tronics is subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, each file reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Such reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven World Trade Center (13th Floor), New York, New York 10019. Copies of such material may be obtained by mail from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Each of Giga-tronics' Common Stock is quoted on the Nasdaq National Market, and such reports, proxy statements and other information can also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. Giga-tronics has filed with the SEC a registration statement on Form S-4, including this Joint Proxy Statement/Prospectus and other information (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act, with respect to the shares of Giga-tronics Common Stock to be issued to holders of ASCOR Securities in the Merger. This Joint Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information, reference is hereby made to the Registration Statement. Copies of the Registration Statement and the exhibits and schedules thereto may be inspected, without charge, at the offices of the SEC, or obtained at prescribed rates from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. 6 GIGA-TRONICS Giga-tronics Incorporated 4650 Norris Canyon Road San Ramon, California 94583 Confidential, For Use Of The Commission Only Preliminary Copy June 14, 1996 To Our Shareholders: I cordially invite you to attend the special meeting of Giga-tronics Incorporated ("Giga-tronics") shareholders to be held at 10:00 a.m. on Wednesday, July 17, 1996, at the Giga-tronics facility, 4650 Norris Canyon Road, San Ramon, California. At such meeting, Giga-tronics shareholders will be asked to consider and approve the issuance of 724,986 shares of Giga-tronics Common Stock in connection with the proposed Merger of Giga-tronics and ASCOR, Inc. ("ASCOR"), as described in the attached Joint Proxy Statement/Prospectus. As a result of the "Merger," and subject to the approval of the Merger by the shareholders of ASCOR, a newly created wholly owned subsidiary of Giga-tronics would be merged into ASCOR, whereby ASCOR would become a wholly owned subsidiary of Giga-tronics and continue operating as a separate company, and each ASCOR shareholder would receive Giga-tronics common stock as consideration for his or her ASCOR stock. The Merger Agreement provides that each share of ASCOR stock and other securities convertible into ASCOR stock would be converted into the right to receive the quotient of (i) 724,986 shares of Giga-tronics common stock, divided by (ii) the total number of ASCOR shares and such convertible securities outstanding at the time the Merger shall become effective. Cash will be paid in lieu of issuance of any fractional shares. If the merger is consummated, the percentage of outstanding stock of Giga-tronics held by ASCOR shareholders would be approximately 21.5%. Your Board of Directors has determined, after due deliberation and discussion, that the consideration to be given to the ASCOR shareholders in the Merger is fair from a financial point of view to, and in the best interests of, Giga-tronics and the shareholders of Giga-tronics. The Board of Directors, by unanimous vote, has approved the terms of the Merger Agreement, and recommends that Giga-tronics shareholders vote FOR the proposed Merger and the issuance of 724,986 shares of Giga-tronics Common Stock in connection with the proposed Merger. It should be noted that two of the four members of the Giga-tronics Board of Directors also participate on the ASCOR Board of Directors. Additionally, three of the four members of the Giga-tronics Board hold varying amounts of ASCOR stock and stock equivalents. Each shareholder is urged to read the attached Joint Proxy Statement/Prospectus accompanying this letter for more details. Approval of the Merger and issuance of Giga-tronics Common Stock requires the approval of a majority of the outstanding shares held by Giga-tronics shareholders. For more details with respect to all of the foregoing, each shareholder is urged to read the Joint Proxy Statement/Prospectus accompanying this letter. The Company counts on your continued interest, and I hope you will be able to attend the meeting. However, regardless of whether you plan to attend in person, it is important that your vote be counted. I urge you to vote your shares by signing and returning the accompanying proxy card. Sincerely, George H. Bruns, Jr. Chairman and Chief Executive Officer -1- 7 GIGA-TRONICS Giga-tronics Incorporated 4650 Norris Canyon Road San Ramon, California 94583 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To the Shareholders: Notice is hereby given that a special meeting of the Shareholders of Giga-tronics Incorporated, a California corporation ("Giga-tronics"), will be held at 10:00 a.m., local time, on Wednesday, July 17, 1996, at the Giga-tronics facility, 4650 Norris Canyon Road, San Ramon, California, for the purpose of considering and voting upon: 1. The approval of the transactions contemplated by the Agreement and Plan of Reorganization ("Reorganization Agreement"), dated as of May 2, 1996, between Giga-tronics, ASCOR Acquisition Corp., a California corporation and wholly owned subsidiary of Giga-tronics ("Acquisition Corp.") and ASCOR, Inc., a California corporation ("ASCOR"), which provides, among other things, that: a) Acquisition Corp. will merge with and into ASCOR with ASCOR as the surviving corporation (the "Merger") and ASCOR will thereby become a wholly owned subsidiary of Giga-tronics. b) Giga-tronics will issue an aggregate of 724,986 shares of Giga-tronics Common Stock to be exchanged for all outstanding shares of ASCOR stock, and certain securities exercisable for the purchase of ASCOR stock. A vote to approve the Merger will constitute a vote to approve the terms of and transactions contemplated by the Reorganization Agreement including the Merger and the issuance of 724,986 shares of Giga-tronics Common Stock. 2. Such other matters as may properly come before the Special Meeting, as long as these matters are the subject of the meeting or incidental to the meeting. Only shareholders of record at the close of business on June 14, 1996 are entitled to notice of and to vote at the Special Meeting or any adjournment thereof. Your attention is directed to the accompanying Joint Proxy Statement/Prospectus for greater detail concerning the proposal described above. Consummation of the Merger requires the affirmative vote of at least a majority of the outstanding shares held by Giga-tronics shareholders. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING REGARDLESS OF THE NUMBER YOU HOLD. PLEASE VOTE, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED PREPAID ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU HAVE PREVIOUSLY RETURNED A PROXY. -2- 8 The Giga-tronics Incorporated Board of Directors unanimously recommends that shareholders vote for the proposal to approve the Merger Agreement. It should be noted that two of the four members of the Giga-tronics Board of Directors also participate on the ASCOR Board of Directors. Additionally, three of the four members of the Giga-tronics Board hold varying amounts of ASCOR stock and stock equivalents. Each shareholder is urged to read the attached Joint Proxy Statement/Prospectus accompanying this letter for more details. Management has no present intention to bring any other business before the Giga-tronics Incorporated shareholders at the Special Meeting. The transactions contemplated by the Merger do not require that any Giga-tronics shareholders send in his or her stock certificates for surrender and exchange. By Order of the Board of Directors, Gregory L. Overholtzer, Secretary San Ramon, California June 14, 1996 -3- 9 ASCOR ASCOR, Inc. 47790 Westinghouse Drive Fremont, California 94539 June 14, 1996 To Our Shareholders: The Board of Directors requests that you review the attached Joint Proxy Statement/Prospectus and return your vote by written consent. ASCOR shareholders will be asked to consider and approve the Reorganization Agreement between Giga-tronics Incorporated and ASCOR, Inc., as described in the attached Joint Proxy Statement/Prospectus. As a result of the "Merger," and subject to the approval of the Merger by the shareholders of Giga-tronics Incorporated, a newly created wholly owned subsidiary of Giga-tronics would be merged into ASCOR, whereby ASCOR would continue to operate as a wholly owned subsidiary of Giga-tronics, and each ASCOR shareholder would receive Giga-tronics Incorporated common stock as consideration for his or her ASCOR stock. The Reorganization Agreement provides that each share of ASCOR common stock would be converted into the right to receive the quotient of (i)724,986 shares of Giga-tronics common stock, divided by (ii) the total number of ASCOR shares outstanding at the time the merger shall be come effective. Cash will be paid in lieu of any fractional shares. Your Board of Directors has determined, after due deliberation and discussion, that the consideration to be given to the ASCOR shareholders in the Merger is fair, from a financial point of view, to the shareholders of ASCOR, Inc.. The Board of Directors, by unanimous vote, has approved the terms of the Reorganization Agreement, and recommends that ASCOR shareholders vote FOR the proposal to approve the Merger. It was noted by the ASCOR Board that two of the five members of the ASCOR Board also participate on the Giga-tronics Board, and that three of the members of the Giga-tronics Board hold varying amounts of ASCOR stock and stock equivalents. Each shareholder is urged to read the attached Joint Proxy Statement/Prospectus accompanying this letter for more details. Approval of the Merger requires the approval of a majority of outstanding shares held by ASCOR shareholders. For more details with respect to all of the foregoing, each shareholder is urged to read the Joint Proxy Statement/Prospectus accompanying this letter. It is important that your vote be counted. I urge you to vote your shares by returning your written consent. Sincerely, Sincerely, George H. Bruns, Jr. Jeffrey Lum Chairman of the Board President 10 ASCOR ASCOR, Inc. 47790 Westinghouse Drive Fremont, California 94539 NOTICE OF WRITTEN CONSENT BY SHAREHOLDERS To the Shareholders: Notice is hereby given that a written consent of the Shareholders of ASCOR, Inc. is needed for the purpose of considering and voting upon: 1. The approval and adoption of the Agreement and Plan of Merger ("Reorganization Agreement"), dated as of May 2, 1996, between Giga-tronics Incorporated and ASCOR, Inc., and all the other transactions contemplated thereby; Only shareholders of record at the close of business on June 14, 1996 are entitled to notice of and to vote by written consent. Your attention is directed to the accompanying Joint Proxy Statement/Prospectus for greater detail concerning the proposal described above. IT IS IMPORTANT THAT YOUR SHARES BE VOTED BY WRITTEN CONSENT REGARDLESS OF THE NUMBER YOU HOLD. PLEASE VOTE, SIGN, DATE AND RETURN YOUR CONSENT IN THE ENCLOSED PREPAID ENVELOPE. The ASCOR, Inc. Board of Directors unanimously recommends that shareholders vote for the proposal to approve the Reorganization Agreement. It was noted by the ASCOR Board that two of the five members of the ASCOR Board also participate on the Giga-tronics Board, and that three of the members of the Giga-tronics Board hold varying amounts of ASCOR stock and stock equivalents. Each shareholder is urged to read the attached Joint Proxy Statement/Prospectus accompanying this letter for more details. The transactions contemplated by the Merger will require that all ASCOR shareholders send in his or her stock certificates for surrender and exchange. By Order of the Board of Directors, Fred Chu, Secretary Fremont, California June 14, 1996 11 GIGA-TRONICS INCORPORATED PROSPECTUS ----------------------------------------- GIGA-TRONICS INCORPORATED ASCOR, INC. JOINT PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY 17, 1996 This Joint Proxy Statement/Prospectus is being furnished to the holders of shares of Common Stock, no par value ("Giga-tronics Common Stock") of Giga-tronics Incorporated, a California corporation ("Giga-tronics"), in connection with the solicitation of proxies by the Board of Directors of Giga-tronics for use at the Special Meeting of Shareholders of Giga-tronics (the "Special Meeting") to be held on July 17, 1996 at 10:00 a.m., local time, at the Company's facilities at 4650 Norris Canyon Road, San Ramon, California 94583 and at any postponements or adjournments thereof. This Joint Proxy Statement/Prospectus also constitutes the Proxy Statement of ASCOR, Inc., a California corporation ("ASCOR") relating to the solicitation of the consent of its shareholders for approval of the Merger (as hereinafter defined). This Joint Proxy Statement/Prospectus also constitutes the prospectus of Giga-tronics with respect to shares of Giga-tronics Common Stock to be issued in the Merger. Giga-tronics has filed a registration statement with the Securities and Exchange Commission (the "Commission") with respect to the shares of Giga-tronics Common Stock to be so issued. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE BY THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY GIGA-TRONICS OR ASCOR. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. -4- 12 SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY THE SHAREHOLDERS OF GIGA-TRONICS AND ASCOR WITH RESPECT TO THE MERGER. ---------------------------------- NEITHER THE MERGER NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. At the Special Meeting, Giga-tronics shareholders will be asked to consider and vote upon a proposal to approve the Merger of Giga-tronics and ASCOR pursuant to the Agreement and Plan of Reorganization, dated as of May 2, 1996 (the "Reorganization Agreement"), by and among Giga-tronics, ASCOR Acquisition Corp., a California corporation and wholly owned subsidiary of Giga-tronics ("Acquisition Corp.") and ASCOR and the transactions contemplated thereby. A copy of the Reorganization Agreement is attached to this Joint Proxy Statement/Prospectus as Annex A. The Reorganization Agreement provides for the merger of Acquisition Corp. with and into ASCOR (the "Merger") whereby ASCOR will become a wholly owned subsidiary of Giga-tronics. This solicitation of proxies is made by and on behalf of the Board of Directors of Giga-tronics. In addition to mailing copies of this Joint Proxy Statement/Prospectus and the accompanying Notice of Special Meeting of Shareholders and proxy to all shareholders of record on June 14, 1996 (the "Record Date"), Giga-tronics will request brokers, custodians, nominees and other fiduciaries to forward copies of this material to persons for whom they hold Giga-tronics Common Stock in order that such shares may be voted. Solicitation may also be made by Giga-tronics' officers and regular employees personally or by telephone. In addition, while Giga-tronics has no present intention to retain anyone to assist in soliciting proxies, Giga-tronics may do so if it deems such action necessary. The cost of solicitation of proxies will be borne by Giga-tronics. The information contained in this Joint Proxy Statement/Prospectus is qualified in its entirety by the Annexes hereto and the documents referred to and incorporated by reference herein, each of which is important and should be carefully reviewed in its entirety. This Joint Proxy Statement/Prospectus, the accompanying Notice of Special Meeting of Shareholders and the accompanying proxy are being mailed to shareholders of Giga-tronics on or about June 21, 1996. IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. The date of this Joint Proxy Statement/Prospectus is June 14, 1996 -5- 13 TABLE OF CONTENTS
Page No. -------- I. Summary................................................................................ 8 II. Risk Factors........................................................................... 17 III. Giga-tronics Incorporated.............................................................. 20 IV. ASCOR, Inc............................................................................. 21 V. The Merger............................................................................. 22 Description of the Merger.............................................................. 22 Voting and Proxies..................................................................... 22 Background of the Merger............................................................... 24 Reasons for the Merger; Recommendation of the Board of Directors....................... 25 Opinion of Financial Advisor........................................................... 28 Conflicts of Interest.................................................................. 29 Employee Benefit Plan.................................................................. 33 Structure of Board of Giga-tronics After Merger........................................ 34 Management and Security Ownership of Giga-tronics after the Merger..................... 34 Accounting Treatment................................................................... 38 Certain Federal Income Tax Consequences................................................ 38 Dissenters' Appraisal Rights........................................................... 39 VI. The Reorganization Agreement and Related Agreements.................................... 43 VII. Summary Historical and Pro Forma Financial Information................................. 52 VIII. Comparative Per Share Data............................................................. 54 IX. Pro Forma Combined Financial Information............................................... 55 X. Information Concerning Giga-tronics Incorporated....................................... 60 General and Business.............................................................. 60 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 64 XI. Information Concerning ASCOR, Inc...................................................... 66 General and Business.............................................................. 66 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 69 XII. Description of Giga-tronics and ASCOR Securities....................................... 71 XIII. Comparison of Rights of Shareholders of Giga-tronics and ASCOR......................... 73 XIV. Shareholder Proposals.................................................................. 74 XV. Experts................................................................................ 75
-6- 14 XVI. Legal Matters............................................................................ 76 XVII. Other Business at the Special Meeting.................................................... 77 XVIII. Annexes.................................................................................. 78
(A) Giga-tronics Financial Statements (B) ASCOR Financial Statements (C) Reorganization Agreement and Exhibits (D) Articles of Incorporation for ASCOR Acquisition Corporation (E) Giga-tronics Financial Advisor Opinion Letter (F) State of California Code for Dissenter's Rights (G) Articles of Incorporation of Giga-tronics (H) Bylaws of Giga-tronics (I) Tender Instructions (J) Letter Agreement -7- 15 SECTION I SUMMARY The following is a brief summary of certain information contained elsewhere in this Joint Proxy Statement/Prospectus. This summary does not purport to be complete and is qualified in its entirety by reference to the full text of this Joint Proxy Statement/Prospectus, the Annexes hereto and the documents referred to herein. Shareholders are urged to read carefully this Joint Proxy Statement/Prospectus and the attached Annexes in their entirety. Capitalized terms used but not defined in this Summary have the meaning given to them elsewhere in this Joint Proxy Statement/Prospectus. The Companies Giga-tronics. Giga-tronics designs, manufactures, and markets microwave and radio frequency signal generation and power measurement instruments for the electronics test and measurement industry. These products are used in the design, production, repair, and maintenance of telecommunications, radar, electronic warfare, and transportation systems. The Company books a mixture of commercial and government-related orders to both domestic and international customers. The Company's only location is at 4650 Norris Canyon Road, San Ramon, California 94583, and its telephone number is (510) 328-4650. ASCOR. ASCOR designs, manufactures and markets an extensive line of switching and connecting devices that link together many specific purpose instruments that comprise a portion of automatic test systems. ASCOR offers a family of Switching and Interface Test Adapters as standard VXI configured products, as well as complete system integration services to the Automatic Test Equipment (ATE) market. The Company books primarily government-related orders, with all sales being domestic. The Company's only location is at 47790 Westinghouse Drive, Fremont, California 94539, and its telephone number is (510) 490-8819. Risk Factors Giga-tronics. The issuance of Giga-tronics Common Stock to ASCOR shareholders and consummation of the Merger involves a degree of risk. In addition to other information included elsewhere in this Joint Proxy Statement/Prospectus, holders of Giga-tronics Common Stock should consider the following: (i) dependence on key ASCOR personnel, (ii) potential distribution channel risks and dropping of Giga-tronics products by "sales reps," (iii) the reliance of ASCOR's revenue stream on a single family of products, (iv) ASCOR's reliance on major defense contracts and a relatively small number of customers, (v) facility and personnel issues related to ASCOR sales growth, and (vi) potential effects on the Giga-tronics stock price of ASCOR's large shareholders wishing to become liquid over a short time period. Before voting on the Merger, shareholders of Giga-tronics should carefully consider the information set forth in "Risk Factors - Giga-tronics," beginning on page 17, as well as other information in the entire Proxy. ASCOR. The Merger of ASCOR into Giga-tronics involves a degree of risk for ASCOR shareholders. In addition to other information included elsewhere in this Joint Proxy Statement/Prospectus, holders of ASCOR common stock and common stock equivalents should consider the following: (i) limited liquidity for ASCOR shareholders, (ii) softness in recent order bookings and low sales order backlog at Giga-tronics, and (iii) succession of Giga-tronics Chief Executive Officer. Before voting on the Merger, shareholders of ASCOR should carefully consider the information set forth in "Risk Factors - ASCOR," beginning on page 18, as well as other information in the entire Proxy. -8- 16 The Special Meeting and Votes Required The Special Meeting of Giga-tronics Shareholders will be held at 10:00 a.m. on July 17, 1996, at the Giga-tronics facilities at 4650 Norris Canyon Road, San Ramon, California 94583. The holders of record of Giga-tronics Common Stock as of the close of business on June 14, 1996, will be entitled to notice of and to vote at the Special Meeting. At this Special Meeting Giga-tronics' shareholders will be asked to vote upon a proposal to approve the Merger to be effected pursuant to the Reorganization Agreement. Approval of the Merger requires the affirmative vote of at least a majority of the outstanding shares of Common Stock held by Giga-tronics shareholders. At the close of business on June 14, 1996, directors and officers of Giga-tronics and their affiliates, in the aggregate were entitled to vote 438,538 shares of Giga-tronics Common Stock, representing 16.5% of the total shares entitled to vote at the Special Meeting. ASCOR will be soliciting the approval of its shareholders by delivery of this Joint Proxy Statement/Prospectus with a request that the shareholders entitled to vote with respect to approval of the Merger give their written consent to the Merger. Approval of the Merger by ASCOR's shareholders requires the written consent of persons holding a majority of the votes entitled to be cast by holders of outstanding (a) ASCOR Common Stock voting as a class, (b) ASCOR Preferred Stock voting as a separate class and (c) ASCOR Common Stock and ASCOR Preferred Stock voting together as a single class. Each share of ASCOR Common Stock is entitled to one vote and each share of ASCOR Preferred Stock is entitled to such number of votes as the number of shares of ASCOR Common Stock into which such share of ASCOR Preferred Stock is convertible, At the close of business on June 14, 1996, directors and officers of ASCOR and their affiliates, in the aggregate held approximately 5,741,368 shares of ASCOR Common Stock and shares of ASCOR Preferred Stock entitled to cast approximately 4,164,023 votes, representing approximately 73% of the outstanding shares of ASCOR Common Stock, approximately 78% of the total votes entitled to be voted by ASCOR Preferred Stock and approximately 75% of the total votes entitled to be voted by ASCOR Common Stock and ASCOR Preferred Stock voting together as a single class, by written consent with respect to the Merger. Description of the Merger At the effective time of the Merger (the "Effective Time"), (i) Acquisition Corp. will be merged with and into ASCOR and ASCOR will become a wholly owned subsidiary of Giga-tronics; (ii) each (a) share of ASCOR no par value Common Stock ("ASCOR Common Stock") and no par value preferred stock ("ASCOR Preferred Stock" and, together with ASCOR Common Stock, the "ASCOR Shares") outstanding immediately prior to the Merger (other than ASCOR Shares held by shareholders who have perfected and not withdrawn their right to seek appraisal of their shares under applicable California law) and (b) outstanding options for the purchase of ASCOR Shares ("ASCOR Option") and warrants exercisable for the purchase of ASCOR Shares ("ASCOR Warrant" and, together with any ASCOR Options, the "ASCOR Convertible Securities") will be converted into the right to receive a pro rata portion of an aggregate of 724,986 Shares of Giga-tronics Common Stock to be issued in the Merger (the "Merger Consideration"). In determining the fraction of a Giga-tronics Stock (the "Exchange Ratio") which holders of ASCOR Shares and ASCOR Convertible Securities (collectively "ASCOR Securities") will be entitled to receive, all ASCOR Convertible Securities will be treated as having been converted or exercised into ASCOR Shares. Any ASCOR Convertible Securities which are considered "out-of-the-money" will be assumed by Giga-tronics and will be exercisable for Giga-tronics Common Stock as adjusted by the Merger. Shares of Giga-tronics Common Stock attributable to ASCOR Convertible Securities which are assumed by Giga-tronics will be retained by Giga-tronics from the Merger Consideration pending their exercise. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - - The Exchange Ratio and ASCOR Convertible Securities." See "THE MERGER - Description of the Merger" and "Dissenter's Appraisal Rights." -9- 17 A maximum of 724,986 shares of Giga-tronics Common Stock will be issuable in the Merger, including (a) shares issuable in respect of ASCOR Convertible Securities which are assumed, which shares will be retained by Giga-tronics if such securities expire unexercised, (b) fractional shares, (c) shares issuable in respect of ASCOR Shares for which dissenters' appraisal rights (see "THE MERGER - Dissenters' Appraisal Rights") are perfected, and (d) shares deemed surrendered upon exercise of ASCOR Convertible Securities for which a deemed net exercise has occurred. The Merger will be effective at the time an Agreement of Merger is filed with the Secretary of State of the State of California. Assuming all conditions to the Merger are met or waived prior thereto, it is anticipated that the Effective Time will occur not later than June 28, 1996. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement - The Exchange Ratio." Other Matters Related to the Merger Background of the Merger: The terms of the Merger (including the Merger Consideration) were determined through negotiations between Giga-tronics and ASCOR. For a description of these negotiations, see "THE MERGER - Background of the Merger." Giga-tronics' Reasons for the Merger; Recommendations of the Giga-tronics Board: The Board of Directors of Giga-tronics believes that the issuance of Common Stock in connection with the Merger of Giga-tronics and ASCOR is fair to and in the best interests of Giga-tronics and its shareholders. The proposed Reorganization Agreement has been approved by the Board by unanimous vote, noting that two of the four Board members are also members of the ASCOR Board of Directors. Additionally, three of the four Giga-tronics Board members hold varying amounts of ASCOR Shares and ASCOR Convertible Securities. In evaluating the Merger, the Board considered the following factors as important: (i) ASCOR's business prospects and recent results of operations and financial position, (ii) the benefit of having access to certain of ASCOR's technology and technical resources, (iii) the potential synergistic benefits derived from the coordination of sales and marketing strategies, and (iv) the ease of integration and exchange of ideas due to long-term familiarity. The Giga-tronics Board of Directors, in making its recommendation to shareholders, considered the positive and negative factors as a whole. THE BOARD OF DIRECTORS OF GIGA-TRONICS UNANIMOUSLY RECOMMENDS THAT GIGA-TRONICS SHAREHOLDERS VOTE FOR APPROVAL OF THE PROPOSAL REGARDING THE MERGER TO BE EFFECTED PURSUANT TO THE REORGANIZATION AGREEMENT. ASCOR's Reasons; Recommendations of the ASCOR Board: The Board of Directors of ASCOR believes that terms of the Reorganization Agreement is fair to and in the best interest of ASCOR and its shareholders. The Reorganization Agreement has been approved by the Board of Directors of ASCOR by unanimous vote, noting that two of the five members of the ASCOR Board of Directors are also members of the Giga-tronics Board. Additionally, two of the members of the ASCOR Board of Directors hold varying amounts of Giga-tronics stock and stock equivalents. In evaluating the Reorganization Agreement, the Board considered the following important factors: (i) Giga-tronics' business prospects and recent results of operations and financial position, (ii) the benefit of having access to certain of Giga-tronics' sales and marketing resources, (iii) the ease of integration and exchange of ideas due to long-term familiarity between the companies, (iv) the benefit of having access to certain management resources to help sustain ASCOR's possible sales growth, and (v) increased liquidity for holders of ASCOR stock and stock equivalents. The ASCOR Board of Directors, in making its recommendation to shareholders, considered the positive and negative factors as a whole. THE BOARD OF DIRECTORS OF ASCOR RECOMMENDS THAT ASCOR SHAREHOLDERS VOTE FOR APPROVAL OF THE PROPOSAL REGARDING THE MERGER TO BE EFFECTED PURSUANT TO THE REORGANIZATION AGREEMENT. -10- 18 Opinion of Giga-tronics Financial Advisor: Wood, Warren & Co. has rendered to the Board of Directors of Giga-tronics its written opinion dated as of May 2, 1996 that, as of such date and based upon and subject to the matters set forth therein the Exchange Ratio to be applied in the Merger is fair, from a financial point of view, to Giga-tronics. See "Giga-tronics Financial Advisor's Opinion." Giga-tronics' Shareholders are urged to read this opinion carefully in its entirety for assumptions made, matters considered and the limits of the review undertaken by Wood, Warren & Co. Conflicts of Interest: Mr. George H. Bruns, Jr. is Chairman of the Board of Directors of both Giga-tronics and ASCOR. Two of the four Giga-tronics Directors (including Mr. Bruns) participate on the Board of Directors of ASCOR. Likewise, two of the five ASCOR Directors (including Mr. Bruns) participate on the Giga-tronics Board. Additionally, Mr. George H. Bruns, Jr. is the Chief Executive Officer of Giga-tronics. It also should be noted that three of the four Giga-tronics Board members (which includes Mr. George H. Bruns, Jr., the Giga-tronics Chief Executive Officer and Chairman of both Boards) beneficially own shares of ASCOR Common or Preferred Stock or ASCOR warrants. These three members hold approximately 33% of the ASCOR outstanding stock and approximately 17% of the Giga-tronics Common Stock as of the record date of June 14, 1996. Additionally, since the ASCOR warrants may be converted into shares of Giga-tronics Common Stock in connection with the Merger, these three members may hold approximately 20% of the combined Company Common Stock if the Merger is consummated. Conditions to Merger; Termination and Expenses: Consummation of the Merger is subject to the satisfaction of various conditions, including among other things approval of the Merger Agreement by Giga-tronics shareholders and by ASCOR shareholders, the absence of any material adverse change in the business or financial condition of Giga-tronics or ASCOR, the ability of Giga-tronics to account for the Merger as a pooling of interests, the absence of the perfection of dissenters' appraisal rights by Giga-tronics Shareholders with respect to 5% or more of the Giga-tronics Common Stock Outstanding on the date of the Special Meeting and the requirement that all outstanding ASCOR Preferred Stock be tendered for exchange into Giga-tronics Common Stock at the Closing in accordance with the provisions of tender instructions (the "Tender Instructions") which will stipulate such ASCOR Preferred Stock tendered therewith be exchanged for Giga-tronics Common Stock in accordance with the terms of the Reorganization Agreement, notwithstanding any other rights the ASCOR Preferred Stock may have or which might arise in a transaction such as the Merger. See 'DESCRIPTION OF GIGA-TRONICS AND ASCOR SECURITIES - ASCOR - ASCOR Preferred Stock" and "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement - Conditions to the Merger." Except as to any condition the satisfaction of which is required by law, the Boards of Directors of ASCOR and Giga-tronics have the authority to waive satisfaction of the respective conditions to such Company's obligations to consummate the Merger. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement Conditions to the Merger". The Reorganization Agreement may be terminated at any time prior to consummation of the Merger by mutual consent of the Boards of Directors of Giga-tronics and ASCOR and by the Board of Directors of Giga-tronics in certain circumstances. The Reorganization Agreement may be amended by mutual consent of the Boards of Directors of Giga-tronics and ASCOR at any time, except that, after approval of the Merger by Giga-tronics and ASCOR shareholder, respectively, no amendment that would have a material adverse effect on such shareholders will be made without obtaining the further approval of said shareholders. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement - Termination." Summary of Income Tax Consequences: It is a condition to the Merger that Giga-tronics and ASCOR receive tax opinions to the effect that the Merger will constitute a tax-free reorganization for federal income tax purposes. The Merger has been structured with the intent that -11- 19 ASCOR shareholders will recognize no gain or loss on the exchange of ASCOR Common Stock into Giga-tronics Common Stock, except for gain or loss attributable to cash received in lieu of fractional shares. ASCOR shareholders are advised to consult their own tax advisors regarding all tax consequences of the Merger. See "THE MERGER - Certain Federal Income Tax Consequences." Accounting Treatment: The Merger is intended to qualify as a pooling-of-interests for accounting and financial reporting purposes. Under this method of accounting, the assets and liabilities of Giga-tronics and ASCOR will be carried forward to the combined company at their recorded historical amounts, income of the combined company will include income of Giga-tronics and ASCOR for the entire fiscal period in which the combination occurs and the reported income of the separate companies for prior periods will be combined and restated as income of the combined company. See "THE MERGER - Accounting Treatment." Management of Giga-tronics and ASCOR Following the Merger: ASCOR will be a wholly owned subsidiary of Giga-tronics after the Merger. The Board of Directors of the combined Giga-tronics Company after the Merger will be the same as the current Giga-tronics Board. The current President of ASCOR, Mr. Jeffrey Lum, will report to Mr. George Bruns, Jr., Chief Executive Officer of Giga-tronics, after the Merger. Mr. Lum will be an officer of Giga-tronics, as well as remain President of the ASCOR subsidiary. The other four remaining Giga-tronics officers (including Mr. George Bruns, Jr. as Chief Executive Officer) will remain the same after the Merger. The four officers of ASCOR currently (including Mr. Jeffrey Lum) will remain officers of the ASCOR subsidiary after the Merger. Dissenters' Rights: Under the California General Corporation Law (the "California Corporate Law") ASCOR Shareholders will be entitled to dissenters' rights of appraisal in connection with the Merger. Giga-tronics Shareholders will also be entitled to such rights under certain circumstances. (See "THE MERGER - Appraisal Rights.") In the event that shareholders of Giga-tronics exercise their rights to dissent with respect to 5% or more of the outstanding shares of Giga-tronics Common Stock, or if holders of ASCOR Shares exercise dissenters' rights with respect to such number of shares of ASCOR stock such that the Merger cannot be accounted for as a pooling of interests, the Board of Directors of Giga-tronics may elect not to proceed with implementation of the Merger, notwithstanding the approval of the Merger by ASCOR's and Giga-tronics' shareholders. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement - Conditions to the Merger." Comparison of Shareholders' Rights: There are no material differences between the rights of holders of ASCOR Common Stock and the rights of holder of Giga-tronics Common Stock, as both corporations are organized in the State of California and have similar Articles of Incorporation and By-Laws. See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF GIGA-TRONICS and ASCOR AND DESCRIPTION OF GIGA-TRONICS AND ASCOR SECURITIES." Exchange Procedures: Promptly after the consummation of the Merger, Chemical Mellon Shareholder Services of California (the "Exchange Agent") will mail a letter of transmittal with instructions to all holders of record of ASCOR Securities as of the Effective Time of the Merger regarding the exchange of their ASCOR share certificates for certificates representing shares of Giga-tronics Common Stock. ASCOR Shareholders should not surrender any Certificates until the letter of transmittal is received. A holder of ASCOR Securities will not be entitled to any rights of a holder of Giga-tronics Common Stock until such holder exchanges the ASCOR Securities for certificates representing Giga-tronics Common Stock. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement - Exchange of Certificates" for more details. -12- 20 Certain Related Agreements: Letter Agreement. Pursuant to a letter agreement among Giga-tronics and ASCOR dated May 20, 1996 (the "Letter Agreement"), Giga-tronics has agreed to use its best faith efforts to effect the registration pursuant to federal securities laws of the Giga-tronic Common Stock to be issued in the Merger on a Form S-4 registration statement. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - Letter Agreement." Registration Rights Agreement. The Reorganization Agreement contemplates that the Giga-tronics Common Stock to be issued in the Merger would not be issued pursuant to a registration statement under federal securities law, but rather pursuant to exemption from such registration requirements as a private placement. If Giga-tronics is unable to effect the registration of such Giga-tronics Common Stock as contemplated by the Letter Agreement, at the Effective Time Giga-tronics will enter into a Registration Rights Agreement with holders of ASCOR Securities who receive Giga--tronics Common Stock pursuant to which they will be granted certain demand and piggyback registration rights with respect to such Giga-tronics Common Stock. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement - Registration of Merger Consideration and The Registration Rights Agreement." Summary Historical and Pro Forma Financial Information: The following historical financial information of Giga-tronics and ASCOR has been derived from their respective historical consolidated financial statements, and should be read in conjunction with such consolidated financial statements and the notes thereto, which are included as Annexes to this Joint Proxy Statement/Prospectus. The selected pro forma financial information of Giga-tronics and ASCOR is derived from the unaudited pro forma combined condensed financial statements and should be read in conjunction with such pro forma statements and notes thereto, which are included elsewhere in this Joint Proxy Statement/Prospectus. For pro forma purposes, ASCOR financial data covers the approximate comparable financial reporting periods used by Giga-tronics. The pro forma financial information does not purport to represent what Giga-tronics' financial position or results of operations would actually have been had the Merger occurred at the beginning of the earliest period presented or to project Giga-tronics' financial position or results of operations for any future date or period. Neither Giga-tronics or ASCOR has declared or paid any dividends on its capital stock during the periods presented. -13- 21
Historical Giga-tronics Fiscal Year Ended - ----------------------- ------------------------------------------------------------------------- (In thousands except per share data) March 30, March 25, March 26, March 27, March 28, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Net sales $ 24,898 $ 21,937 $ 19,890 $ 23,085 $ 16,181 Net earnings (loss) 901 (1,576) 231 1,327 878 Net earnings (loss) per share 0.34 (0.61) 0.09 0.52 0.34 At Period End- Working capital $ 15,830 $ 13,242 $ 14,209 $ 15,370 $ 16,588 Total assets 23,027 22,225 23,580 23,597 19,817 Long-term debt -- -- -- -- -- Shareholders' equity 19,101 18,018 19,671 19,440 18,113
Historical ASCOR Fiscal Year Ended - ---------------- ------------------------------------------------------------------------- (In thousands except per share data) March 30, March 25, March 26, March 27, March 28, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Net sales $ 5,913 $ 4,032 $ 3,577 $ 1,803 $ 1,935 Net earnings 839 709 1,074 (600) (477) Net earnings per share 0.15 0.12 0.22 (0.07) (0.05) At Period End- Working capital $ (1,222) $ (796) $ 19 $ (249) $ 50 Total assets 3,557 3,601 2,135 1,579 1,113 Long-term debt 30 40 -- -- -- Redeemable Preferred Stock 3,442 3,182 2,922 2,662 2,532 Shareholders' equity (1,726) (2,317) (2,766) (3,580) (3,177)
Giga-tronics and ASCOR Fiscal Year Ended --------------------------------------- Pro Forma Combined March 30, March 25, March 26, (In thousands except per share data) 1996 1995 1994 -------- -------- -------- Net sales $ 30,811 $ 25,969 $ 23,467 Net earnings (loss) 1,865 (867) 1,305 Net earnings (loss) per share 0.55 (0.26) 0.40 At Period End- Working capital $ 17,081 $ 13,940 $ 15,040 Total assets 26,584 25,826 25,690 Long-term debt 30 -- -- Shareholders' equity 20,692 18,883 19,827
-14- 22 Comparative Per Share Data: Set out below are income and book value per common share data of Giga-tronics and ASCOR on both a historical and unaudited pro forma condensed combined basis and on a per share equivalent unaudited pro forma basis for ASCOR. Unaudited pro forma condensed combined per share information is derived from the unaudited pro forma condensed combined information presented elsewhere herein which gives effect to the Merger under the pooling of interests accounting method at the beginning of the earliest period presented, and assumes the issuance of 724,986 shares of Giga-tronics Common Stock in 1995 and 1994. Expenses directly attributable to the consummation of the Merger are expected to approximate $250,000. The pro forma adjustment to retained earnings is $125,000 while the total estimated costs are $250,000 because $125,000 of costs are already included in the fiscal 1996 financial statements. The estimated $250,000 of merger costs are not included in the pro forma statements of operations since they will be nonrecurring. The expenses have been deducted in calculating the pro forma combined book value per share, but are not reflected in the pro forma earnings (loss) per share amounts. Neither Giga-tronics or ASCOR has declared or paid any dividends on its capital stock during the periods presented. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Merger had been consummated, nor is it necessarily indicative of future operating results or financial position.
Twelve Months Ended ------------------------------------------------------ March 30, March 25, March 26, Net earnings (loss) per share 1996 1995 1994 - ----------------------------- ------------ ----------- ----------- Historical Giga-tronics $ 0.34 $ (0.61) $ 0.09 Historical ASCOR 0.15 0.12 0.22
Twelve Months Ended ------------------------------------------------------ March 30, March 25, March 26, Net earnings (loss) per share 1996 1995 1994 - ----------------------------- ------------ ----------- ----------- Pro forma combined $ 0.55 $ (0.26) $ 0.40 Pro forma equivalent per ASCOR share 0.03 (A) (0.01)(A) 0.02(A)
Book value per share At March 30, 1996 - -------------------- ----------------- Historical Giga-tronics $ 7.34 Historical ASCOR (0.44) Pro forma combined per Giga-tronics share 6.22 Pro forma combined per ASCOR share 0.34(B)
(A) Determined by multiplying pro forma combined net earnings per share by the estimated Exchange Ratio of 1 to 18.246 (.0548). The 18.246 ratio equals 13,228,069 ASCOR securities as of June 14, 1996 divided by 724,986 Giga-tronics shares issued. (B) Determined by multiplying pro forma combined book value per share by the estimated Exchange Ratio of 1 to 18.246 (.0548). The 18.246 ratio equals 13,228,069 ASCOR securities as of June 14, 1996 divided by 724,986 Giga-tronics shares issued. -15- 23 Comparable Market Price Data: Giga-tronics. Giga-tronics Common Stock is traded over-the-counter in the National Market System of the National Association of Securities Dealers, Inc. Automatic Quotation ("NASDAQ") System. The following table sets forth, for the fiscal quarters indicated, the high and low bid prices of Giga-tronics as reported by the NASDAQ National Market System.
Giga-tronics Common Stock High Low - ------------------------- ---- --- Fiscal Year Ended March 26, 1994 June Quarter 8 1/2 5 3/4 September Quarter 8 5 1/2 December Quarter 7 3/4 6 March Quarter 7 1/2 5 1/4 Fiscal Year Ended March 25, 1995 June Quarter 7 1/4 5 7/8 September Quarter 6 4 3/4 December Quarter 6 3/8 5 March Quarter 6 1/4 4 Fiscal Year Ended March 30, 1996 June Quarter 7 7/8 6 September Quarter 10 1/2 6 3/4 December Quarter 9 6 7/8 March Quarter 8 6 5/8
On June 14, 1996, the last reported sales price of Giga-tronics Common Stock was 11 1/4. Giga-tronics has never paid a dividend on Giga-tronics Common Stock. The Payment of any dividend is at the discretion of Giga-tronics' Board of Directors and depends on Giga-tronics earnings, financial position, capital requirements and such other factors as Giga-tronics' Board of Directors deems relevant. As of June 14, 1996 there were 1,089 holders of record of Giga-tronics Common Stock. ASCOR. ASCOR is a privately held company, and its Securities are not listed on any exchange and does not trade. ASCOR has never paid a dividend on its common stock. As of June 14, 1996 there were 26 holders of record of ASCOR Securities that are entitled to vote with respect to the Merger. -16- 24 SECTION II RISK FACTORS GIGA-TRONICS In addition to the other information included in this Joint Proxy Statement/Prospectus, the following information should be considered carefully by holders of Giga-tronics Common Stock in evaluating the Merger. Dependence On Key Personnel and Ability to Hire Technical Staff to Support Growth ASCOR's future success is highly dependent on certain key management and technical personnel. The loss of any one of these key personnel could have a material adverse impact on ASCOR's results of operation. In addition, there will be no employment contracts awarded to any of these personnel during the Merger. Stock options in the combined Company may be granted in the normal course of business, and the key personnel will have a significant equity interest in the combined Company. ASCOR has "key-executive" life insurance for Mr. Jeffrey Lum, President of ASCOR. See "THE MERGER - Management and Security Ownership After the Merger." ASCOR employs technical staff with a need for a precise set of engineering skills. Given the short supply and high demand on engineers in general since 1994 (due to business expansion in Silicon Valley), rapid growth could put a strain on the Company's ability to hire technical personnel at a pace fast enough to support the higher sales volume. Distribution Channel Conflicts Some of the sales representatives which currently sell Giga-tronics products also sell the Racal Dana VXI product line which competes with ASCOR's products. Since historically, Racal Dana has generated significantly more volume than ASCOR, and since some representatives may have a conflict of interest with Racal Dana by carrying ASCOR products as well as Giga-tronics (post-Merger) products, many of such sales representatives may have to be convinced that it is in their best interest to also represent ASCOR products and to continue to represent Giga-tronics products. There are eight major Giga-tronics sales representatives which also market Racal Dana products. These representatives currently sell approximately $13 million of Giga-tronics products annually. Giga-tronics may be required to develop new sales representatives should current ones resign. There can be no assurance that any loss of sales of Giga-tronics products due to the loss of such sales representatives will be offset by sales of ASCOR products or that Giga-tronics would be successful in developing additional sales representatives to replace any lost sales due to the above-described conflicts. Reliance on A Single Family of Products That Are Military-Dependent All of ASCOR's revenues are associated with the VXI architecture. The future expansion of the Company is dependent on increased acceptance of this type of architecture by customers. To date, acceptance has been primarily by the military, and military orders have generally been soft across most markets in recent years. If military orders declined in the future and if ASCOR is unable to gain acceptance by civilian customers, ASCOR's sales might suffer, which may result in a material adverse effect on the combined companies. -17- 25 Reliance On Major Contracts and A Few Number of Customers ASCOR relies on a relatively small number of large government contracts and government related orders comprise most of its sales. Though ASCOR's few customers are large companies, they also are few in number. The contracts are usually awarded following a competitive bidding process which can begin well before the contract is awarded. The timing and likelihood of any particular contract is difficult to predict. Revenue and earnings are therefore subject to significant fluctuations between quarterly and annual periods depending on the number of contracts awarded. Management Of Growth and Potential Higher Overhead Cost of New Facility ASCOR currently is utilizing all of the available space in its leased Fremont facility. In addition, the lease on the facility is due to expire on January 31, 1998. If sales volume grows significantly over the next year or two, a larger facility will need to be secured. Since current lease rates being paid by ASCOR are substantially below market, a new larger facility at market rates would add significantly to the Company's overhead costs. Higher overhead costs would increase the sales volume break-even point and cause potential volume fluctuations to have a bigger impact on profit. Given the small number of contracts and customers in the current sales mix (See " - Reliance on Major Contracts and A Few Number of Customers"), the Company's vulnerability would be enhanced. Future Sales of Giga-tronics Common Stock Issued in Merger Could Adversely Impact Stock Price In the event that the ASCOR shareholders wish to sell all or a portion of their Giga-tronics Common Stock after consummation of the Merger, their effort to do so could result in a depression of the Giga-tronics share price traded on NASDAQ due to the historically thin trading volume of Giga-tronics stock. ASCOR In addition to the foregoing risk factors which would affect them as shareholders of Giga-tronics and the other information included in this Joint Proxy Statement/Prospectus, the following information should also be considered carefully by holders of ASCOR common stock and common stock equivalents in evaluating the Merger. Limited Liquidity for ASCOR Shareholders and Potential Adverse Impact on Giga-tronics Stock Price Giga-tronics stock has historically traded on thin volume on NASDAQ. The ASCOR shareholders receiving Giga-tronics stock may not be able to sell a significant volume of stock if they wished to increase their liquidity after the Merger. In addition, their effort to sell significant volume of their newly acquired stock could result in a depression of the Giga-tronics share price. In any circumstance, such shareholdings will certainly be subject to the vagaries of the market place. Giga-tronics Revenues Could Decrease Due to Declining Order Intake Current softness in the market for Giga-tronics products has resulted in a substantial decline in backlog. If this trend cannot be reversed in the near term, Giga-tronics shipments in the current year could fall short of plan with a concurrent decline in earnings. -18- 26 Succession of Chief Executive Officer at Giga-tronics Could Result In a Less Supportive Management Perspective for ASCOR Mr. George H. Bruns, Jr. may decide over the next year or two to bring in a new Chief Executive Officer to manage Giga-tronics. Mr. Bruns joined the Company in January of 1995, originally with the intention to just stay a short time period. Due to Mr. Bruns many other business interests he may need to reduce his time spent at Giga-tronics. Since Mr. Bruns has been associated with ASCOR since its inception, a new Chief Executive Officer at Giga-tronics may not be as effective at managing the combined entities. -19- 27 SECTION III GIGA-TRONICS INCORPORATED Giga-tronics designs, manufactures and markets microwave and radio frequency signal generation and power measurement instruments for the electronics test and measurement equipment industry. These products are used in the design, production, repair, and maintenance of telecommunications, radar, electronic warfare, and transportation systems. Giga-tronics has approximately 145 employees and all functions of the Company operate out of a 47,000 square foot facility in San Ramon, California. The Company books a mixture of commercial and government-related orders. In the past three fiscal years, sales related to U.S. Government agencies accounted for 31%, 26%, and 27% of total net sales. It is anticipated that sales to U.S. Government agencies will remain significant in fiscal 1997, even though the outlook for defense-related orders continues to be soft. Shipments are realized to domestic and international customers. On March 30, 1996, Giga-tronics had a backlog of approximately $6,112,000 compared to $10,154,000 at March 25, 1995. The Company shares the market with competitors that are larger and that have greater financial, engineering and marketing resources than the Company. The future success of the Company is dependent on its ability to steadily incorporate advancements in semiconductor and related microwave component technologies into its new products. The Company was incorporated in 1980, and operated previously out of locations in Pleasant Hill, California and Sunnyvale, California. Currently, the San Ramon facility is the only location, which is occupied under a lease with ten years remaining. Two of the fours members of the Giga-tronics Board of Directors, Mr. George H. Bruns, Jr., and Mr. James A. Cole, are also members of the ASCOR Board of Directors. Additionally, Mr. Bruns, Mr. Cole, and Mr. Robert C. Wilson (also on the Giga-tronics Board) hold varying amounts of ASCOR Shares and ASCOR Convertible Securities. Each shareholder is urged to read this Proxy in its entirety for more details. -20- 28 SECTION IV ASCOR, INC. ASCOR designs, manufactures and markets an extensive line of switching and connecting devices that link together many specific purpose instruments that are part of automatic test systems. ASCOR offers a family of Switching and Interface Test Adapters as standard VXI configured products. Additionally, it provides complete systems integration services to the Automatic Test Equipment (ATE) market. In the past three fiscal years, defense-related orders accounted for 87%, 87%, and 100% of net sales in the twelve-month periods ending March, 1996, 1995, and 1994, respectively. Management anticipates that sales to defense contractors will remain significant in fiscal 1997, even though the outlook for defense-related orders continues to be soft. Shipments are realized only to domestic customers. On March 30, 1996, ASCOR had a backlog of approximately $2,742,000 compared to $3,023,000 at March 25, 1995. The Company shares the market with competitors that are larger and that have greater financial, engineering, and marketing resources than the Company. The future success of the Company is dependent on its ability to steadily incorporate advancements in semiconductor and related microwave component technologies into its new products. ASCOR was founded and incorporated in 1987. It has approximately 50 employees and all functions of the Company operate out of a leased facility with 12,160 square feet in Fremont, California. The lease for the facility expires on January 31, 1998. Two of the five members of the ASCOR Board of Directors, Mr. George H. Bruns, Jr., and Mr. James A. Cole, are also members of the Giga-tronics Board of Directors. Additionally, Mr. Bruns, Mr. Cole and Mr. Robert C. Wilson (also on the Giga-tronics Board) hold varying amounts of ASCOR Shares and ASCOR Convertible Securities. Each shareholder is urged to read this Proxy in its entirety for more details. -21- 29 SECTION V THE MERGER Description of the Merger At the Effective Time, (i) Acquisition Corp. will be merged with and into ASCOR and ASCOR will become a wholly owned subsidiary of Giga-tronics; (ii) each (a) share of ASCOR Common Stock and ASCOR Preferred Stock outstanding immediately prior to the Merger (other than ASCOR Shares held by shareholders who have perfected and not withdrawn their right to seek appraisal of their shares under applicable California law) and (b) outstanding ASCOR Convertible Security will be converted into the right to receive a pro rata portion of an aggregate of 724,986 Shares of Giga-tronics Common Stock to be issued in the Merger. In determining the Exchange Ratio which holders of ASCOR Securities will be entitled to receive, all ASCOR Convertible Securities will be treated as having been converted or exercised into ASCOR Shares. Any ASCOR Convertible Securities which are considered "out-of-the-money" will be assumed by Giga-tronics and will be exercisable for Giga-tronics Common Stock as adjusted by the Merger. Shares of Giga-tronics Common Stock attributable to ASCOR Convertible Securities which are assumed by Giga-tronics will be retained by Giga-tronics from the Merger Consideration pending their exercise. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement - The Exchange Ratio and ASCOR Convertible Securities." See "DISSENTERS' APPRAISAL RIGHTS." A maximum of 724,986 shares of Giga-tronics Common Stock will be issuable in the Merger, including (a) shares issuable in respect of ASCOR Convertible Securities which are assumed, which shares will be retained by Giga-tronics if such securities expire unexercised, (b) fractional shares, (c) shares issuable in respect of ASCOR Shares for which dissenters' appraisal rights (see " - DISSENTERS' APPRAISAL RIGHTS") are perfected, and (d) shares deemed surrendered upon exercise of ASCOR Convertible Securities for which a deemed net exercise has occurred. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement - The Exchange Ratio." The Merger will be effective at the time the agreement of merger (the "Agreement of Merger" the form of which is attached to the Reorganization Agreement as Exhibit 1.01 - See Annex C) is filed with the Secretary of State of the State of California. Assuming all conditions to the Merger are met or waived prior thereto, it is anticipated that the Effective Time will occur not later than July 30, 1996. Voting and Proxies - Giga-tronics Date, Time and Place of Special Meeting. The Special Meeting is scheduled to be held at 10:00 a.m., local time, on Wednesday, June 26, 1996, at the Giga-tronics facilities at 4650 Norris Canyon Road, San Ramon, California 94583. Record Date and Outstanding Shares. Only holders of record of shares of Giga-tronics Common Stock at the close of business on June 14, 1996 (the "Record Date") may vote at the Special Meeting or at any adjournments or postponements thereof. As of the Record Date, there were 2,642,970 shares of Giga-tronics Common Stock outstanding, the only class of securities of the Company entitled to vote at the Special Meeting, held by approximately 1,089 shareholders of record. Each shareholder is entitled to one vote for each share registered in the shareholder's name on the Record Date. Voting Proxies. Many of the Company's shareholders may be unable to attend the Special Meeting. Therefore, Giga-tronics' Board of Directors is soliciting proxies so that each shareholder has the opportunity to vote on the proposals to be considered at the Special Meeting. When a proxy card is returned properly signed and dated, the shares represented thereby will be voted in -22- 30 accordance with the instructions on the proxy card. However, if a shareholder does not return a signed proxy card, his or her shares will not be voted by the proxies. Shareholders are urged to mark the boxes on the proxy card to indicate how their shares are to be voted. If a shareholder returns a signed proxy card and a choice is not specified, the shares represented by that proxy card will be voted in favor of the Merger and may also be voted in the proxy holder's discretion on such other business as may properly come before the meeting or any adjournments or postponements thereof, except that shares represented by proxies which have been voted "against" the Reorganization Agreement and the Merger will not be used to vote "for" postponement or adjournment of the Special Meeting for the purpose of allowing additional time for soliciting additional votes "for" the Reorganization Agreement and the Merger. See " - Vote Required.". Shareholders of Giga-tronics who execute proxies retain the right to revoke them at any time before they are voted. Any proxy given by a shareholder may be revoked (i) by duly executing and delivering a later proxy prior to the exercise of such proxy, (ii) by giving notice of revocation in writing to the Secretary of the Company prior to the meeting, at 4650 Norris Canyon Road, San Ramon, California 94583, or (iii) by attending the Special Meeting and voting in person. Vote Required. A quorum for the transaction of business at the meeting consists of holders of the majority of the outstanding shares of the Giga-tronics' Common Stock, present in person or by proxy. For purposes of determining the presence of a quorum, abstentions, but not broker non-votes, will be counted. In the event that less than a majority of the outstanding shares are present at the Special Meeting, either in person or by proxy, a majority of the shares so represented may vote to adjourn the Special Meeting from time to time without further notice, other than announcement at the Special Meeting, until a quorum shall be present or represented. The affirmative vote of holders of at least a majority of the outstanding shares of Common Stock of Giga-tronics as of the Record Date is required to approve and adopt the Reorganization Agreement and the transactions contemplated thereby. Under the California Corporate Law, in determining whether the proposal regarding the adoption of the Reorganization Agreement has received the requisite number of affirmative votes, abstentions will be counted and will have the same effect as a vote against such proposal. Broker non-votes which are not counted for any purpose will have no effect on the proposal. At the Close of Business on June 14, 1996 directors and officers of Giga-tronics were entitled to vote 438,538 shares of Giga-tronics' Common Stock representing 16.5% of the total shares entitled to vote at the Special Meeting. Solicitation of Proxies; Expenses. The cost of solicitation, including the cost of preparing and mailing the Notice of Special Meeting of Shareholders and this Joint Proxy Statement/Prospectus, will be paid by Giga-tronics. Solicitation will be made primarily by mailing this Joint Proxy Statement/Prospectus to all shareholders entitled to vote at the Special Meeting. Proxies may be solicited by officers and regular employees, but at no compensation in addition to their regular compensation as employees. Giga-tronics may reimburse brokers, banks and others holding shares in their names for third parties for the cost of forwarding Joint Proxy Statement/Prospectus to and obtaining proxies from third parties. In addition, while Giga-tronics has no present intention to retain anyone to assist in soliciting proxies, Giga-tronics may do so if it deems such action necessary. ASCOR Shareholder Consent Solicitation - Vote Required Consent Solicitation. ASCOR will deliver copies of this Joint Proxy Statement/Prospectus to all of its shareholders with a request that they execute a written consent approving the Merger. Pursuant to California Corporate Law, the Merger will be deemed approved by ASCOR's shareholders at such time as there have been filed with the secretary of ASCOR consents relating to the vote of ASCOR shareholders required to approve the Merger. See " - Vote Required." Under California Corporate Law ASCOR shareholders who have previously delivered a written consent -23- 31 approving the Merger may revoke the consent by a writing received by ASCOR prior to the time that written consents of the number of votes required to authorize the Merger are received by the secretary of ASCOR. Such revocation is effective upon receipt by the secretary of ASCOR. Vote Required. Approval of the Merger by ASCOR's shareholders requires the written consent of persons holding a majority of the votes entitled to be cast by holders of outstanding (a) ASCOR Common Stock voting as a class, (b) ASCOR Preferred Stock voting as a separate class and (c) ASCOR Common Stock and ASCOR Preferred Stock voting together as a single class. Each share of ASCOR Common Stock is entitled to one vote and each share of ASCOR Preferred Stock is entitled to such number of votes as the number of shares of ASCOR Common Stock into which such share of ASCOR Preferred Stock is convertible. At the close of business on May 20, 1996, directors and officers of ASCOR and their affiliates, in the aggregate held ASCOR Common Stock and ASCOR Preferred Stock entitled to cast 10,546,254 votes, representing 75.0% of the total votes entitled to be voted by ASCOR Common Stock and ASCOR Preferred Stock voting together as a single class, by written consent with respect to the Merger. Background of the Merger Since two of the four Giga-tronics Directors (Mr. George H. Bruns, Jr., and Mr. James A. Cole) are also Directors of ASCOR, Giga-tronics has known about ASCOR since its incorporation in 1987. However, discussion of the proposed merger was initiated by Mr. Jeff Lum, President of ASCOR, and Mr. Bliss McCrum, an ASCOR investor and ASCOR Board member. For Mr. Jeff Lum, primary reasons included the need for capital, the advantage of being associated with a larger company, and the need for access to international markets. For Bliss McCrum, and the other venture capitalists (ASCOR investors), there is a need for medium term liquidity. Over the past two years, the Giga-tronics Board has discussed the pursuit of various acquisition candidates which would potentially be synergistic with the Giga-tronics product line, but never reached any agreements on a transaction. There also were no formal negotiations conducted or offers made or rejected for any acquisition candidates. There was significant contact and discussions with three companies, but negotiations were not initiated due to various negative factors associated with one or all of the candidates, including but not limited to geography (too far from Giga-tronics), inconsistent financial performance, limited history, and the potential purchase price not appearing financially justifiable. Due to the extremely high costs of completing acquisitions, only strong acquisition targets are pursued, and only one acquisition is contemplated at a given time. In September and October of 1995, the idea of a Giga-tronics/ASCOR merger was discussed at both Companys' respective Board meetings. It was felt that if such a merger were otherwise possible, it would substantially broaden the product base and strengthen the technical capability of Giga-tronics while providing marketing leverage and added financial resources for ASCOR. The discussions at the September 27, 1995 ASCOR Board meeting included general discussion concerning Giga-tronics compatibility in the areas of technology, products, and markets. These discussions were held among Mr. George H. Bruns, Jr., Mr. James A. Cole, Mr. Jeffrey Lum, Mr. Bliss McCrum, and Mr. Steven Herrick. There was a brief review of the historical financials for Giga-tronics, as well as the projections for fiscal year 1996 ending March 30, 1996. The discussions held at the October 23, 1995 Giga-tronics Board meeting included general discussion concerning ASCOR compatibility in the areas of technology, products and markets. These discussions were held among Mr. George H. Bruns, Jr., Mr. James A. Cole, Mr. Edward D. Sherman, and Mr. Robert C. Wilson. There was never any discussion or consideration given to the option of contracting for or seeking to enter into a licensing agreement for the desired VXI architecture. In subsequent discussions between the two companies, it was felt that the commonality of interests and purpose suggested a Merger based upon relative, rather than absolute values. At the November 15, 1995 ASCOR Board meeting, there was a more detailed discussion about the advantages of a merger with Giga-tronics. These discussions included the need for cash by ASCOR to re-pay debt, while Giga-tronics was in a cash surplus position. While Giga-tronics had a very strong balance sheet, the earnings stream of Giga-tronics would benefit from a merger with ASCOR. The future growth potential of both companies was discussed. It was decided that a group representing ASCOR (Mr. Jeffrey Lum, Mr. Fred Chu, Mr. James A. Cole, and Mr. Bliss McCrum) would formulate a set of relative values for ASCOR and Giga-tronics after the Merger. Meanwhile, Giga-tronics (represented by Mr. George H. Bruns, Jr.) would also formulate a -24- 32 proposal. Shortly thereafter, Mr. Jeffrey Lum submitted an ASCOR proposal including post-merger values of 69% Giga-tronics and 31% ASCOR. Mr. Bruns indicated that this proposal would not be acceptable because the recent history (3 years) of the two companies had been given too much weight. Since the recent earnings history of ASCOR had been stronger than Giga-tronics, but Giga-tronics had very strong earnings prior to the most recent 3 years through fiscal 1995, more work was needed to reach an equitable ratio of post-merger ownership. At the December 6, 1995 Giga-tronics Board meeting, Mr. George H. Bruns, Jr., Mr. James A. Cole, Mr. Edward D. Sherman, Mr. Robert C. Wilson and Mr. Gregory L. Overholtzer (Chief Financial Officer and Secretary of Giga-tronics) reviewed in detail the five-year history of Giga-tronics and ASCOR, one-year projections for both companies, projected ASCOR cash flow for fiscal 1996, the capitalization of ASCOR, and the positive/negative attributes of both companies. While ASCOR had good technology, good growth, excellent management, and was in a good market, it also was dependent on large contracts, had a large concentration of its sales with a few customers, its sales were all related to the U.S. defense industry, it was going to need cash over the next year, and the ratio of earnings to sales were projected to decline somewhat in the fiscal year 1996 ending September 30. Though Giga-tronics had some product lines which were aging with poor profit margins, it also had a broad market base, more commercial accounts than defense oriented, a strong field organization, a very strong balance sheet and cash position, and a strong earnings history if at least the prior 5 years were included. A post-combination value ratio of ASCOR to Giga-tronics of 22% to 78% was approved by the Giga-tronics Board. On December 7, this proposal was communicated by Mr. George H. Bruns to the ASCOR negotiating team. Mr. Bruns communicated to ASCOR that the Board of Giga-tronics believed that this ratio was equitable and fair to ASCOR, as well as to Giga-tronics Shareholders for all the reasons outlined above, and that if ASCOR was not in agreement, Giga-tronics would seek other synergistic acquisitions to pursue. Over the next few weeks, various proposals with different post-combination value ratios were presented to Mr. George H. Bruns, Jr. by Mr. James A. Cole and Mr. Bliss McCrum. These proposals were reviewed and rejected by Giga-tronics. By mid-December, after due consideration of past and potential future growth, profitability, technical strengths, financial strength and organizational compatibility, it was mutually agreed that a post combination value ratio of ASCOR to Giga-tronics would be 22% to 78%. Based upon the number of outstanding shares of Giga-tronics common stock of 2,569,920 as of December 1, 1995, the preceding ratios suggested that ASCOR thus had an equivalent value of 724,986 Giga-tronics shares. The Board of Directors of Giga-tronics felt it was important that the proposed merger be accounted for as a pooling-of-interests. In late December, the Giga-tronics finance group and the Giga-tronics auditors, KPMG Peat Marwick LLP ("KPMG") began financial due diligence and an analysis of poolability. Upon satisfactory completion of these tasks in late March, 1996, an audit of ASCOR by KPMG was arranged and conducted in April 1996. Upon completion of the audit, the "Reorganization Agreement" was executed on May 2, 1996. On May 20, 1996 Giga-tronics and ASCOR executed the Letter Agreement pursuant to which Giga-tronics agreed to sue its best faith efforts to effect the registration pursuant to federal securities laws of the Giga-tronics Common Stock to be issued in the Merger on a Form S-4 registration statement. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - Letter Agreement." Giga-tronics' Reasons for the Merger; Recommendations of Giga-tronics' Board of Directors The Board of Directors of Giga-tronics believes that the terms of the Reorganization Agreement and the transactions contemplated thereby are fair to, and in the best interest of, Giga-tronics Incorporated and its shareholders. In making that determination, the Giga-tronics Board of Directors considered the following factors: (i) ASCOR's business prospects and recent results of -25- 33 operations and financial position, (ii) the benefit of having access to certain of ASCOR's technology and technical resources, (iii) the potential synergistic benefits derived from the coordination of sales and marketing strategies, and (iv) the ease of integration and exchange of ideas due to long-term familiarity. Mr. George H. Bruns also had numerous meetings with Mr. Roger Wood, the financial advisor, to discuss his analysis of the proposed merger and his findings regarding the fairness of the merger consideration. The Board of Directors of Giga-tronics considered ASCOR's working capital position, anticipated cash flow from operations, available cash balances and the quality of ASCOR's customer base. The Giga-tronics Board also considered the impact that access to ASCOR's engineering personnel could have on advancing Giga-tronics products and technology. The Board noted that Giga-tronics and ASCOR technology was complementary and that ASCOR possessed certain VXI and switching capabilities required by Giga-tronics in developing new products for its markets. ASCOR's understanding of high bandwidth electronic switching could help broaden the Giga-tronics microwave product line by allowing Giga-tronics to incorporate the ASCOR switch technology into its products. ASCOR's products could help Giga-tronics realize new market potential for its microwave products through the use of its VXI architecture. The signal generator product offering of the combined Company could enable the combined Giga-tronics to be a more powerful force in the microwave test instrument marketplace. ASCOR has established strong relationships with some very large companies that may also be potential customers for signal generators and power measurement devices produced by Giga-tronics. In summary, the acquisition of ASCOR by Giga-tronics offers the opportunity to expand one of its oldest product lines by infusing new technical concepts into the product and providing market synergy with an important customer base. Notwithstanding certain distribution channel risks (see "RISK FACTORS - Distribution Channel Conflicts"), the Giga-tronics sales reps may also enable the ASCOR product line to realize more sales domestically, and establish an international customer base as well (currently there are no direct international sales). While the pre-Merger Giga-tronics balance sheet is very strong, Giga-tronics' earnings as a percentage of sales are lower than ASCOR's earnings as a percentage of sales because Giga-tronics generally has more mature products with relatively lower margins. ASCOR's earnings as a percent of sales are relatively high. With the income streams of the entities combined, and the realization of product, market, and technical synergies noted above, the combined Giga-tronics company could realize an improved earnings stream while maintaining a very strong balance sheet. The Board of Directors of Giga-tronics also believes that Mr. George H. Bruns, Jr. and Mr. James A. Cole can, because of their long-term familiarity with both organizations, ease integration and the exchange of ideas between the two companies. In approving the Merger, Giga-tronics also took into account the potential conflicts of interest of Mr. George H. Bruns, Jr., Mr. James A. Cole, and Mr. Robert C. Wilson because of their shareholdings in both Giga-tronics and ASCOR. The Board of Directors of Giga-tronics considered the positive and negative factors as a whole and concluded that the negative factors were outweighed by the positive factors as a whole and accordingly determined that the Merger is fair to, and in the best interests of, the shareholders of Giga-tronics. The negative factors considered included the dependence on key personnel, distribution channel risks, reliance on a single family of products, reliance on major contracts and a few number of customers, growth management, and future sales of common stock after the Merger. In view of the wide variety of factors considered by the Giga-tronics Board of Directors, it did not find it practicable to quantify, or otherwise attempt to assign relative weights to the specific factors considered in making its determination. Consequently the Giga-tronics' Board of Directors did not quantify the assumptions and results of its analysis in reaching its determination that the Merger is fair to, and in the best interests of, Giga-tronics' shareholders. -26- 34 THE BOARD OF DIRECTORS OF GIGA-TRONICS UNANIMOUSLY RECOMMENDS THAT GIGA-TRONICS SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AND ISSUANCE OF 724,986 SHARES OF GIGA-TRONICS COMMON STOCK PURSUANT TO THE TERMS OF THE REORGANIZATION AGREEMENT. ASCOR Reasons for the Merger - Recommendations of ASCOR's Board of Directors The Board of Directors of ASCOR believes that the terms of the proposed Reorganization Agreement and the transactions contemplated thereby are fair to, and in the best interest of, ASCOR, Inc. and its shareholders. In making that determination, the ASCOR Board of Directors considered the following factors: (i) Giga-tronics' business prospects and recent results of operations and financial position, (ii) the benefit of having access to certain of Giga-tronics' sales and marketing resources, (iii) the ease of integration and exchange of ideas due to long-term familiarity, (iv) the benefit of having access to certain management resources to help sustain ASCOR's potential sales growth, and (v) increased liquidity for holders of ASCOR stock and stock equivalents. The Board of Directors of ASCOR considered Giga-tronics' working capital position, anticipated cash flow from operations, available cash balances and the quality of Giga-tronics' customer base. They believed that Giga-tronics' strong balance sheet would permit available cash to assist in funding potential growth of ASCOR. The ASCOR Board believed that, notwithstanding the distribution channel risks discussed above (see "RISK FACTORS - Distribution Channel Conflicts"), the Giga-tronics sales reps and Giga-tronics sales and marketing group could enable the ASCOR product line to realize more sales domestically, and establish an international customer base as well (currently there are no direct international sales). The Board of Directors of ASCOR believes that Mr. George H. Bruns, Jr., and Mr. James A. Cole can, because of their long-term familiarity with both organizations, ease integration and the exchange of ideas between the two companies. With two Board members being common to ASCOR and Giga-tronics, ASCOR will have the benefit of Board familiarity with ASCOR after the merger. This familiarity will prevent short-term decisions being made after the merger that might have poor long-term consequences for ASCOR. Two of the four post-merger Giga-tronics Directors already understand the ASCOR business, and have the product knowledge to immediately implement post-merger decisions that would benefit ASCOR as well as Giga-tronics. These Board members have an in-depth perspective on ASCOR operations. If ASCOR experiences a high sales growth rate, the senior management of Giga-tronics (a Company with five times the revenue) can be helpful in identifying and solving risks and issues related to larger companies. These benefits accrue to ASCOR with no incremental cost being incurred. Since Giga-tronics is publicly traded on NASDAQ, the holders of ASCOR stock and stock equivalents would have increased liquidity after the merger has been consummated and their stock is tradeable after expiration of holding periods required under federal securities law or sold in a registered offering of Giga-tronics stock pursuant to their rights under the Registration Rights Agreement. The Board of Directors of ASCOR considered the positive and negative factors as a whole and concluded that the negative factors were outweighed by the positive factors as a whole and accordingly determined that the Merger is fair to, and in the best interest of, the shareholders of ASCOR. The negative factors considered included the limited liquidity for ASCOR shareholders (historically thin Giga-tronics trading volume), the softness in recent Giga-tronics order intake, and the future succession of the Chief Executive Officer at Giga-tronics. In approving the Merger, the Board of Directors of ASCOR also took into account the potential conflicts of interest of Mr. George H. Bruns. Jr., and Mr. James A. Cole because of their shareholdings and Board positions in both ASCOR and Giga-tronics. THE BOARD OF DIRECTORS OF ASCOR RECOMMENDS THAT ASCOR SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AND EXCHANGE OF ALL OUTSTANDING ASCOR COMMON STOCK FOR GIGA-TRONICS COMMON STOCK PURSUANT TO THE TERMS OF THE REORGANIZATION AGREEMENT. -27- 35 Opinion of Financial Advisor On April 12, 1996, the Giga-tronics Board of Directors retained Wood, Warren and Company to render a fairness opinion. On May 3, 1996, the Giga-tronics Board of Directors received Wood, Warren & Co.'s Opinion dated May 2, 1996, which provided that as of such date that the Exchange Ratio to be applied in the Merger is fair, from a financial point of view, to Giga-tronics. Wood, Warren & Co.'s opinion is directed only to the financial terms of the Reorganization Agreement and does not constitute a recommendation to any shareholder of Giga-tronics as to how such shareholder should vote at the Giga-tronics Special Meeting. No limitations were placed on Wood, Warren & Co. by the Board of Directors of Giga-tronics with respect to the investigation made or the procedures followed in preparing and rendering its opinion. A copy of Wood, Warren & Co.'s written opinion and summary of significant analysis is attached as Annex E hereto and should be read in its entirety for a description of the procedures followed, matters considered, assumptions made and methods employed by Wood, Warren & Co. In arriving at its opinion, Wood, Warren & Co.: (i) reviewed the Merger Agreement and the Joint Proxy Statement/Prospectus dated May 2, 1996 and such other information that was publicly available or was furnished to it by the Company or ASCOR, (ii) reviewed financial statements for the five years ending March 30, 1996 and other financial information, including forecasts, and operating data of Giga-tronics and ASCOR furnished to Wood, Warren & Co. by the companies, (iii) considered the historical stock prices and trading volumes of the common stock of the Company, (iv) reviewed the prices and premiums paid in other business combinations, (v) and prepared a discounted cash flow analysis of ASCOR. In addition, Wood, Warren & Co. held discussions with the senior management of Giga-tronics and ASCOR regarding the strategic rationale for, and benefits of, the Merger and the past and current business operations, financial condition and future prospects of the respective companies on a stand alone basis and as combined in the Merger, and undertook such other financial analyses as it deemed appropriate for purposes of this opinion. The following paragraphs summarize the significant analyses performed by Wood, Warren & Co. in arriving at its opinion. The information presented below is based on the financial condition of the Company and ASCOR as of a date or dates shortly before the date of its opinion (May 2, 1996). The closing price of Giga-tronics common stock on May 2, 1996, as reported by NASDAQ National Marketing System, was $8.25. Based on that price and the assumption that Giga-tronics will issue the maximum 724,986 shares of its common stock in the Merger, the enterprise value of ASCOR was approximately $5.6 million. Analysis of Selected Transactions Analysis. Wood, Warren & Co. compared the proposed Merger with selected merger and acquisition transactions. This analysis included 32 technology company transactions. In examining these transactions, Wood, Warren & Co. analyzed certain income statement and balance sheet parameters of the acquired company relative to the consideration offered. Multiples analyzed included consideration offered to historical revenue, to historical cash flow from operations, to historical earnings before interest and taxes, to historical net income, and to historical book value. Based on the analysis of the selected merger and acquisition transactions, ASCOR's implied equity value ranged from approximately $5.0 million to approximately $16.7 million. Discounted Cash Flow Analysis. Wood, Warren & Co. analyzed the theoretical valuation of ASCOR based on projections prepared by the managements of Giga-tronics and ASCOR. To estimate the total present value of ASCOR's business, Wood, Warren & Co. discounted to present value the business as reflected in the financial performance estimates using discount rates ranging from 25% to 40%. The terminal value was based on multiples of 5.5 and 7.5 times projected earnings before interest and taxes for fiscal 2001. Based on the discounted cash flow analysis, ASCOR's enterprise value ranged from approximately $4.4 million to approximately $9.2 million. Pro Forma Analysis. Wood, Warren & Co. analyzed the pro forma impact of the proposed Merger on Giga-tronics earnings per share. In conducting its analysis, Wood, Warren & Co. relied upon the financial projections for the fiscal years ending March, 1997 through 2001 provided by the management of Giga-tronics and ASCOR, respectively. The analysis indicated that earnings per share of the pro forma combined company would be higher in the first fiscal year after the Merger and higher thereafter through fiscal 2001 than comparable projections for Giga-tronics as a stand-alone company. Stock Trading History Analysis. Wood, Warren & Co. examined the trading history in terms of both price and volume for periods of time ranging from six months, one year, three years and five years. Wood, Warren & Co. noted that the Giga-tronics' average price per share was $7.76, -28- 36 $7.65, $6.64, and $6.84, respectively. In addition, Wood, Warren & Co. analyzed the volume of Giga-tronics shares traded at different prices over the same time periods. Wood, Warren & Co. noted that, for each period analyzed, approximately 48% to 64% of the trading volume was at prices below the six month average price per share of $7.76. Contribution Analysis. Wood, Warren & Co. analyzed the contribution of each of Giga-tronics and ASCOR to certain financial statement categories of the pro forma combined company, including revenue, gross profit, operating income, and net income. The review was made for the three years ended March 30, 1996. This contribution analysis was then compared to the pro forma ownership percentage of ASCOR's shareholders (approximately 22%) in the pro forma combined company. In gross profits and earnings, ASCOR's contribution exceeded that of its approximate ownership in the pro forma combined company. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. No company or transaction used in the above analysis is closely comparable to Giga-tronics or ASCOR or the Merger. Accordingly, Wood, Warren & Co., believes its analyses must be considered as a whole and that considering any portion of such analyses and of the factors considered, without considering all analyses and current factors, could create a misleading or incomplete view of the process underlying the opinion. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold. Conflicts of Interest In considering the recommendations of the Board of Directors of Giga-tronics with respect to the issuance of shares of Giga-tronics Common Stock pursuant to the Reorganization Agreement, shareholders of Giga-tronics should be aware that certain members of Giga-tronics' Board of Directors and the Chief Executive Officer of Giga-tronics have certain interests in the Merger that are in addition to the interests of shareholders of Giga-tronics generally. In particular, three of the four Giga-tronics Board members, including Mr. George H. Bruns, Jr., Chairman and Chief Executive Officer, beneficially own shares of ASCOR Common or Preferred Stock or ASCOR -29- 37 warrants (which shares shall or warrants may be converted into shares of Giga-tronics Common Stock in connection with the Merger), as set out in the table below. Two of the four Giga-tronics Board members, Mr. George H. Bruns, Jr., and Mr. James A. Cole, also participate on the ASCOR Board of Directors (which is comprised of five members in total). These interests were considered, among other matters, in approving the Reorganization Agreement and the transactions completed thereby. ASCOR Securities and Giga-tronics Securities Jointly Held by Giga-tronics Directors and ASCOR Directors Set out below are the individual shares and warrants jointly held in ASCOR and Giga-tronics by the Giga-tronics' Directors and the Chief Executive Officer as of June 7, 1996. (No ASCOR non-Giga-tronics Directors hold any Giga-tronics stock).
Beneficially Owned Beneficially Owned ASCOR Giga-tronics Common Stock Common Stock -------------------------------- ------------------------- Percent Percent Name Shares of Shares Shares of Shares (5) - ---- --------- --------- ------- --------- George H. Bruns, Jr. (1) 454,377 3.4% 357,650 13.5% James A. Cole (2) 3,731,453 28.2% 55,638 2.1% Robert C. Wilson 100,000 (3) 0.8% 25,000 (4) 0.9%
Notes to Table (1) Represents shares held by the Bruns Trust and shares registered in the name of his son and daughter. The 357,650 Giga-tronics shares include 187,650 shares owned by the Bruns Trust and 170,000 registered in the names of son and daughter. The ASCOR shares and warrants are owned by the Bruns Company, a venture investment partnership. (2) James A. Cole is the Managing General Partner of Spectra Enterprise Associates. Spectra is a Venture Partnership which beneficially owns the shares and warrants over which Mr. Cole has shared voting and power to determine the disposition of shares. (3) Represents ASCOR shares held by Venturn, which is a venture partnership in which Robert C. Wilson is a partner and has shared voting and power to determine the disposition of shares. -30- 38 (4) Excludes 24,000 common stock options which are not exercisable within the next 60 days. (5) Percentages based on 2,642,970 total shares outstanding as of June 7, 1996, plus 7,050 exercisable options for Giga-tronics shares. Compensation of Directors Each of Giga-tronics' Directors who is not employed by Giga-tronics receives an annual director's fee of $6,000 and $750 for attendance at each Board meeting. Outside Directors serving on committees of the Board receive $500 for attendance at each committee meeting. These amounts were effective January, 1995. Each of ASCOR's Directors who is not employed by ASCOR receives reimbursement of travel expenses. There are no annual fees or meeting compensation for ASCOR Directors. -31- 39 Compensation of Directors and Executive Officers by Giga-tronics and ASCOR The following table provides information concerning compensation paid or accrued by Giga-tronics or ASCOR, to or on behalf of each Company's Chief Executive Officer and each of the four other most highly compensated executive officers who earned more than $100,000 annual compensation during the last fiscal year, for the fiscal years ended March 30, 1996, March 25, 1995, and March 26, 1994: SUMMARY COMPENSATION TABLE
Long -Term Compensation ----------------------- Annual Compensation Awards Payouts ------------------- --------------- NUMBER OF SECURITIES OTHER RESTRICTED UNDERLYING ALL OTHER NAME AND ANNUAL STOCK OPTIONS/ LTIP COMPEN- PRINCIPAL FISCAL COMPEN- AWARDS SARS PAYOUTS SATION POSITION YEAR SALARY($) BONUS($) SATION($) ($) (#)(1) ($)(2) ($)(3) - --------------------------------------------------------------------------------------------------------------------- George H. Bruns 1996 $ 148,000 -- $ 7,200 (5) -- -- -- -- Chairman and 1995 $ 37,000 (4) -- $ 9,050 (6) -- -- -- -- Chief Executive Officer, Giga-tronics Fred Chu 1996 (7) $ 93,675 $18,099 $ 5,393 (8) -- -- -- $ 924 Vice President, 1995 $ 82,358 $23,449 $10,367 (8) -- -- -- $ 693 Manufacturing, ASCOR Jeffrey Lum 1996 $ 100,300 $22,999 $ 5,032 (8) -- -- -- $ 924 President, ASCOR 1995 $ 87,150 $33,344 $10,329 (8) -- -- -- $ 693 1994 $ 79,750 $19,442 $ 1,040 -- -- -- -- Gregory Overholtzer 1996 (7) $104,885 -- -- -- -- -- $3,392 Vice President, Finance and Chief Financial Officer, Giga-tronics Brad C. Stribling 1996 (7) $111,126 -- -- -- -- -- $2,015 Vice President, 1995 $116,462 $10,000 -- -- 40,000 -- $1,558 Engineering, Giga-tronics David L. White 1996 $119,627 -- -- -- -- -- -- Vice President, 1995 $108,696 -- -- -- -- -- $ 742 Marketing & 1994 $102,019 $10,000 -- -- -- -- $ 385 Sales, Giga-tronics
(1) Stock options granted under the Company's 1990 Stock Option Plan. (2) Long Term Incentive Payment (LTIP): none were made. -32- 40 (3) Represents contributions made by the Company to the Company's 401 (k) Plan which match in part the pre-tax elective deferral contributions (included under Salary) made to such plan by the executive officers. (4) In January, 1995, Mr. George H. Bruns, Jr. assumed the role of Chief Executive Officer. Annualized fiscal 1995 salary was $148,000. (5) Other compensation for Mr. George H. Bruns, Jr. represents a car allowance in 1996. (6) Other compensation for Mr. George H. Bruns, Jr. includes a car allowance of $1,800 for three months and board compensation of $7,250. The Board compensation was earned prior to the assumption of the Chief Executive Officer position in January, 1995. (7) Pursuant to regulations issued by the Commission, no data is reportable for prior fiscal years because annual compensation was below the $100,000 requirement. (8) Other compensation for Mr. Chu and Mr. Lum includes $4,500 car allowance in 1996 and $9,000 car allowance in 1995. Employee Benefit Plan The current ASCOR benefit plan, which is fairly similar to the current Giga-tronics benefit plan, will be retained. In the future, both companies may operate under the current Giga-tronics benefit plan if that is desirable from a cost-benefit trade-off. The differences in the two plans are as follows. Medical and Dental insurance costs and providers are different for the companies. Cost to the Giga-tronics' employees is somewhat higher, though there are more coverage options to choose from. Both companies have 401K plans with company contributions based on employee participation. The rate of corporate matching for Giga-tronics is higher, but the cap on employer matching is lower, than the ASCOR Plan. -33- 41 Structure of Board of Directors After the Merger The Board of Directors of the combined Giga-tronics Company after the merger will be the same as the current Giga-tronics Board.
DIRECTOR NAME AND PRINCIPAL OCCUPATION SINCE: AGE - ----------------------------- ------ --- George H. Bruns, Jr. 1980 78 Chief Executive Officer since January, 1995, Chairman of the Board and a director of Giga-tronics since its inception. Founded Giga-tronics in 1980 and has been a director since inception. Mr. Bruns is General Partner of The Bruns Company, a private venture investment and management consulting firm. Director of Peninsula Wireless Communications Inc., ASCOR Inc. and Testronics Inc. James A. Cole 1994 54 Managing General Partner of Spectra Enterprise Associates and a Partner of New Enterprise Associates. Founder and President of Amplica, Inc. and presently a Director of Vitesse Semi-Conductor Corp., and Spectrian Corp. Edward D. Sherman 1993 62 Served as Product Line Manager of Giga-tronics from May, 1995 through March, 1996. President and Chief Executive Officer at 3dbm, Inc. from January, 1994 through March, 1995. Prior to that time, and from 1990, Mr. Sherman served as President and Chief Executive Officer of Peninsula Engineering. Robert C. Wilson 1991 76 Chairman of Wilson & Chambers, a private investment firm. Mr. Wilson is also currently a director of Storage Technology Corporation, SyQuest Technology, Inc., Southwall Technologies Inc., ReSound Corp., Andros Inc., and Carco Electronics.
Management and Security Ownership After the Merger ASCOR will be a wholly owned subsidiary of Giga-tronics after the Merger. The current President of ASCOR, Mr. Jeffrey Lum, will report to Mr. George Bruns, Chief Executive Officer of Giga-tronics, after the Merger. Mr. Lum's title will be "President of ASCOR, A Giga-tronics Company." All current direct reports of Mr. Jeff Lum at ASCOR will remain as such after the Merger. Mr. Jeff Lum will become an officer of Giga-tronics, thereby resulting in five officers of Giga-tronics, as noted below. George H. Bruns, Jr. - Chairman and Chief Executive Officer Mr. Jeffrey Lum - President of ASCOR, A Giga-tronics Company Mr. Gregory L. Overholtzer - VP, Finance and Chief Financial Officer Mr. Bradley C. Stribling - VP, Engineering Mr. David L. White - VP, Sales and Marketing -34- 42 As a wholly owned subsidiary of Giga-tronics Incorporated, ASCOR will retain the following officers. Jeffrey Lum - President Fred Chu - VP, Manufacturing -35- 43 STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information concerning (i) persons or entities anticipated to hold 5% or more of Giga-tronics Common Stock after the Merger, (ii) anticipated ownership of Giga-tronics by each anticipated director and executive officer of Giga-tronics individually, and by all directors and executive officers of Giga-tronics as a group, (iii) anticipated ownership of Giga-tronics by each current ASCOR director and executive officer, in each case based upon ownership by such person of Giga-tronics Common Stock and ASCOR Common Stock/Common Stock Equivalents as of June 14, 1996 and after giving effect to the Merger. The estimated ASCOR to Giga-tronics exchange ratio of 18.246 to 1 was determined by dividing the Merger Consideration by the number of ASCOR Common Shares and equivalents outstanding as of the date of this Joint Proxy Statement/Prospectus. The actual Exchange Rate at the Effective Time should be approximately the same figure.
Giga-tronics Percent Common of Total Name and Percent Giga-tronics Percent Stock at Outstanding Address of ASCOR of Out- Common of Out- Effective Common Beneficent Owner Securities standing(1) Stock standing Time Stock(2) - ---------------- ---------- -------- ----- -------- ---- ----- George H. Bruns, Jr. (3) 454,377 3.4 357,650 13.5 382,553(4) 11.3 James A. Cole (3) 3,731,453 28.2 55,638 2.1 260,146(5) 7.7 Fred Chu (11) 897,500 6.8 -0- -0- 49,189(6) 1.5 Steve Herrick (11) 857,486 6.5 -0- -0- 46,995(7) 1.4 Jeffrey Lum (11) 1,429,821 10.8 -0- -0- 78,364(8) 2.3 Bliss McCrum (11) 2,434,754 18.4 -0- -0- 133,441(9) 4.0 Gregory L. Overholtzer (3) -0- 0.0 -0- 0.0 -0- 0.0 Bradley C. Stribling (3) -0- 0.0 -0- 0.0 -0- 0.0 Edward D. Sherman (3) -0- 0.0 -0- 0.0 -0- 0.0 David L. White (3) -0- 0.0 250 0.0 250 0.0 Robert C. Wilson (3) 100,000 0.8 25,000 0.9 30,481(10) 0.9 All officers and directors as a group (11 persons including the above) 9,905,391 74.9 438,538 16.5 981,419 29.1 The Robertson Stephens -0- 0.0 253,672 9.6 253,672 7.5 Orphan Fund 555 California Street San Francisco, CA 94104
- -------------------- -36- 44 (1) Total ASCOR securities of 13,228,069 as of June 14, 1996 based on 7,910,144 Common shares, 5,249,516 Preferred shares, and 68,409 Preferred warrants. (2) Total shares of 3,375,006 based on 2,642,970 Giga-tronics shares (as of June 14, 1996) plus 7,050 exercisable options for Giga-tronics shares plus 724,986 shares to be issued in connection with the Merger. (3) Address of all Directors and Officers is c/o Giga-tronics Incorporated, 4650 Norris Canyon Road, San Ramon, CA 94583. (4) Includes 357,650 Giga-tronics shares as of June 14 and 24,903 estimated Giga-tronics shares to be issued in connection with the Merger in respect to 454,377 ASCOR stock shares converted at a conversion ratio of 18.246 to 1. (5) Includes 55,638 Giga-tronics shares as of June 14 and 204,508 estimated Giga-tronics shares to be issued in connection with the Merger in respect to 3,731,453 ASCOR stock shares converted at a conversion ratio of 18.246 to 1. (6) Includes 49,189 estimated Giga-tronics shares to be issued in connection with the Merger in respect to 897,500 ASCOR stock shares converted at a conversion ratio of 18.246 to 1. (7) Includes 46,995 estimated Giga-tronics shares to be issued in connection with the Merger in respect to 857,486 ASCOR stock shares converted at a conversion ratio of 18.246 to 1. (8) Includes 78,304 estimated Giga-tronics shares to be issued in connection with the Merger in respect to 1,429,821 ASCOR stock shares converted at a conversion ratio of 18.246 to 1. (9) Includes 133,441 estimated Giga-tronics shares to be issued in connection with the Merger in respect to 2,434,754 ASCOR stock shares converted at a conversion ratio of 18.246 to 1. (10) Excludes 24,000 Giga-tronics common stock options which are not exercisable within the next 60 days; includes 25,000 Giga-tronics shares and 5,481 estimated Giga-tronics shares to be issued in connection with the Merger in respect to 100,000 ASCOR shares converted at a conversion ratio of 18.246 to 1. (11) Address of all Directors and Officers is c/o ASCOR, Inc., 47790 Westinghouse Drive, Fremont, CA 94539. -37- 45 Accounting Treatment The Merger is intended to qualify as a pooling-of-interests for accounting and financial reporting purposes. Under this method of accounting, the assets and liabilities of Giga-tronics and ASCOR will be carried forward to the combined company (combined Giga-tronics) at their recorded amounts, income of the combined company will include income of Giga-tronics and ASCOR for the entire fiscal period in which the combination occurs (fiscal 1997 ending March 29, 1997) and the reported income of the separate companies for prior periods will be combined and restated as income of the combined company. Expenses of the Merger, which are estimated to be $250,000, will be charged to expense as incurred in fiscal years 1996 and 1997. Pursuant to the Reorganization Agreement, Giga-tronics and ASCOR are required to exercise their best efforts to cause each of their respective affiliates to execute a written agreement as of the Effective Time of the Merger to the effect that such person has not transferred shares of Common Stock of Giga-tronics and Common or Preferred Stock of ASCOR within the preceding 30 days and will not transfer any shares of combined Giga-tronics Common Stock prior to the date that combined Giga-tronics publishes results covering at least 30 days of combined operations of Giga-tronics and ASCOR. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - The Reorganization Agreement and Affiliates Agreements." Certain Federal Income Tax Consequences In the opinion of Brobeck Phleger & Harrison LLP ("Brobeck") , the following discussion describes the material Federal Income tax considerations of the Merger to ASCOR and to the shareholders of ASCOR under existing federal income tax law, which is subject to change, possibly retroactively. This discussion does not describe all aspects of federal Income taxation which may be relevant to particular stockholders in light of their personal circumstances, such as holders whose stock was acquired pursuant to the exercise of an employee stock option or otherwise as compensation, nor to stockholders who are subject to special treatment under the Federal income tax laws (for example, financial institutions, insurance companies, tax-exempt organizations, broker-dealers and foreign taxpayers); nor does it discuss any aspects of state, local, or foreign tax law. THIS DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES OF THE MERGER TO HOLDERS OF ASCOR OPTIONS OR WARRANTS WHICH HAVE NOT BEEN ACTUALLY EXERCISED FOR ASCOR STOCK PRIOR TO THE MERGER, AND SUCH HOLDERS ARE ADVISED TO CONSULT THEIR TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE MERGER. THIS DISCUSSION ALSO DOES NOT DISCUSS THE TAX CONSEQUENCES OF ANY TRANSACTION OTHER THAN THE MERGER (INCLUDING OTHER TRANSACTIONS UNDERTAKEN IN CONNECTION W/OR PURSUANT TO THE MERGER). The Merger has been structured with the intent that it be tax-free to ASCOR and shareholders of ASCOR for federal income tax purposes. In the opinion of Brobeck, based upon certain facts and representations as set forth in such opinion, the Merger will generally constitute a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, for federal income tax purposes. Assuming the Merger qualifies as a reorganization, the following will be the general federal income tax consequences of the Merger to the shareholders of ASCOR: 1. No gain or loss will be recognized by holders of ASCOR stock who exchange their ASCOR stock for Giga-tronics Common Stock, except for any cash received by such stockholders in lieu of fractional shares of such common stock. A holder of ASCOR stock who receives cash in lieu of fractional shares will recognize gain or loss to the extent of the difference between the holder's basis allocable to the fractional share and the amount of cash received for the fractional share (assuming the fractional shares are held as capital assets). -38- 46 2. The aggregate tax basis of Giga-tronics Common Stock received by holders of ASCOR stock in the Merger will equal the aggregate tax basis of the ASCOR stock exchanged therefor, reduced by any amount allocable to any fractional share interest for which cash is received. 3. Provided that ASCOR stock is held by a holder as a capital as set at the Effective Time, the holding period of the Giga-tronics Common Stock received by the holder of ASCOR stock in the Merger will include the holding period of ASCOR stock. 4. No gain or loss will be recognized by ASCOR upon the Merger. The opinion of Brobeck expressed herein represents such counsel's best legal judgment based on existing authorities and is not binding on the Service. The Service might successfully assert upon an audit of either ASCOR or its stockholders that different tax consequences result. In addition, this opinion is based on certain representations made by Giga-tronics, ASCOR and certain ASCOR shareholders. In the event that such representations are inaccurate, counsel's opinion could be altered. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT APPLY TO PARTICULAR CATEGORIES OF HOLDERS OF ASCOR STOCK SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL INCOME TAX LAWS, SUCH AS FOREIGN HOLDERS AND HOLDERS WHOSE ASCOR STOCK WAS ACQUIRED PURSUANT TO THE EXERCISE OF AN EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION. IN ADDITION, THERE MAY BE RELEVANT STATE, LOCAL OR OTHER TAX CONSEQUENCES, NONE OF WHICH ARE DESCRIBED ABOVE. ASCOR SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS AND THE EFFECT OF PROPOSED CHANGES IN THE TAX LAWS. Dissenters' Appraisal Rights General. Giga-tronics shareholders and ASCOR shareholders who follow certain procedures will be entitled, as dissenting shareholders, to have the "fair value" of their Giga-tronics shares or ASCOR Common Stock or ASCOR Preferred Stock determined by a court and to be paid in cash therefor pursuant to California Corporate Law. In the event Giga-tronics shareholders holding more than 5% of outstanding Giga-tronics Common Stock exercise their right of dissent to the Merger (which percentage is the minimum required for such rights to be executable), preventing the transaction from being accounted for as a pooling of interests, the Giga-tronics Board of Directors may elect not to proceed and consummate the Merger. If ASCOR shareholders exercise their right to dissent to the Merger and perfect such rights with respect to such amounts of ASCOR Securities as would be exchanged for 10% or more of the number of shares of Giga-tronics Common Stock to be issued in the Merger, the transaction will not qualify as a pooling of interest and the Giga-tronics Board of Directors may elect not to proceed and consummate the Merger. See "THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS - - The Reorganization Agreement - Conditions to the Merger." Giga-tronics Shareholders. Pursuant to California Corporate Law, as shares of Giga-tronics Common Stock are traded on NASDAQ, no dissenters' rights of appraisal are available to any Giga-tronics shareholders unless demands for payment are filed with respect to 5% or more of the outstanding number of shares of Giga-tronics Common Stock. If the Merger is approved by the required vote of the Giga-tronics shareholders and is not abandoned or terminated, any holder of Giga-tronics Common Stock may, by complying with the provisions of Sections 1300 to and -39- 47 including 1312 of the California Corporate Law, require Giga-tronics to purchase for cash at fair market value the shares owned by such holder which were voted against the Merger. The fair market value shall be determined as of the day before the first announcement of the terms of the proposed Merger (which announcement was made on May 12, 1996) excluding any appreciation or depreciation in consequence of the proposed Merger. THE FOLLOWING IS A BRIEF SUMMARY OF SECTIONS 1300 TO AND INCLUDING 1312, WHICH SETS FORTH THE PROCEDURES FOR DISSENTING FROM THE MERGER BY GIGA-TRONICS SHAREHOLDERS AND DEMANDING STATUTORY APPRAISAL RIGHTS UNDER CALIFORNIA LAW. THIS SUMMARY DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE PROVISIONS OF CALIFORNIA LAW RELATING TO THE RIGHTS OF GIGA-TRONICS SHAREHOLDERS TO AN APPRAISAL OF THE VALUE OF THEIR SHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTIONS 1300 TO AND INCLUDING 1312 OF THE CALIFORNIA CORPORATE LAW, THE FULL TEXT OF WHICH IS ATTACHED HERETO AS ANNEX F. FAILURE TO FOLLOW SUCH PROCEDURES EXACTLY COULD RESULT IN THE LOSS OF APPRAISAL RIGHTS. The dissenting shareholder wishing to require Giga-tronics to purchase his shares of Giga-tronics Common Stock must: (a) vote any of the shares the shareholder wishes to be dissenting shares against the Merger; (b) make written demand upon Giga-tronics not later than the date of the Special Meeting setting forth in the demand such shareholder's name and address, and the number and class of shares which the shareholder demands that Giga-tronics purchase and a statement as to what the shareholder believes the fair market value of such shares to have been, based upon the standard set forth above; and (c) submit for endorsement, within 30 days after the date on which the notice of approval of the Merger by the Giga-tronics shareholders is mailed to such shareholder (which notice must be mailed within 10 days after the date of approval), at the principal office of Giga-tronics, the certificates representing any shares in regard to which demand for purchase is being made, with a statement regarding which of the shares are dissenting shares. Simply voting against approval of the Merger will not be sufficient to constitute the demand described in clause (b) above. Within 10 days after the date of the approval of the Merger, Giga-tronics will mail to each shareholder who has voted against the Merger and made a proper written demand for dissenter's rights with respect to Giga-tronics Common Stock a notice of approval of the Merger together with a statement of the price determined by Giga-tronics to represent the fair market value of dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise dissenters' rights under the California General Corporation Law. The statement of the price of the shares will constitute an offer by Giga-tronics to purchase at the price stated therein any dissenting shares. If Giga-tronics and the dissenting shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder will be entitled to the agreed price plus interest thereon at the legal rate on judgments from the date of such agreement. Subject to the provisions of the California General Corporation Law, payment of the fair market value of the dissenting shares will be made within 30 days after such agreement or after satisfaction of any statutory or contractual condition, whichever is later, and upon surrender of the certificates therefor. -40- 48 If Giga-tronics denies that the shares are dissenting shares or if Giga-tronics and the dissenting shareholder fail to agree upon the fair market value of the shares, then the dissenting shareholder, within six months after the date on which notice of approval of the Merger by the Giga-tronics shareholders is mailed to such shareholder, and not thereafter, may file a complaint in the Superior Court of Contra Costa County, Martinez, California requesting the court to determine whether the shares are dissenting shares, or the fair market value of the dissenting shares, or both, or may intervene in any pending action for the appraisal of any shares of Giga-tronics Common Stock. To the extent that the provisions of Chapter 5 of the California General Corporation Law (which generally prohibits certain payments to shareholders by insolvent companies) prevent the payment to any holders of dissenting shares of the fair market value of such shares, such shareholders will become creditors of Giga-tronics for the amount that they otherwise would have received in repurchase of their dissenting shares, plus interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5 of the California General Corporation Law. ASCOR Shareholders. Pursuant to California Corporate Law, if the Merger is approved by the required vote of the ASCOR shareholders and is not abandoned or terminated, any holder of ASCOR Common Stock may, by complying with the provisions of Sections 1300 to and including 1312 of the California Corporate Law, require ASCOR to purchase for cash at fair market value the shares owned by such holder for which a written consent to the Merger was not given. The fair market value shall be determined as of the day before the first announcement of the terms of the proposed Merger (which announcement was made on May 12, 1996) excluding any appreciation or depreciation in consequence of the proposed Merger. THE FOLLOWING IS A BRIEF SUMMARY OF SECTIONS 1300 TO AND INCLUDING 1312, WHICH SETS FORTH THE PROCEDURES FOR DISSENTING FROM THE MERGER BY ASCOR SHAREHOLDERS AND DEMANDING STATUTORY APPRAISAL RIGHTS UNDER CALIFORNIA LAW. THIS SUMMARY DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE PROVISIONS OF CALIFORNIA LAW RELATING TO THE RIGHTS OF ASCOR SHAREHOLDERS TO AN APPRAISAL OF THE VALUE OF THEIR SHARES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTIONS 1300 TO AND INCLUDING 1312 OF THE CALIFORNIA CORPORATE LAW, THE FULL TEXT OF WHICH IS ATTACHED HERETO AS ANNEX F. FAILURE TO FOLLOW SUCH PROCEDURES EXACTLY COULD RESULT IN THE LOSS OF APPRAISAL RIGHTS. The dissenting shareholder wishing to require ASCOR to purchase his shares of ASCOR Common Stock must: (a) not vote any of the shares the shareholder wishes to be dissenting shares in favor of the Merger; (b) make written demand upon ASCOR not later than thirty days after the date on which the notice of approval of the Merger by ASCOR shareholders is mailed to such shareholder (which notice must be mailed within 10 days after the date of approval), setting forth in the demand such shareholder's name and address, and the number and class of shares which the shareholder demands that ASCOR purchase and a statement as to what the shareholder believes the fair market value of such shares to have been, based upon the standard set forth above; and (c) submit for endorsement, within 30 days after the date on which the notice of approval of the Merger by the ASCOR shareholders is mailed to such shareholder, at the principal office of ASCOR, the certificates representing any shares in regard to which demand for purchase is being made, with a statement regarding which of the shares are dissenting shares. -41- 49 Simply not voting to approve the Merger by not executing the written consent will not be sufficient to constitute the demand described in clause (b) above. Within 10 days after the date of the approval of the Merger, ASCOR will mail to each shareholder who did not vote in favor of the Merger with respect ASCOR Common Stock a notice of approval of the Merger together with a statement of the price determined by ASCOR to represent the fair market value of dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise dissenters' rights under the California General Corporation Law. The statement of the price of the shares will constitute an offer by ASCOR to purchase at the price stated therein any dissenting shares. If ASCOR and the dissenting shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder will be entitled to the agreed price plus interest thereon at the legal rate on judgments from the date of such agreement. Subject to the provisions of the California General Corporation Law, payment of the fair market value of the dissenting shares will be made within 30 days after such agreement or after satisfaction of any statutory or contractual condition, whichever is later, and upon surrender of the certificates therefor. If ASCOR denies that the shares are dissenting shares or if ASCOR and the dissenting shareholder fail to agree upon the fair market value of the shares, then the dissenting shareholder, within six months after the date on which notice of approval of the Merger by the ASCOR shareholders is mailed to such shareholder, and not thereafter, may file a complaint in the Superior Court of Contra Costa County, Martinez, California requesting the court to determine whether the shares are dissenting shares, or the fair market value of the dissenting shares, or both, or may intervene in any pending action for the appraisal of any shares of ASCOR Common Stock. To the extent that the provisions of Chapter 5 of the California General Corporation Law prevent the payment to any holders of dissenting shares of the fair market value of such shares, such shareholders will become creditors of ASCOR for the amount that they otherwise would have received in repurchase of their dissenting shares, plus interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5 of the California General Corporation Law. -42- 50 SECTION VI THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS The Reorganization Agreement The following is a brief summary of certain provisions of the Reorganization Agreement, a copy of which is attached as Annex C to this Joint Proxy Statement/Prospectus and is incorporated herein by reference. This summary is qualified in its entirety by reference to the full text of the Reorganization Agreement. The Reorganization Agreement provides that, subject to the terms and conditions of the Reorganization Agreement, at the Effective Time, Acquisition Corp. will be merged with and into ASCOR, and the separate corporate existence of Acquisition Corp. will thereupon cease. ASCOR will be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation") and will continue to be governed by the laws of the State of California, and the separate corporate existence of ASCOR with all its rights, privileges, immunities, powers and franchises will continue unaffected by the Merger, except as set forth in the Reorganization Agreement. The Merger will have the effects specified in California Corporate Law. As soon as practicable following the closing of the Merger, and provided that the Reorganization Agreement has not been terminated or abandoned, ASCOR and Acquisition Corp. will cause the Agreement of Merger to be executed, acknowledged and filed with the Secretary of State of the State of California. The Merger will become effective at such time as the Agreement of Merger (the form of which is attached as Exhibit 1.01 to the Reorganization Agreement) has been duly filed with the Secretary of State of the State of California. The Exchange Ratio. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any ASCOR Securities, (i) each (a) share of ASCOR Common Stock and ASCOR Preferred Stock outstanding immediately prior to the Merger (other than ASCOR Shares held by shareholders who have perfected and not withdrawn their right to seek appraisal of their shares under applicable California law) and (b) outstanding ASCOR Convertible Security will be converted into the right to receive a pro rata portion of the Merger Consideration (a maximum aggregate of 724,986 Shares of Giga-tronics Common Stock) and (ii) any ASCOR Convertible Securities which are considered "out-of-the-money" will be assumed by Giga-tronics and will be exercisable for Giga-tronics Common Stock as adjusted by the Merger. (See " - ASCOR Convertible Securities.") In determining the Exchange Ratio of Giga-tronics Common Stock for ASCOR Securities which holders of ASCOR Shares and ASCOR Convertible Securities will be entitled to receive, all ASCOR Convertible Securities will be treated as having been converted or exercised into ASCOR Shares. Shares of Giga-tronics Common Stock attributable to ASCOR Convertible Securities which are assumed by Giga-tronics will be retained by Giga-tronics from the Merger Consideration pending their exercise. A maximum of 724,986 shares of Giga-tronics Common Stock will be issuable in the Merger, including (a) shares issuable in respect of ASCOR Convertible Securities which are assumed, which shares will be retained by Giga-tronics if such securities expire unexercised, (b) fractional shares, (c) shares issuable in respect of ASCOR Shares for which dissenters' appraisal rights (see "THE MERGER - Dissenters' Appraisal Rights") are perfected, and (d) shares deemed surrendered upon exercise of ASCOR Convertible Securities for which a deemed net exercise has occurred. The Agreement of Merger to be filed will contain the final exchange ratio (the "Exchange Ratio") for ASCOR Shares into Giga-tronics Common Stock which will be equal to 724,986 -43- 51 divided by the fully diluted number of ASCOR Shares outstanding at the Effective Time (the "ASCOR Outstanding Equivalent Number"). The ASCOR Outstanding Equivalent Number will be equal to the sum of (1) the number of ASCOR Shares outstanding at the Effective Time; plus (2) the total number of ASCOR Shares which would be issuable on the exercise of any ASCOR Convertible Securities. All ASCOR Shares will be exchangeable into Giga-tronics Common Stock at the same Exchange Ratio. ASCOR Convertible Securities. Except as discussed below Giga-tronics will not assume any ASCOR Convertible Securities. At the Effective Time, outstanding ASCOR Convertible Securities will be deemed exercised for such number of shares of Giga-tronics Common Stock as would be exchanged in the Merger for the ASCOR Shares which would have been issued had such ASCOR Convertible Securities been exercised in full immediately prior to the Effective Time, subject to the following provisions. Such deemed exercise of ASCOR Convertible Securities will be on a "net exercise" basis. The full number of shares issuable on exercise of such ASCOR Convertible Securities (including such number of shares as are deemed surrendered in the net exercise) will be included in the number of ASCOR Shares used in calculating the Exchange Ratio. The value of the ASCOR Shares issuable on the exercise of any ASCOR Convertible Security for purposes of determining the number of ASCOR Shares to be surrendered in the deemed net exercise shall be equal to the number of ASCOR Shares issuable on exercise of such ASCOR Convertible Security, multiplied by the Exchange Ratio, multiplied by the average closing price of a share of Giga-tronics Stock on such stock exchange as Giga-tronics Stock is then traded for the five (5) business days immediately preceding the Closing Date. Shares of Giga-tronics Common Stock which would otherwise be issuable in respect of the ASCOR Shares deemed surrendered upon such net exercise will be retained by Giga-tronics and not otherwise issued. Notwithstanding the foregoing, any ASCOR Warrant which, based upon the foregoing determination of the value of ASCOR Shares issuable on its exercise, would be "out-of-the-money" will be assumed by Giga-tronics. For purpose of the forgoing determination, an ASCOR Warrant will be deemed out-of-money if its exercise price per share is greater than the value of such share as determined as described in the immediately preceding paragraph. Any assumed ASCOR Warrant will remain outstanding and exercisable in accordance with its terms except that (1) it will be exercisable for such number of shares of Giga-tronics Common Stock as equals the number of ASCOR Shares for which it was exercisable multiplied by the Exchange Ratio and (2) the exercise price per share of such warrant will be the exercise price as stated on such warrant divided by the Exchange Ratio. The number of shares of Giga-tronics Common Stock as would be issuable on exercise of any ASCOR Warrants so assumed will be reserved out of the Merger Consideration. If any ASCOR Warrant assumed by Giga-tronics expires unexercised the Giga-tronics Common Stock which would have been issuable on its exercise will be retained by Giga-tronics and not otherwise issued. Registration of Merger Consideration. As amended by the Letter Agreement the Reorganization Agreement contemplates that Giga-tronics will use its best faith efforts to secure the registration of the Giga-tronics Common Stock to be issued pursuant to the Merger. As registered securities, such shares of Giga-tronics Common Stock held by former shareholders of ASCOR who were not affiliates of ASCOR or Giga-tronics will generally be freely tradable. If the Giga-tronics Common Stock to be issued pursuant to the Merger are not so registered, they will be issued pursuant to a transaction not involving a public offering and therefore will be characterized as "restricted securities" under federal securities laws. Pursuant to the Securities Act of 1933, as amended (the "Securities Act") any Giga-tronics Common Stock so issued may be resold without registration under the Securities Act only in certain limited circumstances. The Certificates issued pursuant to the Merger without registration would bear the following legend relating to their status as restricted securities: -44- 52 "These securities have not been registered under the Securities Act of 1993, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." Other than as provided by the Letter Agreement if the Giga-tronics Common Stock issued in the Merger is not registered, Giga-tronics will be under no obligation to effect a registration statement with respect to Giga-tronics Common Stock issued in the Merger other than as required pursuant to the Registration Rights Agreement. If such stock is issued pursuant to an effective registration statement, the Registration Rights Agreement will be of no force and the Giga-tronics stock issued will not be legended as above. See " - Registration Rights Agreement" and "Letter Agreement." Exchange of Certificates. Prior to the Effective Time, Giga-tronics shall appoint a bank or trust company to act as exchange agent (the "Exchange Agent") in the Merger. As soon as practicable after the Effective Date, the Exchange Agent will mail to each holder of record of a stock certificate that, immediately prior to the Effective Time, represented outstanding of ASCOR Shares (a "Certificate") whose shares are being converted into Giga-tronics Common Stock (i) a letter of transmittal, and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates evidencing Giga-tronics Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such letter of transmittal, duly executed, the holder of such Certificate will be entitled to receive in exchange therefor a certificate for the number of whole shares of Giga-tronics Common Stock to which the holder of such ASCOR Shares is entitled pursuant to the Reorganization Agreement (and an amount of cash in lieu of any fractional shares of Giga-tronics Common Stock as discussed below). The Certificate so surrendered will forthwith be canceled. Until surrendered, each Certificate will be deemed at any time after the Effective Time to represent the right to receive upon such surrender such whole number of shares of Giga-tronics Common Stock as provided by the Reorganization Agreement and an amount of cash in lieu of any fractional shares of Giga-tronics Common Stock as discussed below. The Exchange Procedures for ASCOR Preferred Stock will differ from the foregoing as described below. It is a condition for Giga-tronics' obligation to consummate the Merger that all ASCOR Preferred Stock be tendered at the closing for exchange for Giga-tronics Common Stock. See " - Conditions to the Merger." The ASCOR Preferred Stock so tendered must be accompanied by the Tender Instructions, in the Form of Annex I, pursuant to which the holder of ASCOR Preferred Stock will agree to accept Giga-tronics Common Stock at the exchange ratio described above and waive any rights to different or additional consideration to which they may be entitled in a transaction such as the Merger. Such rights to additional consideration may arise due to accrual of dividends on the ASCOR Preferred Stock, exercise of liquidation preference rights or conversion of the ASCOR Preferred Stock into ASCOR Common Stock prior to the Merger. See "DESCRIPTION OF GIGA-TRONICS" AND ASCOR SECURITIES - ASCOR - ASCOR PREFERRED STOCK." No dividends on the Giga-tronics Common Stock to be issued in the Merger will be paid to the holder of any unsurrendered Certificate until the holder of record of such Certificate will surrender such Certificate; provided, however, that upon surrender of a Certificate which immediately prior to the Effective Time represented shares of ASCOR Common Stock, there will be paid to the -45- 53 holder of such Certificate the amount of dividends, if any, without interest, which theretofore became payable, but which were not paid by reason of the foregoing, with respect to the number of whole shares of Giga-tronics Common Stock represented by the Certificate or Certificates issued upon such surrender. Subject to the effect, if any, of applicable escheat and other laws, following surrender of any Certificate, there will be delivered to the person entitled thereto, without interest,the amount of dividends so withheld as of any date subsequent to the Effective Time of the Merger and prior to such date of delivery. All Giga-tronics Common Stock delivered, and cash in lieu of any fractional shares of Giga-tronics Common Stock paid, upon the surrender for exchange of shares of ASCOR Common Stock will be deemed to have been delivered and paid in full satisfaction of all rights pertaining to such shares. If, after the Effective Time, Certificates are presented for any reason, they will be canceled and exchanged pursuant to the Reorganization Agreement. No fractional shares of Giga-tronics Common Stock will be issued in connection with the Merger. All shares of Giga-tronics Common Stock to which a holder of ASCOR Shares is entitled immediately prior to the Effective Time will be aggregated. If a fractional share results from such aggregation, in lieu of any such fractional share, each holder of ASCOR Shares who would otherwise have been entitled to receive a fraction of a share of Giga-tronics Common Stock upon surrender of Certificates for exchange will be entitled to receive from the Exchange Agent a cash payment equal to such fraction multiplied by the closing sale price per share of Giga-tronics Common Stock on the last business day on which Giga-tronics Common Stock is traded on the NASD prior to the Effective Time. Representations and Warranties. The Reorganization Agreement contains various customary representations and warranties relating to, among other things: (a) the organization of ASCOR, Giga-tronics and their subsidiaries and similar corporate matters; (b) authorization, execution, delivery, performance and enforceability of the Reorganization Agreement and related matters; (c) certain consents or approvals; (d) conflicts under charters, regulations or by-laws and violations of any instruments or law; (e) the capital structure of ASCOR, Giga-tronics and Acquisition Corp.; (f) certain documents filed by Giga-tronics with the Securities and Exchange Commission and the accuracy of information contained therein; (g) financial statements of ASCOR and Giga-tronics; (h) conduct of business in the ordinary course and absence of certain changes or material adverse effects; (i) insurance, liabilities, litigation and taxes; (j) employee benefit plans and matters relating to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (k) material agreements and leases; (l) title to assets; (m) intellectual property; (n) absence of guaranties of ASCOR; (o) absence of certain business practices by ASCOR; (p) information provided by the parties for inclusion in this Joint Proxy Statement/Prospectus; (q) brokers and finders fees, and (r) the opinion of Giga-tronics' financial advisor. Certain Covenants. Pursuant to the Reorganization Agreement, ASCOR and Giga-tronics have agreed that, from the date of the Reorganization Agreement until the Effective Time, each will (a) conduct its business in the ordinary course; (b) not adopt or propose any change in its Articles of Incorporation or Bylaws; (c) not pay any dividend or make any other distribution to holders of its capital stock nor redeem or otherwise acquire any its securities; (d) not directly or indirectly, merge or consolidate with another entity or dispose of or acquire any material properties or assets except in the ordinary course of business; (e) not, except in the ordinary course of business consistent with past practices, sell, license or otherwise transfer to any person any intellectual property rights; (f) in the case of Giga-tronics call a meeting of shareholders to be held as soon as reasonably practicable for the purpose of voting on, and in the case of ASCOR seek the consent of shareholders for, the approval and adoption of the Reorganization Agreement and ASCOR's Board of Directors will recommend approval and adoption of the Reorganization Agreement and Merger; (g) use its best efforts to carry on its business and preserve its relationship with customers, suppliers, employees and others; (h) comply with applicable federal, state, local and foreign laws, -46- 54 as well as all material agreements and obligations, provide notice of any consent that may be required in connection with the Merger, of any communications from governmental or regulatory agency in connection with the Merger, of any action, suit or claim commenced a threatened relating to the Merger; (i) keep confidential for a period of three years following the termination of the Reorganization Agreement confidential information of each other; (j) use its best efforts to cause each person who is an affiliate (as defined in the Reorganization Agreement) to execute an Affiliates Agreement (see "Affiliates Agreements"). In addition ASCOR has further agreed (i) not enter into or amend any employment agreements, or increase the compensation payable to any of its officers, directors or employees except in the ordinary course of business or as provided by the Reorganization Agreement; (ii) not adopt or amend any employee benefit plan; (iii) not issue any ASCOR securities; (iv) keep in full force and effect existing directors' and officers' liability insurance and will not modify or reduce coverage thereunder; (v) not enter into any transaction that would require the Joint Proxy Statement/Prospectus to be delayed or recirculated; and (vi) provide access to financial and operating information to each other and their respective legal counsel and advisors. Both Giga-tronics and ASCOR have further agreed, as to themselves and their subsidiaries: (a) to promptly notify each other in writing of any event occurring subsequent to the date of the Reorganization Agreement that would cause any representation or warranty to be untrue, inaccurate or misleading; (b) to promptly notify each other of any material adverse change in its business conditions; (c) to execute and file all documents necessary to obtain all authorizations, consents and approvals to consummate the Merger; (d) not to take any action that would prevent the Merger from qualifying as a reorganization under Section 368 of the Code; (e) to cooperate in the preparation of the Joint Proxy Statement/Prospectus and any other filing required in connection with the Merger; (f) not to furnish any written communications if the subject matter pertains to the transactions contemplated by the Reorganization Agreement without first obtaining the prior approval of the other party; and (g) to use their best efforts to satisfy all conditions precedent to the Merger as applicable to each other. No Solicitation of Transactions. Pursuant to the Reorganization Agreement, from the date of the Reorganization Agreement until the earlier of the Effective Time of the Merger or termination of the Reorganization Agreement, ASCOR and the officers, directors, employees or other agents of ASCOR have agreed they will not, directly or indirectly, (i) take any action to solicit, initiate or encourage the making of any Acquisition Proposal (as hereinafter defined); or (ii) engage in negotiations with, or disclose any nonpublic information relating to ASCOR or afford access to the properties, books or records of ASCOR to, any person or entity that informs the Board of Directors that it is considering making, or has made, an Acquisition Proposal. Until such time as the Reorganization Agreement is terminated in accordance with its terms, ASCOR has agreed not to enter into any agreement to merge or consolidate with, or sell a substantial portion of its assets to, any person or entity. ASCOR has agreed to promptly notify Giga-tronics after receipt of any Acquisition Proposal or any request for nonpublic information relating to ASCOR in connection with an Acquisition Proposal or for access to the properties, books or records of ASCOR by any person or entity that informs the Board of Directors that it is considering making, or has made, an Acquisition Proposal. The term "Acquisition Proposal" means (i) any merger, consolidation, tender offer or other similar transaction or related transactions pursuant to which the holders of the voting securities of ASCOR prior to the transaction hold following the consummation of such transaction less than 80% of the voting securities of the surviving entity, (ii) a sale of a material portion of the assets of ASCOR, or (iii) any equity or convertible debt transaction or related transactions in which any person or group of affiliated persons other than current security holders of ASCOR acquire securities of ASCOR representing more than 20% of the aggregate voting power of ASCOR's outstanding securities, other than in each case the transactions contemplated by the Reorganization Agreement or such transactions as occur via unsolicited purchases in the open market. For purposes of the foregoing definition, one person is deemed to be affiliated with a -47- 55 second person if such first person controls, is controlled by or is under common control with the second person, and control, for purposes hereof, is deemed to exist only in the event there exists ownership of or the right to vote, in either case directly or indirectly, securities representing more than 50% of the aggregate voting power of an entity's outstanding securities. Conditions to the Merger. The respective obligations of ASCOR, Giga-tronics and Acquisition Corp. to consummate the Merger are subject to the fulfillment of each of the following conditions, among others: (a) the accuracy of warranties and representations; (b) covenants shall have been complied with in all material respects on or before the Effective Time and a Certificate of a respective officer of Giga-tronics and ASCOR as the case may be, shall have been received by the other party; (c) there shall have been no Material Adverse Effect (as defined in the Reorganization Agreement) and no material adverse change; (d) Giga-tronics shall have received executed Affiliate Agreements; (e) the shareholders of ASCOR and Giga-tronics shall have approved and adopted the Reorganization Agreement and the transactions contemplated thereby; (f) Giga-tronics and ASCOR shall have received a written opinion from Brobeck that the Merger will constitute a reorganization within the meaning of Section 368 of the Code; (g) no statute, rule or regulation by any court or governmental authority shall prohibit the consummation of the Merger; (h) all written consents or authorizations that are required shall have been obtained; and (i) Giga-tronics shall have completed a due diligence review of ASCOR and such review shall not have revealed any facts or circumstances which could have a material adverse effect on ASCOR; and (j) it is a condition of Giga-tronics' obligations that Giga-tronics' shareholders shall not have perfected Dissenters' Rights with respect to 5% or more of the Giga-tronics Common Stock outstanding on the date of the Special Meeting. It is a condition of Giga-tronics obligations under the Reorganization Agreement that as of the Closing Date all shares of ASCOR Preferred Stock outstanding as of the date the Reorganization Agreement was executed shall (i) have remained outstanding, (ii) shall have been tendered at the Closing with the Tender Instructions which provides that such shares are to be exchanged at the Effective Time for Giga-tronics Common Stock in accordance with the terms of the Reorganization agreement, and (iii) not have been transferred by the owners of such shares as of the date of the Reorganization Agreement to any other person. The Reorganization Agreement further provides that it is a condition of Giga-tronics obligations to consummate the Merger that in Giga-tronics' sole discretion the Merger qualifies for accounting treatment as a pooling of interests in accordance with Accounting Principles Board Release No. 16. In making the determination of whether the Merger so qualifies Giga-tronics may consider the impact of ASCOR Shares which are voted against the Merger or which have abstained from voting with respect to the Merger. Termination. The Reorganization Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, before or after the approval by the ASCOR shareholders: (a) by the mutual consent of the ASCOR, Giga-tronics and Acquisition Corp. Board of Directors; (b) by Giga-tronics and Acquisition Corp. or by ASCOR if the Reorganization Agreement is not approved and adopted by Giga-tronics and ASCOR's shareholders prior to December 31, 1996; (c) by the parties to the Reorganization Agreement if there has been a breach of any representation and warranty, or a breach of any covenant or agreement contained in the Reorganization Agreement that has not been cured or waived and which has a material adverse effect on the breaching party; (d) by the parties to the Reorganization Agreement at any time after December 31, 1996, unless the delay is caused by the failure of the terminating party to fulfill its obligations; (e) by Giga-tronics or Acquisition Corp. if such party is not in material breach of its obligations and if the Board of Directors of ASCOR withdraws its recommendation of the Merger or recommends, or approves, acceptance by ASCOR shareholders of any Acquisition Proposal by any other party; (f) by ASCOR, if it is not in material breach of its obligations and if the Board of Directors of either Giga-tronics or Acquisition Corp. withdraw its recommendation of the Merger, -48- 56 or recommend or approve acceptance by Giga-tronics shareholders of any Acquisition Proposal by any other party; (g) by Giga-tronics if the conditions described above regarding absence of pooling-of-interest issues and perfection of dissenters' rights by Giga-tronics' shareholders with respect to dissenters' rights are not fulfilled; and (h) by Giga-tronics if ASCOR has issued any ASCOR Securities between the date of the Reorganization Agreement and the Closing Date without Giga-tronics' prior consent. Governance. The Certificate of Incorporation and Bylaws of Acquisition Corp. in effect immediately prior to the Effective Time will be the Certificate of Incorporation and Bylaws of the Surviving Corporation. At the Effective Time, the initial directors of the Surviving Corporation and the officers of ASCOR will become the initial directors and officers, respectively of the Surviving Corporation. Expenses. Whether or not the Merger is consummated, each party will pay all fees and expenses incurred by such party specifically identifiable to such party in connection with the transactions contemplated thereby. Any other costs and expenses not specifically identified as applicable to either party will be shared equally. Amendment and Waiver. Subject to the applicable provisions of California law, the parties may modify or amend the Reorganization Agreement by written agreement at any time prior to the Effective Time. The conditions to each party's obligations to consummate the Merger may be waived by such party in whole or in part to the extent permitted by applicable law. LETTER AGREEMENT Pursuant to the Letter Agreement between Giga-tronics and ASCOR dated May 20, 1996 (attached as Annex J) Giga-tronics has agreed to use its best faith efforts to file with the Securities and Exchange Commission, and cause the effectiveness under federal securities law of, a registration statement on Form S-4 (or such other form as may be applicable) covering the shares of Giga-tronics Common Stock to be issued in the Merger. ASCOR agreed that upon the issuance of such Giga-tronics Common Stock pursuant to an effective registration statement the Registration Rights Agreement would be of no force and effect and would therefore not be delivered at the Closing. REGISTRATION RIGHTS AGREEMENT Pursuant to the Reorganization Agreement, Giga-tronics will enter into the Registration Rights Agreement at the Effective Time with ASCOR Shareholders. The following is a summary of the Registration Rights Agreement. This summary is qualified in its entirety by reference to the complete text of such agreement, a form of which is filed as an exhibit to the Registration Rights Agreement. If at any time after results covering at least thirty (30) days of combined operations of the Company and ASCOR have been published by the Company in the form of a quarterly earnings report, an effective registration statement filed with the Securities and Exchange Commission (the "Commission"), a report to the Commission on Form 10-K, 10-Q or 8-K, or any other public filing or announcement which includes the combined results of operation, "Holders" (as that term is defined below) request in writing that Giga-tronics file a registration statement under the Securities Act covering the registration of at least 200,000 Registrable Securities (as such number may be adjusted from time to time for stock dividends, splits or other changes in the capitalization of Giga-tronics) or a lesser number if the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $1,000,000, then Giga-tronics will, subject to certain provisos, use all reasonable efforts to file and cause the effectiveness of, within 90 days of the -49- 57 receipt of such request, the registration under the Securities Act of all Registrable Securities which the Holders request to be registered. Giga-tronics will have the right to defer requested registrations in certain circumstances. Giga-tronics is obligated to effect only one (1) such registration pursuant to the Registration Rights Agreement. Giga-tronics will be obligated to maintain the effectiveness of any registration statement filed pursuant to the Holders' request for no more than 180 days subsequent to declaration of its effectiveness by the Commission. If Giga-tronics proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of Giga-tronics Common Stock or other securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration relating either to the sale of securities to participants in a Giga-tronics stock option, stock purchase or similar plan or to an SEC Rule 145 transaction, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), Giga-tronics will subject to certain provisos be required to cause to be registered under the Securities Act all of the Registrable Securities that each Holder requests be registered. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications, including (without limitation), all registration, filing and qualification fees, printers and accounting fees, fees and disbursements of counsel for Giga-tronics and the reasonable fees and disbursements of up to $25,000 for one (but only one) counsel for the selling Holders will be borne by Giga-tronics. The registration rights of any Holder expire (a) if the Registrable Securities were issued by Giga-tronics to the Holder pursuant to a registration statement filed with the SEC or (b) at and after such time as such Holder holds Registrable Securities equal to 1% or less of the outstanding stock of the Company (calculated on an as-converted basis) and is able to dispose of all the Registrable Securities held by such Holder under Rule 144 of the Securities Act during any 90-day period. Under the Registration Rights Agreement "Registrable Securities" means (a) the shares of Giga-tronics Common Stock issuable to the ASCOR Shareholders upon consummation of the Merger and any other shares of Giga-tronics Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Registrable Securities with certain exclusions. "Holder" is defined as any person owning of record Registrable Securities who acquired such Registrable Securities in a transaction or series of transactions not involving any registered public offering. As amended by the Letter Agreement, the Reorganization Agreement contemplates that if the Giga-tronics Common Stock to be issued in the merger has been issued under federal securities law pursuant to an effective registration statement on Form S-4 (or such other form as may be applicable), that the Registration Rights Agreement would be of no force or effect (due to such event triggering the termination of registration rights thereunder) and that the Registration Rights Agreement would therefore not be delivered at the Closing. AFFILIATE AGREEMENTS The following is a brief summary of the terms of the Affiliate Agreements, copies of which are attached as exhibits to the Reorganization Agreement which is attached as Annex C to the Joint Proxy Statement/Prospectus. This summary is qualified in its entirety by reference to the full text of the Affiliate Agreements. -50- 58 Pursuant to the Reorganization Agreement, certain shareholders of ASCOR and Giga-tronics have or will executed Affiliate Agreements. Each Affiliate Agreement provides, among other things, the following representations, warranties and covenants: (a) the party will not sell, transfer, exchange or otherwise dispose of any shares of Giga-tronics Common Shares acquired in the Merger unless such transaction is permitted under Rule 144 or Rule 145 under the 1933 Act or counsel representing the party shall have advised Giga-tronics that no registration under the 1933 Act is required; and (b) the party has, and as of the Effective Time will have, no plan or intention to sell, transfer, exchange or otherwise dispose of more than fifty percent of the shares of Giga-tronics Common Stock acquired in connection with the Merger. The Affiliate Agreement will terminate upon the termination of the Reorganization Agreement. -51- 59 SECTION VII SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following historical financial information of Giga-tronics and ASCOR has been derived from their respective historical consolidated financial statements, and should be read in conjunction with such consolidated financial statements and the notes thereto, which are included as Annexes to this Joint Proxy Statement/Prospectus. The selected pro forma financial information of Giga-tronics and ASCOR is derived from the pro forma combined condensed financial statements and should be read in conjunction with such pro forma statements and notes thereto, which are included elsewhere in this Joint Proxy Statement/Prospectus. For pro forma purposes, ASCOR financial data covers the approximate comparable financial reporting periods used by Giga-tronics. The pro forma financial information does not purport to represent what Giga-tronics' financial position or results of operations would actually have been had the Merger occurred at the beginning of the earliest period presented or to project Giga-tronics' financial position or results of operations for any future date or period.
Historical - Giga-tronics Fiscal Year Ended - ------------------------- ------------------------------------------------------------------------- (In thousands except per share data) March 30, March 25, March 26, March 27, March 28, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Net sales $ 24,898 $ 21,937 $ 19,890 $ 23,085 $ 16,181 Earnings (loss) before income taxes 1,202 (2,220) 293 1,954 1,070 Net earnings (loss) 901 (1,576) 231 1,327 878 Net earnings (loss) per share 0.34 (0.61) 0.09 0.52 0.34 Working capital $ 15,830 $ 13,242 $ 14,209 $ 15,370 $ 16,588 Total assets 23,027 22,225 23,580 23,597 19,817 Long-term debt -- -- -- -- -- Shareholders' equity 19,101 18,018 19,671 19,440 18,113
Historical - ASCOR Fiscal Year Ended - ------------------ --------------------------------------------------------------------- (In thousands except per share data) March 30, March 25, March 26, March 27, March 28, 1996 1995 1994 1993 1992 -------- -------- ---------- ----------- ----------- Net sales $ 5,913 $ 4,032 $ 3,577 $ 1,803 $ 1,935 Earnings (loss) before income taxes 780 761 1,099 (600) (477) Net earnings (loss) 839 709 1,074 (600) (477) Net earnings (loss) per share 0.15 0.12 0.22 (0.07) (0.05) Working capital $ (1,222) $ (796) $ 19 $ (249) $ 50 Total assets 3,557 3,601 2,135 1,579 1,113 Long-term debt 30 40 -- 1 42 Redeemable Preferred Stock 3,442 3,182 2,922 2,662 2,532 Shareholders' equity (deficit) (1,726) (2,317) (2,766) (3,580) (3,177)
-52- 60
Pro Forma - Giga-tronics and ASCOR Twelve Months Ended - ---------------------------------- ----------------------------------------- (In thousands except per share data) March 30, March 25, March 26, 1996 1995 1994 ----------- ----------- ----------- Net sales $ 30,811 $ 25,969 $ 23,467 Earnings (loss) before income taxes 2,107 (1,459) 1,392 Net earnings (loss) 1,865 (867) 1,305 Net earnings (loss) per share 0.55 (0.26) 0.40 Working capital $ 17,081 $ 13,940 $ 14,228 Total assets 26,584 25,826 25,715 Long-term debt 30 -- -- Shareholders' equity 20,692 18,883 19,827
-53- 61 SECTION VIII COMPARATIVE PER SHARE DATA Set out below are income and book value per common share data of Giga-tronics and ASCOR on both a historical and a pro forma condensed combined basis and on a per share equivalent pro forma basis for ASCOR. Pro forma condensed combined per share information is derived from the pro forma condensed combined information presented elsewhere herein which gives effect to the Merger under the pooling of interests accounting method at the beginning of the earliest period presented, and assumes the issuance of 724,986 shares of Giga-tronics Common Stock in 1995 and 1994. Expenses directly attributable to the consummation of the Merger are expected to approximate $250,000. The pro forma adjustment to retained earnings is $125,000 while the total estimated costs are $250,000 because $125,000 of costs are already included in the fiscal 1996 financial statements. The estimated $250,000 of merger costs are not included in the pro forma statements of operations since they will be nonrecurring. The expenses have been deducted in calculating the pro forma combined book value per share, but are not reflected in the pro forma earnings (loss) per share amounts. Neither Giga-tronics or ASCOR has paid any dividends on its capital stock during the periods presented. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Merger had been consummated, nor is it necessarily indicative of future operating results or financial position.
Twelve Months Ended ----------------------------------------------------- Net earnings (loss) per share March 30, March 25, March 26, - ----------------------------- 1996 1995 1994 ----------- ----------- ----------- Giga-tronics historical net earnings $ 0.34 $ (0.61) $ 0.09 (loss) per share ASCOR historical net earnings per share 0.15 0.12 0.22 Pro forma combined net earnings 0.55 (0.26) 0.40 (loss) per share ASCOR equivalent pro forma net 0.03(A) (0.01)(A) 0.02(A) earnings (loss) per share
Book value per share At March 30, 1996 - -------------------- ----------------- Giga-tronics historical book value per share $ 7.34 ASCOR historical book value per share $ (0.44) Pro forma combined book value per Giga-tronics share $ 6.22 ASCOR equivalent pro forma book value per share $ 0.34(B)
(A) Determined by multiplying pro forma combined net earnings per share by the estimated Exchange Ratio of 1 to 18.246 (.0548). The 18.246 ratio equals 13,228,069 ASCOR securities as of June 14, 1996 divided by 724,986 Giga-tronics shares issued. (B) Determined by multiplying pro forma combined book value per share by the estimated Exchange Ratio of 1 to 18.246 (.0548). The 18.246 ratio equals 13,228,069 ASCOR securities as of June 14, 1996 divided by 724,986 Giga-tronics shares issued. -54- 62 SECTION IX PRO FORMA COMBINED FINANCIAL INFORMATION The following pro forma condensed combined financial information should be read in conjunction with the audited financial statements of ASCOR and Giga-tronics that appear as Annexes to this Joint Proxy Statement/Prospectus The pro forma combined balance sheet information as of March 30, 1996 combines the balance sheet information of Giga-tronics as of March 30, 1996 and ASCOR as of March 31, 1996. The pro forma combined statement of income information for the fiscal years 1996, 1995, and 1994 combines the results of Giga-tronics for the fiscal years ended March 30, 1996, March 25, 1995, and March 26, 1994 with the results of ASCOR for twelve months ended March 31, 1996, March 31, 1995, and March 31, 1994. Pro forma combined per share data gives effect to the assumed issuance of 724,986 shares of Giga-tronics Common Stock in exchange for the ASCOR Common Stock in the Merger. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Merger had been consummated, nor is it necessarily indicative of future operating results or financial position. The pro forma condensed combined financial information set forth below gives effect to the Merger under the pooling of interests accounting method at the beginning of the earliest period presented. The pro forma condensed combined statements of operations assume the issuance of 724,986 shares of Giga-tronics Common Stock in 1995 and 1994, and do not give effect to the estimated costs associated with the consummation of the Merger. Total expenses directly attributable to the consummation of the Merger are expected to approximate $250,000. The pro forma condensed combined balance sheet reflects the $250,000 estimated costs of the Merger as a reduction of retained earnings. -55- 63 Giga-tronics and ASCOR Pro Forma Condensed Combined Balance Sheet March 30, 1996 (In thousands)
Pro Forma Pro Forma Assets Giga-tronics ASCOR Adjustments Combined - ------ ------------ ----- ------------- ------------ Current assets Cash, and cash equivalents $ 5,772 $ 151 $ -- $ 5,923 Investments 5,013 300 -- 5,313 Accounts receivable, net 2,715 943 -- 3,658 Inventories 4,660 1,633 -- 6,293 Other current assets 1,373 160 -- 1,533 ----------- ----------- ----------- ----------- Total current assets 19,533 3,187 -- 22,720 Property and equipment, net 1,758 364 -- 2,122 Other assets $ 1,736 $ 6 $ -- $ 1,742 ----------- ----------- ----------- ----------- $ 23,027 $ 3,557 $ -- $ 26,584 =========== =========== =========== =========== Liabilities and Shareholders' Equity Current liabilities Accounts payable 1,540 380 -- 1,920 Other current liabilities 2,163 4,029 (2,473) 3,719 ----------- ----------- ----------- ----------- Total current liabilities 3,703 4,409 (2,473) 5,639 Deferred income taxes 223 -- -- 223 Long-term debt, net of current portion -- 30 -- 30 Redeemable Preferred Stock -- 844 (844) -- Shareholders' equity (deficit) Common stock 7,925 86 3,442 11,453 Unrealized loss on investments (47) -- -- (47) Retained earnings 11,223 (1,812) (125) 9,286 ----------- ----------- ----------- ----------- Total shareholders' equity (deficit) $ 19,101 $ (1,726) $ 3,317 $ 20,692 ----------- ------------ ----------- ----------- $ 23,027 $ 3,557 $ -- $ 26,584 =========== =========== =========== ===========
-56- 64 Giga-tronics and ASCOR Pro Forma Condensed Combined Statement of Operations Year Ended March 30, 1996 (In thousands expect per share data)
Pro Forma Pro Forma Giga-tronics ASCOR Adjustments Combined ------------ ----- ----------- ----------- Net sales $ 24,898 $ 5,913 $ -- $ 30,811 Cost of sales 15,616 3,752 -- 19,368 ----------- ----------- ----------- ----------- Gross margin 9,282 2,161 -- 11,443 Cost and expenses Product development expense 2,512 214 -- 2,726 Selling, general & admin. expense 5,488 1,159 (125) 6,522 Interest and other expense 560 -- -- 560 Interest and other income (480) 8 -- (472) Income taxes 301 (59) -- 242 ----------- ----------- ----------- ----------- Total costs and expenses $ 8,381 $ 1,322 $ (125) $ 9,578 ----------- ----------- ------------ ----------- Net earnings $ 901 $ 839 $ 125 $ 1,865 =========== =========== =========== =========== Net earnings per share $ 0.34 $ 0.15 $ 0.06 (A) $ 0.55 =========== =========== =========== =========== Shares used in computing net earnings per share 2,639 3,947 (3,222)(A) 3,364 =========== =========== =========== ===========
(A) Adjustment to earnings per share and outstanding shares as a result of the Merger and the assumed issuance of 724,986 shares of Giga-tronics Common Stock in exchange for all issued and outstanding shares of ASCOR Common Stock, including exercised ASCOR warrants and converted ASCOR Preferred Stock. -57- 65 Giga-tronics and ASCOR Pro Forma Condensed Combined Statement of Operations Year Ended March 25, 1995 (In thousands except per share data)
Pro Forma Pro Forma Giga-tronics ASCOR Adjustments Combined ------------ ----- ----------- -------- Net sales $ 21,937 $ 4,032 $ -- $ 25,969 Cost of sales 15,019 2,377 -- 17,396 ----------- ----------- ----------- ----------- Gross margin 6,918 1,655 -- 8,573 Costs and expenses Product development expense 2,700 228 -- 2,928 Selling, general and admin. expense 6,104 664 -- 6,768 Interest and other expenses 560 -- -- 560 Interest and other income (226) 2 -- (224) Income taxes (benefit) (644) 52 -- (592) ----------- ----------- ----------- ----------- Total costs and expenses $ 8,494 $ 946 $ -- $ 9,440 ----------- ----------- ----------- ----------- Net earnings (loss) $ (1,576) $ 709 $ -- $ (867) ============ =========== =========== =========== Net earnings (loss) per share $ (0.61) $ 0.12 $ 0.23 (A) $ (0.26) =========== =========== =========== =========== Shares used in computing net earnings per share 2,570 3,774 (3,049)(A) 3,295 =========== =========== =========== ===========
(A) Adjustment to earnings per share and outstanding shares as a result of the Merger and the assumed issuance of 724,986 shares of Giga-tronics Common Stock in exchange for all issued and outstanding shares of ASCOR Common Stock, including exercised ASCOR warrants and converted ASCOR Preferred Stock. -58- 66 Giga-tronics and ASCOR Pro Forma Codensed Combined Statement of Operations Year Ended March 26, 1994
Pro Forma Pro Forma Giga-tronics ASCOR Adjustments Combined ------------ ----- ----------- -------- Net sales $ 19,890 $ 3,577 $ -- $ 23,467 Cost of sales 11,947 1,974 -- 13,921 ----------- ----------- ---------- ----------- Gross margin 7,943 1,603 -- 9,546 Costs and expense4 Product development expense 2,569 130 -- 2,699 Selling, general and admin. expense 4,984 462 -- 5,446 Interest and other expenses 410 -- -- 410 Interest and other income (313) (88) -- (401) Income taxes (benefit) 62 25 -- 87 ----------- ----------- ---------- ----------- Total costs and expenses $ 7,712 $ 529 $ -- $ 8,241 ----------- ----------- ---------- ----------- Net earnings (loss) $ 231 $ 1,074 $ -- $ 1,305 =========== =========== ========== =========== Net earnings (loss) per share $ 0.09 $ 0.22 $ 0.09 (A) $ 0.40 =========== =========== ========== =========== Shares used in computing net 2,570 3,774 (3,049)(A) 3,295 =========== =========== ========== =========== earnings per share
(A) Adjustment to earnings per share and outstanding shares as a result of the Merger and the assumed issuance of 724,986 shares of Giga-tronics Common Stock in exchange for all issued and outstanding shares of ASCOR Common Stock, including exercised ASCOR warrants and converted ASCOR Preferred Stock. -59- 67 SECTION X INFORMATION CONCERNING GIGA-TRONICS INCORPORATED General and Business Giga-tronics designs, manufactures and markets microwave and radio frequency (RF) signal generation and power measurement instruments. These products are used primarily in the design, production, repair and maintenance of telecommunications, radar, electronic warfare, and transportation systems. Industry Segments Giga-tronics operates in one industry segment: electronic test and measurement equipment. Products and Markets Giga-tronics produces signal sources, generators and sweepers, and power measurement instruments for use in the microwave and RF frequency range (10 Khz to 75 GHz). Within each product line are a number of different models and options allowing customers to select frequency range and specialized capabilities, features and functions. The end-user markets can be divided into three broad segments: telecommunications, radar and electronic warfare. Giga-tronics' instruments are used in the design, production, repair and maintenance and calibration of other manufacturers' products, from discrete components to complex systems. Sources and Availability of Raw Materials and Components Substantially all of the components required by Giga-tronics to make its assemblies are available from more than one source. Giga-tronics occasionally uses sole source arrangements to obtain leading-edge technology, favorable pricing or supply terms. Although extended delays in delivering components could result in longer product delivery schedules, Giga-tronics believes that its protection against this possibility stems from its practice of dealing with well-established suppliers and maintaining good relationships with such suppliers. Patents and Licenses Giga-tronics attempts to obtain patents when appropriate. In addition, Giga-tronics has acquired numerous patents in the course of its two recent acquisitions. However, Giga-tronics believes that its competitive position depends on the creative ability and technical competence of its personnel and the timely introduction of new products rather than on the ownership or development of patents. Giga-tronics licenses certain instrument operating system software from third parties. Other than such software licenses, Giga-tronics is not aware that the manufacture and sale of its products requires licenses from others. Giga-tronics believes, based on industry practice, that any necessary licenses could be obtained on conditions which would not have a materially adverse financial effect on Giga-tronics. -60- 68 Seasonal Nature of Business The business of Giga-tronics is not seasonal. Working Capital Practices Giga-tronics does not believe that it has any special practices or special conditions affecting working capital items that are significant for an understanding of its business. Importance of Limited Number of Customers Since its inception, Giga-tronics has been a leading supplier of test instruments to various U.S. Government defense agencies, as well as to their prime contractors. U.S. Government agencies accounted for 31%, 26%, and 27% of net sales in fiscal 1996, 1995, and 1994, respectively. Management anticipates sales to U.S. Government agencies will remain significant in fiscal 1997, even though the outlook for defense-related orders continues to be soft. Backlog of Orders On March 30, 1996, Giga-tronics had a backlog of approximately $6,112,000 compared to $10,154,000 at March 25, 1995. Orders for Giga-tronics' products include large program orders, from both the U.S. Government and defense contractors, with extended delivery dates. Accordingly, the backlog of orders may vary substantially from quarter to quarter and the backlog entering any single quarter may not necessarily be indicative of sales for any period. Backlog includes only those customer orders for which a delivery schedule has been agreed upon between Giga-tronics and the customer and, in the case of U.S. Government orders, for which funding has been appropriated. Giga-tronics believes that essentially all of the year ending backlog will be shipped within the next twelve months. A substantial portion of the year-end backlog consisted of U.S. Government contracts. These contracts contain customary provisions permitting termination at the convenience of the Government upon payment of a negotiated cancellation charge. Giga-tronics never has experienced a significant contract termination. Competition The principal competitive factors in the marketing of microwave and RF test instruments include product functionality, reliability and price. Giga-tronics competes mainly with Hewlett-Packard, Anritsu, Marconi and Rohde & Schwarz. These competitors are larger and have greater financial, engineering and marketing resources than the Company. Nonetheless, Giga-tronics believes that within its chosen markets and applications, its products are fully competitive with those of other manufacturers. Product Development Microwave and RF test instruments of the type manufactured by Giga-tronics historically have had relatively long product life cycles. However, the electronics industry is subject to rapid technological changes at the component level. The future success of Giga-tronics is dependent on its ability to steadily incorporate advancements in semiconductor and related microwave component technologies into its new products. Product development expense was approximately $2,512,000, $2,700,000 and $2,569,000 in fiscal 1996, 1995 and 1994, respectively. Activities included the development of -61- 69 new products and the improvement of existing products. It is management's intention to maintain expenditures for product development at levels required to sustain its competitive position. All of Giga-tronics' product development activities are internally funded and expensed as incurred. Manufacturing The assembly and testing of Giga-tronics' microwave, RF and power measurement products is done at its relatively new San Ramon facility. The Sunnyvale manufacturing operations (performing assembly and test of power measurement products) relocated to the San Ramon facility in July, 1995. Environment To the best of its knowledge, Giga-tronics is in compliance with all federal, state and local laws and regulations involving the protection of the environment. Employees As of March 30, 1996, Giga-tronics employed 146 persons. Management believes that the future success of Giga-tronics depends on its ability to attract and retain skilled personnel. None of Giga-tronics' employees is represented by a labor union and Giga-tronics considers its employee relations to be excellent. Information about Foreign Operations Giga-tronics sells to its international customers through a network of foreign technical sales representative organizations. Sales to foreign customers were approximately $6,791,000, $4,458,000, and $4,544,000 in fiscal 1996, 1995 and 1994, respectively. Giga-tronics has no foreign-based operations or material amount of identifiable assets in foreign countries. Its gross margins on foreign and domestic sales are similar. Management does not believe that foreign sales are subject to materially greater risks than domestic sales. Outlook Even though Giga-tronics has now achieved more balance between its defense and commercial businesses, defense related orders remain very important to Giga-tronics. The outlook for such orders continues to be soft. Giga-tronics believes that some growth can be realized by sustaining an effective new product development program, aggressively pursuing new markets, vigorously competing for defense business, and making synergistic acquisitions. Property As of March 30, 1996, Giga-tronics' executive, marketing, sales and engineering offices and manufacturing facilities are located in approximately 47,000 square feet in San Ramon, California, which Giga-tronics occupies under a lease agreement expiring December 31, 2006. The 30,000 square foot facility in Pleasant Hill, California, which formerly housed all of the signal generator operations, was vacated at the end of April, 1994. The Pleasant Hill lease agreement expired April 30, 1994. The 40,000 square foot facility in Sunnyvale, California, which formerly housed all of the power measurement instrument operations, was vacated in July, 1994. The Sunnyvale lease agreement expired July 31, 1994. -62- 70 Legal Proceedings As of March 30, 1996, Giga-tronics has no pending legal proceedings, other than routine litigation incidental to the Company's business, to which Giga-tronics is a party or to which any of its property is subject. -63- 71 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GIGA-TRONICS FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR FISCAL 1996, 1995, 1994 New orders received in 1996 were $20,856,000, a decrease of 21% from 1995, which increased 30% over 1994. In 1996, the decrease reflects large order decreases in both the microwave signal generator (SG) and radio frequency signal generator (RF) product line. In 1995, the increase in orders resulted from additional orders in both the microwave signal generator and RF product line. Overall, the approximate proportion of net sales coming from defense-related customers was 31% in 1996 and less than 30% in 1995 and 1994. Continuing the focus of a business better balanced between commercial and defense markets has been and remains a major strategic priority. At year-end 1996, Giga-tronics' backlog of unfilled orders was $6,112,000, compared to $10,154,000 at the end of 1995 and $5,800,000 at the end of 1994. The decrease in backlog from 1995 to 1996 resulted mostly from a decline in SG product line defense-related orders. Due to the softness in order intake, fiscal 1997 revenues excluding ASCOR will likely be less than fiscal 1996. However, it is projected at this time that continued improvement in manufacturing efficiencies and other cost reduction activities will largely offset any unfavorable impact caused by the decline in revenues. Net sales for 1996 were $24,898,000, a 13% increase from 1995, which follows a 10% increase in 1995 from 1994. Somewhat greater sales volume for SG products was the major factor. Average selling prices were stable. Gross profit as a percentage of sales increased to 37% in 1996, from 32% in 1995, due to better factory efficiencies. Gross profit as a percentage of sales decreased from 40% to 32% from 1994 to 1995 due to factory inefficiencies associated with the acquired RF signal generator product lines, manufacturing scaleup of new microwave products, inventory reserve increases related to the above product lines, and certain costs for upgrading Giga-tronics' management information system. Giga-tronics continues to implement programs to improve manufacturing efficiencies and reduce costs. While there is a small percentage of product lines (less than 10% of sales) with poor profit margins due to aging of product, potential inventory obsolescence has been carefully analyzed and fully reserved for. There is no expected impact on future results of operations for these product lines. More over, there is a plan for designing and bringing to market new products, which will replace products reaching the end of their life cycle. Since potential inventory obsolescence is constantly being scrutinized, and new product launches are being planned for fiscal 1997 and fiscal 1998, future results of operations are not expected to deteriorate due to these factors. Operating expenses decreased 9% in 1996 over 1995. Costs were tightly controlled in many areas despite higher sales. In 1995, operating expenses increased 17% from 1994 due to personnel severance costs (including those associated with the resignation of Mr. Donald F. Bogue as President and Chief Executive Officer) and additional inventory reserves taken for customer demonstration equipment utilized by sales and marketing. Amortization expense, relating to the intellectual property and non-compete convenants associated with two prior acquisitions, amounted to $560,000, the same as 1995 and increasing from $410,000 in fiscal 1994. The increase from 1994 to 1995 is due to 1995 being the first fiscal year with the full 12 month effect of the two acquisitions (the RF product line in fiscal 1994 and the power measurement product line in fiscal 1993). Interest income increased by 43% to $323,000 in 1996, following a decrease of 28% from 1994 to 1995. The increase in 1996 interest income from 1995 was due primarily to an increase in cash, resulting from an earnings increase and much lower inventory levels. The decrease in 1995 was due to the earnings decline in 1995 and higher inventory balances in fiscal 1995 relative to the inventory level in fiscal 1994. Giga-tronics continues to invest principally in securities which are exempt from federal taxes. The provision for income taxes in 1996 was $301,000. In 1995, income tax expense was a benefit due to a pretax loss of approximately $2,220,000. Giga-tronics recorded net earnings of $901,000, or $0.34 per share, in 1996, an increase in earnings per share from a $0.61 loss in 1995, and $0.09 earnings per share in 1994. The improved results in 1996 were due to a sales increase of 13%, an improved gross profit margin, a decrease in operating expenses of 9%, and an increase in interest income. The loss in 1995 was largely a result of delayed product shipments, depressed manufacturing margins in certain microwave and RF signal generator product lines, related inventory reserve increases, personnel severance costs, and certain costs for upgrading Giga-tronics' management information system, all of which are not expected to recur. -64- 72 Financial Condition and Liquidity At year-end 1996, Giga-tronics had $10,785,000 in cash, cash equivalents and investments, compared to $5,768,000 at the beginning of the year. Most of the increase resulted from the higher earnings, lower inventories and lower receivables in 1996. Inventories have decreased $2 million ($2M) in 1996 due largely to the completed implementation of the MIS system installed early in fiscal 1995. It took almost two years to successfully install and effectively use all of the MIS management tools. Production management now procures inventory closer to shipment time. The receivables declined by $800,000 in 1996 due to a $200,000 increase in the allowance for doubtful accounts and a $600,000 decrease in gross receivables. The allowance has been increased due to the substantial relative increase in "risky" (potentially uncollectible) sales recorded in fiscal 1996 compared to fiscal 1995. The gross receivables have decreased due to more effective collection efforts on the part of Giga-tronics. Cash provided from operations amounted to $5,161,000 in 1996, compared to cash provided from operations of $158,000 in 1995, and cash used by operations of $932,000 in 1994. In 1995, cash provided by operations was negligible, as the small favorable change in balance sheet accounts and "the depreciation add-back" was mostly offset by a $1.6M loss. In 1994, a $2.1M increase in inventories was the major factor in the negative cash flow from operations. This increase was due to a deteriorating MIS system (replaced in early fiscal 1995) and the acquisition of two Fluke Company product lines and related inventory in June of 1993. Giga-tronics continues to maintain a strong financial position, with working capital at year-end of $15,830,000, compared to $13,242,000 and $14,209,000 at the end of 1995 and 1994, respectively. Giga-tronics' current ratio of 5.3 increased somewhat from the 1995 and 1994 figures. Additions to property and equipment were $356,000 in 1996, compared to $670,000 and $673,000 in 1995 and 1994, respectively. This spending reflects continuing investments to support new product development, increase productivity and improve product quality. Other cash outflows for investing activities included $1.3M in 1996 and $3.7M in 1994 for purchases of short-term investments. These are marketable securities, which are available for sale on short notice. In 1994, there was a $1.1M outflow for the acquisition of two product lines from the Fluke Company. Financing cash inflow in 1996 was due to exercise of stock options. Management believes that Giga-tronics has adequate resources to meet its operating and capital expenditure needs for the foreseeable future. -65- 73 SECTION XI INFORMATION CONCERNING ASCOR, INC. General and Business ASCOR was founded and incorporated in California in 1987. ASCOR designs, manufacturers and markets high frequency and high density switches. These switches are used in support of Automated Test Equipment (ATE) or any other application where VXI bus (VME extensions for Instrumentation) architecture is utilized. Industry Segments ASCOR operates in one industry segment: electronic test and measurement equipment. Products and Markets ASCOR produces switch modules which meet the need for low noise and high density switching within the VXI chassis. Switch matrices and scanners utilize over 1,600 relays in a single VXI bus module. Additionally, ASCOR offers switch modules that operate with a bandwidth from DC to in excess of 18 Gigahertz. ASCOR also offers Interface Adapters, which allow multiple pieces of equipment to be tested using the same test instruments. Within the product line, there are a number of different modules and options allowing customers to select frequency range and specialized capabilities, features and functions. The end-user markets are primarily related to electronic warfare, though there will likely be an increasing demand from the telecommunications market if the VXI bus architecture becomes more readily accepted. Sources and Availability of Raw Materials and Components Substantially all of the components required by ASCOR to make its assemblies are available from more than one source. ASCOR occasionally uses sole source arrangements to obtain leading-edge technology, favorable pricing or supply terms. Although extended delays in delivering components could results in longer product delivery schedules, ASCOR believes that its protection against this possibility stem from its practice of dealing with well-established suppliers and maintaining good relationships with such suppliers. Patents and Licenses ASCOR has an exclusive arrangement with GDE Systems for the use and manufacture of a high speed digital pin driver and receiver device. This is a high density semiconductor device used for the output stage of a digital test system. This device contains all the circuitry to drive, receive, or load digital circuits that is being tested. It has an advantage in that it is packaged in one silicon chip and saves circuit board space. The device will give ASCOR the advantage of designing more complex digital VXI modules than possible with current techniques used by competitors. Seasonal Nature of Business The business of ASCOR is not seasonal in nature. -66- 74 Working Capital Practices ASCOR does not believe that it has any special practices or special conditions affecting working capital items that are significant for an understanding of its business. It can be noted, moreover, that most inventory is procured on the basis of confirmed customer sales orders. Importance of Limited Number of Customers Since its inception, ASCOR has been a leading supplier of test instruments to various defense-related contractors. Defense-related orders accounted for 87%, 87%, and 100% of net sales in the twelve-month periods ending March, 1996, March, 1995, and March, 1994. Management anticipates sales to defense contractors will remain significant in fiscal 1997. Backlog of Orders On March 30, 1996, ASCOR had a backlog of approximately $2,742,000 compared to $3,023,000 on March 25, 1995. Orders for ASCOR included large program orders, from both commercial and defense contractors. Backlog includes only those customer orders for which a delivery schedule has been agreed upon between ASCOR and the customer, and in the case of defense-related orders, for which funding has been appropriated. ASCOR believes that essentially all of the March period end backlog will be shipped within the next twelve months. A majority of the March 30, 1996 backlog is related to defense-related contracts. These contracts contain customary provisions permitting termination at the convenience of the customer upon payment of a negotiated cancellation charge. ASCOR never has experienced a significant contract termination. Competition The principal competitive factors in the marketing of VXI switching interface adapters include product modularity, density factor, quality, and price. ASCOR competes mainly with Racal Dana, Hewlett Packard and Tektronix. These competitors are larger and have greater financial, engineering and market resources than ASCOR. However, ASCOR's product line has superior performance over equivalent competitors' models. In addition, the modular design approach of ASCOR's product lends itself to more flexible configuration in order to meet the needs of the customers. ASCOR's products are therefore technically superior to those of other manufacturers while being competitive in price. Product Development The electronics and communications industry is subject to rapid technological changes at the component level. The future success of ASCOR is dependent on its ability to steadily incorporate advancements in semiconductor and related microwave component technologies into its new products. Product development expense was approximately $214,000, $228,000, and $130,000 for the twelve month periods ending March, 1996, March 1995, and March 1994, respectively. Activities included the development of new products and the improvement of existing products. It is management's' intention to maintain expenditures for product development at levels required to sustain its competitive position. All of ASCOR's recent product development activities are internally funded. All product development costs are expensed as incurred. -67- 75 Manufacturing The assembly and testing of ASCOR's products is done at its Fremont facility. Manufacturing operations have been performed in this facility since 1987. Environment To the best of its knowledge, ASCOR is in compliance with all federal, state and local laws and regulations involving the protection of the environment. Employees As of March 30, 1996, ASCOR employed 48 persons. Management believes that the future success of ASCOR depends on its ability to attract and retain skilled personnel. None of ASCOR's employees is represented by a labor union and ASCOR considers its employee relations to be excellent. Information About Foreign Operations ASCOR has no formal organization for sales to international customers. Currently, all of its products that ultimately are shipped overseas have been sold to domestic prime contractors who have sold a complete automatic test system overseas. Outlook Since ASCOR focuses on system integration needs for low noise and high density switching within the VXI chassis, growth would likely be realized on the assumption that a growing number of instruments available in VXI bus architecture would be demanded. Property As of March 30, 1996, ASCOR's executive, marketing, sales and engineering offices and manufacturing facilities are located in approximately 12,160 square feet in Fremont, California, which ASCOR occupies under a lease expiring on January 31, 1998, including the exercise of three one-year options to renew (original lease expired January 31, 1995). Legal Proceedings As of March 30, 1996, ASCOR has no pending legal proceedings, other than routine litigation incidental to ASCOR's business, to which ASCOR is a party or to which any of its property is subject. -68- 76 MANAGEMENT'S DISCUSSION AND ANALYSIS OF ASCOR FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR FISCAL 1996, 1995, 1994 New orders received in 1996 were $5,173,000, an increase of 190% from 1995, which decreased 78% over 1994. In 1996, the increase reflects an increase in commercial related orders. In 1995, the decrease in orders resulted from a reduction in defense related activity. Overall, the approximate proportion of net sales coming from defense-related customers was 87% in 1996 and greater than 90% in 1995 and 1994. At year-end 1996, ASCOR's backlog of unfilled orders was $2,356,000, compared to $3,023,000 at the end of 1995 and $5,223,000 at the end of 1994. The decrease in backlog from 1995 to 1996 resulted mostly from an increase in shipments against large orders placed in 1994. Net sales for 1996 were $5,913,000, a 47% increase from 1995, which follows a 13% increase in 1995 from 1994. Gross profit as a percentage of sales decreased to 37% in 1996, from 41% in 1995, due to lower margins earned on commercial orders. Commercial sales are more price competitive, whereas defense-related sales are typically sole source. In addition, the large contract orders in 1995 allowed for greater manufacturing efficiencies and lower material costs due to a higher volume of repetitive business. Gross profit as a percentage of sales decreased from 45% to 41% from 1994 to 1995 due to increased material costs. Operating expenses increased 54% in 1996 over 1995. In an effort to increase market share, additional marketing personnel were added and the use of regional US sales reps were increased, causing an increase in sales commission expense. In 1995, operating expenses increased 51% from 1994 due to the addition of a Director of Sales & Marketing, a Controller and an increase in national advertising. Interest expense in 1995 and 1996 were similar, but more than $40,000 favorable to interest expense in 1994 due to a larger proportion of customer advance payments received against orders (resulting in higher average cash balances). The provision for income taxes in 1996 was a tax benefit of $59,000. In 1995, income tax expense was $52,000. In 1996 the Company reduced its deferred tax valuation allowance to recognize operating loss carryforwards that are realizable this year and set up an asset that it believes will be realized in the future. Other income decreased by $11,000 in 1996 from 1995. In 1995, other income decreased by $135,000 from 1994 due to the sale of a licensing agreement in 1994. ASCOR recorded profits of $839,000, or $0.15 per share, in 1996, an increase in income per share from $0.12 per share in 1995, and a decrease in income from $0.22 per share in 1994. The improved results in 1996 were due to increased sales of 47% and the tax benefit. The decrease from 1995 to 1994 was primarily due to the 1994 licensing agreement sale, decreased gross margins and an increase in operating expenses resulting from additions to ASCOR's management team. Financial Condition and Liquidity At year-end 1996, ASCOR had $451,000 in cash, cash equivalents and investments, compared to $1,265,000 at the beginning of the year. Most of the decrease resulted from a decrease in customer advances, additional capital expenditures and higher receivables. The higher receivables in 1996 were due to a 72 percent increase in shipments from the fourth quarter of fiscal 1995 to the fourth quarter of fiscal 1996, and a relatively large portion of the Q4 shipments were recorded in March. The accounts receivable allowance, which was zero at previous year-ends amounted to $13,000 because of one invoice deemed to be potentially uncollectible. Cash used in operations amounted to $514,000 in 1996, compared to cash provided from operations of $428,000 in 1995, and cash provided from operations of $1,085,000 in 1994. The 1995 cash provided from operations was due to earnings and customer advances, offset primarily by an increase in inventories. The 1994 cash provided by operations was due to earnings. -69- 77 The working capital position at year-end of ($1,222,000) compared unfavorably to ($796,000) at the end of 1995 due to the redeemable preferred stock. Additions to property and equipment were $277,000 in 1996, compared to $75,000 and $65,000 in 1995 and 1994, respectively. This spending reflects continuing investments to support new product development, increase productivity and improve product quality. Other cash outflows for investing activities included $100,000 in 1996 and $200,000 in 1995 for purchases of short-term investments. Cash outflows from financing activities were negligible. -70- 78 SECTION XII DESCRIPTION OF GIGA-TRONICS AND ASCOR SECURITIES Giga-tronics The authorized capital stock of Giga-tronics consists of 1,000,000 shares of convertible Preferred Stock of no par value and 40,000,000 shares of Common Stock of no par value. At the Effective Time of the Merger, there will be approximately 2,642,970 shares of Giga-tronics Common Stock, issued and outstanding, assuming no additional issuance of common shares. There will be no shares of Giga-tronics Preferred Stock issued and outstanding at the Effective Time of the Merger. Giga-tronics Common Stock. Holders of Giga-tronics Common Stock are entitled to one vote for each share held of record by them on all matters submitted to a vote of the shareholders. Subject to any declarations of dividends on shares of Preferred Stock (if any) holders of Giga-tronics' Common Stock are entitled to receive dividends when and as declared by the Board of Directors out of funds legally available therefore. The Giga-tronics Common Stock is not entitled to any preemptive or other subscription rights, and does not have any conversion rights or redemption or sinking fund provisions. Giga-tronics Preferred Stock. No shares of Preferred Stock are currently outstanding. The Board of Directors of Giga-tronics is authorized to determine the designation of each series and authorized number of shares in each series of Preferred Stock. The Board of Directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of shares of Preferred Stock and to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of share of such series. Such rights granted to any such series of Preferred Stock may create stock which ranks senior to Giga-tronics Common Stock with respect to the payment of dividends and the distribution of assets on liquidation. The Giga-tronics Board of Directors, without shareholder approval can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Giga-tronics Common Stock. The issuance of Preferred Stock could have the effect of delaying, deferring or preventing a change in control of Giga-tronics. General Rights. Voting on the election of directors is cumulative. Upon any voluntary or involuntary liquidation, the holders of Giga-tronics Common Stock are entitled to share in all net assets of Giga-tronics remaining available for distribution to shareholders after payment of all liabilities and the payment of amounts equal to the respective liquidation preferences of each series of Preferred Stock. All outstanding shares of Giga-tronics are, and the shares of Common Stock issued in the Merger will be validly issued, fully paid and non-assessable. The initial transfer agent will be Chemical Trust Company, San Francisco, California. The outstanding shares of Giga-tronics will be traded in the over-the-counter market in the United States. ASCOR The authorized capital stock of ASCOR consists of 30,000,000 shares of Common Stock, -71- 79 no par value and 5,712,283 shares of Preferred Stock, no par value. Immediately prior to the Effective Time of the Merger, there will be approximately 7,910,144 shares of ASCOR Common Stock and 5,249,516 shares of ASCOR Preferred Stock issued and outstanding. ASCOR Common Stock. Holders of ASCOR Common Stock are entitled to receive dividends when and as declared by the ASCOR Board of Directors out of funds legally available therefor. The ASCOR Common Stock is not entitled to any preemptive or other subscription rights, and does not have any conversion rights or redemption or sinking fund provisions. ASCOR Preferred Stock. ASCOR Preferred Stock is entitled to accruing and cumulative dividends at the per annum rate of 10% of the respective series purchase price beginning September 30, 1992 with payment to be made on a quarterly basis beginning September 31, 1992, when and as declared by the ASCOR Board of Directors. The ASCOR Board has never declared any dividends on Preferred Stock. ASCOR Preferred Stock possesses liquidation preferences over ASCOR Common Stock in the amount of each series respective original issuance price plus accrued but unpaid dividends. ASCOR Preferred Stock is subject to mandatory redemption by ASCOR at its original issuance price plus accrued dividends beginning on September 30, 1995 in three annual installments. ASCOR Preferred Stock is convertible into ASCOR Common Stock, at the election of its holder at any time and mandatory upon a qualifying initial public offering of stock of ASCOR, on a one-for-one basis (subject to adjustment for capital structure changes and certain delusive issuances of ASCOR securities not accepted from such adjustment provisions). ASCOR Preferred Stock has voting rights on an as converted to common basis in all matters other than election of directors. So long as at least 25% of number of shares of Preferred Stock originally issued remain outstanding, the holders of ASCOR Preferred Stock are entitled to elect three ASCOR directors (voting together as a single class). Holders of ASCOR Common Stock are entitled to elect two directors and any additional directors (the ASCOR Board of Directors is currently fixed at five directors) would be elected by the holders of ASCOR Common Stock and ASCOR Preferred Stock voting together as a single class. General Voting on the election of directors is cumulative. Upon liquidation, the holders of ASCOR Common Stock are entitled to share ratably in the entire net assets of ASCOR remaining available for distribution of shareholders after payment of all liabilities and after payment of such liquidation preferences as are provided to ASCOR Preferred Shares. All outstanding shares of ASCOR are validly issued, fully paid and nonassessable. Pursuant to the terms of the Reorganization Agreement it is a condition of the obligation of Giga-tronics to consummate the Merger that all holders of ASCOR Preferred Stock tender their shares of ASCOR Preferred Stock at the closing accompanied by the Tender Instructions, in the form of Annex I hereto, thereby agreeing to accept Giga-tronics Common Stock in exchange for such shares in the amounts provided by the terms of the Reorganization Agreement and waiving any rights to additional or different consideration as may be provided by the ASCOR Articles of Incorporation. See "The Reorganization Agreement and Related Agreements - The Reorganization Agreement - Conditions to the Merger." -72- 80 SECTION XIII COMPARISON OF RIGHTS OF SHAREHOLDERS OF GIGA-TRONICS AND ASCOR ASCOR is incorporated under California corporate law. Upon consummation of the Merger, the shareholders of ASCOR will become shareholders of Giga-tronics, a corporation also incorporated under the California corporate law. Accordingly, there are no differences in the laws governing ASCOR and Giga-tronics. Except for the rights and preferences afforded to ASCOR Preferred Stock (See 'DESCRIPTION OF GIGA-TRONICS AND ASCOR SECURITIES - ASCOR - ASCOR Preferred Stock") there are no material differences between the rights and obligations of ASCOR Shareholders and Giga-tronics Shareholders. -73- 81 SECTION XIV SHAREHOLDER PROPOSALS The next shareholder's meeting for Giga-tronics will be the 1996 Annual Meeting on Tuesday, August 6, 1996. Giga-tronics Shareholders' proposals must be directed to the Company Secretary of Giga-tronics and received no later than June 25, 1996 to be considered for inclusion in the Proxy Statement and form of proxy for the 1996 Annual Meeting of Shareholders. -74- 82 SECTION XV EXPERTS The financial statements and schedules of Giga-tronics Incorporated and ASCOR, Inc. as of March 30, 1996, and for each of the three years then ended, included in this Joint Proxy Statement/Prospectus have been audited by KPMG Peat Marwick LLP, independent accountants, as stated in their reports appearing elsewhere herein, and are included in reliance upon such reports and upon the authority of such firm as experts in auditing and accounting. It is expected that representatives from KPMG Peat Marwick LLP will be present at the Special Meeting to respond to appropriate questions of shareholders and to make a statement if they desire. -75- 83 SECTION XVI LEGAL MATTERS The validity of the shares of Giga-tronics Incorporated to be issued in connection with the Merger will be passed upon by Brobeck, Phleger and Harrison in San Francisco, California. -76- 84 SECTION XVII OTHER BUSINESS AT THE SPECIAL MEETING The Board of Directors knows of no other business which will be presented for consideration at the Special Meeting of Giga-tronics Shareholders other than as stated in the Notice of Special Meeting of Shareholders. However, if any other matters are properly brought before the Special Meeting or any adjournment thereof (as long as those matters are the subject of the meeting or incidental to the meeting), the proxy holders will have the discretionary authority to vote the shares they represent in accordance with their best judgment. -77- 85 ANNEX A Giga-tronics, Incorporated Financial Statements 86 INDEPENDENT AUDITOR'S REPORT The Board of Directors and Shareholders Giga-tronics Incorporated: We have audited the accompanying balance sheets of Giga-tronics Incorporated as of March 30, 1996, and March 25, 1995, and the related statements of operations, shareholders' equity and cash flows for the fifty-three week period ended March 30, 1996, and for each of the fifty-two week periods in the two-year period ended March 25, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Giga-tronics Incorporated as of March 30, 1996, and March 25, 1995, and the results of its operations and its cash flows for the fifty-three week period ended March 30, 1996, and for each of the fifty-two week periods in the two-year period ended March 25, 1995, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP San Jose, California April 18, 1996 except as to note 10, which is as of May 2, 1996 A-1 87
Giga-tronics, Incorporated Balance Sheets - ---------------------------------------------------------------------------------------------------- YEARS ENDED MARCH 30, MARCH 25, (IN THOUSANDS, EXCEPT SHARE DATA) 1996 1995 Assets Current Assets Cash and cash equivalents $ 5,772 $ 2,137 Investments 5,013 3,631 Trade accounts receivable, less allowance for doubtful accounts of $222 and $32, respectively 2,715 3,524 Inventories 4,660 6,701 Prepaid expenses 188 588 Deferred income taxes 1,185 868 -------- --------- Total current assets 19,533 17,449 Property and Equipment Machinery and equipment 6,518 6,095 Office furniture and fixtures 322 411 Leasehold improvements 103 93 -------- --------- 6,943 6,599 Accumulated depreciation and amortization (5,185) (4,212) --------- ---------- Net property and equipment 1,758 2,387 Patents and licenses 1,590 2,150 Other assets 146 239 -------- --------- Total assets $ 23,027 $ 22,225 ======== ========= Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 1,540 $ 1,477 Accrued commissions 156 318 Accrued payroll and benefits 474 778 Accrued warranty 480 417 Accrued earnout payment 393 472 Accrued expenses 660 745 -------- --------- Total current liabilities 3,703 4,207 Deferred income taxes 223 -- -------- --------- Total liabilities 3,926 4,207 Commitments and contingencies -- -- Shareholders' Equity Convertible preferred stock of no par value; 1,000,000 shares authorized; no shares outstanding in 1996 and 1995 -- -- Common stock of no par value; 40,000,000 shares authorized; 2,602,420 shares in 1996 and 2,569,920 shares in 1995 issued and outstanding 7,925 7,773 Unrealized loss on securities (47) (77) Retained earnings 11,223 10,322 -------- --------- Total shareholders' equity 19,101 18,018 -------- --------- Total liabilities and shareholders' equity $ 23,027 $ 22,225 ======== =========
See accompanying notes to financial statements. A-2 88
Giga-tronics, Incorporated Statements of Operations - ---------------------------------------------------------------------------------------------------- 53 WEEKS ENDED 52 WEEKS ENDED -------------- ------------------------ MARCH 30, MARCH 25, MARCH 26, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 Net sales $ 24,898 $ 21,937 $ 19,890 Cost of sales 15,616 15,019 11,947 --------- -------- --------- Gross profit 9,282 6,918 7,943 --------- -------- --------- Product development expense 2,512 2,700 2,569 Selling, general and administrative expenses 5,488 6,104 4,984 --------- -------- --------- Operating expenses 8,000 8,804 7,553 --------- -------- --------- Net operating income (loss) 1,282 (1,886) 390 Amortization of intangibles (560) (560) (410) Interest income, net 323 226 313 Other income 157 -- -- --------- -------- --------- Earnings (loss) before income taxes 1,202 (2,220) 293 Provision for income taxes (benefit) 301 (644) 62 --------- --------- --------- Net earnings (loss) $ 901 $ (1,576) $ 231 ========= ========= ========= Net earnings (loss) per share of common stock $ 0.34 $ (0.61) $ 0.09 ========= ========= ========= Weighted average common shares outstanding 2,639 2,570 2,570 ========= ======== =========
See accompanying notes to financial statements. A-3 89
Giga-tronics, Incorporated Statement of Shareholders' Equity - --------------------------------------------------------------------------------------------------------------- COMMON STOCK UNREALIZED (IN THOUSANDS, EXCEPT SHARE DATA) ----------------------- RETAINED LOSS ON SHARES AMOUNT EARNINGS SECURITIES TOTAL Balances as of March 27, 1993 2,569,920 $ 7,773 $ 11,667 $ -- $ 19,440 Net earnings -- -- 231 -- 231 --------- ---------- --------- --------- ---------- Balances as of March 26, 1994 2,569,920 7,773 11,898 -- 19,671 Unrealized loss on securities net of income tax credit of $41 -- -- -- (77) (77) Net loss -- -- (1,576) -- (1,576) --------- ---------- --------- --------- ---------- Balances as of March 25, 1995 2,569,920 7,773 10,322 (77) 18,018 Repurchase of stock (12,500) (94) (94) Exercise of stock options 45,000 246 -- -- 246 Unrealized gain on investments net of income tax expense of $16 -- -- -- 30 30 Net earnings -- -- 901 -- 901 --------- ---------- --------- --------- ---------- Balances as of March 30, 1996 2,602,420 $ 7,925 $ 11,223 $ (47) $ 19,101 ========= ========== ========= ========= ==========
See accompanying notes to financial statements. A-4 90
Giga-tronics, Incorporated Statements of Cash Flows - --------------------------------------------------------------------------------------------------- 53 WEEKS ENDED 52 WEEKS ENDED -------------- ------------------- (IN THOUSANDS) MARCH 30, MARCH 25, MARCH 26, 1996 1995 1994 Cash flows from operations: Net earnings (loss) $ 901 $ (1,576) $ 231 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operations: Depreciation and amortization 1,608 1,527 1,263 Deferred income taxes, net (94) (296) (119) Changes in operating assets and liabilities Trade accounts receivable 809 (126) 410 Inventories 2,041 625 (2,104) Prepaid expenses 400 (434) 111 Accounts payable 63 (68) (3) Accrued commissions (162) (45) 97 Accrued payroll and benefits (304) 237 (181) Accrued warranty 63 55 38 Accrued earnout and other expenses (164) 292 (506) Income taxes payable -- (33) (169) --------- -------- --------- Net cash provided by (used in) operations 5,161 158 (932) --------- -------- --------- Cash flows from investing activities: Patents and licenses, other assets 30 (31) (335) Purchases of investments (1,352) -- (3,749) Acquisitions -- -- (1,123) Additions to property and equipment (356) (670) (673) ---------- -------- --------- Net cash used in investing activities (1,678) (701) (5,880) ---------- -------- --------- Cash flows from financing activities: Issuance of common stock 246 -- -- Repurchase of common stock (94) -- -- ---------- -------- --------- Net cash provided by financing activities 152 -- -- --------- -------- --------- Increase (decrease) in cash and cash equivalents 3,635 (543) (6,812) Beginning cash and cash equivalents 2,137 2,680 9,492 --------- -------- --------- Ending cash and cash equivalents $ 5,772 $ 2,137 $ 2,680 ========= ======== ========= Supplementary disclosure of cash flow information: Cash paid for income taxes $ 340 $ 255 $ 22 ========= ======== =========
See accompanying notes to financial statements. A-5 91 Giga-tronics, Incorporated Notes to Financial Statements 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Operations The Company designs, manufacturers and markets microwave and radio frequency (RF) signal generation and power measurement instruments. The market for the Company is the test and measurement industry. These products are used primarily in the design, production, repair and maintenance of wireless communications, radar and electronic warfare systems. The Company has no foreign operations, and all non-U.S. sales are made in U.S. dollars, and therefore there is no currency risk on these transactions. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Revenue Recognition Revenues are recognized when products are shipped. Interest income is recognized when earned. Cash Equivalents For purposes of the accompanying statements of cash flows, the Company considers all highly liquid debt instruments with maturity dates of 90 days or less from date of purchase to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the respective improvements or the lease term. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 prescribes an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enactment of changes in tax laws or rates. Patents and Licenses Patents and licenses are being amortized using the straight-line method over periods of five to seven years. As of March 30, 1996 and March 25, 1995, accumulated amortization on patents and licenses was $1,741,000 and $1,180,000, respectively. Earnings (Loss) Per Share Earnings (loss) per common and common equivalent share is based on the weighted average number of shares of common stock and dilutive common stock equivalent shares outstanding during the year. Investments During fiscal 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of adopting FAS 115 was not material to the Company's financial position. This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The Company's investments have been classified as available-for-sale securities and are reported at fair value. Unrealized gains and losses have been reported as a separate component of shareholders' equity. Concentration of Credit Risk and Financial Instruments Financial instruments, which potentially subject the Company to credit risk, consist principally of investments and trade accounts receivable. The Company's investments consist principally of variable and fixed rate bonds issued by state and local governmental agencies. The Company individually evaluates the creditworthiness of its customers and generally does not require collateral or other security. Historically, the Company has not incurred any significant credit related losses. Fair Market Value of Financial Instruments The carrying amount for the Company's trade accounts receivable, accounts payable and other accrued expenses approximates fair market value because of the short maturity of these financial instruments. Recent Accounting Pronouncements In October, 1995 the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its financial statements costs related to its employee stock-based compensation plans, such as stock option A-6 92 Giga-tronics, Incorporated Notes to Financial Statements and stock purchase plans, or make pro forma disclosures of such costs in a footnote to the financial statements. The Company expects to continue to use the intrinsic value-based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to account for all of its employee stock-based compensation plans. Therefore, in its financial statements for fiscal 1997, the Company will make the required pro forma disclosures in a footnote to the financial statements. SFAS No. 123 is not expected to have a material effect on the Company's results of operations or financial position. 2 CASH, CASH EQUIVALENTS AND INVESTMENTS Cash and cash equivalents consist of bank and money market accounts, variable and fixed rate bonds, and fixed rate municipal notes which are stated at cost. Investments consist of municipal notes and bonds and U.S. Treasury Bills of varying maturities. The cash equivalents and investments mature or are marketable within 30 days, thus being available for current operating cash needs. As of March 30, 1996, the interest rates on cash, cash equivalents and investments ranged from 3.5% to 6.6%. As of March 30, 1996 and March 25, 1995, the Company had $3,822,000 and $4,249,000, respectively, invested in variable and fixed rate bonds and fixed rate notes issued by governmental agencies. The portfolio is diversified, consisting of five and six different governmental agencies located in various geographic regions of the United States as of March 30, 1996 and March 25, 1995, respectively. 3 ESTIMATED VALUE OF INVESTMENTS Certain cash equivalents and all investments have been classified as available-for-sale securities, and as of March 30, 1996 consisted of the following.
- -------------------------------------------------------------------------------------------------- MARCH 30, 1996 (IN THOUSANDS) AVAILABLE-FOR-SALE SECURITIES -------------------------------------------------------- GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------------------------------------------------------- U.S. Treasury Bills $ 429 $ 1 $ -- $ 430 U.S. Treasury Notes 498 -- 1 497 Municipal securities 4,158 -- 72 4,086 --------- -------- -------- --------- Total debt securities $ 5,085 $ 1 $ 73 $ 5,013 ========= ======== ======== =========
There were no realized gains (losses) on sales of available-for-sale securities in fiscal 1996. Unrealized losses on available-for-sale securities are included as a separate component of shareholders' equity net of a tax benefit of $25,000. The Company's investments are classified as follows:
- -------------------------------------------------------------------------------------------------- MARCH 30, 1996 Short-term investments $ 5,013 =========
The amortized cost and estimated fair value of debt securities as of March 30, 1996 are shown below, by contractual maturity.
- -------------------------------------------------------------------------------------------------- MARCH 30, 1996 (IN THOUSANDS) AVAILABLE-FOR-SALE --------------------------- ESTIMATED FAIR COST VALUE --------------------------- Due in 90 days or less $ 2,689 $ 2,693 Due after 90 days through one year 2,396 2,320 -------- --------- $ 5,085 $ 5,013 ======== =========
Certain cash equivalents and all investments have been classified as available-for-sale securities, and as of March 25, 1995 consisted of the following.
- -------------------------------------------------------------------------------------------------- MARCH 25, 1995 (IN THOUSANDS) AVAILABLE-FOR-SALE SECURITIES -------------------------------------------------------- GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------------------------------------------------------- Municipal securities 4,249 -- 118 4,131 --------- -------- -------- --------- Total debt securities $ 4,249 $ -- $ 118 $ 4,131 ========= ======== ======== =========
There were no realized gains (losses) on sales of available-for-sale securities in fiscal 1995. Unrealized losses on available-for-sale securities are included as a separate component of shareholders' equity net of a tax benefit of $41,000. The Company's investments are classified as follows:
- -------------------------------------------------------------------------------------------------- MARCH 25, 1995 Cash equivalents $ 500 Short-term investments 3,749 --------- $ 4,249 =========
A-7 93 Giga-tronics, Incorporated Notes to Financial Statements 4 SALES TO SIGNIFICANT CUSTOMERS AND EXPORT SALES Sales on contracts with offices and agencies of the U.S. government accounted for 31%, 26%, and 27% of the Company's sales in fiscal 1996, 1995 and 1994, respectively. Export sales accounted for 27%, 20%, and 23% of the Company's sales in fiscal 1996, 1995 and 1994, respectively. The disaggregated listing of export sales by geographical area is shown below.
- ----------------------------------------------------------------------------------------------------- YEARS ENDED MARCH 30, MARCH 25, MARCH 26, (IN THOUSANDS) 1996 1995 1994 Americas $ 935 $ 337 $1,013 Europe 2,354 1,441 1,422 Asia 2,833 2,357 1,776 Rest of World 669 323 333 ------ ------ ----- $6,791 $4,458 $4,544 ====== ====== ======
5 INVENTORIES
- -------------------------------------------------------------------------------------------------- MARCH 30, MARCH 25, (IN THOUSANDS) 1996 1995 Raw materials $ 1,705 $ 2,489 Work-in-progress 2,022 3,347 Finished goods 933 865 -------- --------- $ 4,660 $ 6,701 ======== =========
6 SELLING EXPENSES Selling expenses consist primarily of commissions paid to various marketing agencies. Commission expense totaled $1,598,000, $1,564,000, and $1,420,000 in fiscal 1996, 1995 and 1994, respectively. Advertising costs totaled $583,000, $663,000, and $520,000 for fiscal 1996, 1995 and 1994, respectively. 7 INCOME TAXES Following are the components of the provision for income taxes:
- ----------------------------------------------------------------------------------------------------- YEARS ENDED MARCH 30, MARCH 25, MARCH 26, (IN THOUSANDS) 1996 1995 1994 Current: Federal $ 319 $ (307) $ 114 State 91 -- 67 --------- --------- -------- 410 (307) 181 Deferred: Federal (104) (337) (154) State (5) -- 35 --------- --------- -------- (109) (337) (119) --------- --------- -------- Provision for income taxes (benefit) $ 301 $ (644) $ 62 ========= ========= ========
A-8 94 Giga-tronics, Incorporated Notes to Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
- ------------------------------------------------------------------------------------------------- YEARS ENDED MARCH 30, MARCH 25, (IN THOUSANDS) 1996 1995 Current tax assets, net $ 1,185 $ 868 Noncurrent tax liabilities, net (223) -- ------- ------- Net deferred taxes $ 962 $ 868 ======= ======= Future state tax effect $ 29 $ (133) Allowance for doubtful accounts 96 14 Fixed asset depreciation (223) (91) Inventory reserves and additional costs capitalized 1,059 936 Inventory purchase accounting difference -- (11) Deferred revenue 71 58 Alternative minimum federal tax credit carryforward 16 47 Accrued vacation 92 118 Accrued warranty 170 152 Other accrued liabilities 59 130 General business credit carryforward 115 184 State net operating loss carryforward -- 37 Unrealized loss on equity securities 25 -- Valuation allowances (547) (573) ------- ------- $ 962 $ 868 ======= =======
A-9 95 Giga-tronics, Incorporated Notes to Financial Statements Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
- ------------------------------------------------------------------------------------------------ YEARS ENDED MARCH 30, MARCH 25, MARCH 26, (IN THOUSANDS, EXCEPT PERCENTAGES) 1996 1995 1994 Statutory federal income tax $ 409 34% $(755) (34.0)% $ 99 34.0% Beginning of year change in deferred tax asset valuation allowance (26) (2.2) 236 10.6 -- -- State income tax, net of federal benefit 56 4.7 -- -- 68 23.1 Nontax deductible expenses 20 1.6 34 1.5 -- -- Interest income exempt from federal tax (52) (4.3) (66) (3.0) (92) (31.4) Tax credits (106) (8.8) (122) (5.5) (27) (9.3) Other -- -- 29 1.3 14 6.2 ----- ----- ----- ----- ----- ----- Effective income tax $ 301 25% $(644) (29.1)% $ 62 22.6% ===== ===== ===== ===== ===== =====
8 STOCK OPTION AND EMPLOYEE BENEFIT PLANS Stock Option Plans In March 1990, the Company established a stock option plan which provided for the granting of up to 300,000 shares of common stock at 100% of fair market value at the date of grant, with each grant needing approval by the Board of Directors of the Company. Options granted vest in one or more installments as set forth in the option agreement and must be exercised while the grantee is employed by the Company or within a certain period after termination of employment. Options granted to employees shall not have terms in excess of 10 years from the grant date. In May 1994, the Company amended the 1990 Stock Option Plan to allow the total number of shares of common stock available for issuance to be increased by 100,000 shares to 400,000 shares. During fiscal 1995, the Company offered option holders the opportunity to have outstanding options repriced to current fair value, with the related vesting period starting over. The Company cancelled and reissued (repriced) 77,900 options pursuant to the repricing. Options granted vest in annual installments and must be exercised while the grantee is employed by the Company, or within a certain period after termination of employment. During fiscal 1996, 45,000 options were exercised. As of March 30, 1996, the total number of shares of common stock available for issuance is 355,000. As of March 30, 1996, 157,900 options for shares have been granted, all of which have a term of 5 years. Holders of options may be granted stock appreciation rights which entitle them to surrender outstanding options for a cash distribution under certain changes in ownership of the Company, as defined in the stock option plan. A-10 96 Giga-tronics, Incorporated Notes to Financial Statements Following is a summary of stock option activity:
- --------------------------------------------------------------------------------------------------- SHARES OPTION PRICE Outstanding as of March 27, 1993 361,000 5.50-8.50 Cancelled (41,750) 5.88-8.50 Granted 30,000 6.25 -------- Outstanding as of March 26, 1994 349,250 5.50-8.50 Cancelled (260,900) 5.50-8.50 Granted 124,800 4.00-5.50 -------- Outstanding as of March 25, 1995 213,150 4.00-7.25 Exercised (45,000) 4.00-5.87 Cancelled (37,250) 4.00-7.25 Granted 27,000 7.75 -------- Outstanding as of March 30, 1996 157,900 4.00-7.75 ========
As of March 30, 1996, options to purchase 48,350 shares were exercisable at prices ranging from $4.00 to $7.00 per share. 401(k) Plan The Company has adopted a 401(k) plan which covers substantially all employees. Participants may make voluntary contributions to the plan up to 15% of their defined compensation. The Company is required to match 50% of the first 5% contributed by plan participants. The Company added a discretionary match of 20% of the first 5% contributed by plan participants for calendar 1995. Participants vest ratably in the Company contribution over a four-year period. Company contributions to the plan for fiscal 1996, 1995, and 1994 were approximately $127,000, $101,100, and $86,800, respectively. A-11 97 ANNEX A Giga-tronics, Incorporated Financial Statements 98 Giga-tronics, Incorporated Notes to Financial Statements 9 COMMITMENTS AND CONTINGENCIES On December 6, 1993, the Company entered into an agreement to lease a 47,300 square foot facility located in San Ramon, California, for a period of 10 years commencing April 15, 1994, and ending April 14, 2004. On June 22, 1995, the Company renegotiated the lease. The revised expiration date is December 31, 2006. The facility accommodates all of the Company's present operations. The future minimum lease payments are shown below:
- ------------------------------------------------------------------------------------ FISCAL YEARS 1997 $ 561,737 1998 568,368 1999 568,368 2000 625,678 2001 630,888 Remaining six years 3,858,742 ------------ $ 6,813,781 ============
The aggregate rental expense was $637,000, $568,000 and $595,000 in fiscal 1996, 1995 and 1994, respectively. The Company maintains a $2,000,000 line of credit collateralized by all of the Company's assets. This line of credit bears interest at prime plus 2.25% and expires on July 31, 1996. As of March 30, 1996, none of this line has been utilized. 10 SUBSEQUENT EVENT On May 2, 1996 the Company entered into an agreement to merge with ASCOR, Inc., a private company that designs, manufactures and markets a line of switching and connecting devices. The merger will be accounted for as a pooling-of-interests. Accordingly the historical accounts of ASCOR will be combined with those of the Company as if they had always been merged. The merger is expected to be effective in June 1996. The merger is subject to final approval of the transaction by Giga-tronics and ASCOR shareholders. If the merger had been effective as of March 30, 1996 revenues, net earnings (loss) and earnings (loss) per share would have been as follows:
1996 1995 1994 ---- ---- ---- Revenues (000's) $ 30,811 $ 25,969 $ 23,467 Net earnings (loss) (000's) 1,865 (867) 1,305 Earnings (loss) per share $ 0.55 $ (0.26) $ 0.40
A-12 99 Giga-tronics, Incorporated Information for Shareholders
Summary of Operations: - ---------------------------------------------------------------------------------------------------------- 53 WEEKS ENDED 52 WEEKS ENDED -------------- ------------------------------------------------- MARCH 30, MARCH 25, MARCH 26, MARCH 27, MARCH 28, (IN THOUSANDS) 1996 1995 1994 1993 1992 Net sales $ 24,898 $ 21,937 $ 19,890 $ 23,085 $ 16,181 Gross profit 9,282 6,918 7,943 9,287 5,503 Operating expenses 8,000 8,804 7,553 7,367 4,847 Interest income, net 323 226 313 244 414 Earnings (loss) before income taxes 1,202 (2,220) 293 1,954 1,070 Net earnings (loss) 901 (1,576) 231 1,327 878 Net earnings (loss) per share $ 0.34 $ (0.61) $ 0.09 $ 0.52 $ 0.34 Financial Position: - ---------------------------------------------------------------------------------------------------------- 53 WEEKS ENDED 52 WEEKS ENDED -------------- ------------------------------------------------- MARCH 30, MARCH 25, MARCH 26, MARCH 27, MARCH 28, (IN THOUSANDS, EXCEPT RATIO) 1996 1995 1994 1993 1992 Current ratio 5.3 4.1 4.8 4.9 11.7 Working capital $ 15,830 $ 13,242 $ 14,209 $ 15,370 $ 16,588 Total assets 23,027 22,225 23,580 23,597 19,817 Shareholders' equity 19,101 18,018 19,671 19,440 18,113 Shares of common stock 2,602 2,570 2,570 2,570 2,570 Percentage Data: - ---------------------------------------------------------------------------------------------------------- 53 WEEKS ENDED 52 WEEKS ENDED -------------- ------------------------------------------------- MARCH 30, MARCH 25, MARCH 26, MARCH 27, MARCH 28, 1996 1995 1994 1993 1992 Percent of net sales: Gross profit 37.3% 31.5% 39.9% 40.2% 34.0% Operating expenses 32.1 40.1 38.0 31.9 30.0 Interest income, net 1.3 1.0 1.6 1.1 2.6 Earnings (loss) before income taxes 4.8 (10.1) 1.5 8.5 6.6 Net earnings (loss) 3.6 (7.2) 1.2 5.7 5.4
A-13 100 Giga-tronics, Incorporated Information for Shareholders
Quarterly Financial Information (Unaudited) - ---------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) 1996 ---------------------------------------------------- FIRST SECOND THIRD FOURTH YEAR Net sales $ 6,261 $ 6,212 $ 6,171 $ 6,254 $ 24,898 Gross profit 2,285 2,314 2,264 2,419 9,282 Operating expenses 2,112 2,036 1,862 1,990 8,000 Interest income, net 52 76 91 104 323 Earnings before income taxes 157 287 360 398 1,202 Net earnings 118 215 270 298 901 Net earnings per share $ 0.05 $ 0.08 $ 0.10 $ 0.11 $ 0.34 Shares of common stock 2,570 2,570 2,570 2,602 2,602 - ---------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) 1995 ---------------------------------------------------- FIRST SECOND THIRD FOURTH YEAR Net sales $ 5,547 $ 5,606 $ 5,853 $ 4,931 $ 21,937 Gross profit 2,205 2,103 2,298 312 6,918 Operating expenses 1,954 1,858 2,033 2,959 8,804 Interest income, net 35 52 48 91 226 Earnings (loss) before income taxes 147 157 173 (2,697) (2,220) Net earnings (loss) 93 102 129 (1,900) (1,576) Net earnings (loss) per share $ 0.04 $ 0.04 $ 0.05 $ (0.74) $ (0.61) Shares of common stock 2,570 2,570 2,570 2,570 2,570
Common Stock Market Prices The Company's common stock is traded over the counter on NASDAQ/NMS National Market System using the symbol "GIGA." The number of record holders of the Company's common stock as of March 30, 1996 exceeded 300. The table below shows the high and low closing bid quotations for the common stock during the indicated fiscal periods.
1996 HIGH LOW 1995 HIGH LOW ---------------------------- ---------------------------- First Quarter (3/26-6/24) 7-7/8 6 (3/27-6/25) 7-1/4 5-7/8 Second Quarter (6/25-9/30) 10-1/2 6-3/4 (6/26-9/24) 6 4-3/4 Third Quarter (10/1-12/30) 9 6-7/8 (9/25-12/24) 6-3/8 5 Fourth Quarter (12/31-3/30) 8 6-5/8 (12/25-3/25) 6-3/16 4
A-14 101 ANNEX B ASCOR FINANCIAL STATEMENTS 102 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders ASCOR Incorporated: We have audited the accompanying balance sheets of ASCOR Incorporated (the Company) as of March 31, 1996, and 1995, and the related statements of operations, shareholders' deficit and cash flows for the each of the years in the three-year period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 14 to these financial statements, the Company is expected to merge with Giga-tronics Incorporated, a publicly held company, early in fiscal year 1997, subject to final approval of the transaction by Giga-tronics and ASCOR shareholders. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ASCOR Incorporated as of March 31, 1996, and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP San Jose, California April 25, 1996 except as to note 14, which is as of May 2, 1996 B-1 103 ASCOR, Inc. Balance Sheets
- -------------------------------------------------------------------------------- March 31, March 31, (In thousands, except share data) 1996 1995 Assets Current Assets Cash and cash equivalents $ 151 $ 1,065 Investments 300 200 Trade accounts receivable, less allowance for doubtful accounts of $13 and $0, respectively 943 400 Inventories 1,633 1,704 Prepaid expenses 40 25 Deferred income taxes 120 -- ------- ------- Total current assets 3,187 3,394 Property and Equipment Machinery and equipment 759 520 Office furniture and fixtures 196 162 Leasehold improvements 3 3 ------- ------- 958 685 Accumulated depreciation and amortization (594) (484) ------- ------- Net property and equipment 364 201 Deposits 6 6 ------- ------- Total assets $ 3,557 $ 3,601 ======= ======= Liabilities and Shareholders' Equity Current Liabilities Line of credit $ 55 $ -- Accounts payable 380 96 Accrued commissions 121 -- Accrued payroll and benefits 192 107 Accrued warranty 100 50 Accrued expenses 176 150 Current obligation under capital lease 10 9 Notes payable 730 811 Customer advances -- 1,453 Income taxes payable 47 20 Redeemable Preferred Stock--Series A 1,101 633 Redeemable Preferred Stock--Series B 998 574 Redeemable Preferred Stock--Series C 499 287 ------- ------- Total current liabilities 4,409 4,190 Obligation under capital lease, less current obligation 30 40 ------- ------- Total liabilities 4,439 4,230 Commitments and contingencies -- -- Redeemable Preferred Stock Series A of no par value; 2,553,192 shares authorized; 2,340,425 shares issued and outstanding in 1996 and 1995 358 716 Series B of no par value; 2,000,000 shares authorized; 2,000,000 shares issued and outstanding in 1996 and 1995 325 649 Series C of no par value; 1,159,091 shares authorized; 909,091 shares issued and outstanding in 1996 and 1995 161 323 Shareholders' Deficit Common stock of no par value; 30,000,000 shares authorized; 3,947,375 shares in 1996 and 3,773,875 shares in 1995 issued and outstanding 86 74 Retained deficit (1,812) (2,391) ------- ------- Total shareholders' deficit (1,726) (2,317) ------- ------- Total liabilities and shareholders' deficit $ 3,557 $ 3,601 ======= =======
See accompanying notes to financial statements. B-2 104 ASCOR, Inc. Statement of Operations
- -------------------------------------------------------------------------------- Years Ended March 31, March 31, March 31, (In thousands, except per share data) 1996 1995 1994 Net sales $ 5,913 $ 4,032 $ 3,577 Cost of sales 3,752 2,377 1,974 ------- ------- ------- Gross profit 2,161 1,655 1,603 ------- ------- ------- Product development expense 214 228 130 Selling, general and administrative expenses 1,159 664 462 ------- ------- ------- Operating expenses 1,373 892 592 ------- ------- ------- Net operating income 788 763 1,011 Interest income 43 33 -- Interest expense (57) (52) (64) Other income 6 17 152 ------- ------- ------- Earnings before income taxes 780 761 1,099 Provision for income taxes (benefit) (59) 52 25 ------- ------- ------- Net earnings $ 839 $ 709 $ 1,074 ======= ======= ======= Net earnings per share of common stock $ .15 $ .12 $ .22 ======= ======= ======= Weighted average common shares outstanding 3,947 3,774 3,774 ======= ======= =======
See accompanying notes to financial statements. B-3 105 ASCOR, Inc. Statement of Shareholders' Deficit
- --------------------------------------------------------------------------------- Common Stock Years Ended ------------ Retained (In thousands, except share data) Shares Amount (Deficit) Total Balances as of March 31, 1993 3,773,875 $ 74 $ (3,654) $ (3,580) Accruable Dividends -- -- (260) (260) Net earnings -- -- 1,074 1,074 --------- --------- --------- --------- Balances as of March 31, 1994 3,773,875 74 (2,840) (2,766) Accruable Dividends -- -- (260) (260) Net earnings -- -- 709 709 --------- --------- --------- --------- Balances as of March 31, 1995 3,773,875 74 (2,391) (2,317) Exercise of stock options 173,500 12 -- 12 Accruable Dividends -- -- (260) (260) Net earnings -- -- 839 839 --------- --------- --------- --------- Balances as of March 31, 1996 3,947,375 $ 86 $ (1,812) $ (1,726) ========= ========= ========= =========
See accompanying notes to financial statements. B-4 106 ASCOR, Inc. Statements of Cash Flows
- ----------------------------------------------------------------------------------------- Years Ended March 31, March 31, March 31, 1996 1995 1994 Cash flows from operations: Net earnings $ 839 $ 709 $ 1,074 Adjustments to reconcile net earnings to net cash provided by (used in) operations: Depreciation 114 60 68 Loss on disposal of assets -- -- 3 Deferred income taxes, net (120) -- -- Changes in operating assets and liabilities Trade accounts receivable (543) (118) 435 Inventories 71 (952) (107) Prepaid expenses (15) 20 7 Accounts payable 284 18 (119) Accrued commissions 121 -- -- Accrued payroll and benefits 85 15 (1) Accrued warranty 50 2 48 Accrued expenses 26 (78) 181 Customer advances (1,453) 732 (188) Deferred revenue -- -- (316) Income taxes payable 27 20 -- -------- -------- -------- Net cash (used in) provided by operations (514) 428 1,085 -------- -------- -------- Cash flows from investing activities: Purchases of investments (100) (200) -- Additions to property and equipment (277) (75) (65) -------- -------- -------- Net cash used in investing activities (377) (275) (65) -------- -------- -------- Cash flows from financing activities: Proceeds from line of credit 55 -- -- Repayment of line of credit -- -- (32) Principal payments on note payable (81) -- (84) Principal payment on obligation, capital lease (9) (7) (7) Proceeds from sale of common stock 12 -- -- -------- -------- -------- Net cash used in financing activities (23) (7) (123) -------- -------- -------- Increase (decrease) in cash and cash equivalents (914) 146 897 Beginning cash and cash equivalents 1,065 919 22 -------- -------- -------- Ending cash and cash equivalents $ 151 $ 1,065 $ 919 ======== ======== ======== Supplementary disclosure of cash flow information: Cash paid for income taxes $ 36,326 $ 14,700 $ 83,300 ======== ======== ======== Cash paid for interest $ 50,169 $ 51,381 $ 67,424 ======== ======== ======== Noncash transactions: Purchases under capital lease obligations -- 55 -- ======== ======== ========
See accompanying notes to financial statements. B-5 107 ASCOR, Inc. Notes to Financial Statements 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Operations The Company designs and manufactures modular, computer-based automatic test system equipment used for testing computer assemblies. The Company's customer base is primarily defense related companies located in the United States. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Revenue Recognition The Company receives advances from its major customers for the purchase of inventory and funding of production to fulfill purchase order requirements. Sales are recognized when the products are shipped. In 1996 there were very few advances from customers. Cash Equivalents For purposes of the accompanying statements of cash flows, the Company considers all highly liquid debt instruments with maturity dates of 90 days or less from date of purchase to be cash equivalents. Investments Investments consist of certificates of deposit with original maturities greater than 90 days. Inventories Inventories consist of raw materials and work-in-process and are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from 3 to 7 years. Capital Leases Assets and liabilities are recorded at amounts equal to the lesser of the present value of the minimum lease payments on the lease obligations or the fair market value of the leased equipment at the beginning of the lease terms. Interest expensed relating to the lease liabilities is recorded to effect a constant rate of interest over the terms of the leases. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 prescribes an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enactment of changes in tax laws or rates. Earnings Per Share Earnings per common and common equivalent share is based on the weighted average number of shares of common stock and dilutive common stock equivalent shares outstanding during the year. Net earnings available to common shareholders is reduced by the accruable, but undeclared, dividends due on Series A, Series B, and Series C preferred stock. Product Development Costs Product development costs are charged to operations in the year incurred. Concentration of Credit Risk and Financial Instruments The Company maintains its cash in commercial checking and money market accounts and certificates of deposit. Fair Market Value of Financial Instruments The carrying amount for the Company's investments, trade accounts receivable, accounts payable, notes payable and other accrued expenses approximates fair market value because of the short maturity of these financial instruments. Recent Accounting Pronouncements In October, 1995 the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its financial statements costs related to its employee stock-based compensation plans, such as stock option and stock purchase plans, or make pro forma disclosures of such costs in a footnote to the financial statements. B-6 108 ASCOR, Inc. Notes to Financial Statements The Company expects to continue to use the intrinsic value-based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to account for all of its employee stock-based compensation plans. Therefore, in its financial statements for fiscal 1997, the Company will make the required pro forma disclosures in a footnote to the financial statements. SFAS No. 123 is not expected to have a material effect on the Company's results of operations or financial position. 2 CASH, CASH EQUIVALENTS AND INVESTMENTS Cash and cash equivalents consist of bank accounts and certificates of deposit. The certificates of deposits have maturity dates between 90 and 180 days, maturing in April and May 1996, and bear interest from 5.45% to 5.6%. Certificates of deposit which have original maturities greater than 90 days are considered short-term investments and are stated at cost which approximates market value. 3 SALES TO SIGNIFICANT CUSTOMERS The Company had sales to two customers in 1996, three customers in 1995, and three customers in 1994, which amounted to approximately $3,758,000, $3,027,000, and $2,970,000 of gross revenues for the years ended March 31, 1996, 1995, and 1994, respectively.
Year Ended March 31, 1996 Government Sales Commercial Sales ------------------------- ---------------- ---------------- Customer A $2,836,000 -- Customer B 922,000 -- ---------- --------- $3,758,000 -- Year Ended March 31, 1995 ------------------------- Customer A $1,902,000 -- Customer C 642,000 -- Customer D 483,000 -- ---------- --------- $3,027,000 -- Year Ended March 31, 1994 ------------------------- Customer A $1,498,000 -- Customer E 605,000 -- Customer D -- 867,000 ---------- --------- $2,103,000 $867,000
4 INVENTORIES
- -------------------------------------------------------------------------------- March 31, March 31, (In thousands) 1996 1995 Raw materials $ 683 $ 430 Work-in-progress 950 1,274 ------ ------ $1,633 $1,704 ====== ======
5 SELLING EXPENSES Selling expenses consist primarily of commissions paid to various distributors. Commission expense totaled $237,000, $79,000, and $52,000 in fiscal 1996, 1995 and 1994, respectively. Advertising costs totaled $42,000, $28,000, and $2,000 for fiscal 1996, 1995 and 1994, respectively. 6 BANK BORROWINGS The Company has a $750,000 line of credit agreement with Imperial Bank that provides for interest at prime plus 1.5% (currently at 9.75%) expiring on January 31, 1997. Borrowing is secured by accounts receivable, inventory and equipment. The balance on the credit line is not to exceed $750,000 or 75% of eligible accounts receivables, whichever is less. (The effective borrowing limit was approximately $750,000 on March 31, 1996.) As a condition of the Company's loan with Imperial Bank, management has agreed to subordinate their present stockholders' debt to Imperial Bank. As of March 31, 1996, the Company had $ 55,000 outstanding under the line of credit agreement. 7 NOTES PAYABLE The Company entered into three bridge financing agreements during the period of April, 1991 through December, 1991. All notes are due on demand, provide for interest at 6% per annum and are secured by the assets of the Company. Unpaid interest on the notes payable was approximately $46,645 at the March 31, 1996. The notes payable also offer the holders an option to exercise stock warrants issued with each note payable which expire through December, 1996. At March 31, 1996, there were 6,096,545 warrants outstanding at an exercise price of $0.07. 8 OBLIGATION UNDER CAPITAL LEASE A summary of the obligation under capital lease is as follows: B-7 109 ASCOR, Inc. Notes to Financial Statements
- -------------------------------------------------------------------------------- March 31, March 31, 1996 1995 OCE - Bruning, Inc., payable in monthly installments of $1,077 for the first three months, then $1,155 for the following 57 months, including interest at 9.75% per annum through August, 1999, secured by equipment. $ 40 $ 49 Less current obligation 10 9 ----- ----- $ 30 $ 40 ===== =====
The aggregate maturities of the obligation under capital lease for the next four years are as follows:
- -------------------------------------------------------------------------------- Fiscal Years 1997 $ 14 1998 14 1999 14 2000 5 ---- 47 Less amounts representing interest (7) ---- $ 40 ====
9 INCOME TAXES Following are the components of the provision for income taxes:
- ----------------------------------------------------------------------------------- Years Ended March 31, March 31, March 31, (In thousands) 1996 1995 1994 Current: Federal $ 3 $ 9 $ 17 State 58 43 8 ----- ----- ----- 61 52 25 Deferred: Federal (107) -- -- State (13) -- -- ----- ----- ----- (120) -- -- Provision for income taxes (benefit) $ (59) $ 52 $ 25 ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows: B-8 110 ASCOR, Inc. Notes to Financial Statements
- ---------------------------------------------------------------------------------- Years Ended March 31, March 31, (In thousands) 1996 1995 Current tax assets, net $ 120 $ -- ===== ===== Future state tax effect $ 15 $ 15 Allowance for doubtful accounts 6 -- Fixed asset depreciation (59) (36) Inventory reserves and additional costs capitalized 43 129 Alternative minimum federal tax credit carryforward 29 25 Accrued vacation 26 17 Accrued warranty 43 22 General business credit carryforward 34 34 Federal, net operating loss carryforward 239 434 Valuation allowances (256) (640) ----- ----- $ 120 $ -- ===== =====
Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
- --------------------------------------------------------------------------------------------- Years Ended March 31, March 31, March 31, (In thousands) 1996 1995 1994 Statutory federal income tax $ 265 34% $ 259 34% $ 374 34% Beginning of year change in deferred tax asset valuation allowance (355) (45.5) (236) (31.1) (357) (32.4) State income tax, net of federal benefit 30 3.8 28 3.7 5 .5 Nontax deductible expenses 1 .2 1 .2 3 .2 ----- ----- ----- ----- ----- Effective income tax $ (59) (7.5)% $ 52 6.8% $ 25 2.3% ===== ===== ===== ===== ===== =====
10 STOCK OPTION AND EMPLOYEE BENEFIT PLANS Stock Option Plans In June 1988, the Company established a stock option plan which provided for the granting of up to 1,500,000 shares of common stock at 100% of fair market value at the date of grant, with each grant needing approval by the Board of Directors of the Company. Options granted vest in one or more installments as set forth in the option agreement and must be exercised while the grantee is employed by the Company or within a certain period after termination of employment. Options granted to employees shall not have terms in excess of 10 years from the grant date. During fiscal 1996, 173,500 options were exercised. As of March 31,1996, the total number of shares of common stock available for issuance was 612,625. There were no options granted or exercised in the 2 year period ended March 31, 1995. As of March 31, 1996, no options for shares were outstanding. B-9 111 ASCOR, Inc. Notes to Financial Statements Following is a summary of stock option activity:
- --------------------------------------------------------------------------------- Shares Option Price Outstanding as of March 31, 1993, 1994, 1995 53,500 $.05 - .07 Granted 120,000 .07 Exercised (173,500) .05 - .07 -------- Outstanding as of March 31, 1996 -- ========
401(k) Plan The Company has adopted a 401(k) plan which covers substantially all employees. Participants may make voluntary contributions to the plan up to 15% of their defined compensation. The Company is required to match 10% of the amount contributed by plan participants. Participants vest ratably in the Company contribution over a four-year period. Company contributions to the plan for fiscal 1996,1995 and 1994 were approximately $9,231, $5,586, and $ 0, respectively. 11 COMMITMENTS AND CONTINGENCIES The Company leases its facilities under an operating lease agreement which expires in January, 1997, with a one-year renewal option. Future minimum lease payments for the operating leases at March 31, 1996 are as follows:
- -------------------------------------------------------------------------------------------------------------- Fiscal Years 1997 $ 74 1998 67 ------ $ 141 ======
Under the lease, the Company is required to pay monthly operating expenses in addition to the monthly rent payments. Rent expense, including related occupancy costs, was approximately $97,757, $93,951, and $89,620 for the years ended March 31, 1996, 1995 and 1994. 12 REDEEMABLE PREFERRED STOCK Dividends The holders of each series of preferred stock are entitled to receive cumulative dividends, out of any available funds, accruing quarterly beginning September 30, 1992 of $.047 per share of Series A preferred stock per year, $.05 per share of Series B preferred stock per year, and $.055 per share of Series C preferred stock per year payable in preference and priority to any payment of any dividend on common stock of the Company. As of March 31, 1996, accumulated but undeclared dividends on cumulative Series A, Series B, and Series C preferred stock was approximately $910,000. In 1994, 1995 and 1996, dividends accrued amounted to $260,000 in each year for Series A, B and C preferred stock. Conversion Each share of Series A, Series B and Series C preferred stock is convertible into the number of shares of common stock that results from dividing the original issue price by the "conversion price" in effect at that time. As of March 31, 1996, the conversion price was $0.47, $0.50, and $0.55 for Series A, Series B, and Series C preferred stock, respectively. Each share of preferred stock will be automatically converted upon the effectiveness of a registration statement under the Securities Act of 1933, if the public offering is at least $2.75 per share and total proceeds equal or exceed $5,000,000. Voting Rights Each share of preferred stock has voting rights equal to its common stock equivalents. Liquidation Preference In the event of liquidation, the holders of the Series B preferred and Series C preferred are entitled to receive distributions on a prorata basis, in preference to the holders of the Series A preferred and the holders of common stock. Redemption To the extend of legally available funds, the Company shall redeem on each of September 30, 1995, September 30, 1996, and September 30, 1997 one third of the Series A, Series B and Series C preferred shares at the original issue price, plus any accrued but unpaid dividends. B-10 112 ASCOR, Inc. Notes to Financial Statements Warrants In conjunction with an equipment lease agreement signed in 1990 and a facility lease amendment signed in 1992, warrants to purchase 68,409 and 53,364 shares of Series C preferred stock were issued, respectively. These warrants are exercisable at $.55 a share. The warrants granted in 1992 expired in February, 1995. The remaining warrants expire in September, 1997. No preferred stock has been redeemed or converted to common stock. Additionally, no dividends have been paid or declared by the Company.
Preferred Stock Preferred Stock Preferred Stock Series A Series B Series C -------- -------- -------- Shares Amount Shares Amount Shares Amount Balances as of March 31, 1993 2,340,425 $ 1,129 2,000,000 $ 1,023 909,091 $ 510 Accruable Dividends 110 100 50 --------- --------- --------- --------- --------- --------- Balances as of March 31, 1994 2,340,425 1,239 2,000,000 1,123 909,091 560 Accruable Dividends 110 100 50 --------- --------- --------- --------- --------- --------- Balances as of March 31, 1995 2,340,425 1,349 2,000,000 1,223 909,091 610 Accruable Dividends 110 100 50 --------- --------- --------- --------- --------- --------- Balances as of March 31, 1996 2,340,425 $ 1,459 2,000,000 $ 1,323 909,091 $ 660 ========= ========= ========= ========= ========= ========= Common Stock Issuable If 3,756,334 3,136,319 1,437,656 Preferred Stock ========= ========= ========= Converted as of 3/31/96
Proposed Merger As a result of the proposed merger, (see footnote 14), it is expected that the preferred shareholders will exchange their preferred stock interests for common stock of ASCOR prior to the Merger, and will subsequently receive Giga-tronics stock in exchange for these interests. None of the redeemable preferred stock will be redeemed prior to the Merger. There are no plans to pay the dividends prior to the Merger, since no dividends have been declared. The Giga-tronics common stock, which the ASCOR preferred shareholders will receive, will not include any consideration for undeclared dividends. 13 RESERVED COMMON STOCK As of March 31, 1996, the Company has reserved 11,346,061 shares of common stock for future issuance upon the exercise of stock warrants and the conversion of preferred stock. Additionally, in conjunction with bridge financing agreements entered into during the period of April through December, 1991, warrants to purchase 6,096,545 shares of common stock were issued. These warrants, which are exercisable at $.07 per share, expire five years from the date of issuance between April and December, 1996. 14 SUBSEQUENT EVENT On May 2, the Company entered into an agreement to merge with Giga-tronics Inc., a publicly held company. It is intended that the transaction will be accounted for as a pooling of interests. B-11 113 ANNEX C REORGANIZATION AGREEMENT 114 ================================================================================ AGREEMENT AND PLAN OF REORGANIZATION dated as of May 2, 1996 by and among GIGA-TRONICS INCORPORATED ASCOR ACQUISITION CORP. and ASCOR, INC. 115 TABLE OF CONTENTS
PAGE RECITALS ....................................................................... 1 ARTICLE I THE MERGER............................................................. 2 1.01 The Merger..................................................... 2 1.02 Conversion of Shares........................................... 2 1.03 Exchange of Certificates....................................... 3 1.04 Dissenting Shares.............................................. 4 1.05 Fractional Shares.............................................. 5 1.06 ASCOR Stock Options and Warrants............................... 5 1.07 No Registration of Giga-tronics Common Stock................... 6 ARTICLE II THE SURVIVING CORPORATION.............................................. 6 2.01 Certificate of Incorporation................................... 6 2.02 Bylaws......................................................... 6 2.03 Directors and Officers......................................... 6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF ASCOR................................ 7 3.01 Corporate Existence and Power.................................. 7 3.02 Corporate Authorization........................................ 7 3.03 Governmental Authorization..................................... 7 3.04 Non-Contravention.............................................. 8 3.05 Capitalization................................................. 8 3.06 Subsidiaries and Investments................................... 9 3.07 Financial Statements........................................... 9 3.08 Absence of Changes or Events................................... 9 3.09 No Undisclosed Liabilities..................................... 11 3.10 Litigation..................................................... 12 3.11 Taxes.......................................................... 12 3.12 Insurance...................................................... 13 3.13 Employee Benefit Plans; ERISA.................................. 13 3.14 Material Agreements............................................ 13 3.15 Real Property; Leases.......................................... 14 3.16 Title to Assets................................................ 14 3.17 Environmental Matters.......................................... 15 3.18 Intellectual Property.......................................... 16 3.19 No Guaranties.................................................. 16 3.20 Absence of Certain Business Practices.......................... 16 3.21 Compliance with Laws and Other Instruments..................... 16
i. 116
PAGE 3.22 Disclosure Documents........................................... 17 3.23 Tax Matters.................................................... 17 3.24 Accounting Matters............................................. 17 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF GIGA-TRONICS......................... 17 4.01 Corporate Existence and Power.................................. 17 4.02 Corporate Authorization........................................ 18 4.03 Governmental Authorization..................................... 18 4.04 Non-Contravention.............................................. 19 4.05 Capitalization of Giga-tronics................................. 19 4.06 Capitalization of Merger Sub; Subsidiaries..................... 20 4.07 SEC Filings.................................................... 20 4.08 Financial Statements........................................... 21 4.09 Disclosure Documents........................................... 21 4.10 Absence of Certain Changes..................................... 21 4.11 Litigation..................................................... 22 4.12 Advisor's Fees................................................. 22 ARTICLE V COVENANTS OF ASCOR..................................................... 22 5.01 Conduct of ASCOR............................................... 22 5.02 Shareholders' Meeting; Proxy Material.......................... 24 5.03 Access to Financial and Operation Information.................. 24 5.04 Other Offers................................................... 24 5.05 Maintenance of Business........................................ 25 5.06 Compliance with Obligations.................................... 25 5.07 Notices of Certain Events...................................... 25 5.08 Confidentiality................................................ 26 5.09 Compliance with the Securities Act............................. 26 ARTICLE VI COVENANTS OF GIGA-TRONICS AND MERGER SUB............................... 26 6.01 Conduct of Giga-tronics........................................ 26 6.02 Shareholders' Meeting; Proxy Material.......................... 27 6.03 Maintenance of Business........................................ 27 6.04 Compliance with Obligations.................................... 27 6.05 Notices of Certain Events...................................... 28 6.06 Confidentiality................................................ 28 6.07 Obligations of Merger Sub...................................... 28 6.08 Compliance with the Securities Act............................. 29
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PAGE ARTICLE VII OTHER COVENANTS OF THE PARTIES......................................... 29 7.01 Advice of Changes.............................................. 29 7.02 Regulatory Approvals........................................... 29 7.03 Actions Contrary to Stated Intent.............................. 29 7.04 Certain Filings................................................ 29 7.05 Communications................................................. 30 7.06 Satisfaction of Conditions Precedent........................... 30 ARTICLE VIII CONDITIONS TO THE MERGER............................................... 30 8.01 Conditions to Obligations of Giga-tronics and Merger Sub....... 30 8.02 Conditions to Obligations of ASCOR............................. 31 8.03 Conditions to Obligations of Each Party........................ 32 ARTICLE IX TERMINATION OF AGREEMENT............................................... 33 9.01 Termination.................................................... 33 9.02 Effect of Termination.......................................... 34 ARTICLE X ADDITIONAL AGREEMENTS OF THE PARTIES................................... 35 10.01 Registration Rights Agreement.................................. 35 ARTICLE XI MISCELLANEOUS.......................................................... 35 11.01 Further Assurances............................................. 35 11.02 Fees and Expenses.............................................. 35 11.03 Nonsurvival of Representations and Warranties.................. 35 11.04 Notices........................................................ 35 11.05 Governing Laws................................................. 36 11.06 Binding upon Successors and Assigns; Assignment................ 36 11.07 Severability................................................... 37 11.08 Entire Agreement............................................... 37 11.09 Other Remedies................................................. 37 11.10 Amendment and Waivers.......................................... 37 11.11 No Waiver...................................................... 37 11.12 Construction of Agreement; Knowledge........................... 37 11.13 Counterparts................................................... 38 GLOSSARY ....................................................................... 40
iii. 118 SCHEDULES ASCOR Disclosure Schedule Giga-tronics Disclosure Schedule EXHIBITS Exhibit 1.01 Form of Agreement of Merger Exhibit 5.09 Form of ASCOR Affiliates Agreement Exhibit 6.08 Form of Giga-tronics Affiliates Agreement Exhibit 10.01 Form of Registration Rights Agreement iv. 119 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered into as of the 2nd day of May, 1996, by and among Giga-tronics Incorporated, a California corporation ("Giga-tronics"), ASCOR Acquisition Corp., a California corporation and a wholly owned subsidiary of Giga-tronics ("Merger Sub"), and ASCOR, Inc., a California corporation ("ASCOR"). RECITALS A. The Boards of Directors of Giga-tronics, Merger Sub and ASCOR have each determined to engage in the transactions contemplated hereby, pursuant to which (i) Merger Sub will merge (the "Merger") with and into ASCOR, (ii) each share of common stock, no par value, of ASCOR ("ASCOR Common Stock") and any other shares of ASCOR stock which shall have previously been converted into Ascor Common Stock (except for shares of ASCOR stock as to which dissenters' rights, if available, shall have been perfected) shall be converted into the right to receive a fraction of a share of common stock, no par value, of Giga-tronics ("Giga-tronics Common Stock"), in the manner and amount herein described, and (iii) the capital stock of Merger Sub shall be converted into shares of ASCOR Common Stock, all upon the terms and subject to the conditions set forth herein. B. The Board of Directors of ASCOR has approved, and has resolved to recommend that the shareholders of ASCOR approve, the Merger and this Agreement. C. The respective Boards of Directors of Giga-tronics and Merger Sub have approved the Merger and this Agreement. The Board of Directors of Giga-tronics has resolved to recommend that the shareholders of Giga-tronics approve the Merger and this Agreement. Giga-tronics, as the sole shareholder of Merger Sub, has approved the Merger and this Agreement. D. The parties intend for the transactions contemplated by this Agreement to qualify as a tax-free reorganization in accordance with the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and to be accounted for as a pooling of interests transaction. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, the parties agree as follows: 1. 120 ARTICLE I THE MERGER SECTION 1.01 THE MERGER. (a) Subject to the terms and conditions hereof, and in accordance with the General Corporation Law of California, Merger Sub will be merged with and into ASCOR (the "Merger"), as soon as practicable following the satisfaction or waiver of the conditions set forth in Article VI hereof. Following the Merger, ASCOR shall continue as the surviving corporation (the "Surviving Corporation"), and the separate corporate existence of Merger Sub shall cease. (b) Concurrent with the Closing (as defined in subsection (d) below), Giga-tronics, and ASCOR and Merger Sub shall file an agreement of merger in the form attached hereto as Exhibit 1.01 (the "Agreement of Merger") in the Office of the Secretary of State of the State of California in accordance with California Law. The Merger shall become effective at such time as the Agreement of Merger is duly filed in the Office of the Secretary of State of the State of California (the date of such filing being hereinafter referred to as the "Effective Date" and the time of such filing being hereinafter referred to as the "Effective Time"). (c) From and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, powers and franchises and be subject to all of the restrictions, disabilities and duties of ASCOR and Merger Sub, all as provided under California Law. (d) The closing of the transactions contemplated by this Agreement (the "Closing") shall take place on June 27, 1996 at the offices of Brobeck Phleger & Harrison LLP, One Market Plaza, San Francisco, CA 94105, or at such other date and place as Giga-tronics and ASCOR may agree. The date of the Closing determined pursuant to this Section 1.01(d) is referred to as the "Closing Date." SECTION 1.02 CONVERSION OF SHARES. (a) At the Effective Time: (i) Subject to Section 1.05 hereof, at the Effective Time each issued and outstanding share of ASCOR Common Stock, Series A Preferred Stock of ASCOR (the "ASCOR Series A Shares"), Series B Preferred Stock of ASCOR (the "ASCOR Series B Shares") and Series C Preferred Stock of ASCOR (the "ASCOR Series C Shares" and collectively with the ASCOR Series A Shares and the ASCOR Series B Shares, the "ASCOR Preferred Shares") issued and outstanding immediately prior to the Effective Time (other than Dissenting ASCOR Shares (as defined in Section 1.04 hereof)) shall automatically, by virtue of the Merger and without any action on the part of the holder thereof, be converted into a right to 2. 121 receive the number of shares of Giga-tronics Common Stock as is determined pursuant to this Section 1.02. The ASCOR Common Stock and ASCOR Preferred Shares are collectively referred to herein as the "ASCOR Shares." A maximum total of 724,986 shares of Giga-tronics Common Stock (the "Merger Consideration") will be issued in the Merger, including (1) shares issuable in respect of any warrants for the purchase of ASCOR Common Shares ("ASCOR Common Warrants") and warrants for the purchase of any series of ASCOR preferred stock ("ASCOR Preferred Warrants") (the ASCOR Common Warrants and the ASCOR Preferred Warrants are referred to collectively as the "ASCOR Warrants") which remain outstanding at the Effective Time, (2) shares deemed surrendered on exercise of any ASCOR Warrant for which a deemed net exercise pursuant to Section 1.06 below has been made; (3) shares that would have been issued to holders of Dissenting ASCOR Shares; and (4) fractional shares that would have been issuable but for Section 1.05 below. (ii) The Agreement of Merger to be filed shall contain the final exchange ratio (the "Exchange Ratio") for ASCOR Shares into Giga-tronics Common Stock and shall be equal to 724,986 divided by the fully diluted number of ASCOR Shares outstanding at the Effective Time (the "ASCOR Outstanding Equivalent Number"). The ASCOR Outstanding Equivalent Number shall be equal to the sum of (1) the number of ASCOR Shares outstanding at the Effective time; plus (2) the total number of ASCOR Shares which would be issuable on the exercise of any ASCOR Warrants or ASCOR Options (as such terms are defined below). All ASCOR Shares shall be exchangeable into Giga-tronics Common Stock at the same Exchange Ratio. (b) If between the date of this Agreement and the Effective Time, the number of outstanding ASCOR Shares or shares of Giga-tronics Common Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split-up, combination, exchange of shares or the like, the Exchange Ratio shall be correspondingly adjusted. SECTION 1.03 EXCHANGE OF CERTIFICATES. (a) Giga-tronics (or such third party as Giga-tronics shall appoint) shall act as Exchange Agent (the "Exchange Agent") for delivery of the Merger Consideration to the ASCOR shareholders and, if applicable, the cash to which holders of ASCOR shares shall be entitled pursuant to Section 1.05 hereof. (b) As soon as practicable after the Effective Time, the Exchange Agent shall mail to each holder of record (other than Giga-tronics or Merger Sub or any other subsidiary of Giga-tronics) of a certificate or certificates which immediately prior to the Effective Time represented issued and outstanding ASCOR Shares (individually a "Certificate" and collectively the "Certificates"), a letter of transmittal for return to the Exchange Agent which shall specify that delivery shall be effected, and risk of loss and the 3. 122 title to the Certificates shall pass, only upon receipt of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with and in accordance with such letter of transmittal, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration that such holder is entitled to receive pursuant to Section 1.02(a) hereof. Upon such surrender the Exchange Agent shall promptly deliver such Merger Consideration. (c) Until surrendered, each Certificate shall be deemed for all purposes to evidence only the right to receive the Merger Consideration into which ASCOR Shares formerly represented thereby shall have been converted pursuant to Section 1.02(a) hereof. No dividends or other distribution declared after the Effective Time with respect to Giga- tronics Common Stock shall be paid to the holders of any unsurrendered Certificate until the holder thereof surrenders such Certificate. (d) After the Effective Time there shall be no transfers on the stock transfer books of either ASCOR (the stock transfer books of which shall be closed) or the Surviving Corporation of ASCOR Shares which were outstanding immediately prior to the Effective Time. If after the Effective Time Certificates are presented for transfer to the Exchange Agent, together and in accordance with the letter of transmittal from the Exchange Agent, they shall be cancelled and exchanged for the Merger Consideration. SECTION 1.04 DISSENTING SHARES. ASCOR Shares that have not been voted for approval of this Agreement and with respect to which a demand for payment and appraisal shall have been properly made in accordance with Chapter 13 of the General Corporation Law of California ("Dissenting ASCOR Shares") shall not be converted into the right to receive the Merger Consideration at or after the Effective Time but shall be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting ASCOR Shares pursuant to the law of the State of California. If a holder of Dissenting ASCOR Shares ("Dissenting Shareholder"), shall withdraw his or her demand for such payment and appraisal or shall become ineligible for such payment and appraisal, then, as of the Effective Time of the occurrence of such event of withdrawal or ineligibility, whichever last occurs, such holder's Dissenting ASCOR Shares shall cease to be Dissenting ASCOR Shares and shall be converted into the right to receive, and shall be exchangeable for, the Merger Consideration into which such Dissenting ASCOR Shares would have been converted pursuant to Section 1.02(a) hereof. ASCOR shall give Giga-tronics prompt notice of any demand received by ASCOR from a holder of Dissenting ASCOR Shares for appraisal of ASCOR Shares, and Giga-tronics shall have the right to participate in all negotiations and proceedings with respect to such demand. ASCOR agrees that, except with the prior written consent of Giga-tronics, or as required under the General Corporation Law of California, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such demand for appraisal. Each Dissenting Shareholder who, pursuant to the provisions of Chapter 13 of the General Corporation Law of California, becomes entitled to payment of the value of shares of ASCOR stock shall receive payment therefor (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions). Any Merger Consideration which would have been issuable with respect to Dissenting ASCOR Shares shall be retained by Giga-tronics. 4. 123 SECTION 1.05 FRACTIONAL SHARES. Notwithstanding any other provision of this Agreement to the contrary, no fractional shares of Giga-tronics Common Stock shall be issued in connection with the Merger. All shares of Giga-tronics Common Stock to which a holder of ASCOR Shares is entitled immediately prior to the Effective Time shall be aggregated. If a fractional share results from such aggregation, in lieu of any such fractional share, each holder of ASCOR Shares who would otherwise have been entitled to receive a fraction of a share of Giga-tronics Common Stock upon surrender of Certificates for exchange pursuant to Section 1.03 shall be entitled to receive from the Exchange Agent a cash payment equal to such fraction multiplied by the closing sale price per share of Giga-tronics Common Stock on the last business day on which Giga-tronics Common Stock is traded on the NASD, prior to the Effective Time. SECTION 1.06 ASCOR STOCK OPTIONS AND WARRANTS. (a) Except as described below in Section 1.06(b), Giga-tronics will not assume any options for the purchase of ASCOR Shares (an "ASCOR Option") or ASCOR Warrants. At the Effective Time, outstanding ASCOR Options and ASCOR Warrants shall be deemed exercised for such number of shares of Giga-tronics Common Stock as would be exchanged in the Merger for the ASCOR Shares which would have been issued had such ASCOR Options or ASCOR Warrants been exercised in full and such ASCOR Shares been outstanding immediately prior to the Effective Time, subject to the following provisions of this Section 1.06. Such deemed exercise of ASCOR Options and ASCOR Warrants shall be on a "net exercise" basis. The full number of shares issuable on exercise of such ASCOR Warrant or ASCOR Option (including such number of shares as are deemed surrendered in the net exercise) shall be added to the ASCOR Outstanding Equivalent Number as described in Section 1.02 above. The value of the ASCOR Shares issuable on the exercise of any ASCOR Warrant or ASCOR Option for purposes of determining the number of ASCOR Shares to be surrendered in the deemed net exercise shall be equal to the number of ASCOR Shares issuable on exercise of such ASCOR Warrant or ASCOR Option, multiplied by the Exchange Ratio, multiplied by the average closing price of a share of Giga-tronics Stock on such stock exchange as Giga-tronics Stock is then traded for the five (5) business days immediately preceding the Closing Date. Shares of Giga-tronics Common Stock which would otherwise be issuable in respect of the ASCOR Shares deemed surrendered upon such net exercise shall be retained by Giga-tronics. (b) Notwithstanding the foregoing, any ASCOR Warrant which, based upon the foregoing determination of the value of ASCOR Shares issuable on its exercise, would be "out-of-the-money" shall be assumed by Giga-tronics. An ASCOR Warrant shall be deemed out-of-the-money if its exercise price per share is greater than the value of such share as determined in Section 1.06(a) above. Any assumed ASCOR Warrant shall remain outstanding and exercisable in accordance with its terms except that (1) it shall be exercisable for such number of shares of Giga-tronics Common Stock as equals the number of ASCOR Shares for which it was exercisable multiplied by the Exchange Ratio and (2) the exercise price per share of such warrant shall be the exercise price as stated on such warrant divided by the Exchange Ratio. The number of shares of Giga-tronics Common Stock as would be issuable on exercise in full of any ASCOR Warrants assumed shall be 5. 124 reserved out of the Merger Consideration. If any ASCOR Warrant assumed by Giga-tronics pursuant to this Section 1.06 shall expire unexercised in full or in part, the Giga-tronics Common Stock which would have been issuable on exercise shall be retained by Giga-tronics and not otherwise issued. SECTION 1.07 NO REGISTRATION OF GIGA-TRONICS COMMON STOCK. The parties acknowledge and agree that the Giga-tronics Common Stock to be issued pursuant to the Merger will be issued pursuant to a transaction not involving a public offering and therefore will be characterized as "restricted securities" under federal securities laws. The parties further acknowledge and agree that pursuant to the Securities Act of 1933, as amended (the "Securities Act") the Giga-tronics Common Stock so issued may be resold without registration under the Securities Act only in certain limited circumstances. It is understood that the Certificates issued pursuant to the Merger will bear the following legend: "These securities have not been registered under the Securities Act of 1993, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." Giga-tronics shall be under no obligation to effect a registration statement with respect to Giga-tronics Common Stock received in the Merger other than as required pursuant to the Registration Rights Agreement (as such term is defined in Section 10.01 below). ARTICLE II THE SURVIVING CORPORATION SECTION 2.01 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of the Surviving Corporation shall be amended at the Effective Time to conform to the Certificate of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time. SECTION 2.02 BYLAWS. The Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation, until thereafter amended in accordance with applicable law. SECTION 2.03 DIRECTORS AND OFFICERS. From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with applicable law, the directors of Merger Sub at the Effective Time shall become the initial directors of the Surviving Corporation, and the officers of ASCOR at the Effective Time shall become the initial officers of the Surviving Corporation. 6. 125 ARTICLE III REPRESENTATIONS AND WARRANTIES OF ASCOR Except as disclosed in a document referring specifically to this Agreement (the "ASCOR Disclosure Schedule") which is delivered by ASCOR to Giga-tronics no less than five days prior to the execution of this Agreement (which shall contain appropriate and reasonably detailed references to each representation and warranty to which any item there disclosed pertains), ASCOR represents and warrants to Giga-tronics as set forth below: SECTION 3.01 CORPORATE EXISTENCE AND POWER. ASCOR is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals (collectively, "Governmental Authorizations") required to carry on its business as now conducted. ASCOR is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary. ASCOR has delivered to Giga-tronics true and complete copies of ASCOR's Articles of Incorporation and Bylaws as currently in effect. SECTION 3.02 CORPORATE AUTHORIZATION. The execution, delivery and performance by ASCOR of this Agreement, the ASCOR and Giga-tronics Affiliates Agreements (as defined in Sections 5.09 and 6.08 respectively, hereof) and the consummation by ASCOR of the transactions contemplated hereby and thereby are within ASCOR's corporate powers and have been duly authorized by all necessary corporate action, except for the approval by ASCOR's shareholders in connection with the consummation of the Merger. The ASCOR and Giga-tronics Affiliates Agreement are collectively referred to herein as the "ASCOR Ancillary Agreements." This Agreement and the ASCOR Ancillary Agreements constitute, or upon execution will constitute, valid and binding agreements of ASCOR, enforceable against ASCOR in accordance with their respective terms. SECTION 3.03 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by ASCOR of this Agreement, the ASCOR Ancillary Agreements and the Agreement of Merger and the consummation of the Merger by ASCOR require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than: (a) the filing of the Agreement of Merger in accordance with California Law; (b) compliance with any applicable requirements of the Hart-Scott- Rodino Antitrust Improvements Act of 1976 (the "HSR Act"); (c) compliance with any applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; 7. 126 (d) compliance with any applicable foreign or state securities or "blue sky" laws; and (e) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain would not materially adversely affect the ability of ASCOR, Giga-tronics or Merger Sub to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. SECTION 3.04 NON-CONTRAVENTION. The execution, delivery and performance by ASCOR of this Agreement, the ASCOR Ancillary Agreements and the Certificate of Merger and the consummation by ASCOR of the transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with the Articles of Incorporation or Bylaws of ASCOR; (b) assuming compliance with the matters referred to in Section 3.03 and assuming the requisite approval of ASCOR's shareholders of the Merger, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to ASCOR; (c) conflict with or result in a breach or violation of, or constitute a default under, or result in the termination or cancellation of, or right to accelerate, any agreement, contract or other instrument binding upon ASCOR or any license, franchise, permit or other similar authorization held by ASCOR; or (d) result in the creation or imposition of any Lien (as defined below) on any asset of ASCOR. For purposes of this Agreement, the term "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. SECTION 3.05 CAPITALIZATION. The authorized capital stock of ASCOR consists of 30,000,000 shares of ASCOR Common Stock and 5,712,283 shares of ASCOR Preferred Stock. As of the date hereof, there are outstanding: (a) 3,947,375 shares of ASCOR Common Stock; (b) 2,340,425 ASCOR Series A Shares, 2,000,000 ASCOR Series B Shares and 909,091 ASCOR Series C Shares; (c) ASCOR Preferred Warrants for the purchase of 68,409 ASCOR Preferred Shares and ASCOR Common Warrants for the purchase of 5,119,395 shares of 8. 127 ASCOR Common Stock. The exercise prices of said warrants is $0.55 per warrant for the ASCOR Preferred Warrants and $0.07 per warrant for the ASCOR Common Warrants; (d) No ASCOR Options for the purchase of any ASCOR Shares; and 5,119,395 shares of ASCOR Common Stock reserved for issuance upon exercise of outstanding ASCOR Warrants and ASCOR Options. All outstanding ASCOR Common Shares have been duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in this Section and as otherwise contemplated by this Agreement, there are outstanding (i) no shares of capital stock or other voting securities of ASCOR, (ii) no securities of ASCOR convertible into or exchangeable for shares of capital stock or voting securities of ASCOR and (iii) no options or other rights to acquire from ASCOR, and no obligation of ASCOR to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or other voting securities of ASCOR (the items in clauses (i), (ii) and (iii) being referred to collectively as the "ASCOR Securities"). There are no outstanding obligations of ASCOR to repurchase, redeem or otherwise acquire any ASCOR Securities. No holder of ASCOR Securities has, as of the date hereof, any contractual right to include any such securities in any registration statement proposed to be filed by Giga-tronics under the Securities Act. SECTION 3.06 SUBSIDIARIES AND INVESTMENTS. ASCOR does not own, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, joint venture or other entity. SECTION 3.07 FINANCIAL STATEMENTS. ASCOR has delivered to Purchaser copies (initialled by ASCOR's Secretary and identified with a reference to this Section of this Agreement) of financial statements (hereinafter collectively called the "Financial Statements"), all of which are complete and correct, have been prepared in accordance with generally accepted accounting principles consistently applied and maintained throughout the periods indicated and fairly present the financial condition of ASCOR as at their respective dates and the results of its operations for the periods covered thereby, as follows: balance sheets of ASCOR as at March 30, 1996 and March 25, 1995 and March 26, 1994 and the related audited statements of earnings and cash flows for the years then ended, audited by KPMG Peat Marwick LLP, independent certified public accountants. The audited balance sheet of ASCOR as at March 30, 1996 (the "ASCOR Balance Sheet Date") is referred to herein as the "ASCOR Balance Sheet." Such statements of earnings do not contain any items of special or nonrecurring income or any other income not earned in the ordinary course of business except as expressly specified therein, and such interim financial statements include all adjustments, which consist only of normal recurring accruals, necessary for such fair presentation. SECTION 3.08 ABSENCE OF CHANGES OR EVENTS. Since the ASCOR Balance Sheet Date ASCOR has conducted its business only in the ordinary course consistent with its prior practices and has not: 9. 128 (a) incurred any obligation or liability, absolute, accrued, contingent or otherwise, whether due or to become due, except current liabilities for trade or business obligations incurred in connection with the purchase of goods or services in the ordinary course of business and consistent with its prior practice, none of which liabilities, in any case or in the aggregate, materially and adversely affects the business, liabilities or financial condition of ASCOR; (b) discharged or satisfied any lien, charge or encumbrance other than those then required to be discharged or satisfied, or paid any obligation or liability, absolute, accrued, contingent or otherwise, whether due or to become due, other than current liabilities shown on the Balance Sheet and current liabilities incurred since the Balance Sheet Date in the ordinary course of business and consistent with its prior practice; (c) declared or made any payment of dividends or other distribution to its shareholders or upon or in respect of any shares of its capital stock, or purchased, retired or redeemed, or obligated itself to purchase, retire or redeem, any of its shares of capital stock or other securities; (d) mortgaged, pledged or subjected to lien, charge, security interest or any other encumbrance or restriction any of its property, business or assets, tangible or intangible; (e) sold, transferred, leased to others or otherwise disposed of any of its assets, except for inventory sold in the ordinary course of business, or cancelled or compromised any debt or claim, or waived or released any right of substantial value; (f) received any notice of termination of any contract, lease or other agreement or suffered any damage, destruction or loss (whether or not covered by insurance) which in any case or in the aggregate, has had a materially adverse effect on the assets, operations or prospects of ASCOR; (g) encountered any labor union organizing activity, had any actual or threatened employee strikes, work stoppages, slow-downs or lock-outs, or had any material change in its relations with its employees, agents, customers or suppliers or with any governmental authorities or self-regulatory organizations; (h) transferred or granted any rights under, or entered into any settlement regarding the breach or infringement of, any United States or foreign license, patent, copyright, trademark, trade name, invention or similar rights, or modified any existing rights with respect thereto; (i) made any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, or paid or agreed or orally promised to pay, conditionally or otherwise, any bonus, extra compensation, pension or severance or vacation pay, to any shareholder, director, officer, employee, salesman, distributor or agent of ASCOR; 10. 129 (j) issued or sold any shares of its capital stock or other securities, or issued, granted or sold any options, rights or warrants with respect thereto, or acquired any capital stock or other securities of any corporation or any interest in any business enterprise, or otherwise made any loan or advance to or investment in any person, firm or corporation; (k) made any capital expenditures or capital additions or betterments in excess of an aggregate of $50,000; (l) changed its banking or safe deposit arrangements; (m) instituted, settled or agreed to settle any litigation, action or proceeding before any court or governmental body relating to ASCOR or its property; (n) failed to replenish its inventories and supplies in a normal and customary manner consistent with its prior practice and prudent business practices prevailing in the industry, or made any purchase commitment in excess of the normal, ordinary and usual requirements of its business or at any price in excess of the then current market price or upon terms and conditions more onerous than those usual and customary in the industry, or made any change in its selling, pricing, advertising or personnel practices inconsistent with its prior practice and prudent business practices prevailing in the industry; (o) suffered any change, event or condition which, in any case or in the aggregate, has had or may have a materially adverse effect on ASCOR's condition (financial or otherwise), properties, assets, liabilities, operations or prospects, including, without limitation, any change in ASCOR's revenues, costs, backlog or relations with its employees, agents, customers, or suppliers; (p) entered into any transaction, contract or commitment other than in the ordinary course of business or paid or agreed to pay any legal, accounting, brokerage, finder's fee, taxes or other expenses in connection with, or incurred any severance pay obligations by reason of, this Agreement or the transactions contemplated hereby; or (q) entered into any agreement or made any commitment to take any of the types of action described in subparagraphs (a) through (p) above. SECTION 3.09 NO UNDISCLOSED LIABILITIES. There are no liabilities of ASCOR or any of its Subsidiaries, including contingent liabilities, of the type required to be reflected in financial statements (including the notes thereto) under generally accepted accounting principles that are material to ASCOR, other than: (a) liabilities disclosed or provided for in the ASCOR Balance Sheet (including the notes thereto); (b) liabilities incurred in the ordinary course of business consistent with past practice since the ASCOR Balance Sheet Date and which do not exceed $100,000 in the aggregate; 11. 130 (c) liabilities incurred other than in the ordinary course of business and which do not exceed $25,000 in the aggregate; and (d) liabilities under this Agreement. SECTION 3.10 LITIGATION. There is no action, suit, proceeding, claim or investigation pending or, to the best of ASCOR's knowledge, overtly threatened, against ASCOR or any of its assets or against or involving any of its officers, directors or employees in connection with the business or affairs of ASCOR, including, without limitation, any claims for indemnification arising under any agreement to which ASCOR is a party, which could, individually or in the aggregate, have a Material Adverse Effect on ASCOR or which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated hereby. ASCOR is not subject to or in default with respect to any writ, order, judgment, injunction or decree, which would have a Material Adverse Effect on ASCOR. SECTION 3.11 TAXES. (a) For purposes of this Agreement, "Tax" or "Taxes" means any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any governmental or taxing authority including, without limitation: taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes; license, registration and documentation fees; and customs' duties, tariffs, and similar charges. (b) Except as described in Schedule 3.11 of the ASCOR Disclosure Schedule, (i) ASCOR has filed all federal, state, local and foreign tax returns and reports required to be filed by it and has paid and discharged all Taxes shown as due thereon and has paid all of such other Taxes as are due, other than (a) such filings, payments or other occurrences that would not have a Material Adverse Effect; (ii) neither the IRS nor any other taxing authority or agency, domestic or foreign, is now asserting or, to the best knowledge of ASCOR after due inquiry, threatening to assert against ASCOR any deficiency or claim for additional Taxes or interest thereon or penalties in connection therewith; (iii) ASCOR has not granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any federal, state, county, municipal or foreign income Tax; (iv) the accruals and reserves for Taxes reflected in the ASCOR Balance Sheet and the most recent quarterly financial statements are adequate to cover all Taxes accruable through the date thereof (including interest and penalties, if any, thereon) in accordance with generally accepted accounting principals; (v) ASCOR has not made an election under Section 341(f) of the Code; (vi) ASCOR has withheld or collected and paid over to the appropriate governmental authorities or is properly holding for such payment all Taxes required by law to be withheld or collected, except for such failures to have so withheld or collected and paid over or to be so holding for payment which would not have a Material 12. 131 Adverse Effect and (vii) there are no material liens for Taxes upon the assets of ASCOR, other than liens for Taxes that are being contested in good faith by appropriate proceedings. (c) ASCOR is not party to or bound by, nor has any obligation under any Tax sharing, Tax indemnity or Tax allocation or similar agreement. SECTION 3.12 INSURANCE. ASCOR maintains the policies of fire, liability, use and occupancy and other forms of insurance covering its properties and businesses set forth in the ASCOR Disclosure Schedule. Such policies are in full force and effect. SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA. Schedule 3.13 of the ASCOR Disclosure Schedule lists (i) all the employee benefit plans, programs and arrangements maintained for the benefit of any current or former employee, officer or director of ASCOR (the "Plans") and (ii) all contracts and agreements relating to employment that provide for annual compensation in excess of $75,000 and all severance agreements, with any of the directors, officers or employees of ASCOR (other than, in each case, any such contract or agreement that is terminable by ASCOR at will without penalty or other adverse consequence) (the "Employment Contracts"). Giga-tronics has been furnished with a copy of each Plan, any summary plan descriptions, annual reports, actuarial reports, registration statements or other securities law filings and determination letters produced or filed with respect thereto, and each Employment Contract. Except as set forth in Section 3.13 of the ASCOR Disclosure Schedule: (i) none of the Plans is a multiemployer plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (ii) none of the Plans promises or provides retiree medical or life insurance benefits to any person; (iii) each Plan intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service (the "IRS") that it is so qualified and nothing has occurred since the date of such letter to affect the qualified status of such Plan; (iv) none of the Plans promises or provides severance benefits or benefits contingent upon a change in ownership or control, within the meaning of Section 280G of the Code; (v) each Plan has been operated in all material respects in accordance with its terms and the requirements of applicable law; (vi) no Plan is or has been covered by Title IV of ERISA or Section 412 of the Code; (vii) ASCOR has not incurred any direct or indirect liability under, arising out of or by operation of Title IV of ERISA in connection with the termination of, or withdrawal from, any Plan or other retirement plan or arrangement, and no fact or event exists that could give rise to any such liability; and (viii) ASCOR has not incurred any liability under, and has complied in all respects with, the Worker Adjustment Retraining Notification Act, and no fact or event exists that could give rise to liability under such act. SECTION 3.14 MATERIAL AGREEMENTS. (a) The ASCOR Disclosure Schedule includes a complete and accurate list of all contracts, agreements, leases and instruments to which ASCOR is a party or by which it or its properties or assets are bound which individually involve payments or receipts in excess of $25,000, inclusive of contracts entered into with customers and suppliers in the ordinary course of business, or that pertain to employment or severance benefits for any 13. 132 officer, director or employee of ASCOR, whether written or oral (each a "Material ASCOR Agreement"). (b) Neither ASCOR nor, to the knowledge of ASCOR, any other party is in default under any Material ASCOR Agreement and no event has occurred which (after notice or lapse of time or both) would become a breach or default under, or would permit modification, cancellation, acceleration or termination of any Material ASCOR Agreement or result in the creation of any security interest upon, or any person obtaining any right to acquire, any properties, assets or rights of ASCOR. (c) Each Material ASCOR Agreement is in full force and effect and is valid and legally binding, there are, to the knowledge of ASCOR, no unresolved disputes involving or with respect to any Material ASCOR Agreement, and no party to a Material ASCOR Agreement has advised ASCOR that it intends either to terminate a Material ASCOR Agreement or to refuse to renew a Material ASCOR Agreement upon the expiration of the term thereof. (d) ASCOR is not in violation of, or in default with respect to, any term of its Certificate of Incorporation or any material term of its Bylaws. SECTION 3.15 REAL PROPERTY; LEASES. (a) The ASCOR Disclosure Schedule includes a correct and complete list of all items of real property, including leased property, and any material buildings, structures and improvements located thereon or therein, which are owned or leased by ASCOR. (b) To ASCOR's knowledge, with respect to any real property of ASCOR, including any leased property, and any material buildings, structures and improvements located thereon or therein, such buildings, fixtures and improvements, and the present use thereof, are not the subject of any official complaint or notice of violation of any applicable zoning ordinance, building code or environmental laws, and such premises are not affected or threatened by any condemnation or eminent domain proceeding. (c) All leases of real property and all material leases of personal property by ASCOR are in full force and effect and, to ASCOR's knowledge, there exists no default on the part of ASCOR which would interfere with the use made and proposed to be made of such real and personal property, and, except for leases of personal property terminated in the ordinary course of business, upon consummation of the Merger, will continue to entitle ASCOR to the use and possession of the real or personal property purported to be covered thereby for the terms specified in such leases and for the purposes for which such real or personal property is now used. SECTION 3.16 TITLE TO ASSETS. ASCOR has good, marketable and insurable title to all the properties and assets it owns or uses in its business or purports to own, including, without limitation, those reflected in its books and records and in the Balance Sheet (except 14. 133 inventory sold after the Balance Sheet Date in the ordinary course of business). None of such properties and assets are subject to any mortgage, pledge, lien, charge, security interest, encumbrance, restriction, lease, license, easement, liability or adverse claim of any nature whatsoever, except (i) mortgages or security interests shown on the Balance Sheet as securing specific liabilities or obligations or (ii) those imperfections of title and encumbrances, if any, which, individually or in the aggregate, (A) are not substantial in character, amount or extent and do not materially detract from the value of the properties subject thereto, (B) do not interfere with either the present and continued use of such property or the conduct of ASCOR's normal operations and (C) have arisen only in the ordinary course of business. All of the properties and assets owned, leased or used by ASCOR are in good operating condition and repair, are suitable for the purposes used, are adequate and sufficient for all current operations of ASCOR and are directly related to the business of ASCOR. SECTION 3.17 ENVIRONMENTAL MATTERS. (a) For purposes of this Agreement, the following terms shall have the following meanings: (i) "Hazardous Substances" means (A) those substances defined in or regulated under the following United States federal statutes and their state or foreign counterparts, as each may be amended from time to time, and all regulations thereunder: the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the Federal Insecticide, Fungicide, and Rodenticide Act and the Clean Air Act; (B) petroleum and petroleum products including crude oil and any fractions thereof; (C) natural gas, synthetic gas, and any mixtures thereof; (D) radon; (E) asbestos; (F) any other pollutant or contaminant; and (G) any substance with respect to which a federal, state or local agency requires environmental investigation, monitoring, reporting or remediation; and (ii) "Environmental Laws" means any United States or foreign, federal, state or local law relating to (A) releases or threatened releases of Hazardous Substances or materials containing Hazardous Substances; (B) the manufacture, handling, transport, use, treatment, storage or disposal of Hazardous Substances or materials containing Hazardous Substances; or (C) otherwise relating to pollution of the environment or the protection of human health. (b) Except as would not have a Material Adverse Effect: (i) ASCOR has not violated and is not in violation of any Environmental law; (ii) there has been no contamination, disposal, spilling, dumping, incineration, discharge, storage, treatment or handling of any Hazardous Substance, on or from any of the properties owned or leased by ASCOR (including, without limitation, soils and surface and ground waters); (iii) ASCOR is not liable for any off-site contamination; (iv) ASCOR is not liable under any Environmental Law; (v) ASCOR has all permits, licenses and other authorizations required under any Environmental Law ("Environmental Permits"); (vi) ASCOR has been and is in compliance with its Environmental Permits; and (vii) there are no pending, or, to the best knowledge of ASCOR after due inquiry, threatened claims against ASCOR relating to any Environmental Law or Hazardous Substance. 15. 134 SECTION 3.18 INTELLECTUAL PROPERTY. No claim is pending or, to the knowledge of ASCOR, threatened to the effect that the present or past operations of ASCOR infringes upon or conflicts with the rights of others with respect to any intellectual property (including, without limitation, licenses, patents, patent rights, patent applications, trademarks, trademark applications, trade names, copyrights, drawings, trade secrets, know-how and computer software) necessary to permit ASCOR to conduct its business as now operated (the "ASCOR Intellectual Property"), except as disclosed in the ASCOR Disclosure Schedule, no claim is pending or, to the best knowledge of ASCOR, threatened to the effect that any of the ASCOR Intellectual Property is invalid or unenforceable. ASCOR has provided Giga-tronics with a list of all licenses, patents, patent rights, patent applications, trademarks, trademark applications, trade names, copyrights and service marks of ASCOR and each of its subsidiaries. Except as set forth in the ASCOR Disclosure Schedule, no contract, agreement or understanding between ASCOR or any of its subsidiaries and any other party exists which would impede or prevent the continued use by ASCOR and its subsidiaries of the entire right, title and interest of ASCOR and its subsidiaries in and to the ASCOR Intellectual Property. SECTION 3.19 NO GUARANTIES. None of the obligations or liabilities of ASCOR is guaranteed by, or subject to a similar contingent liability of, any other person, firm or corporation, nor has ASCOR guaranteed, or otherwise become contingently liable for, the obligations or liabilities of any other person, firm or corporation. SECTION 3.20 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither ASCOR nor any officer, employee or agent of ASCOR, nor any other person acting on its behalf, has, directly or indirectly, within the past five years given or agreed to give any gift or similar benefit to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of ASCOR (or assist ASCOR in connection with any actual or proposed transaction) which (a) might subject ASCOR to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (b) if not given in the past, might have had an adverse effect on the assets, business or operations of ASCOR as reflected in the Financial Statements or (c) if not continued in the future, might adversely affect ASCOR's assets, business, operations or prospects or which might subject ASCOR to suit or penalty in any private or governmental litigation or proceeding. SECTION 3.21 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS. ASCOR had complied with all existing laws, rules, regulations, ordinances, orders, judgments and decrees now applicable to its business, properties or operations as presently conducted. Neither the ownership nor use of ASCOR's properties nor the conduct of its business conflicts with the rights of any other person, firm or corporation or violates, or with or without the giving of notice or the passage of time, or both, will violate, conflict with or result in a default, right to accelerate or loss of rights under, any terms or provisions of its certificate of incorporation or by-laws as presently in effect, or any lien, encumbrance, mortgage, deed of trust, lease, license, agreement, understanding, law, ordinance, rule or regulation, or any order, judgment or decree to which ASCOR is a party or by which it may be bound or affected. Neither ASCOR nor any Shareholder is aware of any proposed laws, rules, regulations, ordinances, orders, judgments, decrees, governmental takings, condemnations 16. 135 or other proceedings which would be applicable to its business, operations or properties and which might adversely affect its properties, assets, liabilities, operations or prospects, either before or after the Closing. SECTION 3.22 DISCLOSURE DOCUMENTS. None of the information supplied or to be supplied by ASCOR for inclusion in the proxy statement relating to the meeting of Giga-tronics's shareholders to be held in connection with the Merger (the "Proxy Statement") at the time of mailing of the Proxy Statement to shareholders of Giga-tronics, and at the time of the meeting of Giga-tronics shareholders to be held in connection with the Merger, contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder, except that no representation is made by ASCOR with respect to information supplied by Giga-tronics or Merger Sub for inclusion therein. SECTION 3.23 TAX MATTERS. Neither ASCOR nor any of its affiliates has taken or agreed to take any action that would prevent the Merger from being effected as a pooling of interests or would prevent the Merger from constituting a transaction qualifying under Section 368(a) of the Code. Neither ASCOR nor any of its affiliates or agents is aware of any agreement, plan or other circumstances that would prevent the Merger from qualifying under Section 368(a) of the Code and to their best knowledge after due inquiry, the Merger will so qualify. SECTION 3.24 ACCOUNTING MATTERS. Schedule 3.24 of the ASCOR Disclosure Schedule sets forth all persons who, as of the date of this Agreement, may be deemed to be affiliates of ASCOR under Rule 145 of the Securities Act or otherwise under applicable SEC accounting releases with respect to pooling-of-interests accounting treatment. Prior to the date hereof, ASCOR has advised such persons of the resale restrictions imposed by applicable securities Laws and required to cause the Merger to qualify for pooling-of-interests accounting treatment. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF GIGA-TRONICS Except as disclosed in a document referring specifically to this Agreement (the "Giga- tronics Disclosure Schedule) which is delivered by Giga-tronics to ASCOR concurrently with the execution of this Agreement or as disclosed in public filings made by Giga-tronics with the SEC prior to the date hereof, Giga-tronics represents and warrants to ASCOR as set forth below: SECTION 4.01 CORPORATE EXISTENCE AND POWER. Giga-tronics and Merger Sub are corporations duly incorporated, validly existing and in good standing under the laws of the State of California. Each of Giga-tronics and Merger Sub has all corporate powers and all 17. 136 material Governmental Authorizations required to carry on its business as now conducted. Giga-tronics is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary. Giga-tronics has delivered to ASCOR true and complete copies of Giga-tronics's Articles of Incorporation and Bylaws and Merger Sub's Articles of Incorporation and Bylaws, each as currently in effect. SECTION 4.02 CORPORATE AUTHORIZATION. The execution, delivery and performance by Giga-tronics and Merger Sub of this Agreement, the ASCOR and the Giga-tronics Affiliates Agreements and the consummation by Giga-tronics and Merger Sub of the transactions contemplated hereby and thereby are within the corporate powers of Giga-tronics and Merger Sub and have been duly authorized by all necessary corporate action. The ASCOR and Giga-tronics Affiliates Agreements are collectively referred to herein as the "Giga-tronics Ancillary Agreements." This Agreement and the Giga-tronics Ancillary Agreements constitute, or upon execution will constitute, valid and binding agreements of Giga-tronics and Merger Sub, enforceable in each case against each in accordance with their respective terms. SECTION 4.03 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by Giga-tronics and Merger Sub of this Agreement and the Giga-tronics Ancillary Agreements and the consummation of the Merger by Giga-tronics and Merger Sub, require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than: (a) the filing of an agreement of merger in accordance with California Law; (b) compliance with any applicable requirements of the HSR Act; (c) compliance with any applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; (d) compliance with any applicable requirements of the Securities Act and the rules and regulations promulgated thereunder; (e) compliance with any applicable foreign or state securities or "blue sky" laws; and (f) such other filings or registrations with, or authorizations, consents or approvals of, governmental bodies, agencies, officials or authorities, the failure of which to make or obtain would not materially adversely affect the ability of ASCOR, Giga-tronics or Merger Sub to consummate the transactions contemplated hereby and operate their businesses as heretofore operated. 18. 137 SECTION 4.04 NON-CONTRAVENTION. The execution, delivery and performance by Giga-tronics and Merger Sub of this Agreement and the Giga-tronics Ancillary Agreements and the consummation by Giga-tronics and Merger Sub of the transactions contemplated hereby and thereby do not and will not: (a) contravene or conflict with the respective Articles of Incorporation or Bylaws of Giga-tronics or Merger Sub; (b) assuming compliance with the matters referred to in Section 4.03, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to Giga-tronics, Merger Sub or any Subsidiary of Giga-tronics; (c) conflict with or result in a breach or violation of, or constitute a default under, or result in the termination or cancellation of, or right to accelerate, any agreement, contract or other instrument binding upon Giga-tronics or Merger Sub or any such Subsidiary or any material license, franchise, permit or other similar authorization held by Giga-tronics, Merger Sub or any such Subsidiary; or (d) result in the creation or imposition of any Lien on any asset of Giga-tronics, Merger Sub or any Subsidiary of Giga-tronics. SECTION 4.05 CAPITALIZATION OF GIGA-TRONICS. (a) The authorized capital stock of Giga-tronics consists of 40,000,000 shares of Giga-tronics Common Stock and 1,000,000 shares of preferred stock. As of the date hereof, there were outstanding: (i) 2,603,420 shares of Giga-tronics Common Stock; and (ii) employee and director stock options to purchase an aggregate of 156,150 shares of Giga-tronics Common Stock. Giga-tronics has authorized the issuance of employee rights to purchase 400,000 shares of Giga-tronics Common Stock under Giga-tronics's 1990 Restated Stock Option Plan (the "Giga-tronics Stock Option Plan"). All outstanding shares of Giga-tronics Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and free from any preemptive rights. Except as set forth in this Section and as otherwise contemplated by this Agreement, there are outstanding (i) no shares of capital stock or other voting securities of Giga-tronics, (ii) no securities of Giga-tronics convertible into or exchangeable for shares of capital stock or voting securities of Giga-tronics and (iii) no options or other rights to acquire from Giga-tronics, and no obligation of Giga-tronics to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or other voting securities of Giga-tronics (the items in clauses (i), (ii) and (iii) being referred to collectively as the "Giga-tronics Securities"). There are no outstanding obligations of Giga-tronics or any of its Subsidiaries to repurchase, redeem or otherwise 19. 138 acquire any Giga-tronics Securities. No holder of Giga-tronics Securities has, as of the date hereof, any contractual right to include any such securities in any registration statement proposed to be filed by Giga-tronics under the Securities Act. (b) All shares of Giga-tronics Common Stock issued in the Merger shall, upon issuance, be fully paid, validly issued and nonassessable. Giga-tronics has reserved sufficient shares of Giga-tronics Common Stock for issuance in the Merger based on the number of ASCOR Shares outstanding on the date hereof. SECTION 4.06 CAPITALIZATION OF MERGER SUB; SUBSIDIARIES. The authorized capital stock of Merger Sub consists of 1,000 shares of common stock, no par value, all of which are outstanding. All the issued and outstanding capital stock of Merger Sub is owned by Giga-tronics. Merger Sub has not conducted any business prior to the date hereof and has no assets, liabilities or obligations of any nature other than those incident to its formation and pursuant to this Agreement. Giga-tronics does not own, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, joint venture or other entity other than Merger Sub. SECTION 4.07 SEC FILINGS. (a) Giga-tronics has since March 27, 1993 filed all proxy statements, schedules and reports required to be filed by it with the SEC pursuant to the Exchange Act. (b) Giga-tronics has delivered to ASCOR: (i) its annual reports on Form 10-K for its fiscal years ended March 26, 1994 and March 25, 1995; (ii) its quarterly report on Form 10-Q for its fiscal quarter ending June 24, September 30 and December 30, 1995; (iii) its proxy or information statements relating to meetings of, or actions taken without a meeting by, the shareholders of Giga-tronics held since March 31, 1994; and (iv) all of its other reports, statements, schedules and registration statements filed with the SEC since March 31, 1994. (c) As of its filing date, no such report or statement filed pursuant to the Exchange Act contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (d) No such registration statement, as amended or supplemented, if applicable, filed pursuant to the Securities Act, as of the date such statement or amendment became effective, contained any untrue statement of a material fact or omitted to state any 20. 139 material fact required to be stated therein or necessary to make the statements therein not misleading. SECTION 4.08 FINANCIAL STATEMENTS. The audited financial statements Giga-tronics included in its annual reports on Form 10-K and the unaudited financial statements of Giga-tronics included in its quarterly reports on Form 10-Q referred to in Section 4.07 present fairly, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Giga-tronics as of the dates thereof and its results of operations, shareholders' equity and cash flows for the periods then ended (subject to normal year-end adjustments in the case of any interim financial statements). For purposes of this Agreement, "Giga-tronics Balance Sheet" means the balance sheet of Giga-tronics as of December 30, 1995, and the notes thereto, contained in Giga-tronics's quarterly report on Form 10-Q filed for its fiscal quarter then ended, and "Giga-tronics Balance Sheet Date" means December 30, 1995. SECTION 4.09 DISCLOSURE DOCUMENTS. None of the information supplied or to be supplied by Giga-tronics or Merger Sub for inclusion in the Proxy Statement and the Registration Statement, will, in the case of the Proxy Statement, at the time of mailing of the Proxy Statement to shareholders of Giga-tronics and at the time of the meeting of such shareholders to be held in connection with the Merger, contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading or will, in the case of the Registration Statement, at the time the Registration Statement becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Registration Statement and Proxy Statement will comply as to form in all material respects with the provisions of the Securities Act and Exchange Act, respectively, and the rules and regulations thereunder, except that no representation is made by Giga-tronics with respect to information supplied by ASCOR for inclusion therein. SECTION 4.10 ABSENCE OF CERTAIN CHANGES. Since the Giga-tronics Balance Sheet Date Giga-tronics and its Subsidiaries have in all material respects conducted their business in the ordinary course and there has not been: (a) any Material Adverse Change with respect to Giga-tronics; (b) any declaration, setting aside or payment of any dividend or other distribution in respect of any shares of capital stock of Giga-tronics; (c) any repurchase, redemption or other acquisition by Giga-tronics or any of its Subsidiaries of any outstanding shares of capital stock or other securities of, or other ownership interests in, Giga-tronics or any such Subsidiary; (d) any amendment of any material term of any outstanding Giga-tronics Securities or any Giga-tronics Subsidiary Securities; 21. 140 (e) any damage, destruction or other casualty loss (whether or not covered by insurance) materially and adversely affecting the business, assets, liabilities, earnings or prospects of Giga-tronics or any of its Subsidiaries; (f) any new (or amendment to or alteration of any existing) bonus, incentive compensation, severance, stock option, stock appreciation right, pension, matching gift, profit-sharing, employee stock ownership, retirement, pension group insurance, death benefit, or other fringe benefit plan, arrangement or trust agreement adopted or implemented by Giga-tronics which would result in a material increase in cost to Giga-tronics; (g) the entering into of any agreement by Giga-tronics or any person on behalf of Giga-tronics to take any of the foregoing actions. SECTION 4.11 LITIGATION. There is no action, suit, proceeding, claim or investigation pending or, to the best of Giga-tronics's knowledge, overtly threatened, against Giga-tronics or any of its assets or against or involving any of its officers, directors or employees in connection with the business or affairs of Giga-tronics, including, without limitation, any claims for indemnification arising under any agreement to which Giga-tronics is a party, which could, individually or in the aggregate, have a Material Adverse Effect on Giga-tronics or which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated hereby. Giga-tronics is not subject to or in default with respect to any writ, order, judgment, injunction or decree, which would have a Material Adverse Effect on Giga-tronics. SECTION 4.12 ADVISOR'S FEES. Except for an investment banking firm which may be selected by Giga-tronics (the "Giga-tronics Financial Advisor") following the date hereof to render a fairness opinion in connection with the transactions contemplated by the terms of this Agreement, whose fees will be disclosed in writing to ASCOR and whose fees will be paid by Giga-tronics, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Giga-tronics or any of its Subsidiaries who is entitled to any fee or commission from Giga-tronics or any of its affiliates upon consummation of the transactions contemplated by this Agreement. ARTICLE V COVENANTS OF ASCOR ASCOR agrees that: SECTION 5.01 CONDUCT OF ASCOR. From the date hereof until the Effective Time, ASCOR shall in all material respects conduct its business in the ordinary course. Without limiting the generality of the foregoing, from the date hereof until the Effective Time, except as contemplated hereby or previously disclosed by ASCOR to Giga-tronics in writing, without the prior written consent of Giga-tronics: 22. 141 (a) ASCOR will not adopt or propose any change in its Articles of Incorporation or Bylaws; (b) ASCOR will not enter into or amend any employment agreements, oral or written or increase the compensation payable or to become payable by it to any of its officers, directors, or consultants over the amount payable as of December 31, 1995, or increase the compensation payable to any other employees (other than (A) increases in the ordinary course of business which are not in the aggregate material to ASCOR, or (B) pursuant to plans disclosed in ASCOR Disclosure Schedule), or adopt or amend any employee benefit plan or arrangement (oral or written); (c) Except pursuant to the exercise of ASCOR Options or ASCOR Warranties already outstanding, ASCOR will not issue any ASCOR Securities; (d) ASCOR will keep in full force and effect its existing directors' and officers' liability insurance and will not modify or reduce the coverage thereunder; (e) ASCOR will not pay any dividend or make any other distribution to holders of its capital stock nor will ASCOR redeem or otherwise acquire any ASCOR Securities; (f) ASCOR will not, directly or indirectly, merge or consolidate with another entity or dispose of or acquire any material properties or assets except in the ordinary course of business; (g) ASCOR will not incur any additional indebtedness for borrowed money in excess of $50,000 in the aggregate, except pursuant to existing arrangements which have been disclosed to Giga-tronics prior to the date hereof; (h) ASCOR will not amend or change the period of exercisability or accelerate the exercisability of any outstanding options or warrants to acquire shares of capital stock, or accelerate, amend or change the vesting period of any outstanding restricted stock; (i) Except as provided in Section 5.04, ASCOR will not enter into any transaction that would require the Proxy Statement to be delayed or recirculated under circumstances which would in the reasonable judgment of Giga-tronics delay the occurrence of the Effective Date beyond the date specified in Section 9.01(viii); (j) ASCOR will not, except in the ordinary course of business consistent with past practices, sell, license or otherwise transfer to any person any ASCOR intellectual property rights; and (k) ASCOR will not agree or commit to do any of the foregoing. 23. 142 SECTION 5.02 SHAREHOLDERS' MEETING; PROXY MATERIAL. ASCOR shall cause a meeting of its shareholders to be duly called and held as soon as reasonably practicable or shall seek the written consent of its shareholders following the approval of the Proxy Statement for the purpose of voting on (or in the case of a written consent, consenting to) the approval and adoption of this Agreement and the Merger. The Board of Directors of ASCOR shall, subject to their fiduciary duties, recommend approval and adoption of this Agreement and the Merger by ASCOR's shareholders. In connection with such meeting or seeking of written consent, ASCOR: (a) will, together with Giga-tronics and Merger Sub, promptly prepare and file with the SEC, will use all reasonable efforts to have cleared by the SEC and will thereafter deliver to its shareholders as promptly as practicable the Proxy Statement and all other proxy materials for such meeting; (b) will use all reasonable efforts to obtain the necessary approvals by its shareholders of this Agreement and the transactions contemplated hereby; and (c) will otherwise comply with all legal requirements applicable to such meeting. SECTION 5.03 ACCESS TO FINANCIAL AND OPERATION INFORMATION. From the date hereof until the Effective Time, ASCOR will give Giga-tronics, its counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours to the offices, properties, books and records of ASCOR, will furnish to Giga- tronics, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data as such persons may reasonably request and will instruct ASCOR's employees, counsel and financial advisors to cooperate with Giga-tronics in its investigation of the business of ASCOR and in the planning for the combination of the businesses of ASCOR and Giga-tronics following the consummation of the Merger; provided that no investigation pursuant to this Section shall affect any representation or warranty given by ASCOR to Giga-tronics hereunder. In addition, ASCOR will cooperate in arranging joint meetings among representatives of ASCOR and Giga-tronics and persons with whom ASCOR maintains business relationships. All requests for information made pursuant to this Section shall be directed to the Controller of ASCOR or such person as may be designated by him. All information obtained pursuant to this Section 5.03 shall be governed by any confidentiality agreements currently in effect between Giga-tronics and ASCOR as well as the terms of Section 5.08 of this Agreement. SECTION 5.04 OTHER OFFERS. From the date hereof until the earlier of the Effective Date or the termination of this Agreement in accordance with the terms hereof, ASCOR and the officers, directors, employees or other agents of ASCOR will not, directly or indirectly, (i) take any action to solicit, initiate or encourage the making of any Acquisition Proposal (as hereinafter defined); or (ii) engage in negotiations with, or disclose any nonpublic information relating to ASCOR or afford access to the properties, books or records of ASCOR to, any person or entity that informs the Board of Directors that it is considering making, or has made, an Acquisition Proposal. Until this Agreement shall be 24. 143 terminated in accordance with the terms hereof, ASCOR will not enter into any agreement to merge or consolidate with, or sell a substantial portion of its assets to, any person or entity. ASCOR will promptly notify Giga-tronics after receipt of any Acquisition Proposal or any request for nonpublic information relating to ASCOR in connection with an Acquisition Proposal or for access to the properties, books or records of ASCOR by any person or entity that informs the Board of Directors that it is considering making, or has made, an Acquisition Proposal. The term "Acquisition Proposal" shall mean (i) any merger, consolidation, tender offer or other similar transaction or related transactions pursuant to which the holders of the voting securities of ASCOR prior to the transaction hold following the consummation of such transaction less than 80% of the voting securities of the surviving entity, (ii) a sale of a material portion of the assets of ASCOR, or (iii) any equity or convertible debt transaction or related transactions in which any person or group of affiliated persons other than current security holders of ASCOR acquire securities of ASCOR representing more than 20% of the aggregate voting power of ASCOR's outstanding securities, other than in each case the transactions contemplated by this Agreement. For purposes of the foregoing definition, one person shall be deemed to be affiliated with a second person if such first person controls, is controlled by or is under common control with the second person, and control, for purposes hereof, shall be deemed to exist only in the event there exists ownership of or the right to vote, in either case directly or indirectly, securities representing more than 50% of the aggregate voting power of an entity's outstanding securities. SECTION 5.05 MAINTENANCE OF BUSINESS. ASCOR will use its best efforts to carry on its business, keep available the services of its officers and employees and preserve its relationships with those of its customers, suppliers, licensors and others having business relationships with it that are material to its business in substantially the same manner as it has prior to the date hereof. If ASCOR becomes aware of a material deterioration or facts which are likely to result in a material deterioration in the relationship with any material customer, supplier, licensor or others having business relationships with it, it will promptly bring such information to the attention of the Giga-tronics in writing. SECTION 5.06 COMPLIANCE WITH OBLIGATIONS. Prior to the Effective Date, ASCOR shall comply with (i) all applicable federal, state, local and foreign laws, rules and regulations, (ii) all material agreements and obligations, including its Articles of Incorporation and Bylaws, by which it, its properties or its assets may be bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to ASCOR and its properties or assets. SECTION 5.07 NOTICES OF CERTAIN EVENTS. ASCOR shall, upon obtaining knowledge of any of the following, promptly notify Giga-tronics of: (a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the Merger; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the Merger; and 25. 144 (c) any actions, suits, claims, investigations or other judicial proceedings commenced or threatened against ASCOR which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Sections 3.10 or 3.20 or which relate to the consummation of the Merger. SECTION 5.08 CONFIDENTIALITY. ASCOR agrees that for a period of three years following any termination of this Agreement ASCOR shall not (a) disclose to any person, association, firm, corporation or other entity in any manner, directly or indirectly, any confidential information or data relevant to the operations of Giga-tronics whether of a technical or commercial nature, nor (b) use, or permit or assist, by acquiescence or otherwise, any person, association, firm, corporation or other entity to use, directly or indirectly, any such information or data in any manner which reasonably would be deemed to be competitive with the operations of Giga-tronics excepting only use of (i) information in the public domain at the time of disclosure to ASCOR (ii) information subsequently coming into the public domain by means other than disclosure by ASCOR or any of its agents (iii) information ASCOR can establish and document was in its possession or was known to it prior to its disclosure to ASCOR by Giga-tronics; (iv) information disclosed to ASCOR by a third party not in violation of any obligation of confidentiality or nondisclosure known to ASCOR or of which ASCOR should reasonably have known; or (v) information which was independently developed by ASCOR or which is generally known in ASCOR's industry. SECTION 5.09 COMPLIANCE WITH THE SECURITIES ACT. ASCOR shall prior to 15 days after signing but in any event prior to mailing of the Proxy Statement cause each person who is an "affiliate," as that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act, of ASCOR to deliver to Giga-tronics an Affiliates Agreement in substantially the form attached hereto as Exhibit 5.09 (an "ASCOR Affiliates Agreement"). ARTICLE VI COVENANTS OF GIGA-TRONICS AND MERGER SUB Giga-tronics and Merger Sub agree that: SECTION 6.01 CONDUCT OF GIGA-TRONICS. From the date hereof until the Effective Time, Giga-tronics and its Subsidiaries shall in all material respects conduct their business in the ordinary course. Without limiting the generality of the foregoing, from the date hereof until the Effective Time, except as contemplated hereby or previously disclosed by Giga-tronics to ASCOR in writing, without the prior written consent of ASCOR: (a) Giga-tronics will not adopt or propose any changes in its Certificate of Incorporation or Bylaws (other than those contemplated by the Giga-tronics Reincorporation); 26. 145 (b) Except pursuant to the exercise of options described in Section 4.05 or stock purchase rights under Giga-tronics's Stock Option Plan and except the granting of stock options in the ordinary course of business consistent with past practice, Giga-tronics will not issue any Giga-tronics Securities; (c) Giga-tronics will not pay any dividend or make any other distribution to holders of its capital stock nor will Giga-tronics or any of its Subsidiaries redeem or otherwise acquire any Giga-tronics Securities; (d) Giga-tronics will not, directly or indirectly, merge or consolidate with another entity or dispose of or acquire any material properties or assets except in the ordinary course of business; (e) Giga-tronics shall take no extraordinary actions affecting its capital structure (e.g., declaration of stock dividends or stock splits); (f) Giga-tronics will not except, in the ordinary course of business consistent with past practices, sell, license or otherwise transfer to any person any Giga-tronics intellectual property rights or any intellectual property rights of any of its Subsidiaries; and (g) Giga-tronics will not, and will not permit any of its Subsidiaries to, agree or commit to do any of the foregoing. SECTION 6.02 SHAREHOLDERS' MEETING; PROXY MATERIAL. Giga-tronics shall promptly prepare and file with the SEC under the Securities Act the Proxy Statement and shall use all reasonable efforts to cause the Proxy Statement to be approved as promptly as practicable. Giga-tronics shall cause a meeting of its shareholders (the "Giga-tronics Shareholders' Meeting") to be duly called and held as soon as reasonably practicable following the approval of the Proxy Statement for the purpose of voting on the approval and adoption of this Agreement and the Merger. Giga-tronics shall take any action required to be taken under foreign or state securities or "blue sky" laws in connection with the issuance of Giga-tronics Common Stock in the Merger. SECTION 6.03 MAINTENANCE OF BUSINESS. Giga-tronics will use its best efforts to carry on its business, keep available the services of its officers and employees and preserve its relationships with those of its customers, suppliers, licensors and other persons having business relationships with it that are material to its business in substantially the same manner as it has prior to the date hereof. If Giga-tronics becomes aware of a material deterioration or facts which are likely to result in a material deterioration in the relationship with any customer, supplier, licensor or others having business relationships with it, it will promptly bring such information to the attention of ASCOR in writing. SECTION 6.04 COMPLIANCE WITH OBLIGATIONS. Prior to the Effective Date, Giga-tronics and its Subsidiaries shall each comply with (i) all applicable federal, state, local and foreign laws, rules and regulations, (ii) all material agreements and obligations, including 27. 146 its respective certificate or articles of incorporation and bylaws, by which it, its properties or its assets may be bound, and (iii) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to Giga-tronics and its Subsidiaries and their respective properties or assets. SECTION 6.05 NOTICES OF CERTAIN EVENTS. Giga-tronics shall, upon obtaining knowledge of any of the following, promptly notify ASCOR of: (a) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the Merger; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the Merger; and (c) any actions, suits, claims, investigations or other judicial proceedings commenced or threatened against Giga-tronics or any of its Subsidiaries which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 4.11 or which relate to the consummation of the Merger. SECTION 6.06 CONFIDENTIALITY. Giga-tronics agrees that for a period of three years following any termination of this Agreement Giga-tronics shall not (a) disclose to any person, association, firm, corporation or other entity in any manner, directly or indirectly, any confidential information or data relevant to the operations of ASCOR, whether of a technical or commercial nature, nor (b) use, or permit or assist, by acquiescence or otherwise, any person, association, firm, corporation or other entity to use, directly or indirectly, any such information or data in any manner which reasonably would be deemed to be competitive with the operations of ASCOR excepting only use of (i) information in the public domain at the time of disclosure to Giga-tronics (ii) information subsequently coming into the public domain by means other than disclosure by Giga-tronics or any of its agents (iii) information Giga-tronics can establish and document was in its possession or was known to it prior to its disclosure to Giga-tronics by ASCOR; (iv) information disclosed to Giga-tronics by a third party not in violation of any obligation of confidentiality or nondisclosure known to Giga-tronics or of which Giga-tronics should reasonably have known; or (v) information which was independently developed by Giga-tronics or which is generally known in ASCOR's industry. SECTION 6.07 OBLIGATIONS OF MERGER SUB. Giga-tronics will take all action necessary to cause Merger Sub to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. Merger Sub will not issue any shares of its capital stock, any securities convertible into or exchangeable for its capital stock, or any option, warrant or other right to acquire its capital stock to any Person other than Giga-tronics or a wholly owned Subsidiary of Giga-tronics. Merger Sub shall not incur any indebtedness or liabilities of any kind except pursuant to this Agreement. 28. 147 SECTION 6.08 COMPLIANCE WITH THE SECURITIES ACT. Giga-tronics shall use its best efforts to cause each person who is an "affiliate," as that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act, of Giga-tronics to enter on or prior to the Effective Date an Affiliates Agreement in substantially the form attached hereto as Exhibit 6.08 (a "Giga-tronics Affiliates Agreement"). ARTICLE VII OTHER COVENANTS OF THE PARTIES The Parties agree that: SECTION 7.01 ADVICE OF CHANGES. Each party will promptly advise each other party in writing (i) of any event known to its executive officers occurring subsequent to the date of this Agreement that would render any representation or warranty of such party contained in this Agreement, if made on or as of the date of such event or the Effective Date, untrue, inaccurate or misleading in any material respect (other than an event so affecting a representation or warranty which is expressly limited to a state of facts existing at a time prior to the occurrence of such event) and (ii) of any Material Adverse Change in the business condition of the party and its Subsidiaries, taken as a whole. SECTION 7.02 REGULATORY APPROVALS. Prior to the Effective Time, each party shall execute and file, or join in the execution and filing of, any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be reasonably required, or that the other company may reasonably request, in connection with the consummation of the Merger. Each party shall use its reasonable best efforts to obtain all such authorizations, approvals and consents. SECTION 7.03 ACTIONS CONTRARY TO STATED INTENT. No party hereto shall, from or after the date hereof and either before or after the Effective Time, take any action that would prevent the Merger from qualifying as a reorganization under Section 368 of the Code. SECTION 7.04 CERTAIN FILINGS. The Parties shall cooperate with one another: (a) in connection with the preparation of the Proxy Statement; (b) in connection with the preparation of any filing required by the HSR Act; (c) in determining whether any action by or in respect of, or filing with, any governmental body, agency or official, or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement; and 29. 148 (d) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith or with the Proxy Statement and seeking timely to obtain any such actions, consents, approvals or waivers. SECTION 7.05 COMMUNICATIONS. Between the date hereof and the Effective Time, no party will furnish any written communication to its shareholders or to the public generally if the subject matter thereof relates to the transactions contemplated by this Agreement without the prior approval of ASCOR and Giga-tronics as to the content thereof, which approval shall not be unreasonably withheld; provided that the foregoing shall not be deemed to prohibit any disclosure required by any applicable law or by any competent governmental authority. SECTION 7.06 SATISFACTION OF CONDITIONS PRECEDENT. The parties will use their reasonable best efforts to satisfy or cause to be satisfied all the conditions precedent that are set forth in Article VIII, as applicable to each of them, and to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby. ARTICLE VIII CONDITIONS TO THE MERGER SECTION 8.01 CONDITIONS TO OBLIGATIONS OF GIGA-TRONICS AND MERGER SUB. The obligations of Giga-tronics and Merger Sub hereunder are subject to the fulfillment or satisfaction, on and as of the Effective Date, of each of the following conditions (any one or more of which may be waived by Giga-tronics, but only in a writing signed by Giga-tronics): (a) Accuracy of Representations and Warranties. The representations and warranties of ASCOR contained in Article III shall be true and accurate in all material respects on and as of the Effective Date with the same force and effect as if they had been made on the Effective Date (except to the extent a representation or warranty speaks only as of an earlier date) and ASCOR shall have provided Giga-tronics with a certificate executed by the President and the Chief Financial Officer of ASCOR, dated as of the Effective Date, to such effect; provided, however, that any inaccuracy of a representation or warranty, on the date hereof or on the Effective Date, shall not result in the non-satisfaction of this Section 8.01(a) unless any such inaccuracy or inaccuracies, either (i) individually or in the aggregate, represent a Material Adverse Effect on ASCOR or (ii) are willful and intentional misrepresentations of a material matter that constitute common law fraud. For purposes of this Agreement, a "Material Adverse Effect," with respect to any person or entity, means a material adverse effect on the financial condition, business, liabilities (including contingent liabilities) or results of operations of such person or entity and its 30. 149 subsidiaries, taken as a whole; and "Material Adverse Change" shall mean a change or a development involving a prospective change which would have a Material Adverse Effect. (b) Covenants. ASCOR shall have performed and complied with all of its covenants contained in Articles V and VII in all material respects on or before the Effective Date, and Giga-tronics shall receive a certificate to such effect signed by ASCOR's President and Chief Financial Officer. (c) No Material Adverse Change. There shall have been no Material Adverse Change in ASCOR since the ASCOR Balance Sheet Date. (d) Affiliates Agreements. Giga-tronics shall have received from each person or entity who may be deemed pursuant to Section 5.09 to be an affiliate of ASCOR a duly executed Affiliates Agreement, and such Affiliates Agreements shall remain in full force and effect. (e) Satisfactory Completion of Due Diligence Review. Giga-tronics shall have completed its due diligence review of the business, operations and financial condition of ASCOR by May 24, 1996 and such review shall not have revealed any facts or circumstances which in the reasonable judgment of Giga-tronics could have a Material Adverse Effect on ASCOR. If such due diligence review shall reveal facts or circumstances which in the reasonable judgement of Giga-tronics could have a Material Adverse Effect on ASCOR, Giga-tronics shall promptly notify ASCOR of its determination or shall be deemed to have waived compliance with this condition. (f) Pooling of Interests Matters. In the sole discretion of Giga-tronics, the Merger shall qualify for accounting treatment as a pooling of interests in accordance with Accounting Principles Board Release No. 16. In determining whether the Merger so qualifies Giga-tronics may consider the impact on such qualification of ASCOR Shares which are voted against the Merger or which have abstained from voting with respect to the Merger. (g) Giga-tronics Dissenters' Rights. Shareholders of Giga-tronics shall not have perfected dissenters' rights with respect to Giga-tronics Common Stock with respect to five percent (5%) or more of the Giga-tronics Common Stock outstanding on the date of the Giga-tronics Shareholder Meeting. (h) ASCOR Preferred Stock. As of the Closing Date all shares of ASCOR Preferred Stock outstanding as of the date of this Agreement shall (i) have remained outstanding (ii) shall have been tendered at the Closing with instructions that such shares are to be exchanged at the Effective Time for Giga-tronics Common Stock in accordance with the terms of this Agreement, and (iii) not have been transferred by the owners of such shares as of the date of this Agreement to any other person. SECTION 8.02 CONDITIONS TO OBLIGATIONS OF ASCOR. ASCOR's obligations hereunder are subject to the fulfillment or satisfaction, on and as of the Effective Date, of 31. 150 each of the following conditions (any one or more of which may be waived by ASCOR, but only in a writing signed by ASCOR): (a) Accuracy of Representations and Warranties. The representations and warranties of Giga-tronics set forth in Article IV shall be true and accurate in all material respects on and as of the Effective Date with the same force and effect as if they had been made on the Effective Date (except to the extent a representation or warranty speaks only as of an earlier date and except for changes contemplated by this Agreement) and Giga-tronics shall have provided ASCOR with a certificate executed by the President and the Chief Financial Officer of Giga-tronics, dated as of the Effective Date, to such effect; provided, however, that any inaccuracy of a representation or warranty, on the date hereof or on the Effective Date, shall not result in the non-satisfaction of this Section 8.02(a) unless any such inaccuracy or inaccuracies, either (i) individually or in the aggregate, represent a Material Adverse Effect on Giga-tronics or (ii) are willful and intentional misrepresentations that constitute common law fraud of a material matter. (b) Covenants. Giga-tronics shall have performed and complied with all of its covenants contained in Section 2.03 and Articles VI and VII in all material respects on or before the Effective Date, and ASCOR shall receive a certificate to such effect signed by Giga-tronics's President and Chief Financial Officer. (c) No Material Adverse Change. There shall have been no Material Adverse Change in Giga-tronics since the Giga-tronics Balance Sheet Date. SECTION 8.03 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective obligations of ASCOR and Giga-tronics hereunder are subject to the fulfillment, on and as of the Effective Date, of each of the following conditions (any one or more of which may be waived by such parties, but only in a writing signed by such parties): (a) Shareholder Approval. Each of ASCOR's shareholders and Giga-tronics' shareholders shall have duly approved this Agreement, the Merger Agreement and the Merger, all in accordance with applicable laws and regulatory requirements. (b) Tax-Free Reorganization. Each of ASCOR and Giga-tronics shall have received a written opinion from Brobeck, Phleger & Harrison LLP ("Brobeck") to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code, which opinions shall be substantially identical in form and substance. In preparing ASCOR and the Giga-tronics tax opinions, Brobeck may rely on (and to the extent reasonably required, the parties and ASCOR's shareholders shall make) reasonable representations related thereto. (c) Illegality or Legal Constraint. No statute, rule, regulation, executive order, decree, injunction or restraining order shall have been enacted, promulgated or enforced (and not repealed, superseded or otherwise made inapplicable) by any court or governmental authority which prohibits the consummation of the Merger (each party 32. 151 agreeing to use its reasonable best efforts to have any such order, decree or injunction lifted). (d) Consents. All written consents, assignments, waivers or authorizations ("Consents"), other than Governmental Authorizations, that are required as a result of the Merger for the continuation in full force and effect of any material contracts or leases of ASCOR or Giga-tronics shall have been obtained, other than those Consents the failure of which to obtain would not have a Material Adverse Effect on ASCOR or Giga-tronics. (e) Governmental Authorizations. There shall have been obtained any and all Governmental Authorizations, permits, approvals and consents of securities or "blue sky" commissions of any jurisdiction and of any other governmental body or agency, that may reasonably be deemed necessary so that the consummation of the Merger will be in compliance with applicable laws, the failure to comply with which would have a Material Adverse Effect on Giga-tronics, ASCOR or the Surviving Corporation or would be reasonably likely to subject any of Giga-tronics, Merger Sub, ASCOR or any of their respective directors or officers to substantial penalties or criminal liability. (f) HSR Act. The waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. ARTICLE IX TERMINATION OF AGREEMENT SECTION 9.01 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time whether before or after the approval by the shareholders of ASCOR or Giga-tronics: (i) by mutual consent of the Boards of Directors of Giga-tronics, Merger Sub and ASCOR; (ii) by either Giga-tronics and Merger Sub or ASCOR, if the requisite vote of the shareholders of Giga-tronics shall not have been obtained or the written consent of shareholders of ASCOR shall not be obtained by December 31, 1996; (iii) by Giga-tronics, if it is not in material breach of its obligations under this Agreement and if the Board of Directors of ASCOR shall have: (A) withdrawn its recommendation of the Merger, or 33. 152 (B) recommended or approved any acceptance by shareholders of any Acquisition Proposal (other than an Acquisition Proposal made by Giga-tronics or an affiliate of Giga-tronics); or (iv) by ASCOR, if it is not in material breach of its obligations under this Agreement and if the Board of Directors of Giga-tronics shall have: (A) withdrawn its recommendation of the Merger, or (B) recommended or approved any acceptance by shareholders of any Acquisition Proposal (other than an Acquisition Proposal made by ASCOR or an affiliate of ASCOR); or (v) by either Giga-tronics and Merger Sub or ASCOR, respectively, (A) if there has been a breach of any representation and warranty such that Section 8.01(a) or 8.02(a), respectively, cannot be satisfied or (B) if there has been the willful breach on the part of ASCOR or Giga-tronics and Merger Sub, respectively, of any covenant or agreement contained in this Agreement such that Sections 8.01(b) or 8.02(b) cannot be satisfied, and in both case (A) and case (B) such breach has not been promptly cured after notice to the breaching party; or (vi) by Giga-tronics, if the conditions contained in Section 8.02(f), (g) or (h) are not satisfied; or (vii) by Giga-tronics, if ASCOR shall have issued any ASCOR Securities between the date of this Agreement and the Closing Date without the prior consent of Giga-tronics; or (viii) by either Giga-tronics and Merger Sub or ASCOR, respectively, at any time after December 31, 1996, unless the delay is caused by the failure of the terminating party to fulfill its obligations hereunder. SECTION 9.02 EFFECT OF TERMINATION. In the event of termination of this Agreement as provided above, this Agreement shall forthwith become void, and there shall be no liability on the part of either Giga-tronics, Merger Sub or ASCOR, except that each of the agreements contained or referred to in Sections 5.08, 6.06 and 11.02 shall survive the termination hereof; provided, however, that each party shall be entitled to any remedies at law or in equity in the event of a breach of this Agreement by the other party, except as provided in Sections 11.02(b) and (c). 34. 153 ARTICLE X ADDITIONAL AGREEMENTS OF THE PARTIES SECTION 10.01 REGISTRATION RIGHTS AGREEMENT. Concurrent with the Effective Time Giga-tronics will execute and deliver to the ASCOR Share holders a Registration Rights Agreement substantially in the form of Exhibit 10.01 hereto. ARTICLE XI MISCELLANEOUS SECTION 11.01 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to better evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. SECTION 11.02 FEES AND EXPENSES. Whether or not the Merger is consummated, each party shall pay all fees and expenses incurred by such party, including counsel fees and fees of accountants and investment bankers contracted by such party, and any other expenses specifically identifiable to such party in connection with the transactions contemplated hereby. Any other costs and expenses not specifically identified as applicable to either ASCOR or Giga-tronics shall be shared equally. SECTION 11.03 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made herein, and in any instrument delivered pursuant hereto, shall be deemed to be conditions to the Merger and shall not survive the Merger. SECTION 11.04 NOTICES. Any notice or communication required or permitted by this Agreement shall be deemed sufficiently given if in writing and, if delivered personally, when it is delivered or, if delivered in another manner, the earlier of when it is actually received by the party to whom it is directed or when the period set forth below expires (whether or not it is actually received): (a) if deposited with the U.S. Postal Service, postage prepaid, and addressed to the party to receive it as set forth below, 48 hours after such deposit as registered or certified mail; or (b) if accepted by Federal Express or a similar delivery service in general usage for delivery to the address of the party to receive it as set forth next below, 24 hours after the delivery time promised by the delivery service. 35. 154 Giga-tronics and Merger Sub: Giga-tronics Incorporated 4650 Norris Canyon Road San Ramon, CA 94583 Attention: George H. Bruns, Jr. Chief Executive Officer Facsimile: (510) 328-4700 With copy to: Brobeck, Phleger & Harrison LLP Spear Street Tower One Market Plaza San Francisco, CA 94105 Attention: William L. Hudson, Esq. Facsimile: (415) 442-1010 ASCOR: ASCOR, Inc. 47790 Westinghouse Drive Fremont, CA 94539 Attention: Jeffrey Lum President Facsimile: (510) 490-8493 With copy to: Brian Fraser, Esq. Attorney at Law 6114 La Salle Avenue, Suite 646 Oakland, CA 94611 Facsimile: (510) 839-3461 Such communications shall be effective when they are received by the addressee thereof. Any party may change its address for such communications by giving notice thereof to the other parties in conformity with this Section. SECTION 11.05 GOVERNING LAWS. The laws of the State of California (irrespective of its choice of law principles) shall govern all issues concerning the Merger and all other issues concerning the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties. SECTION 11.06 BINDING UPON SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Agreement and the provisions hereof shall be binding upon each of the parties, their permitted successors and assigns. This Agreement may not be assigned by any party without the prior consent of the other. 36. 155 SECTION 11.07 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall for any reason or to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances shall continue in full force and effect and in no way be affected, impaired or invalidated. SECTION 11.08 ENTIRE AGREEMENT. This Agreement and the other agreements and instruments referenced herein constitute the entire understanding and agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto other than the Confidentiality Agreement. SECTION 11.09 OTHER REMEDIES. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party shall be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law on such party, and the exercise of any one remedy shall not preclude the exercise of any other. SECTION 11.10 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof or default in the performance hereof shall not be deemed to constitute a waiver of any other default or any succeeding breach or default. At any time before or after approval of this Agreement and the Merger by the shareholders of ASCOR and prior to the Effective Time, this Agreement may be amended or supplemented by ASCOR or Giga-tronics with respect to any of the terms contained in this Agreement, except that following approval by the shareholders of ASCOR there shall be no amendment or change to the provisions hereof with respect to the Exchange Ratio without further approval by the shareholders of ASCOR, and no other amendment shall be made which by law requires further approval by such shareholders without such further approval. SECTION 11.11 NO WAIVER. The failure of any party to enforce any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce such provisions. SECTION 11.12 CONSTRUCTION OF AGREEMENT; KNOWLEDGE. A reference to an Article, Section or an Exhibit shall mean an Article of, a Section in, or Exhibit to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and shall not in any manner limit the construction of this Agreement which shall be considered as a whole. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." For purposes of this Agreement, "knowledge" of any party shall mean the knowledge of the executive officers of such party after such officers shall have made inquiry that is customary and appropriate under the circumstances to which reference is made. 37. 156 SECTION 11.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original as against any party whose signature appears thereon and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the paries reflected hereon as signatories. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. GIGA-TRONICS INCORPORATED R. HATCH By:___________________________________ _________________________________ Name: George H. Bruns, Jr. Title: Chief Executive Officer ASCOR ACQUISITION CORP. DOMINION PARTNERS By:___________________________________ By:______________________________ Name:_________________________________ Name:____________________________ Title:________________________________ Firm:____________________________ ASCOR, INC. SBH ASSOCIATES, INC. By:___________________________________ By:______________________________ Name:_________________________________ Name:____________________________ Title:________________________________ Firm:____________________________ [CONTINUES ON NEXT PAGE] 38. 157 CONTINENTAL CAPITAL EUCLID PARTNERS III L.P. CORPORATION By:___________________________________ By:______________________________ Name:_________________________________ Name:____________________________ Firm: ________________________________ Title:___________________________ SPECTRA ENTERPRISES INTERVEN II, S.A. ASSOCIATES By:___________________________________ By:______________________________ Name:_________________________________ Name:____________________________ Firm: ________________________________ Title:___________________________ THE BRUNS COMPANY By:___________________________________ Name:_________________________________ Title:________________________________ 39. 158 GLOSSARY PAGE Acquisition Proposal ......................................................25 Agreement .......................................................1 Agreement of Merger .......................................................2 Ascor .......................................................1 Ascor Affiliates Agreement..................................................26 Ascor Ancillary Agreements...................................................7 Ascor Balance Sheet .......................................................9 Ascor Balance Sheet Date.....................................................9 Ascor Common Stock .......................................................1 Ascor Common Warrants .......................................................3 Ascor Disclosure Schedule....................................................7 Ascor Intellectual Property.................................................16 Ascor Option .......................................................5 Ascor Outstanding Equivalent Number..........................................3 Ascor Preferred Shares.......................................................2 Ascor Preferred Warrants.....................................................3 Ascor Securities .......................................................9 Ascor Series A Shares .......................................................2 Ascor Series B Shares .......................................................2 Ascor Series C Shares .......................................................2 Ascor Shares .......................................................3 Ascor Warrants .......................................................3 Brobeck ......................................................32 Certificate .......................................................3 Certificates .......................................................3 Closing .......................................................2 Closing Date .......................................................2 Code .......................................................1 Consents ......................................................33 Dissenting Ascor Shares......................................................4 Dissenting Shareholder.......................................................4 Effective Date .......................................................2 Effective Time .......................................................2 Employment Contracts ......................................................13 Environmental Laws ......................................................15 Environmental Permits ......................................................15 ERISA ......................................................13 Exchange Act ...................................................7, 18 Exchange Agent .......................................................3 Exchange Ratio .......................................................3 Financial Statements .......................................................9 Giga-tronics .......................................................1 40. 159 PAGE Giga-tronics Affiliates Agreement...........................................29 Giga-tronics Ancillary Agreements...........................................18 Giga-tronics Balance Sheet..................................................21 Giga-tronics Balance Sheet Date.............................................21 Giga-tronics Common Stock....................................................1 Giga-tronics Disclosure Schedule............................................17 Giga-tronics Financial Advisor..............................................22 Giga-tronics Securities.....................................................19 Giga-tronics Shareholders' Meeting..........................................27 Giga-tronics Stock Option Plan..............................................19 Governmental Authorizations..................................................7 Hazardous Substances ......................................................15 HSR Act .......................................................7 IRS ......................................................13 Lien .......................................................8 Material Adverse Change.....................................................31 Material Adverse Effect.....................................................30 Material Ascor Agreement....................................................14 Merger ....................................................1, 2 Merger Consideration .......................................................3 Merger Sub .......................................................1 Plans ......................................................13 Proxy Statement ......................................................17 Securities Act .......................................................6 Surviving Corporation .......................................................2 Tax ......................................................12 Taxes ......................................................12 41. 160 AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 1.01 AGREEMENT OF MERGER This Agreement of Merger, dated as of ______________, 1996 ("Merger Agreement"), is made and entered into by ASCOR Acquisition Corporation, a California corporation ("AAC"), ASCOR Inc., a California corporation ("ASCOR") (AAC and ASCOR being collectively referred to as the "Constituent Corporations") and Giga- tronics, Inc., a California Corporation ("Giga-tronics"). WITNESSETH: WHEREAS, the Constituent Corporations and Giga-tronics previously have entered into an Agreement and Plan of Reorganization (the "Agreement and Plan of Reorganization") providing for certain representations, warranties and agreements in connection with the transactions contemplated; and WHEREAS, the Boards of Directors of the Constituent Corporations deem it advisable and in the best interests of the Constituent Corporations and in the best interests of the shareholders of the Constituent Corporations that AAC merge (the "Merger") with and into ASCOR. NOW, THEREFORE, the Constituent Corporations and Giga-tronics hereby agree as follows: ARTICLE I. The Constituent Corporations 1.01 (a) ASCOR was incorporated under the laws of the State of California on ______________________________. (b) ASCOR is authorized to issue an aggregate of 30,000,000 Common Shares (the "ASCOR Common Stock") and 5,712,293 Preferred Shares (the "ASCOR Preferred Stock"). (c) As of the date and time immediately prior to the consummation of the Merger, there will be an aggregate of 3,947,375 shares of ASCOR Common Stock, 2,340,425 shares of ASCOR Series A Preferred Stock, 2,000,000 shares of ASCOR Series B Preferred Stock outstanding and 909,091 shares of ASCOR Series C Preferred Stock outstanding. The outstanding shares of ASCOR Common Stock and ASCOR Preferred Stock are referred to herein as the "ASCOR Shares." 1 161 1.02 (a) AAC was incorporated under the laws of the State of California on May ___, 1996. (b) AAC is authorized to issue an aggregate of 1,000 shares of common stock ("AAC Common Stock"). (c) As of the date and time immediately prior to the consummation of the Merger, an aggregate of 1,000 shares of AAC Common Stock were outstanding and owned by Giga-tronics. ARTICLE II. The Merger 2.01 (a) This Merger Agreement shall be submitted to the shareholders of ASCOR and AAC. If adopted and approved by the written consent of the shareholders of ASCOR and AAC and if all of the conditions precedent to the consummation of the Merger specified in the Agreement and Plan of Reorganization shall have been satisfied or duly waived by the party entitled to satisfaction thereof, then, unless terminated as provided in the Agreement and Plan of Reorganization, this Merger Agreement, along with certificates meeting the requirements of the California General Corporation Law, shall be filed with the Secretary of State of California. Upon such filing, the Merger shall become effective ("Effective Time of the Merger"). (b) At the Effective Time of the Merger, AAC shall be merged into ASCOR and the separate corporate existence of AAC shall thereupon cease. ASCOR shall be the surviving corporation in the Merger (the "Surviving Corporation") and the separate corporate existence of ASCOR, with all of its purposes, objects, rights, privileges, powers, immunities and franchises, shall continue unaffected and unimpaired by the Merger. 2.02 (a) The Surviving Corporation shall succeed to all of the rights, privileges, powers, immunities and franchises of AAC, all of the properties and assets of AAC and all of the debts, choices in action and other interests due or belonging to AAC and shall be subject to, and responsible for, all of the debts, liabilities and obligations of AAC with the effect set forth in the California General Corporation Law. (b) If, at any time after the Effective Time of the Merger, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of AAC acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or to otherwise carry out this Merger Agreement, the officers and directors of the 2 162 Surviving Corporation shall and will be authorized to execute and deliver, in the name and on behalf of the Constituent Corporations or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of the Constituent Corporations or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation or to otherwise carry out this Merger Agreement. ARTICLE III. Articles of Incorporation 3.01 The Articles of Incorporation of ASCOR in effect immediately prior to the Effective Time of the Merger shall be amended and restated to read as attached at Exhibit A. ARTICLE IV. Manner And Basis Of Converting Shares Of The Constituent Corporations 4.01 At the Effective Time of the Merger: (a) Each share of AAC Stock which is outstanding immediately prior to the Effective Time of the Merger shall be converted at the Effective Time of the Merger into one share of ASCOR Common Stock. (b) Each share of ASCOR Common Stock, each share of ASCOR Series A Preferred Stock, each share of ASCOR Series B Preferred Stock and each share of ASCOR Series C Preferred Stock (except for shares, if any, which shall then or thereafter constitute "dissenting shares" within the meaning of Section 1300 of the California General Corporations Law and those shares of AAC common stock converted to shares of ASCOR Common Stock pursuant to Section 4.01(a) above) which is outstanding immediately prior to the Effective Time of the Merger shall be converted at the Effective Time of the Merger into [__________________ FINAL NUMBER TO BE INSERTED AT CLOSING PURSUANT TO CALCULATION CONTAINED IN REORGANIZATION AGREEMENT] shares (the "Exchange Ratio") of Giga-tronics Common Stock. 4.02 Giga-tronics shall not be required to issue or deliver any fractional shares of Giga-tronics Giga-tronics Common Stock or any Giga-tronics certificates 3 163 representing fractional shares of Giga-tronics Common Stock in connection with any exchange of ASCOR certificates for Giga-tronics certificates; however, Giga-tronics shall pay to each person who would otherwise be entitled to receive a Giga-tronics certificate representing a fractional share of Giga-tronics Common Stock an amount in cash (rounded to the nearest whole cent) equal to such fraction multiplied by the closing sale price per share of Giga-tronics Common Stock on the last business day on which Giga- tronics Common Stock is traded on the NASD prior to the Effective Time. 4.03 Immediately after the Effective Time of the Merger and after surrender to Giga-tronics or such other party designated by Giga-tronics (the "Exchange Agent") of any certificate which prior to the Effective Time of the Merger shall have represented any ASCOR Shares, Giga-tronics shall cause to be distributed to the person in whose name such certificate shall have been issued a certificate registered in the name of such person representing the whole shares of Giga-tronics Common Stock into which any shares previously represented by the surrendered certificate shall have been converted at the Effective Time of the Merger, along with the check representing the value of any fractional share as determined in Section 4.02 above. Until surrendered to the Exchange Agent, each certificate which immediately prior to the Effective Time of the Merger shall have represented any ASCOR Share shall be deemed at and after the Effective Time of the Merger to represent only the right to receive upon surrender the certificate and payment contemplated above. Upon such surrender, there shall be paid to the person in whose name the certificate representing such shares of Giga-tronics Ordinary Shares shall be issued and without interest any dividends which shall have become payable with respect to such shares of Giga-tronics Common Stock between the Effective Time of the Merger and the time of such surrender. ARTICLE V. General 5.01 This Merger Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5.02 Notwithstanding approval of this Merger Agreement by the shareholders of either of the Constituent Corporations, this Merger Agreement shall terminate forthwith in the event that the Agreement and Plan of Reorganization shall be terminated as therein provided. 5.03 This Merger Agreement may be amended by the parties hereto at any time before or after approval hereof by the shareholders of the Constituent Corporations and Giga-tronics, but, after any such approval, no amendment shall be made which would have a material adverse effect on the shareholders of either of the 4 164 Constituent Corporations or Giga-tronics, or change any of the principal terms of the Merger Agreement, without the further approval of such shareholders. This Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Without limiting the foregoing, the parties hereto acknowledge and agree that any modification of the manner or basis of converting ASCOR Shares into Giga-tronics Common Stock shall require further approval of the Board of Directors (or appropriate committee thereof empowered to so act) of Giga-tronics and the shareholders of ASCOR. 5 165 IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement as of the date first written above. ASCOR ACQUISITION CORP. By ________________________________ George H. Bruns, Jr. President By ________________________________ Greg Overholtzer Secretary ASCOR, INC. By ________________________________ Jeffrey Lum President By ________________________________ ____________________ Secretary GIGA-TRONICS, INC. By ________________________________ George H. Bruns, Jr. Chief Executive Officer By ________________________________ Greg Overholtzer Secretary 166 EXHIBIT A TO AGREEMENT OF MERGER ONE. The name of the Corporation is ASCOR, Inc. TWO. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. THREE. The Corporation is authorized to issue One Thousand (1,000) shares of Common Stock of one class. FOUR. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. FIVE. The Corporation is authorized to indemnify the directors and officers of the Corporation to the fullest extent permissible under California law. 167 AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 5.09 FORM OF ASCOR AFFILIATES AGREEMENT THIS AFFILIATES AGREEMENT (the "Agreement") is entered into as of this __ day of May, 1996 among GIGA-TRONICS, INC., a California corporation ("Giga- tronics"), the undersigned shareholder ("Shareholder") of ASCOR, INC., a California corporation ("ASCOR"), ASCOR ACQUISITION CORP., a California corporation and wholly owned subsidiary of Giga-tronics ("MERGER SUB") and ASCOR. This Agreement is entered into in connection with that certain Agreement and Plan of Reorganization dated as of May __, 1996 (the "Reorganization Agreement") among Giga-tronics, Merger Sub, and ASCOR. The Reorganization Agreement provides for the merger (the "Merger") of Merger Sub with and into ASCOR in a transaction in which issued and outstanding shares of common stock, no par value, and preferred stock, no par value, of ASCOR (the "ASCOR Stock") will be exchanged for shares of common stock, no par value of Giga-tronics (the "Giga-tronics Stock") on the terms and conditions set forth in the Reorganization Agreement. Capitalized terms used herein and not defined herein shall have their defined meanings as set forth in the Reorganization Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties and covenants set forth herein, the parties agree as follows: 1. TAX AND ACCOUNTING TREATMENT. Shareholder understands and agrees that it is intended that the Merger will be treated as a "reorganization" for federal income tax purposes and as a "pooling of interests" in accordance with generally accepted accounting principals and the applicable General Rules and Regulations published by the Securities and Exchange Commission (the "SEC"). Shareholder further understands and agrees that Shareholder may be deemed to be an "Affiliate" of ASCOR within the meaning of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933, as amended (the "Securities Act"), although nothing contained herein should be construed as an admission of such fact. 2. RELIANCE UPON REPRESENTATIONS, WARRANTIES AND COVENANTS. Shareholder has been informed that the treatment of the Merger as a reorganization for federal income tax purposes requires that a sufficient number of former stockholders of ASCOR maintain a meaningful continuing equity ownership interest in Giga-tronics after the Merger. Shareholder understands that the representations, warranties and covenants of the Shareholder set forth herein will be relied upon by Giga-tronics, ASCOR, and agrees that their respective counsel and accounting firms and other stockholders of ASCOR shall be entitled to rely thereon. 1. 168 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SHAREHOLDER. Share- holder represents, warrants and covenants as follows: (a) Shareholder has full power and authority to execute this Agreement, to make the representations, warranties and covenants herein contained and to perform Shareholder's obligations hereunder. (b) Appendix A attached hereto sets forth all shares of ASCOR Stock owned by Shareholder, including all ASCOR Stock as to which Shareholder has sole or shared voting or investment power and all rights and options to acquire ASCOR Stock. (c) Shareholder will not sell, transfer, exchange, pledge, or otherwise dispose of, or make any offer or agreement relating to any of the foregoing with respect to, any shares of Giga-tronics Stock that Shareholder may acquire in connection with the Merger, or any securities that may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor (all such shares and other securities of Giga-tronics being herein sometimes collectively referred to as "Restricted Securities"), or any option, right or other interest with respect to any Restricted Securities, unless (i) such transaction is permitted pursuant to Rule 144 and 145(d) under the Securities Act, (ii) counsel representing Shareholder shall have advised Giga-tronics in a written opinion letter satisfactory to Giga-tronics and Giga-tronics's legal counsel, and upon which Giga-tronics and its legal counsel may rely, that no registration under the Securities Act would be required in connection with the proposed sale, transfer or other disposition, (iii) a registration statement under the Securities Act covering the Giga-tronics Stock proposed to be sold, transferred or otherwise disposed of, describing the manner and terms of the proposed sale, transfer or other disposition, and containing a current prospectus, shall have been filed with the SEC and made effective under the Securities Act, or (iv) an authorized representative of the SEC shall have rendered written advice to Shareholder (sought by Shareholder or counsel to Shareholder, with a copy thereof and all other related communications delivered to Giga-tronics) to the effect that the SEC would take no action, or that the staff of the SEC would not recommend that the SEC take action, with respect to the proposed disposition if consummated. (d) Notwithstanding any other provision of this Agreement to the contrary, Shareholder will not sell, transfer, exchange, pledge or otherwise dispose of, or in any other way reduce Shareholder's risk of ownership or investment in, or make any offer or agreement relating to any of the foregoing with respect to any ASCOR Stock or any rights, options or warrants to purchase ASCOR Stock, or any Restricted Securities or other securities of Giga-tronics (i) during the 30-day period immediately preceding the Effective Time of the Merger and (ii) until such time after the Effective Time of the Merger as Giga-tronics has publicly released a report 2. 169 including the combined financial results of Giga-tronics and ASCOR for a period of at least 30 days of combined operations of Giga-tronics and ASCOR within the meaning of Accounting Series Release No. 130, as amended, of the SEC. Giga- tronics agrees to publish such financial results expeditiously in a manner consistent with its prior practices; provided that nothing contained herein shall obligate Giga- tronics to publish its financial results other than on a quarterly basis. (e) Shareholder has, and as of the Effective Time of the Merger will have, no plan or intention (a "Plan") to sell, transfer, exchange, pledge (other than in a pre-existing bona fide margin account) or otherwise dispose of (any of the foregoing, a "Sale"), more than fifty percent (50%) of the shares of Giga-tronics Stock that Shareholder may acquire in connection with the Merger, or any securities that may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor. Sale shall also be deemed to include a distribution by a partnership to its partners, or a corporation to its stockholders, or any other transaction which results in a reduction in the risk of ownership. Shareholder is not aware of, or participating in, any Plan on the part of ASCOR stockholders to engage in Sales of the shares of Giga-tronics Stock to be issued in the Merger such that the aggregate fair market value, as of the Effective Time of the Merger, of the shares subject to such Sales would exceed fifty percent (50%) of the aggregate fair market value of all shares of outstanding ASCOR Stock immediately prior to the Merger. For purposes of the preceding sentence, shares of ASCOR Stock (i) with respect to which dissenters' rights are exercised, (ii) which are exchanged for cash in lieu of fractional shares of Giga-tronics Stock or (iii) with respect to which a pre-Merger Sale occurs in a transaction that is in contemplation of, or related or pursuant to, the Merger or the Reorganization Agreement, shall be considered to be shares of ASCOR Stock that are exchanged for Giga-tronics Stock in the Merger and then disposed of pursuant to a Plan. If any of Shareholder's representations in this Section 3(e) ceases to be true at any time prior to the Effective Time of the Merger, Shareholder will deliver to each of ASCOR and Giga- tronics, prior to the Effective Time of the Merger, a written statement to that effect, signed by Shareholder. 4. RULE 144 AND 145. From and after the Effective Time of the Merger and for so long as is necessary in order to permit Shareholder to sell the Giga-tronics Stock held by and pursuant to Rule 144 under the Securities Act, Giga-tronics will use its best efforts to file on a timely basis all reports required to be filed by it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, referred to in paragraph (c)(1) of Rule 144 under the Securities Act, in order to permit Shareholder to sell the Giga-tronics Stock held by it pursuant to the terms and conditions of Rule 144. Shareholder understands that, except as set forth in the Reorganization Agreement and the Registration Rights Agreement, Giga-tronics is under no obligation to register the sale, transfer or other disposition of any Restricted Securities by or on behalf of Shareholder or to take any other action necessary in order to make compliance with an exemption from registration available. 3. 170 5. NOTICES. Any notice or communication required or permitted by this Agreement shall be deemed sufficiently given if in writing and, if delivered personally, when it is delivered or, if delivered in another manner, the earlier of when it is actually received by the party to whom it is directed or when the period set forth below expires (whether or not it is actually received): A. if deposited with the U.S. Postal Service, postage prepaid, and addressed to the party to receive it as set forth below, 48 hours after such deposit as registered or certified mail; or B. if accepted by Federal Express or a similar delivery service in general usage for delivery to the address of the party to receive it as set forth next below, 24 hours after the delivery time promised by the delivery service. Giga-tronics and Merger Sub: Giga-tronics, Inc. 4650 Norris Canyon Road San Ramon, CA 94583 Attention: George H. Bruns, Jr. Chief Executive Officer Facsimile: (510) 328-4700 With copy to: Brobeck, Phleger & Harrison Spear Street Tower One Market Plaza San Francisco, CA 94105 Attention: William L. Hudson, Esq. Facsimile: (415) 442-1010 ASCOR: ASCOR, Inc. 47790 Westinghouse Drive Fremont, CA 94539 Attention: Jeffrey Lum President Facsimile: (510) 490-8493 4. 171 With copy to: Brian Fraser Attorney-at-Law 6114 La Salle Avenue, Suite 646 Oakland, CA 94611 Facsimile: (510) 839-3461 If to Shareholder: At the address set forth beneath the Shareholder's signature below. or to such other address as any party may designate for itself by notice given as provided in this Agreement. 6. TERMINATION. This Agreement shall be terminated and shall be of no further force and effect upon the termination of the Reorganization Agreement pursuant to Article IX thereof. 7. BINDING AGREEMENT. This Agreement will inure to the benefit of and be binding upon and enforceable against the parties and their successors and assigns, including administrators, executors, representatives, heirs, legatees and devisees of Shareholder and any pledgee holding Restricted Securities as collateral. 8. WAIVER. No waiver by any party hereto of any condition or of any breach of any provision of this Agreement shall be effective unless in writing and signed by each party hereto. 9. GOVERNING LAW. This Agreement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of California (irrespective of its choice of law provisions). 10. ATTORNEYS' FEES. In the event of any legal action or proceeding to enforce or interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final judgment. 11. EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. 12. COUNTERPARTS. This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one instrument. 5. 172 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. GIGA-TRONICS, INC. By: __________________________ Name: Title: Chief Executive Officer SHAREHOLDER: ________________________________ Name: Address: ________________________________ ________________________________ ASCOR ACQUISITION CORP. By: __________________________ Name: Title: Chief Executive Officer ASCOR, INC. By: __________________________ Name: Title: President 6. 173 APPENDIX A RESTRICTED SECURITIES
Number of Shares ---------------- ASCOR Common Stock .................................... _______________________ ASCOR Preferred Stock.................................. _______________________
________________________________________________________________________________ Options or Warrants to Purchase ASCOR Stock __________________________________________________ __________________ __________________________________________________ __________________ __________________________________________________ __________________ 7. 174 AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 6.08 FORM OF GIGA-TRONICS AFFILIATES AGREEMENT THIS AFFILIATES AGREEMENT (the "Agreement") is entered into as of this __ day of May, 1996 among GIGA-TRONICS, INC., a California corporation ("Giga-tronics"), the undersigned shareholder ("Shareholder") of GIGA-TRONICS, ASCOR ACQUISITION CORP., a California corporation and wholly owned subsidiary of Giga-tronics ("MERGER SUB") and ASCOR, INC., a California corporation ("ASCOR"). This Agreement is entered into in connection with that certain Agreement and Plan of Reorganization dated as of May __, 1996 (the "Reorganization Agreement") among Giga-tronics, Merger Sub, and ASCOR. The Reorganization Agreement provides for the merger (the "Merger") of Merger Sub with and into ASCOR in a transaction in which issued and outstanding shares of common stock, no par value, and preferred stock, no par value of ASCOR (the "ASCOR Stock") will be exchanged for shares of common stock, no par value of Giga-tronics (the "Giga-tronics Stock") on the terms and conditions set forth in the Reorganization Agreement. Capitalized terms used herein and not defined herein shall have their defined meanings as set forth in the Reorganization Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties and covenants set forth herein, the parties agree as follows: 1. TAX AND ACCOUNTING TREATMENT. Shareholder understands and agrees that it is intended that the Merger will be treated as a "reorganization" for federal income tax purposes and as a "pooling of interests" in accordance with generally accepted accounting principals and the applicable General Rules and Regulations published by the Securities and Exchange Commission (the "SEC"). Shareholder further understands and agrees that Shareholder may be deemed to be an "Affiliate" of Giga-tronics within the meaning of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933, as amended (the "Securities Act"), although nothing contained herein should be construed as an admission of such fact. 2. RELIANCE UPON REPRESENTATIONS, WARRANTIES AND COVENANTS. Shareholder has been informed that the treatment of the Merger as a reorganization for federal income tax purposes requires that a sufficient number of shareholders of Giga-tronics maintain a meaningful continuing equity ownership interest in Giga-tronics after the Merger. Shareholder understands that the representations, warranties and covenants of the Shareholder set forth herein will be relied upon by Giga-tronics, ASCOR, and agrees that their respective counsel and accounting firms and other shareholders of ASCOR shall be entitled to rely thereon. 1. 175 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SHAREHOLDER. Shareholder represents, warrants and covenants as follows: (a) Shareholder has full power and authority to execute this Agreement, to make the representations, warranties and covenants herein contained and to perform Shareholder's obligations hereunder. (b) Appendix A attached hereto sets forth all shares of Giga-tronics stock owned by Shareholder, including all Giga-tronics stock as to which Shareholder has sole or shared voting or investment power and all rights and options to acquire Giga-tronics stock. (c) Shareholder will not sell, transfer, exchange, pledge, or otherwise dispose of, or make any offer or agreement relating to any of the foregoing with respect to, any shares of Giga-tronics Stock that Shareholder may acquire in connection with the Merger, or any securities that may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor (all such shares and other securities of Giga-tronics being herein sometimes collectively referred to as "Restricted Securities"), or any option, right or other interest with respect to any Restricted Securities, unless (i) such transaction is permitted pursuant to Rule 144 and 145(d) under the Securities Act, (ii) counsel representing Shareholder shall have advised Giga-tronics in a written opinion letter satisfactory to Giga-tronics and Giga-tronics's legal counsel, and upon which Giga-tronics and its legal counsel may rely, that no registration under the Securities Act would be required in connection with the proposed sale, transfer or other disposition, (iii) a registration statement under the Securities Act covering the Giga-tronics Stock proposed to be sold, transferred or otherwise disposed of, describing the manner and terms of the proposed sale, transfer or other disposition, and containing a current prospectus, shall have been filed with the SEC and made effective under the Securities Act, or (iv) an authorized representative of the SEC shall have rendered written advice to Shareholder (sought by Shareholder or counsel to Shareholder, with a copy thereof and all other related communications delivered to Giga-tronics) to the effect that the SEC would take no action, or that the staff of the SEC would not recommend that the SEC take action, with respect to the proposed disposition if consummated. (d) Notwithstanding any other provision of this Agreement to the contrary, Shareholder will not sell, transfer, exchange, pledge or otherwise dispose of, or in any other way reduce Shareholder's risk of ownership or investment in, or make any offer or agreement relating to any of the foregoing with respect to any Giga-tronics stock or any rights, options or warrants to purchase Giga-tronics stock, or other securities of Giga-tronics (i) during the 30-day period immediately preceding the Effective Time of the Merger and (ii) until such time after the Effective Time of the Merger as Giga-tronics has publicly released a report including the combined 2. 176 financial results of Giga-tronics and ASCOR for a period of at least 30 days of combined operations of Giga-tronics and ASCOR within the meaning of Accounting Series Release No. 130, as amended, of the SEC. Giga-tronics agrees to publish such financial results expeditiously in a manner consistent with its prior practices; provided that nothing contained herein shall obligate Giga-tronics to publish its financial results other than on a quarterly basis. (e) Shareholder has, and as of the Effective Time of the Merger will have, no plan or intention (a "Plan") to sell, transfer, exchange, pledge (other than in a pre-existing bona fide margin account) or otherwise dispose of (any of the foregoing, a "Sale"), more than fifty percent (50%) of the shares of Giga-tronics Stock that Shareholder may acquire in connection with the Merger, or any securities that may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor. Sale shall also be deemed to include a distribution by a partnership to its partners, or a corporation to its shareholders, or any other transaction which results in a reduction in the risk of ownership. Shareholder is not aware of, or participating in, any Plan on the part of ASCOR shareholders to engage in Sales of the shares of Giga-tronics Stock to be issued in the Merger such that the aggregate fair market value, as of the Effective Time of the Merger, of the shares subject to such Sales would exceed fifty percent (50%) of the aggregate fair market value of all shares of outstanding ASCOR Stock immediately prior to the Merger. For purposes of the preceding sentence, shares of ASCOR Stock (i) with respect to which dissenters' rights are exercised, (ii) which are exchanged for cash in lieu of fractional shares of Giga-tronics Stock or (iii) with respect to which a pre-Merger Sale occurs in a transaction that is in contemplation of, or related or pursuant to, the Merger or the Reorganization Agreement, shall be considered to be shares of ASCOR Stock that are exchanged for Giga-tronics Stock in the Merger and then disposed of pursuant to a Plan. If any of Shareholder's representations in this Section 3(e) ceases to be true at any time prior to the Effective Time of the Merger, Shareholder will deliver to each of ASCOR and Giga- tronics, prior to the Effective Time of the Merger, a written statement to that effect, signed by Shareholder. 4. RULE 144 AND 145. From and after the Effective Time of the Merger and for so long as is necessary in order to permit Shareholder to sell the Giga-tronics Stock held by and pursuant to Rule 144 under the Securities Act, Giga-tronics will use its best efforts to file on a timely basis all reports required to be filed by it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, referred to in paragraph (c)(1) of Rule 144 under the Securities Act, in order to permit Shareholder to sell the Giga-tronics Stock held by it pursuant to the terms and conditions of Rule 144. Shareholder understands that, except as set forth in the Reorganization Agreement and the Registration Rights Agreement, Giga-tronics is under no obligation to register the sale, transfer or other disposition of any Restricted Securities by or on behalf of Shareholder or to take any other action necessary in order to make compliance with an exemption from registration available. 3. 177 5. NOTICES. Any notice or communication required or permitted by this Agreement shall be deemed sufficiently given if in writing and, if delivered personally, when it is delivered or, if delivered in another manner, the earlier of when it is actually received by the party to whom it is directed or when the period set forth below expires (whether or not it is actually received): A. if deposited with the U.S. Postal Service, postage prepaid, and addressed to the party to receive it as set forth below, 48 hours after such deposit as registered or certified mail; or B. if accepted by Federal Express or a similar delivery service in general usage for delivery to the address of the party to receive it as set forth next below, 24 hours after the delivery time promised by the delivery service. Giga-tronics and Merger Sub: Giga-tronics, Inc. 4650 Norris Canyon Road San Ramon, CA 94583 Attention: George H. Bruns, Jr. Chief Executive Officer Facsimile: (510) 328-4700 With copy to: Brobeck, Phleger & Harrison Spear Street Tower One Market Plaza San Francisco, CA 94105 Attention: William L. Hudson, Esq. Facsimile: (415) 442-1010 ASCOR: ASCOR, Inc. 47790 Westinghouse Drive Fremont, CA 94539 Attention: Jeffrey Lum President Facsimile: (510) 490-8493 4. 178 With copy to: Brian Fraser Attorney-at-Law 6114 La Salle Avenue, Suite 646 Oakland, CA 94611 Facsimile: (510) 839-3461 If to Shareholder: At the address set forth beneath the Shareholder's signature below. or to such other address as any party may designate for itself by notice given as provided in this Agreement. 6. TERMINATION. This Agreement shall be terminated and shall be of no further force and effect upon the termination of the Reorganization Agreement pursuant to Article IX thereof. 7. BINDING AGREEMENT. This Agreement will inure to the benefit of and be binding upon and enforceable against the parties and their successors and assigns, including administrators, executors, representatives, heirs, legatees and devisees of Shareholder and any pledgee holding Restricted Securities as collateral. 8. WAIVER. No waiver by any party hereto of any condition or of any breach of any provision of this Agreement shall be effective unless in writing and signed by each party hereto. 9. GOVERNING LAW. This Agreement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of California (irrespective of its choice of law provisions). 10. ATTORNEYS' FEES. In the event of any legal action or proceeding to enforce or interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final judgment. 11. EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. 12. COUNTERPARTS. This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one instrument. 5. 179 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. GIGA-TRONICS, INC. By: ___________________________ Name: Title: Chief Executive Officer SHAREHOLDER: __________________________________ Name: Address: __________________________________ __________________________________ ASCOR ACQUISITION CORP. By: ___________________________ Name: Title: Chief Executive Officer ASCOR, INC. By: ___________________________ Name: Title: President 6. 180 APPENDIX A RESTRICTED SECURITIES
Number of Shares ---------------- ASCOR Common Stock .................................... _______________________ ASCOR Preferred Stock.................................. _______________________
________________________________________________________________________________ Options or Warrants to Purchase ASCOR Stock __________________________________________________ __________________ __________________________________________________ __________________ __________________________________________________ __________________ 7. 181 AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 10.01 GIGA-TRONICS, INC. REGISTRATION RIGHTS AGREEMENT JUNE ___, 1996 182 TABLE OF CONTENTS PAGE SECTION 1. Amendment..................................................... 1 1.1 Amendment and Waiver.......................................... 1 1.2 Effect of Amendment or Waiver................................. 1 SECTION 2. Registration Rights........................................... 2 2.1 Definitions................................................... 2 2.2 Requested Registration........................................ 2 2.3 Company Registration.......................................... 4 2.4 Obligations of the Company.................................... 4 2.5 Furnish Information........................................... 5 2.6 Expenses of Demand Registration............................... 5 2.7 Expenses of Company Registration.............................. 6 2.8 Underwriting Requirements..................................... 6 2.9 Delay of Registration......................................... 7 2.10 Indemnification............................................... 7 2.11 Reports Under Securities Exchange Act of 1934................. 9 2.12 Assignment of Registration Rights............................. 9 2.13 Limitations on Subsequent Registration Rights................. 9 2.14 Termination of Registration Rights............................ 10 SECTION 3. Miscellaneous................................................. 10 3.1 Assignment.................................................... 10 3.2 Third Parties................................................. 10 3.3 Governing Law................................................. 10 3.4 Counterparts.................................................. 10 3.5 Notices....................................................... 10 3.6 Severability.................................................. 11 3.7 Rights of Holders............................................. 11 3.8 Delays or Omissions........................................... 11 3.9 Attorney's Fees............................................... 11 i. 183 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of the ____ day of [June] 1996, by and among Giga-tronics, Inc., a California corporation (the "Company") and the shareholders who are former shareholders (the "Ascor Shareholders") of Ascor, Inc., a California corporation ("Ascor") . RECITALS WHEREAS, as of the date hereof each of the Ascor Shareholders owns the number of shares of the Company's Common Stock (the "Common Stock") set forth opposite its name on Exhibit A hereto; WHEREAS, the Ascor Shareholders received such Company Common Stock pursuant to the Merger of Ascor with Ascor Acquisition Corporation, a wholly-owned subsidiary of the Company pursuant to the terms of that certain Agreement and Plan of Reorganization dated as of May ___, 1996 (the "Merger Agreement") by and among the Company Ascor Acquisition Corp. And Ascor; and WHEREAS, the execution of this Agreement by the Company is a condition to the obligations of Ascor under the Merger Agreement and the Company has agreed to execute this Agreement and grant to the Ascor Shareholders the rights contained herein in order to fulfill such condition. NOW, THEREFORE, the parties agree as follows: SECTION 1. Amendment 1.1 Amendment and Waiver. Except as expressly provided in this Agreement, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than upon the written consent of all of (i) the Company and (ii) the Holders of at least a majority of the Registrable Securities. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of Registrable Securities and the Company. In the event that an underwriting agreement is entered into between the Company and any Holder, and such underwriting agreement contains terms differing from this Agreement as to any such Holder, the terms of such underwriting agreement shall govern. 1.2 Effect of Amendment or Waiver. Without limiting the provisions of Section 1.1 hereof, the Investors and their successors and assigns acknowledge that by the operation of Section 3.7 hereof the holders of a majority of the outstanding Registrable Securities, acting in conjunction with the Company, will have the right and power to diminish or eliminate all rights pursuant to this Agreement 1. 184 SECTION 2. Registration Rights 2.1 Definitions. As used in this Agreement: (a) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act") and the subsequent declaration or ordering of the effectiveness of such registration statement. (b) The term "Registrable Securities" means: (i) the shares of Common Stock issuable to the Ascor Shareholder upon consummation of the Merger; and (ii) any other shares of Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Registrable Securities, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned; provided, however, that Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold, assigned or otherwise transferred in a transaction in which the rights under this Section 2 have not been assigned in accordance with Section 2.13. (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities. (d) The term "Holder" means any person owning of record Registrable Securities who acquired such Registrable Securities in a transaction or series of transactions not involving any registered public offering. (e) Capitalized terms used but not defined in this Agreement shall have the meanings attributed to them in the Merger Agreement. 2.2 Requested Registration. (a) If the Company shall receive at any time after results covering at least thirty (30) days of combined operations of the Company and Ascor have been published by the Company in the form of a quarterly earnings report, an effective registration statement filed with the Securities and Exchange Commission (the "Commission"), a report to the Commission on Form 10-K, 10-Q or 8-K, or any other 2. 185 public filing or announcement which includes the combined results of operation, a written request from one or more Holders that the Company file a registration statement under the Securities Act covering the registration of at least 200,000 Registrable Securities (as such number may be adjusted from time to time for stock dividends, splits or other changes in the capitalization of the Company) or a lesser number if the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $1,000,000, then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 2.2(b), use all reasonable efforts to file and cause the effectiveness of, within 90 days of the receipt of such request, the registration under the Securities Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.5. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.2 and the Company shall include such information in the written notice referred to in subsection 2.2(a). The underwriter will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders; provided, however, that if the Company is not also intending to sell any shares under such Registration Statement, then the underwriter will be selected by a majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 2.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 2.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder. (c) The Company is obligated to effect only one (1) such registration pursuant to this Section 2.2. The Company shall be obligated to maintain the effectiveness of any registration statement filed pursuant to this Section 2.2 for no more than 180 days subsequent to declaration of its effectiveness by the Commission. 3. 186 (d) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than one hundred and twenty (120) days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than twice in total. 2.3 Company Registration. If (but without any obligation to do so under this Agreement) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its Common Stock or other securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration relating either to the sale of securities to participants in a Company stock option, stock purchase or similar plan or to an SEC Rule 145 transaction, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 2.8, cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. 2.4 Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred eighty (180) days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. 4. 187 (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or, except as required under the Securities Act, to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange or automated quotation system on which similar securities issued by the Company are then listed. 2.5 Furnish Information. (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. (b) The Company shall have no obligation with respect to any registration requested pursuant to Section 2.2 or Section 2.12 if, due to the failure of sufficient Holders to satisfy the condition precedent set forth in subsection 2.5(a), the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in subsection 2.2(a) or subsection 2.12(b)(2), whichever is applicable. 2.6 Expenses of Demand Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or 5. 188 qualifications pursuant to Section 2.2, including (without limitation), all registration, filing and qualification fees, printers and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of up to $25,000 for one (but only one) counsel for the selling Holders shall be borne by the Company. 2.7 Expenses of Company Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 2.3 for each Holder (which right may be assigned as provided in Section 2.13), including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto, but excluding the fees and disbursements of counsel for the selling Holders and underwriting discounts and commissions relating to Registrable Securities. 2.8 Underwriting Requirements. In connection with any offering involving an underwriting of shares being issued by the Company, the Company shall not be required under Section 2.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it, and then only in such quantity as will not, in the opinion of the underwriters, jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters reasonably believe compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters believe will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders, provided that the number of shares of Registrable Securities to be included in any such offering shall not be reduced unless all other securities held by persons other than the Holders or the Company are first entirely excluded from the underwriting); but in no event shall the amount of securities of the selling Holders included in the offering be reduced below twenty percent (20%) of the total amount of securities included in such offering. For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder," and any pro rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder," as defined in this sentence. 6. 189 2.9 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2. 2.10 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 2: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Securities Act, the 1934 Act or any state securities law; and the Company will pay as incurred to each such Holder, underwriter or controlling person, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 2.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to 7. 190 the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 2.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 2.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section 2.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.10. (d) No indemnifying party, in the defense of any claim arising out of a Violation shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation and, in the event the terms of such judgment or settlement include any term other than the payment by the indemnifying party of money damages, the indemnifying party shall not so consent or enter into such a settlement without the consent of each indemnified party (which will not be unreasonably withheld) whether or not the terms thereof include such a release. (e) The obligations of the Company and Holders under this Section 2.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 2, and otherwise. 8. 191 (f) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 2.11 Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration the Company agrees to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the 1934 Act. 2.12 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities who, after such assignment or transfer, holds (i) at least 1% of the Registrable Securities then outstanding (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), or (ii) all of the shares of Registrable Securities held by such Holder, provided that, within a reasonable time after such transfer, the Company is furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 2. 2.13 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 2.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of 9. 192 the date set forth in subsection 2.2(a) or within one hundred twenty (120) days of the effective date of any registration effected pursuant to Section 2.2. 2.14 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 2: (a) if the Registrable Securities were issued by Giga-tronics to the Holder pursuant to a registration statement filed with the SEC; or (b) at and after such time as such Holder holds Registrable Securities equal to 1% or less of the outstanding stock of the Company (calculated on an as-converted basis) and is able to dispose of all the Registrable Securities held by such Holder under Rule 144 during any 90-day period. SECTION 3. Miscellaneous 3.1 Assignment. Subject to the provisions of Section 2.13 hereof, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. 3.2 Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 3.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California in the United States of America as applied to agreements among California residents entered into and to be performed entirely within California. 3.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.5 Notices. Any notice or communication required or permitted by this Agreement shall be deemed sufficiently given if in writing and, if delivered personally, when it is delivered or, if delivered in another manner, the earlier of when it is actually received by the party to whom it is directed or when the period set forth below expires (whether or not it is actually received): A. if deposited with the U.S. Postal Service, postage prepaid, and addressed to the party to receive it as set forth below their signatures, 48 hours after such deposit as registered or certified mail; or 10. 193 B. if accepted by Federal Express or a similar delivery service in general usage for delivery to the address of the party to receive it as set forth next below their signatures, 24 hours after the delivery time promised by the delivery service. 3.6 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be enforceable in accordance with its terms. 3.7 Rights of Holders. Each holder of Registrable Securities shall have the absolute right to exercise or refrain from exercising any right or rights that such holder may have by reason of this Agreement, including, without limitation, the right to consent to the waiver or modification of any obligation under this Agreement, and such holder shall not incur any liability to any other holder of any securities of the Company as a result of exercising or refraining from exercising any such right or rights. 3.8 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party to this Agreement, upon any breach or default of the other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 3.9 Attorney's Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 11. 194 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the day and year first above written. GIGA-TRONICS, INC. By: __________________________ Chief Executive Officer Address: Giga-tronics, Inc. 4650 Norris Canyon Road San Ramon, CA 94583 Attention: George H. Bruns, Jr. Facsimile: (510) 328-4700 ASCOR, INC. By: ________________________ President Address: Ascor, Inc. 47790 Westinghouse Drive Fremont, CA 94539 Attention: Jeffrey Lum Facsimile: (510) 490-8493 ASCOR SHAREHOLDER _______________________ Name _______________________ By Address: _______________________ _______________________ 195 ANNEX D Articles of Incorporation of ASCOR Acquisition Corp. 196 ARTICLES OF INCORPORATION OF Ascor Acquisition Corp. The undersigned incorporator, for the purpose of forming a corporation under the General Corporation Law of the State of California, hereby declares: ONE. The name of the Corporation is Ascor Acquisition Corp. TWO. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. THREE. The name and complete business address in this state of the Corporation's initial agent for service of process is: Mr. Greg Overholzer c/o Giga-Tronics Incorporated 4650 Norris Canyon Road San Ramon, California 94583 FOUR. The Corporation is authorized to issue One Thousand (1,000) shares of Common Stock of one class. 197 FIVE. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. SIX. The Corporation is authorized to indemnify the directors and officers of the Corporation to the fullest extent permissible under California law. IN WITNESS WHEREOF, the undersigned has executed these Articles of Incorporation. _________________________________________ , Incorporator 2. 198 ANNEX E GIGA-TRONICS FINANCIAL ADVISOR OPINION LETTER 199 ANNEX E WOOD, WARREN & CO. May 2, 1996 Board of Directors Giga-tronics Incorporated 4650 Norris Canyon Road San Ramon, CA 94583 Dear Sirs: You have requested our opinion as to the fairness from a financial point of view to Giga-tronics Incorporated ("Giga-tronics" or the "Company") of the Exchange Ratio (defined below) to be applied in connection with the proposed merger of Giga-tronics and ASCOR Incorporated ("ASCOR") (the "Merger"). Giga-tronics and ASCOR have entered into an Agreement and Plan of Merger ("Merger Agreement") pursuant to which a newly created wholly owned subsidiary of the Company would be merged into ASCOR, whereby ASCOR would continue to operate as a wholly owned subsidiary of the Company, and each share of ASCOR common stock would be converted into the right to receive Giga-tronics common stock based on the quotient of (i) 724,986 shares of Giga-tronics common stock, divided by (ii) the total number of ASCOR shares outstanding at the time the Merger shall become effective, which is expected to be approximately 14,500,000 shares. The quotient based on 14,500,000 ASCOR shares outstanding would be .0500, and will change less than 1/100th based on the actual number of ASCOR shares outstanding when the Merger becomes effective. The terms and conditions of the Merger are set forth in more detail in the Giga-tronics proxy statement dated May 2, 1996 ("Proxy Statement"). In arriving at our opinion, we: (1) reviewed the Merger Agreement and the Proxy Statement dated May 2, 1996 and such other information that was publicly available or was furnished to us by the Company or ASCOR which we believe to be relevant to our inquiry, (2) reviewed financial and operating information with respect to the business operations and prospects of the Company and ASCOR furnished to us by the Company and ASCOR, (3) prepared a discounted cash flow analysis of ASCOR, (4) considered the historical stock prices and trading volumes of the common stock of the Company from calendar 1993 to the present, and (5) reviewed the prices and premiums paid in other business combinations. In addition, Wood, Warren & Co. held discussions with senior management of Giga-tronics and ASCOR regarding the strategic rationale for, and benefits of, the Merger and the past and current business operations, financial condition and future prospects of the respective companies on a stand alone basis and as combined in the Merger, and undertook such other financial analyses and investigations as we deemed appropriate for purposes of this opinion. In rendering our opinion, we have relied upon and assumed, without independent verification, the accuracy, completeness and fairness of all the financial and other information that was available to us from public sources, that was provided to us by the Company and ASCOR or that was otherwise reviewed by us. We are not qualified to and did not evaluate the technical capabilities of ASCOR's products or services. We have not E-1 200 assumed any responsibility for making any independent evaluation of the assets or liabilities of the Company or ASCOR or for making any independent verification of any of the information supplied to or reviewed by us. Our opinion is necessarily based on economic, market, financial and other conditions as they exist on, and on the information made available to us as of, the date of this letter. Our opinion does not constitute a recommendation to any shareholder as to how such shareholder should vote on the proposed Merger. Our opinion does not address the underlying business decision of the Company to enter into the Merger. We are expressing no opinion as to what the value of Giga-tronics common stock will actually be when issued pursuant to the Merger or the prices at which the common stock will actually trade at any time. Wood, Warren & Co., as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, private placements and valuations for corporate and other purposes. Based upon the foregoing and such factors as we deem relevant, we are of the opinion that the Exchange Ratio to be applied in the Merger is fair to the Company from a financial point of view. Very truly yours, Wood, Warren & Co. E-2 201 ANNEX E FINANCIAL ADVISOR ANALYSIS FOR OPINION LETTER Giga-tronics engaged Wood, Warren & Co. to render an opinion as to the fairness from a financial point of view to Giga-tronics of the Exchange Ratio used in connection with the Merger. Wood, Warren & Co. rendered its written opinion on May 2, 1996 to the Board of Directors of Giga-tronics that, as of such date, the Exchange Ratio is fair from a financial point of view. Wood, Warren & Co.'s opinion is directed only to the financial terms of the Merger Agreement and does not constitute a recommendation to any stockholder of Giga-tronics as to how such stockholder should vote at the Giga-tronics Special Meeting. A copy of Wood, Warren & Co.'s opinion dated May 2, 1996 and the procedures followed by Wood, Warren & Co., is attached hereto as Annex E pages E-1 and E-2, and the summary of the complete opinion set forth in this Joint Proxy Statement is qualified in its entirety by reference to the opinion. Giga-tronics stockholders are advised to read the opinion in its entirety. No limitations were placed on Wood, Warren & Co. by the Board of Directors of Giga-tronics with respect to the investigation made or the procedures followed in preparing and rendering its opinion. In arriving at its opinion, Wood, Warren & Co.: (i) reviewed the Merger Agreement and the Proxy Statement dated May 2, 1996 and such other information that was publicly available or was furnished to it by the Company or ASCOR, (ii) reviewed financial statements for the five years ending March 30, 1996 and other financial information, including forecasts, and operating data of Giga-tronics and ASCOR furnished to Wood, Warren & Co. by the companies, (iii) considered the historical stock prices and trading volumes of the common stock of the Company, (iv) reviewed the prices and premiums paid in other business combinations, (v) and prepared a discounted cash flow analysis of ASCOR. In addition, Wood, Warren & Co. held discussions with senior management of Giga-tronics and ASCOR regarding the strategic rationale for, and benefits of, the Merger and the past and current business operations, financial condition and future prospects of the respective companies on a stand alone basis and as combined in the Merger, and undertook such other financial analyses as it deemed appropriate for purposes of this opinion. The following paragraphs summarize the significant analyses performed by Wood, Warren & Co. in arriving at its opinion. The information presented below is based on the financial condition of the Company and ASCOR as of a date or dates shortly before the date of its opinion (May 2, 1996). The closing price of Giga-tronics common stock on May 2, 1996, as reported by NASDAQ National Marketing System, was $8.25. Based on that price and the assumption that Giga-tronics will issue the maximum 724,986 shares of its common stock in the Merger, the enterprise value of ASCOR was approximately $5.6 million. Analysis of Selected Transactions Analysis. Wood, Warren & Co. compared the proposed Merger with selected merger and acquisition transactions. This analysis included 32 technology company transactions. In examining these transactions, Wood, Warren & Co. analyzed certain income statement and balance sheet parameters of the acquired company relative to the consideration offered. Multiples analyzed included consideration offered to historical revenue, to historical earnings before interest and taxes, to historical net income, and to historical book value. Based on the analysis of the selected merger and acquisition transactions, ASCOR's implied enterprise value ranged from approximately $5.0 million to approximately $16.7 million. E-3 202 Discounted Cash Flow Analysis. Wood, Warren & Co. analyzed the theoretical valuation of ASCOR based on projections prepared by the managements of Giga-tronics and ASCOR. To estimate the total present value of ASCOR's business, Wood, Warren & Co. calculated a net present value of the free cash flows for the fiscal years ended March 31, 1997 through 2001 using discount rates ranging from 25% to 40%. The terminal value was based on multiples of 5.5 and 7.5 times projected earnings before interest and taxes for fiscal 2001. Based on the discounted cash flow analysis, ASCOR's enterprise value ranged from approximately $4.4 million to approximately $9.2 million. Pro Forma Analysis. Wood, Warren & Co. analyzed the pro forma impact of the proposed Merger on Giga-tronics earnings per share. In conducting its analysis, Wood, Warren & Co. relied upon the financial projections for the fiscal years ending March, 1997 through 2001 provided by the management of Giga-tronics and ASCOR, respectively. The analysis indicated that earnings per share of the pro forma combined company would be higher in the first fiscal year after the Merger and higher thereafter through fiscal 2001 than comparable projections for Giga-tronics as a stand-alone company. Stock Trading History Analysis. Wood, Warren & Co. examined the trading history in terms of both price and volume for periods of time ranging from six months, one year, three years and five years. Wood, Warren & Co. noted that the Giga-tronics' average price per share was $7.76, $7.65, $6.64, and $6.84, respectively. In addition, Wood, Warren & Co. analyzed the volume of Giga-tronics shares traded at different prices over the same time periods. Wood, Warren & Co. noted that, for each period analyzed, approximately 48% to 64% of the trading volume was at prices below the six month average price per share of $7.76. Contribution Analysis. Wood, Warren & Co. reviewed the contribution of each of Giga-tronics and ASCOR to certain financial statement categories of the pro forma combined company, including revenue, gross profit, earnings before interest and taxes, and net income. The review was made for the three years ended March 30, 1996. This contribution analysis was then compared to the pro forma ownership percentage of ASCOR's shareholders (approximately 22%) in the pro forma combined company. For the year ended March 1996 and the average of the three year period, ASCOR contributed approximately 19% and 17% to revenues, 19% and 18% to gross profit, 52% and 102% (based on the two fiscal years 1994 and 1996 because Giga-tronics had a loss in 1995) to earnings before interest and taxes, and 45% and 64% to net income. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. No company or transaction used in the above analysis is closely comparable to Giga-tronics or ASCOR or the Merger. Accordingly, Wood, Warren & Co., believes its analyses must be considered as a whole and that considering any portion of such analyses and of the factors considered, without considering all analyses and current factors, could create a misleading or incomplete view of the process underlying the opinion. Any estimates contained in these E-4 203 analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold. In arriving at its opinion, Wood, Warren & Co. relied, without independent verification, solely on the aforementioned information and activities and did not obtain any independent appraisal of the properties or assets of the Company or ASCOR. With respect to the financial projections supplied to it, Wood, Warren & Co. assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of management of Giga-tronics and ASCOR as to the future financial performance of the companies. Wood, Warren & Co.'s opinion is necessarily based upon market, financial, economic and other conditions existing, and the information available to it, as of the date of its opinion. It should be understood that, although subsequent developments may affect its opinion, Wood, Warren & Co. does not have any obligation to update, review or reaffirm its opinion. Wood, Warren & Co. was formally engaged by the Board of Directors on April 12, 1996 to render an opinion as to the fairness from a financial point of view to Giga-tronics of the proposed Merger Exchange Ratio. Pursuant to the engagement letter, Giga-tronics agreed to pay Wood, Warren & Co. a fee of $29,950 of which $8,000 was to be paid upon the execution of the engagement letter and $10,000 became due at the time the Proxy Statement was mailed to stockholders and the balance is payable upon consummation of the Merger. The obligation of the Company to pay such fees to Wood, Warren & Co. was not contingent on whether the opinion of Wood, Warren & Co. was favorable or unfavorable. In addition, the Company agreed to indemnify Wood, Warren & Co., against certain liabilities, including liabilities under the federal securities laws, related to or arising out of its engagement. Wood, Warren & Co., as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, private placements and valuations for corporate reorganizations and other purposes. E-5 204 ANNEX F STATE OF CALIFORNIA CODE FOR DISSENTER'S RIGHTS 205 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE PURCHASE AT FAIR MARKET VALUE; DEFINITIONS. (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action, but adjusted for any stock split, reverse stock split, or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the list of OTC margin stocks issued by the Board of Governors of the Federal Reserve System, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in * * * subparagraph (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in * * * subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that * * * subparagraph (A) rather than * * * subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND FOR PURCHASE; TIME; contents. (a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, such corporation 1. 206 shall mail to each such shareholder a notice of the approval of the reorganization by its outstanding shares (Section 152) within 10 days after the date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of the price determined by the corporation to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's right under such sections. The statement of price constitutes an offer by the corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309. (b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase such shares shall make written demand upon the corporation for the purchase of such shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it is received by the corporation or any transfer agent thereof (1) in the case of shares described in clause (i) or (ii) or paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos in that paragraph), not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other case within 30 days after the date on which the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed reorganization or short-form merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares at such price. 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED SECURITIES. Within 30 days after the date on which notice of the approval by the outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (a) if the shares are certificated securities, the shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the shares. 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET VALUE; FILING; TIME OF PAYMENT. (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as 2. 207 between the corporation and the holders thereof shall be filed with the secretary of the corporation. (b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement. 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF ISSUES; APPOINTMENT OF APPRAISERS. (a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation, within six months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. (b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may be consolidated. (c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares. 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT; JUDGMENT; PAYMENT; APPEAL; COSTS. (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it. (b) If a majority of the appraisers appointed fail to make and file a report within 10 days from the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares. (c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal rate from the date on which judgment was entered. 3. 208 (d) Any such judgment shall be payable forthwith with respect to uncertificated securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment. (e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301, and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301). 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST. To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5. 1307. DIVIDENDS ON DISSENTING SHARES. Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by the corporation therefor. 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF DEMAND FOR PAYMENT. Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto. 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS. Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require the corporation to purchase their shares upon the happening of any of the following: (a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorney's fees. (b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles. (c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six 4. 209 months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder's demand for purchase of the dissenting shares. 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS; LITIGATION OF SHAREHOLDERS' APPROVAL. If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation. 1311. EXEMPT SHARES. This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger. 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS. (a) No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization. (b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such shareholder's shares pursuant to this chapter; but if the shareholder institutes any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the shareholder's shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except upon 10 days prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member. (c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is 5. 210 just and reasonable as to the shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so controlled. 6. 211 ANNEX G ARTICLES OF INCORPORATION OF GIGA-TRONICS 212 ARTICLES OF INCORPORATON OF GIGATRONICS, INC. I. The name of this corporation is GIGATRONICS, INC. 11. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. The name and address in the State of California of this corporation's initial agent for service of process is: Mr John Scheck 5 Garden Estates Court Alamo, CA 94507 1. 213 IV This corporation is authorized to issue only one class of shares of stock; and the total number of shares which this corporation is authorized to issue is 250,000. DATED: March 3, 1980 /S/ ----------------------------------- Harold C. Nachtrieb I hereby declare that I am the person who executed the foregoing Articles of Incorporation, which execution is my act and deed. ----------------------------------- Harold C. Nachtrieb 2. 214 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF GIGATRONICS, INC. John Scheck and Stanley Keller certify that: 1. They are the President and Secretary, respective ly, of GIGATRONICS, INC., a California corporation (the "Corpora tion"). 2. Article FOURTH of the Articles of Incorporation of the Corporation is hereby amended to read in full as follows: "FOURTH: This Corporation is authorized to issue two classes of shares, which shall be known as Common Stock and Preferred Stock. The total number of shares of Common Stock which this Corporation is authorized to issue is 1,000,000 and the total number of shares of Preferred Stock which this Corporation is authorized to issue is 25O,000. Upon the Amendment of this Article to read as herein above set forth, each outstandinq share is converted into or reconstitut Common Share." 3. Article FIFTH is added to the Articles of Incorpora- tion and reads as follows: "FIFTH: Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors shall determine the designation of each series and the authorized number of shares in each series. The Board of Directors is authorized to determine and alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of shares of Preferred Stock and to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series." 215 "If the number of shares of any series of Preferred Stock shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution initially fixing the number of shares of such series." 4. The foregoing Amendment of Articles of Incorporsation has been duly approved by the Board of Directors. 5. The foregoing Amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the Corporation is 37,000. The number of shares voting in favor of Amendment equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) /S/ ----------------------------------- John Scheck, President /S/ ----------------------------------- Stanley Keller, Secretary The undersigned declare under penalty of perjury that the matters set forth in the foregoing Certificate are true of their own knowledge. Executed at Pleasant Hill, California on this 14 day of January, 1981. /S/ ----------------------------------- John Scheck, President /S/ ----------------------------------- Stanley Keller, Secretary -2- 216 CERTIFICATE OF DETERMINATION OF PREFERENCES OF PREFERRED STOCK SERIES A OF GIGATRONICS, INC. The undersigned, John Scheck and Stanley Keller, do hereby certify: 1. That said John Scheck is, and at all times herein mentioned was, the duly elected and acting President of GIGA- TRONICS, INC., a California corporation, and that said Stanley Keller is, and at all times herein mentioned was, the duly elected and acting-Secretary of said corporation: 2. That at a meeting held January 7, 1981, the following resolutions were duly adopted by the Board of Directors of said corporation: WHEREAS, Articles Fourth and Fifth of the Articles of Incorporation of this corporation provide for a class of its authorized shares known as Preferred Stock, comprising 250,000 shares of no par value, issuable from time to time in one or more series, and authorize the Board of Directors to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights in terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation preferences of any wholly unissued class, or of a wholly unissued series of any class of shares, or the number of shares constituting any unissued series of any class and the designation of such series, or any of them; and to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issuance of shares of that series; and 217 WHEREAS, it is the desire of the Board of Directors of this corporation pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a first series of said Preferred Stock; NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide, pursuant to Article Fifth of the Articles of Incorporation, for the issuance of a first series of Preferred Stock of the Corporation, and it does hereby fix and determine the rights, preferences, restrictions and other matters relating to said series of Preferred Stock as follows: I. Title of Series The-first series of Preferred Stock shall be designated and known as "Preferred Stock, Series A". II. Number of Shares The number of shares constituting the Preferred Stock, Series A shall be 35,500 shares. III. Dividend Rights The holders of the Preferred Stock, Series A shall be entitled to receive, out of funds legally available therefor, dividends at the rate of One Dollar Forty Cents ($1.40) per annum per share, payable in cash quarterly on the fifteenth (15th) day of March, June, September and December in each year, commencing March 15, 1981, when and as declared by the Board of Directors of the Corporation. Such dividends shall not be cumulative; provided, however, that if the Corporation's independent certified public accountant determines, for any fiscal year, that the Corporation had after-tax earnings for such year, legally available for the payment of dividends, dividends will cumulate in an amount equal to the lesser of dividends payable but not declared during such fiscal year and after-tax earnings for such fiscal year. Dividends so cumulative will be paid or set apart for payment, but without interest, before the payment of any dividend on the common stock of the Corporation (the "Common Stock'). Dividends shall be paid by forwarding a check, postage prepaid, to the address of each holder (or, in the -2- 218 case of joint holders, to the address of either such holder) of Preferred Stock, Series A as shown on the books of the Corporation, unless such holder specifies another address by written notice to the Corporation. The forwarding of such check shall satisfy all obligations of the Corporation with respect to such dividends, unless such check is not paid upor timely presentation. The holders of the Preferred Stock, Series A shall be entitled to dividends as set forth in this Section III and no more. At any time after all dividends on the Preferred Stock, Series A shall have been declared and paid or set apart for payment in accordance with the provisions of this Section III, dividends may be paid on outstanding Common Stock out of any funds legally available therefor. IV. Liquidation Riqhts. In the event of any liquidation, dissolution and winding up of the Corporation, whether voluntary or not, the holders of Preferred Stock, Series A shall be entitled to receive an amount per share equal to Twenty Dollars ($20) plus all dividends to which they are entitled before any amount shall be paid to holders of the Common Stock, and shall not be entitled to receive any portion of the remaining assets of the Corporation. V. Voting Rights The holders of the Preferred Stock, Series A shall have one vote for each full share of Common Stock into which their respective shares of Preferred Stock, Series A, are convertible on all matters on which holders of Common Stock are entitled to vote, and, except as expressly provided by law, shall have no other rights to vote with respect to any matter. VI. - Conversion to Common Stock The Preferred Stock, Series A shall be convertible into Common Stock as follows: A. Definitions. For purposes of this Section VI, the following definitions shall apply: (1) "Series A Issuance Date" shall mean the first date on which the Corporation issues any shares of Preferred Stock, Series A. -3- 219 (2) "Conversion Price" shall mean the price, determined pursuant to this Section VI, at which shares of Common Stock shall be deliverable upon conversion of Preferred Stock, Series A. (3) "Current Conversion Price" shall mean the Conversion Price immediately before the occurrence of any event, which, pursuant to Section VI.C, causes a redetermination of the Conversion Price. (4) "Convertible Securities" shall mean any indebtedness or shares of stock convertible into or exchangeable for Common Stock. (5) "Options" shall mean any rights or options to subscribe for or purchase Common Stock or Convertible Securities. (6) "Common Stock Outstanding" shall include all Common Stock issuable upon exercise of all outstanding Options and conversion of all outstanding Convertible Securities. (7) "Distribution" shall have the meaning of the term "distribution to its shareholders" in the California Corporations Code as in effect on the date of this certificate. B. Right to Convert; Initial Conversion Price. Each holder of the Preferred Stock, Series A may, at any time, upon surrender of the certificates therefor, convert any or all of his Preferred Stock, Series A into fully paid and non-assessable shares of Common Stock at the Conversion Price, each share of Preferred Stock, Series A being taken at Twenty Dollars ($20) for the purpose of such conversion. The Conversion Price shall initially be Twenty Dollars ($20) per share of Common Stock. Such initial Conversion Price shall be subject to adjustment from time to time in certain instances as hereinafter provided. No adjustments with respect to conversion shall be made on account of any dividends that may be cumulated but unpaid on the Preferred Stock, Series A surrendered for conversion, but no dividends shall thereafter be paid on the Common Stock unless such cumulated but unpaid dividends have first been paid to the holders at the time of conversion of the Preferred Stock, Series A. Before any holder of Preferred Stock, Series A shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates therefor, duly -4- 220 endorsed, to the office of the Corporation or any transfer agent for such Preferred Stock, Series A, and shall give written notice to the Corporation at such office that he elects to convert the same. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, Series A, or to his nominee or nominees, certificates for the number of full shares of Common Stock to which he shall be entitled, together with cash in lieu of any fraction of a share as hereinafter provided, and, if ' less than all of the shares of Preferred Stock, Series A represented by such certificate are converted, a certificate representing the shares of Preferred Stock, Series A not converted. Such conversion shall be deemed to have been made as of the date of such surrender of the Preferred Stock, Series A to be converted, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on such date. C. Adjustments to Conversion Price. Subject to Section VI.C.9, the Conversion Price in effect from time to time shall be subject to adjustment in certain cases as follows: 1. Issuance of Securities. In case the Corporation shall at any time after the Series A Issuance Date (i) issue or sell any Common Stock without consideration, or for a consideration per share less than the Current Conversion price, or (ii) pay or make a dividend or other Distribution on the Common Stock (other than in cash out of its retained earnings, in Common Stock, in Convertible Securities, or in Options) then, and thereafter successively upon each such issuance, sale, dividend or other Distribution, the Current Conversion Price shall simultaneously with such issuance, sale, dividend or other Distribution be adjusted to a Conversion Price (calculated to the nearest cent) determined by dividing (a) an amount equal to (i) the total number of shares of Common Stock Outstanding when the Current Conversion Price became effective multiplied by the Current Conversion Price, plus (ii) the aggregate of the amount of all consideration, if any, received by the Corporation for the issuance or sale of Common Stock since the Current Conversion Price became effective, minus (iii) the aggregate amount of all dividends or Distributions on Common Stock (other than in cash out of its retained earnings, in shares of Common Stock, in Convertible Securities, or in Options), paid by the Corporaton since the Current Conversion Price became effective, by -5- 221 (b) the total number of shares of Common Stock Outstanding immediately after such issuance, sale, dividend, or other Distribution, except that the Current Conversion Price shall not be reduced if the amount of such reduction would be less than fifty cents ($.50), and in no event shall the Conversion Price exceed the Initial Conversion Price. For the purposes of this subsection VI.C.1, the following provisions shall also be applicable: (i) Cash Consideration. In case of the issuance or sale of additional Common Stock for cash, the consideration received by the Corporation therefor shall be deemed to be the amount of cash received by the Corporation for such shares (or, if such shares are offered by the Corporation for subscription, the subscription price, or, if such shares are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price), without deducting there from any compensation or discount paid or allowed to underwriters or dealers or others performing similar services or for any expenes incurred in connection therewith. (ii) Non-Cash Consideration. In case of the issuance (Otherwise than upon conversion or exchange of Convertible Securities) or sale of additional Common Stock, Options or Convertible Securities for a consideration other than cash or a consideration a part of which shall be other than cash, the fair value of such consideration as determined by the Board of Directors of the Corporation in the good faith exercise of its business judgment, irrespective of the accounting treatment thereof, shall be deemed to be the value, for purposes of this Section VI, of the consideration other than cash received by the Corporation for such securities. (iii) Options and Convertible Securities. In case the Corporation shall in any manner issue or grant any Options or any Convertible Securities, the total maximum number of shares -6- 222 of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities at the time such Convertible Securities first become convertible or exchangeable shall (as of the date of issue or grant of such Options or, in the case of the issue or sale of Convertible Securities other than where the same are issuable upon the exercise of Options, as of the date of such issue or sale) be deemed to be issued and to be outstanding for the purpose of this subsection VI.C.1 and to have been issued for the price per share for which shares of Common Stock are issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities at the time such Convertible Securities first become convertible or exchangeable; provided that, subject to the provisions of subsection VI.C.2, no further adjustment of the Conversion Price shall be made upon the actual issuance of any such Common Stock or Convertible Securities or upon the conversion or exchange of any such Convertible Securities. (iv) Dividends in Common Stock, Options, or Convertible Securities. In the case of the issuance of additional Common Stock, Options, or Convertible Securities as a dividend or as a Distribution on Common Stock, the aggregate number of shares of Common Stock issued (or deemed issued pursuant to Section VI.C.1(iii)) in payment of such dividend or Distribution shall be deemed to have been issued on the record date for such dividend or Distribution and shall be deemed to have been issued without consideration. (v) Other Dividends. In case of the payment or making of a dividend or other Distribution on Common Stock in property (excluding Common Stock, Convertible Securities and Options, but including all other securities), such dividend or other Distribution shall be deemed to have been paid or made on the record date for such dividend or other Distribution and in the amount of such dividend or other Distribution in property on such record date, as determined by the Board of Directors of the Corporation. -7- 223 (vi) Reclassification. The reclassification of securities other than Common Stock into securities including Common Stock shall be deemed to involve the issuance for a consideration other than cash of such Common Stock at the close of business on the date fixed for the determination of shareholders entitled to receive such Common Stock. (vii) Record Date. In the event that there shall be no record date for the determination of shareholders entitled to any dividend or Distribution declared by the Corporation, the first business day during which the stock transfer books of the Corporation shall be closed for the purpose of such determination shall be deemed to be the record date for the determination of shareholders entitled to such dividend or Distribution. 2. Change in Option Price or Conversion Rate. In the event that the purchase price provided for in any Option referred to in subsection VI.C.1(iii), or the rate at which any Convertible Securities referred to in subsection VI.C.1(iii) are convertible into or exchangeable for shares of Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Current Conversion Price in effect at the time of such event shall forthwith be readjusted to the Conversion Price that would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. In the event that the purchase price provided for in any such Option referred to in subsection VI.C.1(iii), or the additional consideration (if any) payable upon the conversion or exchange of any Convertible Securities referred to in subsection VI.C.1(iii), or the rate at which any Convertible Securities referred to in subsection VI.C.1(iii) are convertible into or exchangeable for shares of Common Stock, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of shares of Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security, the Current Conversion Price then in effect hereunder shall, upon issuance of such shares of Common Stock, be adjusted to such amount as would have -8- 224 obtained had such Option or Convertible Security never been issued and had adjustments been made only upon the issuance of the shares of Common Stock delivered as aforesaid. 3. Termination of Option or Conversion Rights. In the event of the termination or expiration of any right to purchase Common Stock under any Option or of any right to convert or exchange Convertible Securities, the Current Conversion Price shall, upon such termination, be changed to the Conversion Price that would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the shares of Common Stock issuable thereunder shall no longer be deemed to be Common Stock Outstanding. 4. Stock Splits. In the event the out standing Common Stock shall be subdivided into a greater number of shares of Common Stock, the Current Conversion Price shall, simultaneously with the effectiveness of such subdivision, be proportionately reduced, and conversely,in case the outstanding Common Stock shall be combined into a smaller number of shares of Common Stock, the Current Conversion Price shall, simultaneously with the effectiveness of such combination, be proportionately increased. For the purposes of subsections VI.C.1 and VI.C.4, a distribution of Common Stock to holders of Common Stock in which the number of shares distributed is 25 percent (25%) or more of the number of shares of Common Stock upon which the distribution is to be made shall be deemed to be a subdivision of Common Stock, and a distribution of a lesser number of shares of Common Stock shall be deemed to be a stock dividend. 5. Successive Changes. The above provisions of this Section VI shall similarly apply to successive issuances, sales, dividends or other Distributions,subdivisions and combinations on or of the Common Stock after the Series A Issuance Date. 6. Merger; Sale of Corporation. Subject to Section IV, in the event, after the Series A Issuance Date, of any consolidation of the Corporation with, or merger of the Corporation with or into another corporation (other than a consolidation or merger in which the Corporation is the continuing corporation and which does -9- 225 not result in any reclassification of, or change in, the outstanding shares of Common Stock), or in case of any sale or transfer to another corporation of all or substantially all of the assets of the Corporation, each share of Preferred Stock, Series A shall be treated for all purposes as if it had been converted into Common Stock on the earlier of (i) the record date, if any, for voting by holders of Common Stock on such event and (ii) the date of such event. 7. Other Events Altering Conversion Price. Upon the occurrence of any event not specifically denominated in this Section VI as altering the Conversion Price that, in the reasonable exercise of the business judgment of the Board of Directors of the Corporation requires, on equitable principles, the alteration of the Conversion Price, the Conversion Price will be equitably altered. 8. Miscellaneous Conversion Price Matters. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock the full number of shares of Common Stock deliverable upon conversion of all the then outstanding Preferred Stock, Series A, and shall, at its own expense, take all such actions and obtain all such permits and orders as may be necessary to enable the Corporation lawfully to issue such Common Stock upon the conversion of such Preferred Stock. No fractions of Common Stock shall be issued upon the conversion of Preferred Stock, Series A, and in lieu thereof the Corporation shall pay the holder an amount in cash equal to the fair market value of such fractional interest as determined by the Board of Directors of the Corporation in the exercise of its good faith business judgment. 9. Excluded Events. Notwithstanding anything in this Section VI to the contrary, the Conversion Price shall not be adjusted by virtue of the issuance or sale of an aggregate of not more than 20,000 shares of Common Stock to employees of the Corporation at a price,which is less than the Conversion Price at the time of such issuance or sale (all as determined in accordance with this Section VI). D. Mandatory Conversion. At any time on or after the earlier of (a) the date on which any Common Stock is sold to the public by the Corporation (or selling shareholders, if any) in a public offering registered under the Securities Act of 1933 at a per share public offering price of not less -10- 226 than twice the Conversion Price (as defined in Section VI.A(2) hereof) then in effect, or (b) the expiration of three (3) years after the Series A Issuance Date (as defined in Section VI.A.(3), then, in either case, the Corporation, may, at its election, cause all or any portion of the Preferred Stock, Series A to be converted at the Conversion Price then in effect. The Corporation shall give notice of its election to cause conversion under this Section VI.D by mail, postage prepaid, at least 15 days prior to the date specified for conversion, to each holder of record of the Preferred Stock, Series A at the address of such holder as the same shall appear on the books of the Corporation, which notice shall specify said conversion date, the Conversion Price, the number of shares of Common Stock to be issued upon such conversion, the amount of the cash adjustment to be paid in respect of a fractional share of Common Stock and the amount of any dividends cumulated Sand unpaid prior to such conversion date. On and after said conversion date, notwithstanding that any certificates for the Preferred Stock, Series A shall not have been surrendered for conversion, the shares of Preferred Stock, Series A evidenced thereby shall be deemed to be no longer outstanding, and all rights with respect thereto shall forthwith cease and terminate, except only the rights of the holder (i) to receive the shares of Common Stock to which he shall be entitled upon conversion thereof, (ii) to receive the amount of cash payable in respect of any fractional share of Common Stock to which he shall be entitled, and (iii) with respect to dividends cumulated but unpaid on such Preferred Stock, Series A prior to such conversion date. VII. Warrant. Subject to the terms and conditions hereinafter set forth, each holder of Preferred Stock, Series A, is hereby granted the right (a "Warrant"), to purchase, upon (but only upon and in no event after) conversion into Common Stock of the shares of Preferred Stock, Series A to which such Warrant relates, one share of Common Stock for each five share of Preferred Stock, Series A, held, at a price ("Exercise Price") of Twenty Dollars ($20.00) per share of Common Stock. The Warrants are exercisable at the office of the Corporation, or such other office or agency as the Corporation may from time to time designate, upon surrender of the certificate for the holder's Preferred Stock, Series A for conversion into shares of Common Stock and payment of the Exercise Price for the shares of Common Stock to be purchased -11- 227 on such exercise, in United States currency, either in cash, or by certified or official bank check payable to the order of the Corporation. A Warrant may be exercised only in full, only upon conversion of all Preferred Stock, Series A held by the holder making such exercise, and only upon exercise of all Warrants relating to such holder's shares of Preferred Stock, Series A. Shares of Common Stock sufficient to provide for the exercise of the Warrants shall at all times be reserved by the Corporation for issuance upon exercise. All shares of Common Stock issuable upon the exercise of the Warrants shall be validly issued, full paid and non-assessable. VIII. Certain Taxes The Corporation shall pay any and all issuance and other taxes (excluding any federal or state income taxes) that may be payable in respect of any issuance or delivery of shares of Common Stock on conversion of Preferred Stock, Series A, or on exercise of any Warrant. The Corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock, Series A to which such issuance relates were registered, and no such issuance or delivery shall be made unless and until the person requesting such issuance has paid to the Corporation the amount of any such tax, or it is established to the satisfaction of the Corporation that such tax has been paid. RESOLVED FURTHER, that the President or any Vice President and the Secretary or any Assistant Secretary of this Corporation be, and they hereby are, authorized and directed to prepare and file a Certificate of Determination of Preferences in accordance with the foregoing resolution and the provisions of California law and to take such actions as they may deem necessary or appropriate to carry out the intent of the foregoing resolution. -12- 228 3. That the authorized number of shares of Preferred Stock of said corporation is 250,000 and that no such Preferred Stock has been issued. IN WITNESS WHEREOF, the undersigned have executed this Certificate this 14 day of January, 1981. /S/ --------------------------- John Scheck, President /S/ --------------------------- Stanley Keller, Secretary Each of the undersigned declares under penalty of perjury that the matters set forth in the foregoing Certificate of Determination are true and correct. Executed at Pleasant Hill, California, on January l4, 1981. /S/ --------------------------- John Scheck /S/ --------------------------- Stanley Keller -13- 229 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DETERMINATION OF PREFERENCES OF PREFERRED STOCK, SERIES A OF GIGATRONICS, INC. JOHN SCHECK and STANLEY KELLER certify that: 1. They are the President and the Secretary, respectively, of GIGATRONICS, INC., a California corporation. 2. On January 15, 1981, the Corporation filed with the Secretary of State a Certificate of Determination of Preferences of Preferred Stock, Series A, as amended by an amendment thereto filed on January 27, 1981 (the "Certificate"). 3. Clause VII of the Certificate is amended to read in its entirety as follows: " VII. Warrant. Subject to the terms and conditions hereinafter set forth, each holder of Preferred Stock, Series A, is hereby granted the right (a "Warrant"), to purchase at any time prior to conversion into Common Stock of the shares of Preferred Stock, Series A to which such Warrant relates, one share of Common Stock for each five shares of Preferred Stock, Series A, held, at a price ("Exercise Price") of Twenty Dollars ($20.00) per share of Common Stock. The Warrants are exercisable at the office of the Corporation, or such other of office or agency as the Corporation may from time to time designate, upon delivery or the certificate for the holder's Preferred Stock, Series A to be marked by the Corporation indicating exercise of the Warrants and payment of the Exercise Price for the shares of Common Stock to be purchased on such exercise, in United States currency, either in cash, or by certified or official bank check payable to the order of the Corporation. A Warrant may be exercised only in full and only upon exercise of all Warrants relating to such holder's shares of Preferred Stock, Series A. Shares of Common Stock sufficient to provide for the exercise of the Warrants shall at all times be reserved by the Corporation for issuance upon exercise. All shares of Common Stock issuable upon the exercise of the Warrants shall be validly issued, full paid and non-assessable." 230 4. The foregoing amendment of the Certificate has been duly approved by the Board of Directors. 5. The foregoing amendment of the Certificate has been duly approved by the required vote of shareholders in accordance with Sections 902 and 903 of the Corporations Code. The total number of outstanding shares of the Common Stock of the Corporation is 51,798. The total number of outstanding shares of Preferred Stock of the Corporation is 25,500. The number of shares voting in favor of the amendment exceeded the vote required. The percentage vote required was more than fifty percent (50%) of the Common Stock and more than fifty percent (50%) of the Preferred Stock. /S/ --------------------------- John Scheck, President /S/ --------------------------- Stanley Keller, Secretary The undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of their own knowledge. Executed at Pleasant Hill California on June 7, 1982. /S/ --------------------------- John Scheck /S/ --------------------------- Stanley Keller 231 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF GIGA-TRONICS INCORPORATED The undersigned, John W. Scheck and Stanley S. Keller, hereby certify that: 1. They are duly elected and acting President and Secretary, respectively, of Giaa-tronics Incornorated, a California corporation. 2. A new Article VI is added to the Articles of Incorporation, reading in full as follows: "VI. Section 1. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Section 2 This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders." 3. The foregoing amendment has been duly approved by resolution of the Board of Directors of this corporation. 232 4. The foregoing amendment has been approved by the holders of the requisite number of shares of this corporation in accordance with Section 902 and 903 of the California General Corporation Law. The total number of outstanding shares entitled to vote with respect to the foregoing amendment was 3,154,020 shares of Common Stock. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required, such required vote being a majority of the outstanding shares of Common Stock. IN WITNESS WHEREOF, the undersigned have executed this certificate on August 12, 1988. /S/ --------------------------- John Scheck, President /S/ --------------------------- Stanley Keller, Secretary Each.of the undersigned declares under penalty of perjury that the matters set forth in the foregoing certificate are true and correct. Executed at Pleasant Hill, California, on August l2 1988. /S/ --------------------------- John Scheck, President /S/ --------------------------- Stanley Keller, Secretary 233 ANNEX H BYLAWS OF GIGA-TRONICS 234 BYLAWS OF GIGATRONICS, INC. A California Corporation ARTICLE I Offices Section l. Principal Executive Office: The princpal executive office of the corporation shall be at 2495 Estand Way, Pleasant Hill, California. The board of directors is granted full power and authority to change the principal executive office from one location to another in California. Section 2. Other Offices. Other offices may at any time be established by the board of directors at any place or places where the corporation is qualified to do business. 1-1 235 ARTICLE II Meetings of Shareholders Section l. Place of Meetings. All meetings of shareholders shall be held at the principal executive office of the corporation, or at such other p1ace within or without the State of California which may be designated by the board of directors pursuant to the authority hereby granted to said board. or by the written consent of all persons entitled to vote thereat and not present at the meeting, given either before or after the meeting and filed with the secretary of the corporation. Section 2. Annual Meeting. The annual meeting of shareholders shall be held at 2:00 p.m. on the second Tuesday in July provided, however, that should said day fall upon a legal holiday, then any such annual meeting of shareholders shall be neld at the same time and place on the next day thereafter ensuing which is not a legal holiday. At such meeting; directors sha1i be elected, reports of the affairs of the corporation shall be considered, and any other business may be transacted which is within the powers on the shareholders. Section 3. Notice - Annual meeting written notice of each each annual meeting shall be given to each shareholder entitled to vote, either personally or by first class mail or other means of written communication, charges prepaid, addressed to such shareholder at the shareholder's address appearing on the books of the corporation or provided to the corporation for the purpose of notice. All such notices shall be sent to each shareholder entitled thereto not less than ten (l0) days nor more than sixty (60) days before each annual meetings and shall specify: (a) the place, date and hour of such meeting; (b) those matters which the board, at the time oL the mailing of the notice, intends to present for action be the shareholders; (c) if directors are to be elected, the names of nominees intended, at the time of the notice, to be presented by management for election; (d) the general nature of a proposal, if any, to take action with respect to approval of: (i) a contract or other transaction with an interested director, (ii) amendment of the articles of incorporation, (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law, (iv) voluntary dissolution of the corporation, or (v) a distribution in dissolution other than in accordance with the rights of preferred shares, if any; and II-1 236 the articles of incorportion, (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law, (iv) voluntary dissolution of the corporation, or (v) a distribution in dissolution other than in accordance with the rights of preferred shares, if any; and (e) such other matters, if any, as may be expressly required by statute Section 4. Special Meetings. Special meetings of the shareholders, for the purpose-of taking any action permitted by the shareholders under the California General Corporation Laws and the articles of incorporation of this corporation, may be called at any time by the chairman of the board, president or by the board of directors, or by one or more shareholders holding not less than ten percent (10%) of the voting power of the corporation, by written request to the chairman of the board, the president, a vice president or the secretary, who shall forthwith cause notice to be given to the shareholders entitled to vote that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty five (35) nor more than sixty (60) days after receipt of the request Except in special cases cohere other express provision is made by statute, notice of special meetings shall be given in the same manner as for annual meetings of shareholders. Notices of any special meeting shall, in addition to the matters required by item (a), and if applicable, item (c) of the preceding section, specify the general nature of the business to be transacted and no business other than that specified in the notate may be transacted at said special meeting. Section 5. Adjourned Meeting and Notice Thereof. Any annual or special shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by majority vote of the shares present in person or represented by proxy, but in the absence of a quorum, no business (except as provided in Section 8(d) below "Quorum") may be transacted at such meeting. No notice of an adjourned meeting need be given other than by announcement of the time and place thereof at the meeting at which such adjournment is taken unless the meeting is adjourned for 45 days or more or unless a new record date for the adjourned meeting is fixed after adjournment. Section 6. Validation of Defectively Called or Noticed Meetings. The transactions at any meeting of shareholders, however called and noticed, shall be as valid as though had at a meeting held after regular call and notice, if a quorum is present and II-2 237 if either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, or who, though present, has, at the beginning of the meeting, properly objected to the transaction of any business because the meeting was not lawfully called or convened, or to particular matters of business legally required to be included in the notice, but not so included, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 7. Action Without Meeting. (a) Election of Directors. Directors may be elected, without a meeting by written consent, setting forth the action so taken, signed by all of the persons entitled to vote for the election of directors. A director may be elected at any time to fill a vacancy not filled by the directors by the written consent of persons holding a majority of the shares entitled to vote for the election of directors. (b) Other Action. Any other action which, under any provision of the General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and, except as hereinafter set forth, without notice, by written consent, setting forth the action so taken, signed by the holders of not less than the number of shares necessary to take such action at a meeting at which all shares entitled to vote thereon were present and voted. If the consents of all of the shareholders entitled to vote have been solicited in writing, no notice need be given of the action so taken. If consents were not solicited in writing and the written consents of all of the shareholders entitled to vote were not obtained, prompt notice of the action taken shall be given to the shareholders not consenting. As to proposed shareholder approval of any of the following matters, notice to the shareholders not consenting in writing shall be given in the manner provided in Article II, Section 3, of these bylaws at least ten (10) days before consummation of the action authorized by such approval: (i) a contract or other transaction with an interested director, (ii) indemnification of an agent of the corporation as authorized by Section 6, Article V, of these Bylaws, (iii) a reorganization the corporation as defined in Section 181 of the General Corpora tion Law, or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any. II-3 238 (c) Notice of Action by Consent of Majority. Prompt notice of the taking of any corporate action approved by the shareholders without a meeting by less then unanimous written consent shall be given to the shareholders entitled to vote who have not consented in writing. Such notice shall be given in the manner provided in Section 3, Article II, of these Bylaws. (d) Record Date. Unless the board of directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the date on which such written consent is first given. (e) Revocation of Written Consent. A written consent may be revoked by the shareholder by writing received by the corporation prior to the time that the written consents of the number of shares required to authorize the proposed action have been received by the secretary of the corporation. Such a revocation shall be effective upon receipt by the secretary. Section 8. Voting. (a) Record Date. Unless a record date for voting purposes be fixed, as provided in Section 7, Article V, of these Bylaws, then, subject to the provisions of California General Corporation Law Sections 702 and 704, only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice of the meeting is given, or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held, shall be entitled to vote at such meeting, and such day shall be the record date for such meeting. (b) Manner of Voting. Vote may be via voice or by ballot; provided however, at all elections for directors, vote must be by ballot upon demand by a shareholder made at any election before the voting begins. (c) Cumulative Voting. Every shareholder entitled to vote at any election for directors shall have the right to cumulate his or her votes provided that the name of the candidate has been placed in nomination prior to voting and that any shareholder, at the meeting, prior to voting, has given notice of his or her intention to cumulate his or her votes. II-4 239 If votes for directors are cumulated, each shareholder may give one candidate the number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or to distribute the votes on the same principle among as many candidates as the shareholder desires. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. (d) Quorum. The presence in person or by proxy of persons entitled to vote a majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. The shareholder's present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken, other than adjournment, is approved by at least a majority of the shares required to constitute a quorum. (e) Proxies. Persons entitled to vote or execute consents shall have the right to do so either in person or by one or more agents authorized by written proxy executed by the person or that person's authorized agent and filed with the secretary of the corporation; provided, however, no proxy shall be valid after 11 months from the date of its execution unless the proxy provides the length of time for which the proxy is to continue in force, which in no case shall exceed the duration permitted by law. (f) Revocation of Proxy. A duly executed proxy continues in full force and effect until: (i) an instrument revoking it, or a duly executed proxy bearing a later date is filed with the secretary of the corporation, prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted. Section 9. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be nominated. In case any person II-5 240 appointed as inspector fails to appear or fails or refuses to act, the vacancy may, and on the request of any shareholder or a shareholder's proxy shall, be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the meeting. The duties of such inspectors shall be as prescribed by Section 707 of the General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. In the determination of the validity and effect of proxies the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. II-6 241 ARTICLE III Directors Section 1. Powers. Subject to limitations of the articles of incorporation and of the California General Corporation Law as to action to be authorized or approved by the shareholders, and subject to the duties of directors as prescribed by the bylaws, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be controlled by, the board of directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the following powers, to wit: (a) To select and remove all the officers, agents and employees of the corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the articles of incorporation or the bylaws, fix their compensation and require from them security for faithful service. (b) To conduct, manage and control the affairs and business of the corporation, and to make such rules and regulations therefor not inconsistent with law, or with the articles of incorporation or the bylaws, as they may deem best. (c) To change the principal executive office and principal office for the transaction of the business of the corporation from one location to another as provided in Article I, Section 1, hereof; to fix and locate from time to time one or more subsidiary offices of the corporation within or without the State of California, as provided in Article I, Section 2, hereof; to designate any place within or without the State of California for the holding of any shareholders' meeting or meetings; and to adopt, make and use a corporate seal; to prescribe the forms of certificates of stock; to alter the form of such seal and of such certificates from time to time, as in their judgment they may deem best, provided such seal and such certificates shall at all times comply with the provisions of law. (d) To authorize the issuance of shares of stock of the corporation from time to time, upon such terms as may be lawful. III-1 242 (e) To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. (f) By resolution adopted by a majority of the authorized number of directors, to designate an executive and other committees, each consisting of two or more directors, to serve at the pleasure of the board, and to prescribe the manner in which proceedings of such committee shall be conducted. Unless the board of directors shall otherwise prescribe the manner of proceedings of any such committee, meetings of such committee may be regularly scheduled in advance and may be called at any time by any two members thereof; otherwise, the provisions of these bylaws with respect to notice and conduct of meetings of the board shall govern. Any such committee, to the extent provided in a resolution of the board, shall have all of the authority of the board, except with respect to: (i) the approval of any action for which the General Corporation Law or the articles of incorporation also require shareholder approval; (ii) the filling of vacancies on the board or in any committee; (iii) the fixing of compensation of the directors for serving on the board or on any committee; (iv) the adoption, amendment or repeal of bylaws; (v) the amendment or repeal of any resolution of the board; (vi) any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the board; and (vii) the appointment of other committees of the board or the members thereof. III-2 243 Section 2. Number and Qualification of Directors. The number of directors of the corporation shall not be less than three (3) nor more than five (5) until changed by amendment of the articles of incorporation or by a bylaw amending this Section 2 duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote, provided that a bylaw specifying or changing the minimum number or changing from a variable to a fixed board, or vice versa, may only be adopted by approval of the outstanding shares and provided further that a bylaw or amendment of the articles reducing the authorized number or the minimum number of directors below five cannot be adopted if the votes cast against its adoption at a meeting or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3 percent of the outstanding sharesentitled to vote. The exact number of directors shall be fixed from time to time, within the limits specified in the articles of incorporation or in this Section 2, by a bylaw or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding shares entitled to vote, or by the board of directors. Section 3. Election and Term of Office. The directors shall be elected at each annual meeting of shareholders but, if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. All directors shall hold office until their respective successors are elected, subject to the General Corporation Law and the provisions of these bylaws with respect to vacancies on the board. Section 4. Vacancies. A vacancy in the board of directors shall be deemed to exist in case of the death, resignation or removal of any director, if a director has been declared of unsound mind by order of cours or convicted of a felony, if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. (a) Filling Vacancies. Vacancies in the board of directors, including a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. III-3 244 (b) The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. (c) If, after the filling of any vacancy by the directors, the directors then in office who have been elected by the shareholders shall constitute less than a majority of the directors then in office, (i) any holder or holders of an aggregate of 5 percent or more of the total number of shares at the time outstanding having the right to vote for such directors may call a special meeting of shareholders, or (ii) the superior court of the proper county shall, upon application of such shareholder or shareholders, summarily order a special meeting of shareholders, to be held to elect the entire board. The term of office of any directors shall terminate upon such election of a successor. Section 5. Resignation of Director. Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary of the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the board of directors accept the resignation of a director tendered to take effect at a future time, the board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. Section 6. Effect of Reduction in Number. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. Section 7. Place of Meeting. Regular meetings of the board of directors shall be held at any place within or without the state which has been designated from time to time by resolution of the board or by written consent of all members of the board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held either at a place so designated or at the principal executive office. Section 8. Meetings. (a) Organization Meeting. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting at the place of said annual meeting or at such other place as shall be fixed by the board of directors, for the purpose of organization, election of officers, and the transaction of other business. Call and notice of such meetings are hereby dispensed with. (b) Regular Meetings. Regular meetings of the board of directors shall be held, without call, at the time and place fixed by the board. Notice of all regular meetings is hereby dispensed with except as provided hereinbelow. III-4 245 (c) Special Meetings. Special meetings of the board of directors for any purpose or purposes shall be called at any time by the chairman of the board, the president, any vice president, the secretary or by any two directors and shall be held upon four days' notice by mail or 48 hours' notice delivered personally or by telephone or telegraph. A notice or waiver of notice need not specify the purpose of any special meeting of the board. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (d) Adjourned Meetings. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. (e) Place of Meeting. Meetings of the board may be held at any place within or without the state which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, designated in the bylaws or by resolution of the board. (f) Participation by Conference Call. Members of the board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this subdivision constitutes presence in person at such meeting. (g) Quorum. A majority of the authorized number of directors constitutes a quorum of the board for the transaction of business. Section 9. Notice of Meeting. Written notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone, or by telegraph or mail, charges prepaid, addressed to him at his address as it is shown upon the records of the corporation or, if it is not so shown on such records or is not readily ascertainable, at the place at which the meetings of the directors are III-5 246 regularly held. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered, personally or by telephone or telegraph, as above provided, it shall be so delivered at least 48 hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such director. Section 10. Action Without Meeting. Any action required or permitted to be taken by the board of directors may be taken without a meeting if all members of the board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the board and shall have the same force and effect as a unanimous vote of such directors. Section 11. Action at a Meeting - Required Vote. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, unless a greater number, or the same number after disqualifying one or more directors from voting, is required by law, by the articles of incorporation, or by these bylaws. A meeting at which a quorim is initially present may continue to transact business notwithstanding the withdrawal of director, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 12. Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the board. III-6 247 ARTICLE IV Officers Section 1. Officers. The officers of the corporation shall be a president, a vice-president, a secretary and a treasurer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more additional vice-presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two or more offices, except that the offices of president and secretary shall not be held by the same person. Section 2. Election. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by the board of directors, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 3. Subordinate Officers, Etc. The board of directors may appoint, and may empower the chairman of the board or the president, whichever of such officers is serving as the chief executive officer of the corporation, to appoint such other officers as the business of the corporation may require, each of whom shall hold office, for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine. Section 4. Removal and Resignation. Any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors (subject, in each case, to the rights, if any, of an officer under any contract of employments). Any officer may resign at any time by giving written notice to the board of directors or to the chairman of the board or the president, whichever of such officers is serving as the chief executive officer of the corporation, or to the secretary of the corporation, without prejudice however, to the rights, if any, of the corporation under any contract to which such officer is a party. Any such resigation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. IV-1 248 Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the bylaws,for regular appointments to such office. Section 6. Chairman of the Board. If there shall be a chairman of the board, who is not a full-time employee of the corporation, such officer shall, if present, preside at all meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors. If such officer is a full-time employee of the corporation, he shall be the chief executive officer of the corporation, and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and at all meetings of the board of directors. He shall be ex-officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers, and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or the bylaws. Section 7. President. If there shall be no chairman of the board or if such officer is not a full-time employee of the corporation, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have the powers and duties set forth hereinabove for a chairman of the board who is a full-time employee of the corporation. If there shall be a chairman of the board who is full-time employee of the corporation, the president, in the absence or disability of the chairman of the board, shall if present, preside at all meetings of the board of director and shall exercise and perform such other powers and duties as may be from time to time assigned to him by the board. Section 8. Vice-President. In the absence or disability of the president, the vice-presidents in order of their rank as fixed by the board of directors or, if not ranked, the vice-president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice-presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws. IV-2 249 Section 9. Secretary. The secretary shall record or cause to be recorded, and shall keep or cause to be kept, at the principal executive office and such other place as the board of directors may order, a book of minutes of actions taken at all meetings of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. Section 10. Treasurer. The treasurer shall be the chief financial officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus and shares. Any surplus, including earned surplus, paid-in surplus and surplus arising from a reduction of stated capital, shall be classified according to source and shown in a separate account. The books of account shall at all reasonable times be open to inspection by any director. The treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the chairman of the board, the president and directors, whenever they request it, an account of all of his transactions as treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or the bylaws. IV-3 250 ARTICLE V Miscellaneous Section 1. Inspection of Corporate Records. (a) Shareholder. The accounting books and records, the record of shareholders, and minutes of proceedings of the shareholders and the board and committees of the board of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder. Such inspection by a shareholder may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. (b) Director. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 2. Waiver of Annual Reports to Shareholders. As provided by Section 1501(a) of the California General Corporation Law, the annual report to shareholders is hereby expressly waived. Section 3. Contracts, Etc., How Executed. The board of directors, except as in the bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the board of directors, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 4. Certificate for Shares. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman or vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. V-1 251 Any of the signatures on the certificate may be facsimile, provided that in such event at least one signature, including that of either officer or the corporation's registrar or transfer agent, if any, shall be manually signed. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. (a) Legend Stock. Any such certificate shall also contain such legend or other statement as may be required by Section 418 of the General Corporation Law, the Corporate Securities Law of 1968, the federal securities laws, and any agreement between the corporation and the issuee thereof. (b) Issuance Before Full Payment. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the board of directors or the bylaws may provide; provided, however, that any such certificate so issued prior to full payment shall state on the face thereof the amount remaining unpaid and the terms of payment thereof. (c) Lost or Destroyed Certificates. No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate will be issued without the surrender and cancellation of the old certificate if (1) the old certificate is lost, apparently destroyed or wrongfully taken; (2) the request for the issuance of the new certificate is made within a reasonable time after the owner of the old certificate has notice of its loss, destruction, or theft; (3) the request for the issuance of a new certificate is made prior to the receipt of notice by the corporation that the old certificate has been acquired by a bona fide purchaser; (4) the owner of the old certificate files a sufficient indemnity bond with or provides other adequate security to the corporation; and (5) the owner satisfies any other reasonable requirements imposed by the corporation. In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the holders of the old and new certificates, shall be governed by the provisions of Section 8104 and 8405 of the California Commercial Code. V-2 252 Section 5. Representation of Shares of Other Corporations. The president or any vice-president and the secretary or any assistant secretary of this corporation are authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 6. Indemnification of Agents of the Corporation; Purchase of Liability Insurance. (a) Definitions: Agent; Proceeding; Expenses. For the purposes of this section, "agent" means any person who is or was a director, officer, employee or other agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; "proceeding" means any threatened, pending or completed action or proceeding whether civil, criminal, administrative or investigative; and "expenses" includes without limitation attorneys' fees and any expenses of establishing a right to indemnification under subdivision (d) or paragraph (3) of subdivision (e). (b) Power to Indemnify Agent. (i) The corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that such person is or was an agent of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement V-3 253 conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (ii) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No indemnification shall be made under this subdivision (b): (A) In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation in the performance of such person's duty to the corporation, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for the expenses which such court shall determine; (B) Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or (C) Of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. (c) Expenses. To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in subdivision (b) or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. V-4 254 (d) Vote Authorizing Indemnification. Except as provided in subdivision (c), any indemnification under this section shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in subdivision (b) or (c), by: (i) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (ii) Approval of the shareholders by majority vote, with the shares owned by the person to be indemnified not being entitled to vote thereon; or (iii) The court in which such proceeding is or was pending upon application made by the corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by the corporation. (e) Advancement of Expenses. Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this section. (f) Validity and Limitation. No provision made by a corporation to indemnify its or its subsidiary's directors or officers for the defense of any proceeding, whether contained in the articles, bylaws, a resolution of shareholders or directors, an agreement or otherwise, shall be valid unless consistent with this section. Nothing contained in this section shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract or otherwise. (g) No indemnification or advance shall be made under this section, except as provided in subdivision (c) or paragraph (iii) of subdivision (d), in any circumstance where it appears: V-5 255 (i) That it would be inconsistent with a provision of the articles, bylaws, a resolution of the shareholders or an agreement in effect at the time of accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (ii) That it would be inconsistent witn any condition expressly imposed by a court in approving a settlement. (h) Purchase o,f Insurance. The corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against such liability under the provisions of this section. (i) Trustee, Etc. Excluded. This section does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an agent as defined in subdivision (a) of the employer corporation. A corporation shall have power to indemnify such a trustee, investment manager or other fiduciary to the extent permitted by General Corporation Law subdivision (f) of Section 207. Section 7. Record Date. In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the board may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. Section 8. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of constructions and definitions contained in the California General Corporation Law shall govern the construction of these bylaws. V-6 256 ARTICLE VI Amendments Section 1. Power of Shareholders. New bylaws may , be adopted or these bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written assent of shareholders entitled to vote such shares except as otherwise provided by law or by the articles of incorporation. Section 2. Power of Directors. Subject to the right of shareholders as provided in Section l of this Article VI to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the board of directors provided, however, that the board of directors may adopt a bylaw or amendment thereof changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in Section 2 of Article III of these bylaws. VI-1 257 CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: 1. That I am the duly elected and acting secretary of GIGATRONICS, INC. a California corporation; and 2. That the foregoing bylaws, comprising 23 pages, constitute the bylaws of said Corporation duly taken on March 26, 1980. IN WITNESS WHEREOF, I have hereunto subscribe my name and affixed the seal of said corporation this 30 day of April, 1980. /S/ ------------------------- Arthur Bjerlie Secretary 258 ANNEX I Tender Instructions 259 ANNEX I TENDER INSTRUCTIONS WHEREAS, Giga-tronics Incorporated, a California corporation ("Giga-tronics") and ASCOR, Inc., a California corporation ("ASCOR") are parties to that certain AGREEMENT AND PLAN OF REORGANIZATION (the "Reorganization Agreement") entered into as of the 2nd day of May, 1996, by and among Giga-tronics ASCOR Acquisition Corp., a California corporation and a wholly owned subsidiary of Giga-tronics ("Merger Sub"), and ASCOR, which Reorganization Agreement the undersigned holder ("Shareholder") of preferred stock of ASCOR ("ASCOR Preferred Stock") has previously executed; and WHEREAS, pursuant to Section 8.02(h) of the Reorganization Agreement it is a condition to the obligations of Giga-tronics to consummate the Merger that all shares of ASCOR Preferred Stock be tendered to Giga-tronics as of the Closing Date in accordance with the terms contained hereinafter; and NOW, THEREFORE, in consideration of the foregoing, Shareholder hereby tenders the shares of ASCOR Preferred Stock, in such amounts and of such series as are listed below (which amounts represent all ASCOR Preferred Stock owned by the undersigned and all ASCOR Preferred Stock which was owned by Shareholder as of May 2, 1996, the date of the Reorganization Agreement) in exchange for shares of Giga-tronics Common Stock pursuant to the terms of the Reorganization Agreement. Shareholder acknowledges and agrees that pursuant to Section 1.02 of the Reorganization Agreement, and as provided in the Agreement of Merger attached as Exhibit 1.01 to the Reorganization Agreement, all shares of ASCOR Preferred Stock and Common Stock of ASCOR will be exchanged for Giga-tronics Common Stock at the same Exchange Rate. Shareholder agrees that the Giga-tronics Common Stock to be received pursuant to the exchange described herein pursuant to the terms of the Reorganization Agreement (and any cash in lieu of fractional shares of Giga-tronics Common Stock) represents the full amount of consideration due to the undersigned upon consummation of the Merger. Shareholder hereby waives any (a) rights to receipt of accrued dividends on such Preferred Stock provided by Article Fourth, Section 1 of the Articles of Incorporation of ASCOR (the "ASCOR Articles"), (b) liquidation rights pertaining to ASCOR Preferred Stock as such may be provided by Article Fourth, Section 2 of the ASCOR Articles, (c) rights to convert into common stock as provided by Article Fourth, Section 6 of the ASCOR Articles, and (d) any other rights which the ASCOR Preferred Stock may possess whether pursuant to the ASCOR Articles or otherwise. 260 Shareholder has have executed this Tender Instructions as of the Closing Date as such term is defined in the Reorganization Agreement. SHAREHOLDER By:_______________________________ Name:_____________________________ Title:____________________________ ASCOR Preferred Shares Held and Tendered Herewith Series A _______________________ Series B _______________________ Series C _______________________ 261 ANNEX J Letter Agreement 262 May 20, 1996 ASCOR, Incorporated. 47790 Westinghouse Drive Fremont, CA 94539 Attention: Jeffrey Lum, President ASCOR, Incorporated ("ASCOR") and Giga-tronics, Incorporated ("Giga-tronics") are parties to that certain AGREEMENT AND PLAN OF REORGANIZATION (the "Reorganization Agreement") entered into as of the 2nd day of May, 1996, by and among Giga-tronics , ASCOR Acquisition Corp., a California corporation and a wholly owned subsidiary of Giga-tronics ("Merger Sub"), and ASCOR. All capitalized terms used but not defined herein shall have the meaning ascribed to them in the Reorganization Agreement. Pursuant to the terms of the Reorganization Agreement Giga-tronics is to issue a maximum of 724,986 shares of Giga-tronics Common Stock in the Merger. Further pursuant to the terms of the Reorganization Agreement, such issuance is to be not pursuant to a registration under federal securities laws, rather pursuant to an exemption therefrom. The Reorganization Agreement also contemplates that at the Closing of the Merger Giga-tronics will enter into a Registration Rights Agreement (in the form of Exhibit 10.01 to the Reorganization Agreement) with the former shareholders of ASCOR. Pursuant to Section 2.14 of the Registration Rights Agreement the registration rights granted thereunder will not be available if the Giga-tronics Common Stock issued in the merger was "issued by Giga-tronics to the Holder pursuant to a registration statement filed with the SEC". Giga-tronics believes it is in the interests of Giga-tronics and the combined companies to issue the Giga-tronics Common Stock pursuant to such a registration statement. Therefore, Giga-tronics now agrees to use its best faith efforts to file with the Securities and Exchange Commission, and cause the effectiveness under federal securities law of, a registration statement on Form S-4 (or such other form as may be applicable) covering the shares of Giga-tronics Common Stock to be issued in the Merger. The undersigned hereby agree that upon the issuance of such Giga-tronics Common Stock pursuant to an effective registration statement the Registration Rights Agreement will be of no force and effect and will therefore not be delivered at the Closing. 263 Please acknowledge your acceptance and agreement to the foregoing by signing and returning a copy of this letter. Very truly yours, GIGA-TRONICS, INCORPORATED By:________________________________ Name: Title: ACCEPTED AND AGREED ASCOR, INCORPORATED By:________________________ Name: Title: 264 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Giga-tronics is incorporated in California. Under Section 317 of the California Corporation Code (the "CCC"), a California corporation generally has the power to indemnify its present and former directors and officers against expenses, judgments, fines, settlements and other amounts actually paid and reasonably incurred by them in connection with any threatened, pending or completed action or proceeding so long as they acted in good faith and in a manner they reasonably believed to be in the best interests of the company, and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. The Articles of Incorporation of Giga-tronics (the "Articles") and the Bylaws of Giga-tronics (the "Bylaws") provide that Giga-tronics has the powers of indemnification as specified in Section 317 of the CCC. The Bylaws provide to the extent an agent of Giga-tronics has been successful on the merits in defense of a proceeding relating to which Giga-tronics has the power to indemnify them, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. The Bylaws further provide that except in such cases where an agent is successful on the merits in such defense, indemnification is to be made only upon a determination that indemnification is proper in the circumstances because the agent met standards of conduct as determined by (i) a majority vote of a quorum consisting of directors who are not parties to such proceeding; (ii) approval of the shareholders by majority vote, with the shares owned by the person to be indemnified not being entitled to vote thereon; or (iii) the court in which such proceeding is or was pending upon application made by the corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by the corporation. Section 204(a)(10) of the CCC provides that Articles of Incorporation may, subject to certain provisos, contain a provision eliminating or limiting the personal liability of a director for monetary damages in an action brought by or in the right of the company for breach of a director's duty to the company and its shareholders. The Articles provide that the liability of the directors of Giga-tronics for monetary damages will be eliminated to the fullest extent permissible under California law. 265 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 - Agreement and Plan of Reorganization dated as of May 2, 1996 among the Registrant, ASCOR, Acquisition Corp. and ASCOR, Inc. ( "ASCOR ") (included as Annex C to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 2.2 - Letter Agreement dated May 20, 1996 between the Registrant and ASCOR (included as Annex J to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 2.3 - Form of Agreement of Merger (included as Exhibit 1.01 to the Agreement and Plan of Reorganization included as Annex C to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 3.1 - Articles of Incorporation of Giga-tronics Incorporated (included as Annex G to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 3.2 - Bylaws of Giga-tronics Incorporated (included as Annex A to the Joint Proxy Statement/ Prospectus included in Part I of this Registration Statement). 4.1 - Specimen certificate of the Registrant's Common Stock. 5.1 - Opinion of Brobeck, Phleger & Harrison, counsel to the Registrant. 8.1 - Tax Opinion of Brobeck, Phleger & Harrison, counsel to the Registrant. 10.1 - 1990 Restated Stock Option Plan and form of Incentive Stock Option Agreement. 10.2 - Standard form Indemnification Agreement for Directors and Officers. 10.3 - Lease between Giga-tronics Incorporated and Calfront Associates for 4650 Norris Canyon Road, San Ramon, CA, dated December 6, 1993. 19.1 - Fairness Opinion of Wood, Warren & Co. (included as Annex E to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 23.1 - Consent of Brobeck, Phleger & Harrison (included in Exhibit 5.1). 23.2 - Consent of KPMG Peat Marwick LLP. 23.3 - Consent of KPMG Peat Marwick LLP. 23.4 - Consent of Wood, Warren & Co. 24.1 - Power of Attorney (see Signature Page included in Registration Statement).
266 (b) Financial Statement Schedules Giga-tronics, Incorporated Schedule II. Valuation and Qualifying Accounts ASCOR, Inc. Schedule II. Valuation and Qualifying Accounts ITEM 22. UNDERTAKINGS (a) The undersigned registrants hereby undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1993; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) (1) The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The Registrant undertakes that every prospectus (i) that is filed pursuant to the immediately preceding paragraph b.(1), or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the 267 securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (d) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. 268 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Ramon, State of California, on June 19, 1996. GIGA-TRONICS, INCORPORATED By: /s/ GEORGE H. BRUNS, JR. ----------------------------------------------- George H. Bruns, Jr., Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, George H. Bruns, Jr. and Gregory L. Overholtzer, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign this Registration Statement and any and all amendments hereto (including post-effective amendments), and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be dome by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ GEORGE H. BRUNS, JR. Chairman of the Board and June 19, 1996 - ---------------------------------- Chief Executive Officer George H. Bruns, Jr. (Principal Executive Officer and Director) /s/ GREGORY L. OVERHOLTZER Vice President, Finance and June 19, 1996 - ---------------------------------- Chief Financial Officer Gregory L. Overholtzer (Principal Accounting Officer) /s/ JAMES A. COLE Director June 19, 1996 - ---------------------------------- James A. Cole /s/ EDWARD D. SHERMAN Director June 19, 1996 - ---------------------------------- Edward D. Sherman /s/ ROBERT S. WILSON Director June 19, 1996 - ---------------------------------- Robert S. Wilson
269 REPORT OF INDEPENDENT AUDITORS ON SCHEDULES The Board of Directors Giga-tronics Incorporated Under date of April 18, 1996, except for Note 10, which is as of May 2, 1996 we reported on the balance sheets of Giga-tronics Incorporated as of March 30, 1996 and the related statements of operations, shareholders' equity and cash flows for the fifty-three week period ended March 30, 1996, and for the fifty two week periods in the two-year period ended March 25, 1995 included in the Registration Statement. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement Schedule II, Valuation and Qualifying Accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP San Jose, California April 18, 1996 except as to note 10, which is as of May 2, 1996 S-1 270 GIGA-TRONICS INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------- ------------ -------------------------- ---------- ---------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COST AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ------------------------- ------------ ---------- ---------- ---------- ---------- $ $ $ $ $ Year ended March 30, 1996 - ------------------------- Allowances deducted from assets: Accounts receivable: For doubtful accounts(1) 31,676 209,907 -- 19,824 221,759 ------ ------- ------ ------ ------- Total 31,676 209,907 -- 19,824 221,759 ====== ======= ====== ====== ======= Year ended March 25, 1995 - ------------------------- Allowances deducted from assets: Accounts receivable: For doubtful accounts(1) 87,065 13,775 -- 69,164 31,676 ------ ------- ------ ------ ------- Total 87,065 13,775 -- 69,164 31,676 ====== ======= ====== ====== ======= Year ended March 26, 1994 - ------------------------- Allowances deducted from assets: Accounts receivable: For doubtful accounts(1) 43,265 45,000 -- 1,200 87,065 ------ ------- ------ ------ ------- Total 43,265 45,000 -- 1,200 87,065 ====== ======= ====== ====== =======
- --------------- (1) Reserve for accounts receivable collection exposure. S-2 271 REPORT OF INDEPENDENT AUDITORS ON SCHEDULES The Board of Directors ASCOR, Incorporated Under date of April 25, 1996, except for Note 14, which is as of May 2, 1996, we reported on the balance sheet of ASCOR, Incorporated as of March 31, 1996 and 1995, and the related statements of operations, shareholders' deficit and cash flows for each of the years in the three-year period ended March 31, 1996 included in the Registration Statement. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement Schedule II, Valuation and Qualifying Accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP San Jose, California April 18, 1996 except as to note 14, which is as of May 2, 1996 S-3 272 ASCOR INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------- ------------ -------------------------- ---------- ---------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COST AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ------------------------- ------------ ---------- ---------- ---------- ---------- $ $ $ $ $ Year ended March 30, 1996 - ------------------------- Allowances deducted from assets: Accounts receivable: For doubtful accounts(1) -- 13,123 -- -- 13,123 ------ ------ ------ ------ ------ Total -- 13,123 -- -- 13,123 ====== ====== ====== ====== ====== Year ended March 25, 1995 - ------------------------- Allowances deducted from assets: Accounts receivable: For doubtful accounts(1) -- -- -- -- -- ------ ------ ------ ------ ------ Total -- -- -- -- -- ====== ====== ====== ====== ====== Year ended March 26, 1994 - ------------------------- Allowances deducted from assets: Accounts receivable: For doubtful accounts(1) -- -- -- -- -- ------ ------ ------ ------ ------ Total -- -- -- -- -- ====== ====== ====== ====== ======
- --------------- (1) Reserve for accounts receivable collection exposure. S-4 273 PROXY GIGA-TRONICS INCORPORATED SPECIAL MEETING OF SHAREHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS George H. Bruns and Greg Overholtzer, or either of them, are hereby constituted and appointed the lawful attorneys and proxies of the undersigned, each with full power of substitution, to vote and act as proxy with respect to all shares of Common Stock of Giga-tronics Incorporated ("Giga-tronics") standing in the name of the undersigned on the books of Giga-tronics at the close of business on June 14, 1996, at the Special Meeting of Shareholders to be held at 10:00 A.M., on July 17, 1966, at Giga-tronics' Facilities at 4650 Norris Canyon Road, San Ramon, CA 94583, or at any adjournment or postponement thereof. THE POWERS HEREBY GRANTED MAY BE EXERCISED BY BOTH OF SAID ATTORNEYS OR PROXIES OR THEIR SUBSTITUTES PRESENT AND ACTING AT THE SPECIAL MEETING OF SHAREHOLDERS OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF OR, IF ONLY ONE BE PRESENT AND ACTING, THEN BY THAT ONE. THE UNDERSIGNED HEREBY REVOKES ANY AND ALL PROXIES HERETOFORE GIVEN BY THE UNDERSIGNED TO VOTE AT SAID MEETING. Shares of Giga-tronics Common Stock represented by properly executed proxies will be voted and such shares will be voted in accordance with the specification indicated. If no specifications are made this properly executed proxy will be voted FOR Proposal No. 1 (CONTINUED AND TO BE SIGNED ON OTHER SIDE) 274 This Proxy when properly executed will be voted in the manner directed herein. If no election is made, this Proxy will be voted FOR Proposal 1. 1. Proposal to approve and adopt the Agreement and Plan of Reorganization dated as of May 2, 1996 (the "Reorganization Agreement") by and among Giga-tronics, ASCOR Acquisition Corp., a California corporation ("Merger Sub") and ASCOR, Incorporated ("ASCOR") and the transactions contemplated by the Reorganization Agreement. FOR AGAINST ABSTAIN / / / / / / Receipt is acknowledged of the Notice of Special Meeting and Joint Proxy Statement/Prospectus (with all enclosures and attachments) relating to the Special Meeting. Whether or not you expect to attend the meeting, you are urged to execute and return this proxy, which may be revoked at any time prior to its use. Signature______________________________ Signature______________________________ Date___________________________________ Please sign your name exactly as it appears printed hereon. Executors administrators, guardians, officers of corporations and others signing in a fiduciary capacity should sign their full title as such. 275 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 - Agreement and Plan of Reorganization dated as of May 2, 1996 among the Registrant, ASCOR, Acquisition Corp. and ASCOR, Inc. ( "ASCOR ") (included as Annex C to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 2.2 - Letter Agreement dated May 20, 1996 between the Registrant and ASCOR (included as Annex J to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 2.3 - Form of Agreement of Merger (included as Exhibit 1.01 to the Agreement and Plan of Reorganization included as Annex C to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 3.1 - Articles of Incorporation of Giga-tronics Incorporated (included as Annex G to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 3.2 - Bylaws of Giga-tronics Incorporated (included as Annex A to the Joint Proxy Statement/ Prospectus included in Part I of this Registration Statement). 4.1 - Specimen certificate of the Registrant's Common Stock. 5.1 - Opinion of Brobeck, Phleger & Harrison, counsel to the Registrant. 8.1 - Tax Opinion of Brobeck, Phleger & Harrison, counsel to the Registrant. 10.1 - 1990 Restated Stock Option Plan and form of Incentive Stock Option Agreement. 10.2 - Standard form Indemnification Agreement for Directors and Officers. 10.3 - Lease between Giga-tronics Incorporated and Calfront Associates for 4650 Norris Canyon Road, San Ramon, CA, dated December 6, 1993. 19.1 - Fairness Opinion of Wood, Warren & Co. (included as Annex E to the Joint Proxy Statement/Prospectus included in Part I of this Registration Statement). 23.1 - Consent of Brobeck, Phleger & Harrison (included in Exhibit 5.1). 23.2 - Consent of KPMG Peat Marwick LLP. 23.3 - Consent of KPMG Peat Marwick LLP. 23.4 - Consent of Wood, Warren & Co. 24.1 - Power of Attorney (see Signature Page included in Registration Statement).
EX-4.1 2 EXHIBIT 4.1 1 Exhibit 4.1 Specimen Stock Certificate of Registrant The face of the stock certificate has a border which is a continuous wavy pattern all the way around. In the upper left and right corner contain a different leaf pattern. In the center at the top is a drawing of an eagle. Below the eagle is the company name in logo fashion. The company loga, the eagle and the boarder are all in blue ink. The following is the text which appears in black on the face of the stock certificate starting in the upper lefthand corner and moving left to right and down: Common Stock Common Stock This certificate is transferable in the cities of San Francisco, California or New York, New York. See reverse for certain definitions and a statement as to the rights, preferences, privileges and restrictions of shares. Giga-tronics Incorporated Incorporated Under the Laws of the State of California This certifies that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF GIGA-TRONICS INCORPORATED transferable on the books of the Corporation by the holder hereof, in person or by duly authorized attorney, upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: President Secretary COUNTERSIGNED AND REGISTERED BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (SAN FRANCISCO) TRANSFER AGENT AND REGISTRAR BY AUTHORIZED OFFICER. The following is the text in black ink which appears on the reverse of the stock certificate starting in the upper lefthand corner and moving left to right and down: GIGA-TRONICS INCORPORATED The Company is authorized to issue Common Stock and Preferred Stock. The Board of Directors of the Company has authority to fix the number of shares and the designation of any series of Preferred Stock and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any unissued Preferred Stock. A statement of the rights, preferences, privileges, and restrictions granted to or imposed upon the respective classes or series of stock and upon the holders thereof as established, from time to time, by the Articles of Incorporation of the Company and by any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge from the Transfer Agent of the Company at its offices in San Francisco, California or New York, New York. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM-as tenants in common UNIF GIFT MIN ACT-Custodian (Cust) (Minor) under Uniform Gifts to Minors Act (State) TEN ENT-as tenants by the entireties JT TEN-as joint tenants with right of survivorship and not as tenants in common. Additional abbreviations may also be used though not in the above list. For value received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the 2 books of the within named Corporation with full power of substitution in the premises. Dated: NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-5.1 3 EXHIBIT 5.1 1 Exhibit 5.1 June 19, 1996 Giga-tronics, Incorporated 4650 Norris Canyon Road San Ramon, CA 94583 Re: Registration Statement on Form S-4 of Giga-tronics, Incorporated Ladies and Gentlemen: We have acted as counsel to Giga-tronics, Incorporated, a California corporation (the "Company") with respect to the proposed offering by the Company of up to 724,986 shares (the "Shares") of the Common Stock of the Company, no par value per share (the "Common Stock"), in connection with the contemplated merger (the "Merger") of ASCOR Acquisition Corp., a California corporation ("Merger Sub"), with and into ASCOR, Inc., a California corporation ("ASCOR"), pursuant to terms of the Agreement and Plan of Reorganization, dated as of May 2, 1996, by and among the Company, Merger Sub and ASCOR, as amended by that certain Letter Agreement dated May 20, 1996 between the Company and ASCOR (collectively the "Merger Agreement"). As such counsel, we have examined such corporate records, certificates and other documents and have made such other factual and legal investigations as we have deemed relevant and necessary as the basis for the opinions hereinafter expressed. In such examinations, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as conformed or photostatic copies. Based on the foregoing, we are of the opinion that: 1. The issuance by the Company of the Shares in connection with the Merger has been duly authorized by all necessary corporate action on the part of the Company. 2. When issued following consummation of the Merger as described in the Merger Agreement the Shares will be duly and validly issued and outstanding, fully paid and non-assessable shares of Common Stock. 2 Giga-tronics, Incorporated Page 2 June 19, 1996 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus. Very truly yours, /s/ Brobeck, Phleger & Harrison LLP ----------------------------------- BROBECK, PHLEGER & HARRISON LLP EX-8.1 4 EXHIBIT 8.1 1 Exhibit 8.1 June 11, 1996 Giga-tronics Incorporated 4650 Norris Canyon Road San Ramon, California 94583 ASCOR, Inc. 47790 Westinghouse Drive Fremont, California 94539 Ladies and Gentlemen: This opinion is being delivered to you pursuant to Section 8.03(b) of the Agreement and Plan of Reorganization (the "Agreement") among Giga-tronics Incorporated, a California corporation ("Giga-tronics"), its wholly owned subsidiary, ASCOR Acquisition Corp., a California corporation ("Sub"), and ASCOR, Inc., a California corporation ("ASCOR"), dated May 2, 1996. Pursuant to the Agreement, Sub will merge with and into ASCOR (the "Merger"), and ASCOR will become a wholly owned subsidiary of Giga-tronics. Except as otherwise provided, capitalized terms referred to herein have the meanings set forth in the Agreement. All section references, unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the "Code"). We have acted as legal counsel to Giga-tronics and Sub in connection with the Merger. As such, and for the purpose of rendering this opinion, we have examined (or will examine on or prior to the Effective Date) and are relying (or will rely) upon (without any independent investigation or review thereof) the truth and accuracy, at all relevant times, of the statements, covenants, representations and warranties contained in the following documents (including all schedules and exhibits thereto): 1. The Agreement; 2. Representations made to us by Giga-tronics and Sub in a letter reproduced as an exhibit hereto; 2 Giga-tronics Incorporated June 11, 1996 Page 2 3. Representations made to us by ASCOR in a letter reproduced as an exhibit hereto; 4. Representations made by certain shareholders of ASCOR in "Affiliates Agreements"; 5. The Registration Statement filed with respect to the Merger; and 6. Such other instruments and documents related to the formation, organization and operation of Giga-tronics, ASCOR and Sub or to the consummation of the Merger and the transactions contemplated thereby as we have deemed necessary or appropriate. In connection with rendering this opinion, we have assumed or obtained representations (and are relying thereon, without any independent investigation or review thereof) that: 1. Original documents (including signatures) are authentic, documents submitted to us as copies conform to the original documents, and there has been (or will be by the Effective Time) due execution and delivery of all documents where due execution and delivery are prerequisites to effectiveness thereof; 2. The Merger will be consummated in accordance with the Agreement and will be effective under the laws of the State of California; 3. The shareholders of ASCOR do not, and will not on or before the Effective Date, have an existing plan or intent to dispose of an amount of Giga-tronics Common Stock to be received in the Merger (or to dispose of ASCOR capital stock in anticipation of the Merger) such that the shareholders of ASCOR will not receive and retain a meaningful continuing equity ownership in Giga-tronics that is sufficient to satisfy the continuity of interest requirement as specified in Treasury Regulations Section 1.368-1(b) and as interpreted in certain Internal Revenue Service rulings and federal judicial decisions; 4. After the Merger, ASCOR will hold "substantially all" of its and Sub's properties within the meaning of Section 368(a)(2)(E)(i) of the Code and the regulations promulgated thereunder; 5. To the extent any expenses relating to the Merger (or the "plan of reorganization" within the meaning of Treasury Regulations Section 1.368-1(c) with respect to the Merger) are funded directly or indirectly by a party other than the 3 Giga-tronics Incorporated June 11, 1996 Page 3 incurring party, such expenses will be within the guidelines established in Revenue Ruling 73-54, 1973-1 C.B. 187; and 6. At all relevant times, including as of the Effective Time, (i) no outstanding indebtedness of ASCOR, Giga-tronics or Sub has or will represent equity for tax purposes; and (ii) no outstanding equity of ASCOR, Giga-tronics or Sub has or will represent indebtedness for tax purposes. Based on our examination of the foregoing items and subject to the assumptions, exceptions, limitations and qualifications set forth herein, we are of the opinion that, for federal income tax purposes, the Merger will be a "reorganization" as defined in Section 368(a) of the Code. In addition to the assumptions set forth above, this opinion is subject to the exceptions, limitations and qualifications set forth below. 1. This opinion represents and is based upon our best judgment regarding the application of federal income tax laws arising under the Code, existing judicial decisions, administrative regulations and published rulings and procedures. Our opinion is not binding upon the Internal Revenue Service or the courts, and there is no assurance that the Internal Revenue Service will not successfully assert a contrary position. Furthermore, no assurance can be given that future legislative, judicial or administrative changes, on either a prospective or retroactive basis, would not adversely affect the accuracy of the conclusions stated herein. Nevertheless, we undertake no responsibility to advise you of any new developments in the application or interpretation of the federal income tax laws. 2. This opinion addresses only the classification of the Merger as a reorganization under Section 368(a) of the Code, and does not address any other federal, state, local or foreign tax consequences that may result from the Merger or any other transaction (including any transaction undertaken in connection with the Merger). In particular, we express no opinion regarding (i) whether and the extent to which any ASCOR shareholder who has provided or will provide services to ASCOR, Giga-tronics or Sub will have compensation income under any provision of the Code; (ii) the effects of such compensation income, including but not limited to the effect upon the basis and holding period of the Giga-tronics stock received by any such shareholder in the Merger; (iii) the potential application of the "golden parachute" provisions (Sections 280G, 3121(v)(2) and 4999) of the Code, the alternative minimum tax provisions (Sections 55, 56 and 57) of the Code or Sections 305, 306, 357, 424, and 708, or the regulations promulgated thereunder; (iv) other than that the Merger will be a reorganization within the meaning of Code Section 368 and the consequences that follow directly and solely 4 Giga-tronics Incorporated June 11, 1996 Page 4 from such characterization, the corporate level tax consequences of the Merger to Giga-tronics, Sub or ASCOR, including without limitation the survival and/or availability, after the Merger, of any of the federal income tax attributes or elections of ASCOR, after application of any provision of the Code, as well as the regulations promulgated thereunder and judicial interpretations thereof; (v) the basis of any equity interest in ASCOR acquired by Giga-tronics in the Merger; (vi) the tax consequences of any transaction in which ASCOR stock or a right to acquire ASCOR stock was received; (vii) the tax consequences of the Merger to holders of options or warrants for ASCOR stock; or (viii) the tax consequences that may be relevant to particular classes of ASCOR stockholders such as dealers in securities, corporate shareholders subject to the alternative minimum tax, foreign persons, and holders of shares acquired upon exercise of stock options or in other compensatory transactions. 3. No opinion is expressed as to any transaction other than the Merger as described in the Agreement or to any transaction whatsoever, including the Merger, if all the transactions described in the Agreement are not consummated in accordance with the terms of such Agreement and without waiver or breach of any material provision thereof or if all of the representations, warranties, statements and assumptions upon which we relied are not true and accurate at all relevant times. In the event any one of the statements, representations, warranties or assumptions upon which we have relied to issue this opinion is incorrect, our opinion might be adversely affected and may not be relied upon. 4. This opinion has been delivered to you for the purpose of satisfying the conditions set forth in Section 8.03(b) of the Agreement and is intended solely for your benefit; it may not be relied upon for any other purpose or by any other person or entity, and may not be made available to any other person or entity without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and further consent to all references to us in the Registration Statement. Very truly yours, /s/ Brobeck, Phleger & Harrison LLP ----------------------------------- BROBECK, PHLEGER & HARRISON LLP Enclosures 5 Exhibit to Exhibit 8.1 June 12, 1996 Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, California 94306 Re: Merger pursuant to the Agreement and Plan of Reorganization (the "Agreement") dated May 2, 1996, among Giga-tronics Incorporated, a California corporation ("Giga-tronics"), ASCOR, Inc., a California corporation ("ASCOR") and ASCOR Acquisition Corp., a California corporation ("Sub") Ladies and Gentlemen: This letter is supplied to you in connection with your rendering of an opinion pursuant to Section 8.03(b) of the Agreement regarding certain federal income tax consequences of the Merger. Unless otherwise indicated, capitalized terms not defined herein have the meanings set forth in the Agreement. A. REPRESENTATIONS On behalf of Giga-tronics and Sub, the undersigned hereby certify and represent that the following facts are now true and will continue to be true as of the Effective Date of the Merger: 1. Pursuant to the Merger, Sub will merge with and into ASCOR, and ASCOR will acquire all of the assets and liabilities of Sub. At least ninety percent (90%) of the fair market value of the net assets and at least seventy percent (70%) of the fair market value of the gross assets held by ASCOR immediately prior to the Merger will continue to be held by ASCOR immediately after the Merger. For the purpose of determining the percentage of ASCOR's net and gross assets held by it immediately following the Merger, the following assets will be treated as property held by ASCOR immediately prior but not subsequent to the Merger: (i) assets disposed of by ASCOR prior to or subsequent to the Merger and in contemplation thereof (including without limitation any asset disposed of by ASCOR, other than in the ordinary course of 6 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 2 business, pursuant to a plan or intent existing during the period ending on the Effective Date and beginning with the commencement of negotiations (whether formal or informal) with Giga-tronics regarding the Merger (the "Pre-Merger Period")), (ii) assets used by ASCOR to pay expenses or liabilities incurred in connection with the Merger, and (iii) assets used to make distribution, redemption or other payments in respect of ASCOR capital stock or rights to acquire such stock (including payments to dissenters) that are made in contemplation of the Merger or related thereto; 2. Giga-tronics is participating in the Merger for good and valid business reasons and not for tax purposes; 3. Prior to the Merger, Giga-tronics will be in "Control" of Sub. As used herein, "Control" of a corporation shall consist of ownership of stock possessing at least eighty percent (80%) of the total combined voting power of all classes of stock entitled to vote and at least eighty percent (80%) of the total number of shares of all other classes of stock of the corporation. For purposes of determining Control, a person shall not be considered to own voting stock if rights to vote such stock (or to restrict or otherwise control the voting of such stock) are held by a third party (including a voting trust) other than an agent of such person; 4. In the Merger, all shares of ASCOR capital stock will be exchanged solely for voting stock of Giga-tronics, except to the extent of cash paid to dissenters and cash paid in lieu of fractional shares in accordance with the terms of the Merger Agreement; 5. Giga-tronics has no plan or intention to cause ASCOR to issue additional shares of stock after the Merger that would result in Giga-tronics losing Control of ASCOR; 6. Giga-tronics has no plan or intention to reacquire any of its stock issued pursuant to the Merger; 7. Except for transfers described in both Section 368(a)(2)(C) of the Internal Revenue Code of 1986, as amended (the "Code"), and Treasury Regulation Section 1.368-2(j)(4), Giga-tronics has no current plan or intention to (i) liquidate ASCOR; (ii) merge ASCOR with or into another corporation including Giga-tronics or its affiliates; (iii) sell, distribute or otherwise dispose of the capital stock of ASCOR; or (iv) cause ASCOR to sell or otherwise dispose of any of its assets (or any assets acquired from Sub) except for dispositions made in the ordinary course of business or payment of expenses incurred by ASCOR pursuant to the Merger (including payments made with respect to dissenting shareholders and fractional shares); 7 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 3 8. In the Merger, Sub will have no liabilities assumed by ASCOR and will not transfer to ASCOR any assets subject to liabilities; 9. Giga-tronics intends that, following the Merger, the historic business of ASCOR will be continued; 10. Neither Giga-tronics nor any current or former subsidiary of Giga-tronics owns, or has owned during the past five (5) years, directly or indirectly, any shares of ASCOR capital stock, or the right to acquire or vote any such shares (except such rights as are granted in the Agreement); 11. Giga-tronics is not an investment company within the meaning of Sections 368(a)(2)(F)(iii) and (iv) of the Code; 12. No shareholder of ASCOR is acting as agent for Giga-tronics in connection with the Merger or approval thereof, and Giga-tronics will not reimburse any ASCOR shareholder for ASCOR capital stock such shareholder may have purchased or for other obligations such shareholder may have incurred; 13. Neither Giga-tronics nor Sub is under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code; 14. Giga-tronics has no knowledge of any plan or intention on the part of ASCOR's shareholders (a "Plan") to engage in a sale, exchange, transfer, distribution, pledge, disposition or any other transaction which results in a reduction in the risk of ownership or a direct or indirect disposition (a "Sale") of shares of Giga-tronics Common Stock to be issued to such shareholders in the Merger, which shares would have an aggregate fair market value, as of the Effective Date of the Merger, in excess of fifty percent (50%) of the aggregate fair market value, immediately prior to the Merger, of all outstanding shares of ASCOR capital stock. For purposes of this paragraph, shares of ASCOR capital stock (or the portion thereof) (i) with respect to which a ASCOR shareholder receives consideration in the Merger other than Giga-tronics Common Stock (including, without limitation, cash received as a result of the exercise of dissenters' rights and cash received in lieu of fractional shares of Giga-tronics Common Stock) and/or (ii) with respect to which a Sale occurs prior to and in contemplation of the Merger shall be considered shares of outstanding ASCOR capital stock exchanged for Giga-tronics Common Stock in the Merger and then disposed of pursuant to a Plan; 15. The payment of cash in lieu of fractional shares of Giga-tronics is solely for the purpose of avoiding the expense and inconvenience to Giga-tronics of issuing fractional shares and does not represent separately bargained-for consideration. The 8 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 4 total cash consideration that will be paid in the Merger to ASCOR shareholders in lieu of fractional shares of Giga-tronics Common Stock will not exceed one percent (1%) of the total consideration that will be issued in the Merger to ASCOR shareholders in exchange for their shares of ASCOR capital stock. The fractional share interests of each ASCOR shareholder will be aggregated and no ASCOR shareholder will receive cash in an amount greater than the value of one full share of Giga-tronics Common Stock; 16. Except with respect to payments of cash to dissenting ASCOR shareholders and payments of cash in lieu of fractional shares of Giga-tronics Common Stock, one hundred percent (100%) of the ASCOR capital stock outstanding immediately prior to the Merger will be exchanged solely for Giga-tronics Common Stock. Thus, except as set forth in the preceding sentence, Sub and Giga-tronics intend that no consideration be paid or received (directly or indirectly, actually or constructively) for ASCOR capital stock other than Giga-tronics Common Stock; 17. At the Effective Time of the Merger, the fair market value of the Giga-tronics Common Stock received by each ASCOR shareholder will be approximately equal to the fair market value of the ASCOR capital stock surrendered in exchange therefor, and the aggregate consideration received by ASCOR shareholders in exchange for their ASCOR capital stock will be approximately equal to the fair market value of all of the outstanding shares of ASCOR capital stock immediately prior to the Merger; 18. No shares of Sub have been or will be used as consideration or issued to shareholders of ASCOR pursuant to the Merger; 19. Giga-tronics, ASCOR, Sub and the shareholders of ASCOR will each pay separately its or their own expenses in connection with the Merger; 20. There is no intercorporate indebtedness existing between Giga-tronics and ASCOR or between Sub and ASCOR that was issued, acquired or will be settled at a discount as a result of the Merger, and Giga-tronics will assume no liabilities of ASCOR or any ASCOR shareholder in connection with the Merger; 21. The terms of the Agreement and all other agreements entered into in connection therewith are the product of arm's-length negotiations; 22. None of the compensation received by any shareholder-employees of ASCOR will be separate consideration for, or allocable to, any of their shares of ASCOR capital stock; none of the shares of Giga-tronics Common Stock received by any shareholder-employees of ASCOR will be separate consideration for, or allocable to, any employment agreement or any covenants not to compete; and the compensation paid to 9 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 5 any shareholder-employees of ASCOR will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services; 23. No "poison pill" or similar rights will be associated with the Giga-tronics Common Stock on or prior to the date of the Merger; 24. With respect to each instance, if any, in which shares of ASCOR capital stock have been purchased by a shareholder of Giga-tronics (a "Shareholder") during the Pre-Merger Period (a "Stock Purchase"): (i) the Stock Purchase was made by such Shareholder on its own behalf and with its own funds and not as a representative, or for the benefit, of Giga-tronics; (ii) the purchase price paid by such Shareholder pursuant to the Stock Purchase was the product of arm's-length negotiations, was funded by such Shareholder's own assets, and was not advanced, and will not be reimbursed, either directly or indirectly, by Giga-tronics; (iii) at no time was such Shareholder or any other party required or obligated to surrender to Giga-tronics the ASCOR capital stock acquired in the Stock Purchase, and neither such Shareholder nor any other party will be required to surrender to Giga-tronics the Giga-tronics Common Stock for which such shares of ASCOR capital stock will be exchanged in the Merger; and (iv) the Stock Purchase was not a formal or informal condition to consummation of the Merger and was entered into solely to satisfy the separate interests of such Shareholder and the seller; 25. Each of the representations made by Giga-tronics and Sub in the Agreement and any other documents associated therewith is true and accurate; and 26. The undersigned is authorized to make all of the representations set forth herein on behalf of Giga-tronics and Sub. B. RELIANCE BY YOU IN RENDERING OPINION; LIMITATIONS ON YOUR OPINION 1. The undersigned recognize that (i) your opinion will be based on the representations set forth herein and on the statements contained in the Agreement and the documents related thereto and (ii) your opinion will be subject to certain limitations and qualifications including that it may not be relied upon if any such representations are not accurate in all material respects. 10 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 6 2. The undersigned recognize that your opinion will not address any tax consequences of the Merger or any action taken in connection therewith except as expressly set forth in such opinions. Very truly yours, GIGA-TRONICS INCORPORATED, a California corporation By___________________________________ Title________________________________ ASCOR ACQUISITION CORP., a California corporation By___________________________________ Title________________________________ 11 Exhibit to Exhibit 8.1 June 12, 1996 Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, California 94306 Re: Merger pursuant to the Agreement and Plan of Reorganization (the "Agreement") dated May 2, 1996, among Giga-tronics Incorporated, a California corporation ("Giga-tronics"), ASCOR, Inc., a California corporation ("ASCOR") and ASCOR Acquisition Corp., a California corporation ("Sub") Ladies and Gentlemen: This letter is supplied to you in connection with your rendering of an opinion pursuant to Section 8.03(b) of the Agreement regarding certain federal income tax consequences of the Merger. Unless otherwise indicated, capitalized terms not defined herein have the meanings set forth in the Agreement. A. REPRESENTATIONS On behalf of ASCOR, the undersigned hereby certifies and represents that the following facts are now true and will continue to be true through the Effective Date of the Merger: 1. Pursuant to the Merger, Sub will merge with and into ASCOR, and ASCOR will acquire all of the assets and liabilities of Sub. At least ninety percent (90%) of the fair market value of the net assets and at least seventy percent (70%) of the fair market value of the gross assets held by ASCOR immediately prior to the Merger will continue to be held by ASCOR immediately after the Merger. For the purpose of determining the percentage of ASCOR's net and gross assets held by it immediately following the Merger, the following assets will be treated as property held by ASCOR immediately prior but not subsequent to the Merger: (i) assets disposed of by ASCOR prior to or subsequent to the Merger and in contemplation thereof (including, without limitation, any asset disposed of by ASCOR, other than in the ordinary course of business, pursuant to a plan or intent existing during the period ending on the Effective 12 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 2 Date of the Merger and beginning with the commencement of negotiations (whether formal or informal) with Giga-tronics regarding the Merger (the "Pre-Merger Period")), (ii) assets used by ASCOR to pay other expenses or liabilities incurred in connection with the Merger and (iii) assets used to make distribution, redemption or other payments in respect of ASCOR capital stock or rights to acquire such stock (including payments to dissenters) that are made in contemplation of the Merger or related thereto; 2. ASCOR has made no transfer of any of its assets (including any distribution of assets with respect to, or in redemption of, stock) in contemplation of the Merger or during the Pre-Merger Period other than (i) in the ordinary course of business and (ii) payments for expenses incurred in connection with the Merger; 3. ASCOR is participating in the Merger for good and valid business reasons and not for tax purposes; 4. At the time of the Merger, except as specified in, or disclosed in the Agreement or in a schedule or exhibit to, the Agreement, ASCOR will have no outstanding warrants, options or convertible securities nor any other type of right outstanding pursuant to which any person could acquire shares of ASCOR capital stock or any other equity interest in ASCOR; 5. In the Merger, shares of ASCOR capital stock representing "Control" of ASCOR will be exchanged solely for voting stock of Giga-tronics; at the time of the Merger, there will exist no rights to acquire ASCOR capital stock or to vote (or restrict or otherwise control the vote of) ASCOR capital stock which, if exercised, could affect Giga-tronics' acquisition and retention of Control of ASCOR. For purposes of this paragraph, shares of ASCOR capital stock exchanged in the Merger for cash and other property (including, without limitation, cash paid to dissenters and cash paid in lieu of fractional shares of Giga-tronics Common Stock) will be treated as ASCOR capital stock outstanding on the date of the Merger but not exchanged for voting stock of Giga-tronics. As used herein, "Control" of a corporation shall consist of ownership of stock possessing at least eighty percent (80%) of the total combined voting power of all classes of stock entitled to vote and at least eighty percent (80%) of the total number of shares of all other classes of stock of the corporation. For purposes of determining Control, a person shall not be considered to own voting stock if rights to vote such stock (or to restrict or otherwise control the voting of such stock) are held by a third party (including a voting trust) other than an agent of such person; 6. ASCOR has no obligation, understanding, agreement or intention to issue additional shares of stock after the Merger that would result in Giga-tronics losing Control of ASCOR; 13 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 3 7. The liabilities of ASCOR have been incurred by ASCOR in the ordinary course of its business; 8. The fair market value of ASCOR's assets will, on the Effective Date, exceed the aggregate liabilities of ASCOR; 9. Other than shares of ASCOR capital stock or options to acquire ASCOR capital stock issued as compensation to present or former service providers (including, without limitation, employees and directors) of ASCOR in the ordinary course of business, no issuances of ASCOR capital stock or rights to acquire ASCOR capital stock have occurred or will occur during the Pre-Merger Period other than pursuant to options, warrants or agreements outstanding prior to the Pre-Merger Period or as otherwise specifically identified in the Agreement; 10. Cash or other property paid to employees of ASCOR during the Pre-Merger Period has been or will be in the ordinary course of business or pursuant to agreements entered into prior to the Pre-Merger Period; 11. ASCOR is not and will not be on the Effective Date an "investment company" within the meaning of Section 368(a)(2)(F)(iii) and (iv) of the Code; 12. ASCOR is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code; 13. ASCOR has no knowledge of any plan or intention on the part of ASCOR's shareholders (a "Plan") to engage in a sale, exchange, transfer, distribution, pledge, disposition or any other transaction which results in a reduction in the risk of ownership or a direct or indirect disposition (a "Sale") of shares of Giga-tronics Common Stock to be issued to such shareholders in the Merger, which shares would have an aggregate fair market value, as of the Effective Date of the Merger, in excess of fifty percent (50%) of the aggregate fair market value, immediately prior to the Merger, of all outstanding shares of ASCOR capital stock. For purposes of this paragraph, shares of ASCOR capital stock (or the portion thereof) (i) with respect to which a ASCOR shareholder receives consideration in the Merger other than Giga-tronics Common Stock (including, without limitation, cash received as a result of the exercise of dissenters' rights and cash received in lieu of fractional shares of Giga-tronics Common Stock) and/or (ii) with respect to which a Sale occurs prior to and in contemplation of the Merger shall be considered shares of outstanding ASCOR capital stock exchanged for Giga-tronics Common Stock in the Merger and then disposed of pursuant to a Plan; 14 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 4 14. The payment of cash in lieu of fractional shares of Giga-tronics is solely for the purpose of avoiding the expense and inconvenience to Giga-tronics of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to ASCOR shareholders in lieu of fractional shares of Giga-tronics Common Stock will not exceed one percent (1%) of the total consideration that will be issued in the Merger to ASCOR shareholders in exchange for their shares of ASCOR capital stock. The fractional share interests of each ASCOR shareholder will be aggregated, and no ASCOR shareholder will receive cash in an amount greater than the value of one full share of Giga-tronics Common Stock; 15. Except with respect to payments of cash to dissenting ASCOR shareholders and payments of cash in lieu of fractional shares of Giga-tronics Common Stock, one hundred percent (100%) of the ASCOR capital stock outstanding immediately prior to the Merger will be exchanged solely for Giga-tronics Common Stock. Thus, except as set forth in the preceding sentence, ASCOR intends that no consideration be paid or received (directly or indirectly, actually or constructively) for ASCOR capital stock other than Giga-tronics Common Stock; 16. At the Effective Date of the Merger, the fair market value of the Giga-tronics Common Stock received by each ASCOR shareholder will be approximately equal to the fair market value of the ASCOR capital stock surrendered in exchange therefor, and the aggregate consideration received by ASCOR shareholders in exchange for their ASCOR capital stock will be approximately equal to the fair market value of all of the outstanding shares of ASCOR capital stock immediately prior to the Merger; 17. No shares of Sub have been or will be used as consideration or issued to shareholders of ASCOR pursuant to the Merger; 18. Giga-tronics, ASCOR, Sub and the shareholders of ASCOR will each pay separately its or their own expenses in connection with the Merger; 19. There is no intercorporate indebtedness existing between Giga-tronics and ASCOR or between Sub and ASCOR that was issued, acquired or will be settled at a discount as a result of the Merger, and Giga-tronics will assume no liabilities of ASCOR or any ASCOR shareholder in connection with the Merger; 20. The terms of the Agreement and all other agreements entered into in connection therewith are the product of arm's-length negotiations; 21. None of the compensation received by any shareholder-employees of ASCOR will be separate consideration for, or allocable to, any of their shares of 15 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 5 ASCOR capital stock; none of the shares of Giga-tronics Common Stock received by any shareholder-employees of ASCOR will be separate consideration for, or allocable to, any employment agreement or any covenants not to compete; and the compensation paid to any shareholder-employees of ASCOR will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services; 22. No direct or indirect subsidiary of ASCOR owns any shares of ASCOR capital stock; 23. No "poison pill" or similar rights will be associated with shares of ASCOR capital stock on or prior to the date of the Merger; 24. With respect to each instance, if any, in which shares of ASCOR capital stock have been purchased by a shareholder of Giga-tronics (a "Shareholder") during the Pre-Merger Period (a "Stock Purchase"): (i) to the best knowledge of ASCOR, (A) the Stock Purchase was made by such Shareholder on its own behalf and with its own funds, rather than as a representative, or for the benefit, of Giga-tronics, (B) the Stock Purchase was entered into solely to satisfy the separate interests of such Shareholder and the seller and (C) the purchase price paid by such Shareholder pursuant to the Stock Purchase was the product of arm's-length negotiations and (ii) the Stock Purchase was not a formal or informal condition to consummation of the Merger; 25. Each of the representations made by ASCOR in the Agreement and any other documents associated therewith is true and accurate; and 26. The undersigned is authorized to make all of the representations set forth herein on behalf of ASCOR. B. RELIANCE BY YOU IN RENDERING OPINION; LIMITATIONS ON YOUR OPINION 1. The undersigned recognizes that (i) your opinion will be based on the representations set forth herein and on the statements contained in the Agreement and documents related thereto and (ii) your opinion will be subject to certain limitations and qualifications including that they may not be relied upon if any such representations are not accurate in all material respects. 16 Brobeck, Phleger & Harrison LLP June 12, 1996 Page 6 2. Notwithstanding anything herein to the contrary, the undersigned makes no representations regarding any actions or conduct of ASCOR pursuant to Giga-tronics' exercise of control over ASCOR after the Merger. 3. The undersigned recognizes that your opinion will not address any tax consequences of the Merger or any action taken in connection therewith except as expressly set forth in such opinions. Very truly yours, ASCOR, INC., a California corporation By:_____________________________________ Title:__________________________________ EX-10.1 5 EXHIBIT 10.1 1 Exhibit 10.1 GIGA-TRONICS INCORPORATED RESTATED 1990 STOCK OPTION PLAN AS RESTATED JULY 23, 1992 AND AMENDED MAY 17, 1994 2 ARTICLE ONE GENERAL PROVISIONS I. PURPOSES OF THE PLAN A. This Restated 1990 Stock Option Plan (the "Plan"), as restated effective July 23, 1992 and amended May 17, 1994, is intended to promote the interests of Giga-tronics Incorporated, a California corporation (the "Company"), by providing a method whereby the Company's employees are to be offered equity incentives intended to encourage such individuals to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company and to continue to render services to the Company or its parent or subsidiary corporations. B. For purposes of the Plan, the following definitions shall be in effect: BOARD: the Company's Board of Directors. COMMON STOCK: The Common Stock issuable under the Plan shall be shares of the Company's common stock, no par value. DISABILITY: The permanent incapacity of an individual, by reason of physical or mental illness, to perform his/her usual duties for the Company. Disability shall be determined by the Committee after consideration of such medical evidence as it may require. EMPLOYEE: An individual shall be considered to be an Employee for so long as such individual remains in the employ of the Company or one or more of its parent or subsidiary corporations. FAIR MARKET VALUE: The Fair Market Value per share of Common Stock on any relevant date under the Plan shall be the mean between the highest bid and lowest asked prices (or, if such information is available, the closing selling price) per share of Common Stock on such date in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers on the Nasdaq National Market (or any successor system). Should the Common Stock become traded on a national securities exchange, then the Fair Market Value per share shall be the closing selling price on such exchange on the date in question, as such price is quoted on the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on the over-the- 3 counter market (or national securities exchange) on the date in question, then the Fair Market Value shall be the mean between the highest bid and lowest asked prices (or closing selling price) on the last preceding date for which such quotations exist. PARENT: A corporation shall be deemed to be a parent of the Company if it is a corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided each such corporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 16(B) INSIDER: An individual shall be considered to be a Section 16(b) Insider on any relevant date under the Plan if such individual is at the time subject to the short-swing profit restrictions of Section 16(b) of the Securities Exchange Act of 1934 by reason of his or her affiliation with the Company. SERVICE: An individual shall be deemed to be in the Service of the Company for so long as such individual (i) renders service on a periodic basis to the Company or one or more of its parent or subsidiary corporations as an Employee or (ii) serves as a non-employee member of the Company's Board of the Directors. SUBSIDIARY: A corporation shall be deemed to be a subsidiary of the Company if it is one of the corporations (other than the Company) in an unbroken chain of corporations beginning with the Company, provided each such corporation (other than the last corporation in the unbroken chain) owns, at the time of determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. For purposes of all non-statutory option grants under Article Two and all Corporate Transaction provisions of the Plan, the term "subsidiary" shall also include any partnership, joint venture or other business entity of which the Company owns, directly or indirectly through another subsidiary corporation, more than a fifty percent (50%) interest in voting power, capital or profits. C. Stock option grants made to any individual under the Plan shall not in any way affect, limit or restrict such individual's eligibility to participate in any other stock plan or 2. 4 other compensation or benefit plan, arrangement or practice now or hereafter maintained by the Company or any parent or subsidiary corporation. II. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by a committee (the "Committee") of two (2) or more Board members appointed by the Board. A Board member shall be eligible to serve on such Committee only if such individual shall not have received, at any time during the twelve (12)-month period preceding the date such individual is to commence Committee service, any awards or grants under this Plan (other than an automatic option grant under the provisions of this Plan in effect prior to the May 1994 amendment) or under any other stock option, stock appreciation, stock bonus or other stock plan of the Company or its parent or subsidiary corporations. The Board shall have the authority to fill any and all vacancies on the Committee, however caused. B. Subject to the express provisions of the Plan, the Committee shall have plenary authority: (i) to make discretionary option grants to Employees under the Discretionary Option Grant Program set forth in Article Two; (ii) to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations deemed necessary or advisable in administering the Plan; and (iii) to change the terms and conditions of any outstanding option grant under the Discretionary Option Grant Program, provided such action does not, without the consent of the holder, adversely affect the rights and obligations such individual may have under the Plan or the outstanding grant. C. Determinations of the Committee on all matters relating to the Plan and any option grants or stock issuances made hereunder shall be final, binding and conclusive on all persons having any interest in the Plan or any options granted or shares issued under the Plan. III. PLAN STRUCTURE AND ELIGIBILITY A. The Plan as amended May 1994 shall consist only of the Discretionary Option Grant Program set forth in Article Two. The terms and provisions of Articles One and Five of the Plan shall also be applicable to such program. 3. 5 B. The individuals eligible to participate in the Discretionary Option Grant Program ("Optionees") shall be limited to Employees (including officers and directors) of the Company or its parent or subsidiary corporations. Non-employee members of the Board shall not be eligible to participate in the Discretionary Option Grant Program. C. Members of the Committee shall not, during their period of Committee service, participate in the Discretionary Option Grant Program of Article II of this Plan or in any other stock option, stock bonus, stock purchase or stock plan of the Company or its parent or subsidiary corporations. IV. STOCK SUBJECT TO THE PLAN A. The Common Stock issuable under the Plan shall be made available either from authorized but unissued shares of Common Stock or from shares of Common Stock reacquired by the Company on the open market. The aggregate number of shares of Common Stock issuable over the term of this Plan shall not exceed 400,000 shares (subject to adjustment from time to time in accordance with paragraph C. below). B. Should an option expire or terminate for any reason prior to exercise or surrender in full (including options cancelled in accordance with the cancellation-regrant provisions of Article Two below), the shares subject to the portion of the option not so exercised or surrendered shall be available for subsequent option grants under the Plan. Shares subject to any stock appreciation rights exercised in accordance with the Stock Appreciation Right provisions of Articles Two and all share issuances under the Plan shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent option grants under this Plan. If the exercise price of an outstanding option under the Plan is paid with shares of Common Stock or if shares of Common Stock otherwise issuable under the Plan are withheld by the Company in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised, and not by the net number of shares of Common Stock actually issued. C. In the event any change is made to the Common Stock issuable under the Plan by reason of any stock dividend, stock split, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) 4. 6 the maximum number and/or class of shares issuable under this Plan, to reflect the effect of such change upon the Company's capital structure, (ii) the class and/or maximum number of securities for which stock options and separately exercisable stock appreciation rights may be granted to any one participant in the aggregate after April 30, 1994 and (iii) the number and/or class of shares and the exercise price per share of the stock subject to each outstanding option in order to preclude the dilution or enlargement of benefits thereunder. The adjustments determined by the Committee shall be final, binding and conclusive. D. In the event that (i) the Company is the surviving entity in any Corporate Transaction which does not result in the termination of outstanding options pursuant to the Corporate Transaction provisions of the Plan or (ii) the outstanding options under the Plan are to be assumed in connection with such Corporate Transaction, then each such continuing or assumed option shall, immediately after such Corporate Transaction, be appropriately adjusted Ito apply and pertain to the number and class of securities which would be issuable, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Common Stock as are subject to such option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share, provided the aggregate option price shall remain the same, and to the number and class of securities which remain issuable under this Plan. E. In no event may any one individual participating in the Plan be granted stock options and separately exercisable stock appreciation rights for more than 200,000 shares in the aggregate over the remaining term of the Plan, subject to adjustment from time to time in accordance with paragraph C. above. For purposes of such limitation, no stock options or stock appreciation rights granted prior to May 1, 1994 shall be taken into account. 5. 7 ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. TERMS AND CONDITIONS OF OPTIONS A. The Committee shall have plenary authority (subject to the express provisions of the Plan) to determine which Employees are to be granted options under this Discretionary Option Grant Program, the number of shares to be covered by each such option, the status of the granted option as either an incentive stock option which meets the requirements of Section 422 of the Internal Revenue Code ("Incentive Option") or a non-statutory option not intended to meet such requirements, the time or times at which such option is to become exercisable and the maximum term for which the option is to remain outstanding. B. The granted options shall be evidenced by instruments in such form as the Committee shall from time to time approve; provided, however, that each such instrument shall comply with and incorporate the terms and conditions specified below. 1. Option Price. a. The option price per share shall be fixed by the Committee, but in no event shall the option price per share be less than eighty percent (80%) of the Fair Market Value per share of Common Stock on the date of the option grant. b. The option price shall become immediately due upon exercise of the option and shall, subject to the loan provisions of this Article Two, be payable in one of the alternative forms specified below: (A) full payment in cash or check made payable to the Company's order; or (B) full payment in shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at Fair Market Value on the Exercise Date (as such term is defined below); or 6. 8 (C) full payment in a combination of shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at Fair Market Value on the Exercise Date and cash or check made payable to the Company's order; or (D) full payment through a sale and remittance procedure pursuant to which the Optionee (I) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Company by reason of such purchase and (II) shall concurrently provide written directives to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. c. For purposes of subparagraph b. above, the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Company. Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the option price for the purchased shares must accompany the exercise notice. 2. Term and Exercise of Options. a. Each option granted under this Discretionary Option Grant Program shall be exercisable in one or more installments over the Optionee's period of Service as shall be determined by the Committee and shall be set forth in the instrument evidencing such option; provided, however, that (i) no such option shall become exercisable in whole or in part within the first six (6) months after the grant date, except as otherwise provided in Section III of this Article Two and (ii) no such option shall have a term in excess of ten (10) years from the grant date. b. During the lifetime of the optionee, the option, together with any stock appreciation rights pertaining to such option, shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee other than a transfer of the option effected by will or by the laws of descent and distribution following the optionee's death. 7. 9 3. Termination of Service. a. Should an Optionee cease to continue in Service for any reason (other than termination set forth in subparagraph c. below) while the holder of one or more outstanding options under this Discretionary Option Grant Program, then such options shall not be exercisable at any time after the earlier of (i) the specified expiration date of the option term or (ii) the expiration of the limited period of time (not to exceed twelve (12) months after the Optionee's cessation of Service) specified by the Committee in the option agreement. Each such option shall, during the applicable period following cessation of Service, be exercisable only to the extent of the number of shares (if any) in which the Optionee is vested on the date of such cessation of Service. b. Any option granted to an Optionee under this Discretionary Option Grant Program and outstanding in whole or in part on the date of the Optionee's death may be subsequently exercised, but only to the extent of the number of shares (if any) in which the Optionee is vested on the date of his/her cessation of Service (less any shares subsequently purchased by the optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Any such exercise must occur prior to the earlier of (i) the expiration date of the option term or (ii) the expiration of the limited period of time (not to exceed twelve (12) months following the Optionee's cessation of Service) specified by the Committee in the option agreement. c. If the Optionee's Service is terminated for any of the following reasons, then all outstanding options granted the Optionee under this Discretionary Option Grant Program shall immediately terminate and cease to be exercisable immediately upon such termination of Service: (1) Optionee's intentional misconduct or continuing gross neglect of duties which materially and adversely affects the business and operations of the Company or any parent or subsidiary corporation employing Optionee; (2) Optionee's unauthorized use or disclosure (or attempt thereat) of confidential information or trade secrets of the Company or its parent or subsidiary corporations; or 8. 10 (3) Optionee's commission of an act involving embezzlement, theft, fraud, falsification of records, destruction of property or commission of a crime or other offense involving money or other property of the Company or any parent or subsidiary corporation employing Optionee. The reasons for termination of Optionee's Service set forth in this subparagraph c. are not intended to be, and are not inclusive of, all acts or omissions which the Company may deem to constitute misconduct or other grounds for terminating the Optionee's (or any other individual's) Service. d. The Committee shall have complete discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to establish as a provision applicable to the exercise of one or more options granted under this Discretionary Option Grant Program that during the limited period of exercisability following cessation of Service, the option may be exercised not only with respect to the number of shares in which the Optionee is vested at the time of such cessation of Service but also with respect to one or more subsequent installments of purchasable shares in which the Optionee would otherwise have vested had the Optionee continued in Service. In addition, the Committee shall have similar discretion to extend the period of time during which the option is to remain exercisable following the optionee's cessation of Service, but in no event shall such period extend beyond the specified expiration date of the option term. 4. Shareholder Rights. An option holder shall have none of the rights of a shareholder with respect to any shares covered by the option until such individual shall have exercised the option, paid the option price and satisfied all other conditions precedent to the issuance of certificates for the purchased shares. II. STOCK APPRECIATION RIGHTS A. Each Section 16(b) Insider shall have a limited stock appreciation right ("Limited Right") in tandem with each option grant (whether an Incentive Option or a non-statutory option) made to such individual under this Discretionary Option Grant Program. The Limited Right shall entitle the Section 16(b) Insider to surrender the underlying option in connection with a Change in Control (as defined below) for an appreciation distribution from the Company in an amount equal to the excess of (I) the Change in Control Price (as defined below) of the number of shares in which the Section 16(b) Insider is at the time vested under the surrendered option over (II) the aggregate option price payable for such vested shares. 9. 11 B. The terms and conditions applicable to each such Limited Right shall be as follows: 1. The option may only be surrendered during the thirty (30)-day period following the Change in Control. However, the Section 16(b) Insider may not surrender any option which (I) has not been outstanding for at least six (6) months prior to the surrender date and (II) is not at the time exercisable for any vested shares. 2. For purposes of calculating the appreciation distribution payable by the Company on each surrendered option, the Change in Control Price per share of the vested Common Stock subject to the surrendered option shall be deemed to be equal to the greater of (a) the Fair Market Value per share on the option surrender date or (b) the highest reported price per share paid in effecting the Change in Control. However, if the option is an Incentive Option, then the Change in Control Price of the vested shares subject to the surrendered option shall not exceed the value per share determined under clause (a) above. 3. The appreciation distribution shall be made entirely in cash, and neither the approval of the Committee nor the consent of the Board shall be required in connection with such surrender and distribution. The shares of Common Stock subject to each surrendered option shall not be available for subsequent issuance under this Plan. 4. A Change in Control shall be deemed to occur in the event any of the following transactions is effected: (i) the acquisition by a person or group of related persons, other than the Company or any person controlling, controlled by or under common control with the Company, of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities pursuant to a transaction or series of related transactions which the Board does not approve; or 10. 12 (ii) the first date within any period of twelve (12) consecutive months or less on which there is effected any change in the composition of the Board such that the majority of the Board (determined by rounding up to the next whole number) ceases to be comprised of individuals who either (A) have been members of the Board continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. Upon the occurrence of any of the following transactions (a "Corporate Transaction") to which the Company is a party and for which the approval of the Company's shareholders is obtained: (i) a merger or acquisition in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Company's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company to any entity other than a parent or subsidiary of the Company, or (iii) any reverse merger in which the Company is the surviving entity but in which fifty percent (50%) or more of the Company's outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger, the exercisability of each option outstanding under this Discretionary Option Grant Program (whether or not such option has been outstanding for a period of six (6) months) shall be automatically accelerated so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock purchasable under such option and may be exercised for all or any portion of such shares. However, the instrument evidencing an option grant under this Discretionary Option Grant Program may provide that such option shall not be so 11. 13 accelerated if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof, or (ii) such option is to be replaced by a comparable cash incentive program of the successor corporation based on the value of the option at the time of the Corporate Transaction, or (iii) the acceleration of such option is subject to other applicable limitations imposed by the Committee at the time of grant. The determination of comparability under clause (i) or (ii) above shall be made by the Committee, and its determination shall be final, binding and conclusive. The Committee shall have the discretion, exercisable either in advance of any actually-anticipated Corporate Transaction or at the time of an actual Corporate Transaction, to provide (upon such terms and conditions as it may deem appropriate) for either the automatic acceleration of one or more assumed or replaced options which are not otherwise to be accelerated in connection with the Corporate Transaction or the automatic vesting of any cash incentive programs implemented in replacement of such options, in the event the Optionee's employment should subsequently terminate within a designated period following the effective date of such Corporate Transaction. B. Immediately following the consummation of the Corporate Transaction, all outstanding options under this Discretionary Option Grant Program shall, to the extent not previously exercised or assumed by the successor corporation or its parent company, terminate and cease to be outstanding. C. Upon the occurrence of any of the following transactions (a "Change in Control"): (i) the acquisition by a person or group of related persons, other than the Company or any person controlling, controlled by or under common control with the Company, of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities pursuant to a transaction or series of related transactions which the Board does not approve; or (ii) the first date within any period of twelve (12) consecutive months or less on which there is effected any change in the composition of the Board such that the majority of the Board (determined by rounding up 12. 14 to the next whole number) ceases to be comprised of individuals who either (A) have been members of the Board continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board; the exercisability of each option outstanding under this Discretionary Option Grant Program (whether or not such option has been outstanding for a period of six (6) months) shall be automatically accelerated so that each such option shall become exercisable, immediately prior to such Change in Control, for the full number of shares purchasable under such option and may be exercised for all or any portion of such shares at any time thereafter until the expiration or sooner termination of the option term. However, an outstanding option under this Discretionary Option Grant Program shall not be so accelerated if and to the extent one or more limitations imposed by the Committee at the time of grant preclude such acceleration upon a Change in Control. The Committee shall have the discretion, exercisable either in advance of any actually-anticipated Change in Control or at the time of an actual Change in Control, to provide (upon such terms and conditions as it may deem appropriate) for the automatic acceleration of one or more outstanding options which are not otherwise to be accelerated upon a Change in Control, in the event the Optionee's employment should subsequently terminate within a designated period following the effective date of such Change in Control. D. In the event a particular transaction qualifies as both a Corporate Transaction and a Change in Control, the provisions of Section III.A shall be controlling. E. The grant of options under this Discretionary Option Grant Program shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. INCENTIVE OPTIONS A. The terms and conditions specified below shall be applicable to all Incentive Options granted under this Discretionary Option Grant Program. Options which are specifically designated as "non-statutory" options when issued under this Discretionary Option Grant Program shall not be subject to such terms and conditions. 13. 15 1. Option Price. The option price per share of the Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the grant date. 2. 10% Stockholder. If any individual to whom an Incentive Option is to be granted pursuant to the provisions of this Discretionary Option Grant Program is on the grant date the owner of stock (as determined under Section 425(d) of the Internal Revenue Code) possessing 10% or more of the total combined voting power of all classes of stock of the Company or any one of its parent or subsidiary corporations (such person to be herein referred to as a 10% Stockholder), then (i) the option price per share shall not be less than one hundred and ten percent (110%) of the Fair Market Value per share of Common Stock on the grant date and (ii) the maximum term of the option shall not exceed five (5) years from the grant date. 3. Dollar Limitation. The aggregate fair market value (determined on the basis of the Fair Market Value in effect on the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Company or its parent or subsidiary corporations) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability thereof as incentive stock options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. B. Except as modified by the preceding provisions of this Incentive Options section, all the provisions of this Discretionary Option Grant Program shall be applicable to the Incentive Options granted hereunder. V. CANCELLATION AND RE-GRANT OF OPTIONS A. The Committee shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under this Discretionary Option Grant Program and to grant in 14. 16 substitution therefor new options under this Plan covering the same or different numbers of shares of Common Stock but having an option price per share not less than (i) eighty percent (80%) of the Fair Market Value per share of Common Stock on the new grant date, or (ii) one hundred percent (100%) of such Fair Market Value if the new option is to be an Incentive Option, or (iii) one hundred and ten percent (110%) of such Fair Market Value if the new option is to be an Incentive Option subject to the provisions of Section IV.A.2. VI. LOANS OR GUARANTEE OF LOANS A. The Committee may assist any Employee (including any officer or director) in the exercise of one or more outstanding options under this Discretionary Option Grant Program by (a) authorizing the extension of a loan to such Employee from the Company, (b) permitting the Employee to pay the option price for the purchased Common Stock in installments over a period of years or (c) authorizing a guarantee by the Company of a third-party loan to the Employee. The terms of any loan, installment method of payment or guarantee (including the interest rate and terms of repayment) shall be established by the Committee in its sole discretion. Loans, installment payments and guarantees may be granted without security or collateral, but the maximum credit available to the optionee shall not exceed the sum of (i) the aggregate option price of the purchased shares plus (ii) any Federal and State income and employment tax liability incurred by the Employee in connection with the exercise of the option. 15. 17 ARTICLE THREE MISCELLANEOUS I. TAX WITHHOLDING A. The Company's obligation to deliver shares or cash upon the exercise or surrender of stock options or stock appreciation rights granted under the Discretionary Option Grant Program shall be subject to the satisfaction of all applicable Federal, State and local income and employment tax withholding requirements. B. The Committee may, in its discretion and upon such terms and conditions as it may deem appropriate (including the applicable safe-harbor provisions of SEC Rule 16b-3 or any successor rule or regulation) provide any or all holders of outstanding option grants under the Discretionary Option Grant Program with the election to have the Company withhold, from the shares of Common Stock purchased or issued pursuant to such options, a portion of those shares with an aggregate Fair Market Value equal to the designated percentage (any multiple of 5% specified by the Optionee) of the Federal and State income taxes ("Taxes") incurred in connection with their acquisition. In lieu of such direct withholding, one or more Optionees may also be granted the right to deliver shares of Common Stock to the Company in satisfaction of such Taxes. The withheld or delivered shares shall be valued at the Fair Market Value on the applicable determination date for such Taxes or such other date required by the applicable safe-harbor provisions of SEC Rule 16b-3. II. AMENDMENT OF THE PLAN A. Except to the extent otherwise provided in this Article Three, the Board shall have the complete and exclusive authority to amend or modify the Plan in any or all respects whatsoever. However, no such amendment or modification shall, without the consent of the holders, adversely affect rights and obligations with respect to any stock options or stock appreciation rights at the time outstanding under the Plan. B. The Board shall not, without the approval of the Company's shareholders, (i) increase the maximum number of shares issuable under the Plan or the number of shares for which any one individual participating in the Plan may be granted stock options and separately exercisable stock appreciation rights in the aggregate after April 30, 1994, except for permissible adjustments in the event of a change in the corporate structure of the Company, (ii) materially increase the benefits accruing to participants 16. 18 under the Plan or (iii) materially modify the eligibility requirements for participation in the Plan. III. EFFECTIVE DATE AND TERM OF PLAN A. The Plan was initially adopted by the Board on June 26, 1990 and approved by the Company's shareholders at the 1990 Annual Meeting. The Committee may grant stock options under the Discretionary Option Grant Program at any time prior to the date fixed herein for termination of the Plan. B. The Board amended and restated the Plan effective May 8, 1991 to implement the automatic option grant program for certain non-employee Board members and to conform the provisions of the Plan to recent changes in the SEC rules under Section 16 of the Securities Exchange Act of 1934 applicable to transactions effected under the Plan by Section 16(b) Insiders. The May 1991 restatement was approved by the Company's shareholders at the 1991 Annual Meeting. The May 1991 restatement shall apply only to options granted under the Plan from and after the May 8, 1991 effective date. Each option (together with any related stock appreciation right) issued and outstanding under the Plan immediately prior to such effective date shall continue to be governed by the terms and conditions of the Plan (and the option agreement evidencing such option and stock appreciation right) as in effect on the date such option was previously granted, and nothing in the May 1991 restatement shall be deemed to affect or otherwise modify the rights or obligations of the holders of such options with respect to the acquisition of shares of Common Stock thereunder or the exercise of their outstanding stock appreciation rights. C. On July 23, 1992, the Board adopted a restatement of the Plan to bring the Plan into compliance with recent SEC interpretive rulings under Rule 16b-3, as amended May 1, 1991, under the Securities Exchange Act of 1934. The July 1992 restatement shall apply only to options granted under the Plan from and after the July 23, 1992 effective date. Each option (together with any related stock appreciation right) issued and outstanding under the Plan immediately prior to such effective date shall continue to be governed by the terms and conditions of the Plan (and the option agreement evidencing such option and stock appreciation right) as in effect on the date such option was previously granted, and nothing in the July 1992 restatement shall be deemed to affect or otherwise modify the rights or obligations of the holders of such options with respect to the acquisition of shares of Common Stock thereunder or the exercise of their outstanding stock appreciation rights. 17. 19 D. The sale and remittance procedure for the exercise of outstanding options shall be available for all options granted under the Plan after April 30, 1991 and for all non-statutory options outstanding under the Plan on such date. The Committee may also allow such procedure to be utilized in connection with one or more disqualifying dispositions of Incentive Option shares effected after such date. E. On May 17, 1994, the Board amended the Plan to increase the number of shares of Common Stock issuable over the term of the Plan by an additional 100,000 shares, and such amendment shall be submitted for shareholder approval at the 1994 Annual Meeting. The 100,000-share increase became effective immediately upon authorization by the Board, but no option granted on the basis of such increase shall be exercisable unless and until the increase shall have been approved by the Company's shareholders. If such shareholder approval is not obtained at the 1994 Annual Meeting, then any options previously granted on the basis of the 100,000-share increase shall terminate and no further options based on such increase shall be granted. Those options granted under the Plan which are not based on such increase shall remain outstanding in accordance with the terms and conditions of the respective instruments evidencing such options, whether or not the requisite shareholder approval is obtained. Subject to the foregoing limitations, the Plan Administrator may grant options under the Plan at any time before the date fixed herein for termination of the Plan. In addition, the May 1994 amendment eliminated the automatic option grant program previously in effect under the Plan for non-employee Board members, retroactive to January 1, 1993. F. The Plan shall in all events terminate upon the earlier of (i) the tenth (10th) anniversary of the date of its adoption by the Board or (ii) the date on which all shares available for issuance under the Plan shall have been issued or cancelled pursuant to the exercise or surrender of stock options and/or stock appreciation rights under the Plan. If the date of termination is determined under clause (i) above, then any stock options and stock appreciation rights at the time outstanding under the Plan shall continue to have force and effect in accordance with the provisions of the instruments evidencing such grants. G. Options may be granted under this Plan to purchase shares of Common Stock in excess of the number of shares then available for issuance under the Plan, provided (i) an amendment to increase the maximum number of shares issuable under the Plan is adopted by the Board prior to the initial grant of any such option and within one year thereafter such amendment is approved by the Company's shareholders and (ii) each option granted is not to 18. 20 become exercisable, in whole or in part, at any time prior to the obtaining of such shareholder approval. IV. MISCELLANEOUS PROVISIONS A. Any cash proceeds received by the Company from the issuance of shares hereunder shall be used for general corporate purposes. B. The implementation of the Plan, the granting of any stock option, and the issuance of Common Stock hereunder, shall be subject to the Company's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, and the stock options granted under it and the Common Stock issued pursuant to it. C. Neither the action of the Company in establishing the Plan, nor any action taken by the Board or the Committee hereunder, nor any provision of the Plan itself shall be construed so as to grant any individual the right to remain in the employ or service of the Company or any of its parent or subsidiary corporations for any period of specific duration, and the Company (or any parent or subsidiary retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. D. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including (without limitation) the right of the Company (a) to grant options for proper corporate purposes otherwise than under this Plan to any Employee or other person, firm or company or association or (b) to grant options to, or assume the option of, any person in connection with the acquisition (by purchase, lease, merger, consolidation or otherwise) of the business and assets (in whole or in part) of any person, firm, company or association. 19. 21 EXHIBIT A to EXHIBIT 10.1 EXHIBIT A Giga-Tronics Incorporated STOCK OPTION AGREEMENT WITNESSETH: RECITALS A. The Board of Directors of the Company (the "Board") has adopted the Company's Restated 1990 Stock Option Plan (the "Plan") for the purpose of attracting and retaining the services of key employees (including officers and directors) who contribute to the financial success of the Company or its parent or subsidiary corporations. B. Optionee is an individual who is to render valuable services to the Company or its parent or subsidiary corporations, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Company's grant of a stock option to Optionee. C. For purposes of this Agreement, the following definitions shall be in effect: Employee: Optionee shall be considered to be an Employee for so long as such individual remains in the employ of the Company or one or more of its Parent or Subsidiary corporations. Fair Market Value: The Fair Market Value per share of Common Stock on any relevant date under the Plan shall be the mean between the highest bid and lowest asked prices (or, if such information is available, the closing selling price) per share of Common Stock on such date in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers through the NASDAQ system (or any successor system). Should the Common Stock become traded on a national securities exchange, then the Fair Market Value per share shall be the closing selling price on such exchange on the date in question, as such price is quoted on the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on the over-the-counter market (or national securities exchange) on the date in question, then the Fair Market Value shall be the mean between the highest bid and lowest asked prices (or closing selling price) on the last preceding date for which such quotations exist. 1. 22 Parent: A corporation shall be deemed to be a Parent of the Company if it is a corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided each such corporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Service: Optionee shall be deemed to be in the Service of the Company for so long as such individual (i) renders services on a periodic basis to the Company or one or more of its Parent or Subsidiary corporations as an Employee or (ii) serves as a non-employee member of the Board. Subsidiary: A corporation shall be deemed to be a Subsidiary of the Company if it is a member of an unbroken chain of corporations beginning with the Company provided each corporation in such chain (other than the last corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. In the event this option is a non-statutory option as specified in the Grant Notice, the term "Subsidiary" shall also include any partnership, joint venture or other business entity of which the Company owns, directly or indirectly through another subsidiary corporation, more than a fifty percent (50%) interest in voting power, capital or profits. TERMS 1. Grant of Option. Subject to and upon the terms and conditions set forth in this Agreement, the Company hereby grants to Optionee, as of the grant date (the "Grant Date") specified in the accompanying Notice of Grant of Stock Option (the "Grant Notice"), a stock option to purchase up to that number of shares of the Company's Common Stock (the "Optioned Shares") as is specified in the Grant Notice. The Optioned Shares shall be purchasable from time to time during the option term at the option price per share (the "Option Price") specified in the Grant Notice. 2. Option Term. This option shall have a maximum term of five (5) years measured from the Grant Date and shall accordingly expire at the close of business on the expiration date (the "Expiration Date") specified in the Grant Notice, unless sooner terminated in accordance with Paragraph 5 or 7A of this Agreement. 2. 23 3. Transferability. This option shall not be transferable or assignable by Optionee other than by will or by the laws of descent and distribution. Accordingly, this option may be exercised, during Optionee's lifetime, only by Optionee. 4. Exercisability. This option shall become exercisable for the Optioned Shares in one or more installments as is specified in the Grant Notice. As the option becomes exercisable in one or more installments, it shall remain so exercisable until the Expiration Date or sooner termination of the option term under Paragraph 5 or Paragraph 7A of this Agreement. 5. Termination of Service. In connection with the Optionee's cessation of Service, the option term specified in Paragraph 2 shall terminate (and this option shall cease to be exercisable) prior to the ExpiratiOn Date in accordance with the following provisions: (i) Except as otherwise provided in subparagraphs (ii) and (iii) below, should the Optionee's Service with the Company terminate at any time during the option term, then the period for exercising this option shall be reduced to a two (2) month period commencing with the date of such termination of Service but in no event shall this option be exercisable at any time after the Expiration Date. During such limited period of exercisability, this option may not be exercised for more the number of Optioned Shares (if any) for which the option is exercisable on the date of Optionee's termination of Service.(1) Upon the expiration of such two (2) month period or (if earlier) upon the Expiration Date, the option shall terminate and cease to be outstanding. (ii) Should Optionee die while this option is outstanding, then the personal representative of the Optionee's estate (or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have the right to exercise this option for any or all of the Optioned Shares for which this option is exercisable on the date of the Optionee's cessation of Service. Such right shall lapse, and this option shall cease to be exercisable, upon the earlier of (A) the - ------------- (1) In the event this option is an incentive stock option as specified in the Grant Notice, the exercise of this option more than three (3) months after the date of Optionee's cessation of Employee status for any reason (other than death or permanent disability) will disqualify this option for favorable tax treatment as further specified in Paragraph 17A. 3. 24 expiration of the six (6) month period measured from the date of Optionee's cessation of Service or (B) the Expiration Date. (iii) Should the Optionee's Service be terminated for any of the following reasons, then this option shall terminate and cease to be exercisable immediately upon such termination of Service: (1) Optionee's intentional misconduct or continuing gross neglect of duties which materially and adversely affects the business and operations of the Company or any Parent or Subsidiary corporation employing Optionee; (2) Optionee's unauthorized use or disclosure (or attempt thereat) of confidential information or trade secrets of the Company or its Parent or subsidiary corporations; (3) Optionee's commission of an act involving embezzlement, theft, fraud, falsification of records, destruction of property or commission of a crime or other offense involving money or other property of the Company or any Parent or subsidiary corporation employing Optionee. The reasons for termination of Optionee'S Service set forth in this subparagraph (iii) are not intended to be, and are not inclusive of, all acts or omissions which the Company may deem to constitute misconduct or other grounds for terminating the Optionee's (or any other individual's) Service. 6. Adjustment in Optioned Shares. A. In the event any change is made to the Common Stock issuable under the Plan by reason of any stock dividend, stock split, combination of shares, exchange of shares, or other change affecting the outstanding Common stock as a class without receipt of consideration, the Plan Administrator shall make appropriate adjustments to (a) the class and/or number of securities subject to this option and (b) the Option Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. The adjustments so determined by the Plan Administrator shall be final, binding and conclusive. B. In the event that (i) the Company is the surviving entity in any Corporate Transaction (within the meaning of paragraph 7A) which does not result in the termination of this option pursuant to the provisions of Paragraph 7 or (ii) this option is to be assumed in connection with such Corporate Transaction, then this option shall, immediately after such Corporate Transaction, be appropriately adjusted to apply and 4. 25 pertain to the number and class of securities which would be issuable, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Common Stock as are subject to this option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the Option Price payable per share, provided the aggregate Option Price shall remain the same. 7. Corporate Transaction/Change in Control. A. Upon the occurrence of one or more of the following transactions (a "Corporate Transaction"): (i) a merger or acquisition in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Company's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company to any entity other than a Parent or Subsidiary of the Company, or, (iii) any reverse merger in which the Company is the surviving entity but in which fifty percent (50%) or more of the Company's outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger, the exercisability of this option shall, to the extent it is not otherwise at the time fully exercisable, be automatically accelerated so that such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the Optioned Shares and may be exercised for all or any portion of such shares. No such acceleration of this option, however, shall occur if and to the extent (i) the option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof or (ii) the option is to be replaced by a comparable cash incentive program of the successor corporation based on the option spread (the excess of the Fair Market Value of the shares of the Common Stock at the time subject to the option over the Option Price payable for such shares) at the time of the Corporate Transaction. The determination of option comparability under clause (i) or (ii) shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. This option, to the extent not previously exercised, shall terminate upon the consummation of the Corporate 5. 26 Transaction and cease to be exercisable, unless it is expressly assumed by the successor corporation or parent thereof. C. Upon the occurrence of one or more of the following transactions (a "Change in Control"): (i) the acquisition by a person or group of related persons, other than the Company or any person controlling, controlled by or under common control with the Company, of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities pursuant to a transaction or series of related transactions which the Board does not approve; or (ii) the first date within any period of thirty- six (36) consecutive months or less on which there is effected any change in the composition of the Board such that the majority of the Board (determined by rounding up to the next whole number) ceases to be comprised of individuals who either (I) have been members of the Board continuously since the beginning of such period or (II) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (I) who were still in office at the time such election or nomination was approved by the Board; the exercisability of this option (if outstanding at the time) shall be automatically accelerated so that such option shall become exercisable, immediately prior to the consummation or the Change in Control, for all of the Optioned Shares and may be exercised for all or any portion of such shares at any time thereafter until the expiration or sooner termination of the option term. D. This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 8. Privilege of Stock Ownership. The holder of this option shall not have any of the rights of a shareholder with respect to the Optioned Shares until such individual shall have exercised the option, paid the Option Price for the purchased shares and satisfied all other applicable conditions precedent to the issuance of the certificates for such shares. 6. 27 9. Manner of Exercising Option. A. In order to exercise this option for one or more Optioned Shares for which this option is at the time exercisable, Optionee (or in the case of exercise after Optionee's death, the Optionee's executor, administrator, heir or legatee, as the case may be) must take the following actions: (i) Execute and deliver to the Secretary of the Company a written notice of exercise (the "Exercise Notice") in substantially the form of Exhibit I attached hereto. (ii) Pay the aggregate Option Price for the purchased shares in one or more of the following alternative forms: (1) full payment in cash or check made payable to the Company's order; or (2) full payment in shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at Fair Market Value on the Exercise Date (as such term is defined below); or (3) full payment in a combination of shares of Common Stock held for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at Fair Market Value on the Exercise Date and cash or check. (iii) Furnish to the Company appropriate documentation that the person or persons exercising the option, if other than Optionee, have the right to exercise this option. B. The Option Price may also be paid through a sale and remittance procedure. Pursuant to such procedure, Optionee (I) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased Optioned Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Option Price payable for such purchased shares plus all applicable federal and state income and employment taxes required to be withheld by the Company by reason of such purchase and (II) shall concurrently provide written directives to the Company to deliver the certificates for the purchased Optioned Shares directly to such brokerage firm in order to complete the sale transaction. C. For purposes of this Agreement, the Exercise Date shall be the first date on which the Exercise Notice shall have been delivered to the Company. Except to the extent the sale and 7. 28 remittance procedure of Paragraph 9B is utilized, payment of the Option Price shall immediately become due and shall accompany the Exercise Notice. D. As soon as practical after the Exercise Date, the Company shall mail or deliver to Optionee (or to the other person or persons exercising this option) a certificate or certificates representing the purchased shares. E. In no event may this option be exercised for any fractional shares. 10. Compliance with Laws and Regulations. A. The exercise of this option and the issuance of Optioned Shares upon such exercise shall be subject to compliance by the Company and the Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Company's Common Stock may be listed at the time of such exercise and issuance. B. In connection with the exercise of this option, Optionee shall execute and deliver to the Company such representations in writing as may be requested by the Company in order for it to comply with the applicable requirements of federal and state securities laws. 11. Successors and Assigns. Except to the extent otherwise provided in Paragraph 3 or 7A, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of Optionee and the successors and assigns of the Company. 12. Liability of Company. A. If the Optioned Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without shareholder approval be issued under the Plan, then this option shall be void with respect to such excess shares unless shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained. B. The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Company of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. 8. 29 The Company, however, shall use its best efforts to obtain all such approvals. 13. No Employment or Service Contract. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Company (or any Parent or Subsidiary employing or retaining Optionee) for any period of time or otherwise interfere with or restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining Optionee) or the Optionee, which rights are hereby expressly reserved by each, to terminate the Optionee's Service at any time for any reason whatsoever, with or without cause. 14. Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Company in care of the Corporate Secretary at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 15. Construction. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 16. Governing Law. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that state's conflict-of-laws rules. 17. Additional Terms Applicable to an Incentive Stock Option. In the event this option is an incentive stock option as specified in the Grant Notice, the following terms and conditions shall also apply to the grant: A. This option shall cease to qualify for favorable tax treatment as an incentive stock option under the federal tax laws if (and to the extent) this option is exercised for one or more Optioned Shares: (i) more than three (3) months after the date the Optionee ceases Employee status for any reason other than death or permanent disability or (ii) more than one (1) year after the date the Optionee ceases Employee status by reason of permanent disability. 9. 30 For purposes of this Paragraph 17, Optionee shall be deeded to be permanently disabled if Optionee is, by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) consecutive months or more, unable to perform his/her usual duties for the Company or Subsidiary retaining his/her services. B. Except in the event of a Corporate Transaction or Change in Control under Paragraph 7, this option shall not become exercisable in any calendar year during which it is outstanding if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Common Stock for which this option or one or more other post-1986 incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Company or any Parent or Subsidiary corporations) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion will first become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 17B would not be contravened. C. Should the exercisability of this option be accelerated upon a Corporate Transaction or Change in Control in accordance with Paragraph 7, then this option shall qualify for favorable tax treatment as an incentive stock option under the federal tax laws only to the extent the aggregate fair market value (determined at the Grant Date) of the Common Stock for which this option first becomes exercisable in the calendar year in which the Corporate Transaction or Change in Control occurs does not, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Common Stock for which this option or one or more other post-1986 incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Company or any Parent or Subsidiary corporations) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. D. To the extent this option should fail to qualify as an incentive stock option under the federal tax laws, the Optionee will recognize compensation income in connection with the acquisition of one or more Optioned Shares hereunder, and the Optionee must make appropriate arrangements for the satisfaction of all federal, state or local income tax withholding 10. 31 requirements and federal social security employee tax requirements applicable to such compensation income. 18. Additional Terms Applicable to a Non-Statutory Stock Option. In the event this option is a non-statutory stock option as specified in the Grant Notice, Optionee hereby agrees to make appropriate arrangements with the Company or Parent or Subsidiary employing Optionee for the satisfaction of any federal, state or local income tax withholding requirements and federal social security employee tax requirements applicable to the exercise of this option. 11. 32 EXHIBIT I NOTICE OF EXERCISE OF STOCK OPTION I hereby notify Giga-Tronics Incorporated (the "Company") that I elect to purchase ____________ shares of Common Stock of the Company (the "Purchased Shares") pursuant to that certain option (the "Option") granted to me on __________________________, 19___ to purchase up to ________________shares of the Company's Common Stock at an option price of $____________ per share (the "Option Price"). Concurrently with the delivery of this Exercise Notice to the Secretary of the Company, I shall hereby pay to the Company the Option Price for the Purchased Shares in accordance with the provisions of my agreement with the Company evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. ______________________________________ ________________________________________ Date Optionee Address: ________________________________________ ________________________________________ Print name in exact manner it is to appear on the stock certificate: ________________________________________ Address to which certificate is to be sent, if different from address above: ________________________________________ Social Security Number: ________________________________________ Employee Number: ________________________________________ 12. EX-10.2 6 EXHIBIT 10.2 1 Exhibit 10.2 INDEMNIFICATION AGREEMENT THIS AGREEMENT, made and entered into the 14th day of May, 1990 between Giga- tronics, Incorporated, a California corporation ("Corporation"), and ___________ ("Officer"), WITNESSETH THAT: WHEREAS, Officer of the Corporation, performs a valuable service in such capacity of Corporation; and WHEREAS, the Articles of Incorporation of the Corporation authorizes and permits contracts between Corporation and its officers with respect to indemnification of such officers; and WHEREAS, in accordance with the authorization as provided by the California General Corporation Law, as amended ("Code"), Corporation may purchase and maintain a policy or policies of Directors and Officers Liability insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its directors and officers in the performance as officers and directors of Corporation; and WHEREAS, as a result of recent developments affecting the terms, scope and availability of D & O Insurance there exists general uncertainty as to the extent of protection afforded officers and directors by such D & O Insurance and by statutory and by-law indemnification provisions; and WHEREAS, in order to induce Officer to continue to serve as an officer of Corporation, Corporation has determined and agreed to enter into this contract with Officer; NOW, THEREFORE, in consideration of Officer's continued service as an officer after the date hereof, the parties hereto agree as follows: 1. Indemnity of Officer. Corporation hereby agrees to hold harmless and indemnify Officer to the full extent authorized by the provisions of the Code, as it may be amended from time to time. 2. Additional Indemnity. Subject only to the limitations set forth in Section 3 hereof, Corporation hereby further agrees to hold harmless and indemnify Officer: (a) Against any and all expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Officer in connection with any threatened, pending or completed 2 action, suit or proceedings, whether civil, criminal, administrative or investigative (including an action by or in the right of Corporation) to which Officer is, was, or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Officer is, was or at any time becomes a director, officer, employee or agent of Corporation, or is or was serving or at any time serves at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; and (b) otherwise to the fullest extent as may be provided to officer by corporation under the non-exclusivity provision of the articles of incorporation of corporation and the code. 3. Limitations on Additional Indemnity. (a) No indemnity pursuant to Section 2 hereof shall be paid by Corporation for any of the following: (i) except to the extent the aggregate of losses to be indemnified thereunder exceeds the sum of such losses for which the Officer is indemnified pursuant to Section 1 hereof or pursuant to any D & O Insurance purchased and maintained by Corporation; (ii) in respect to remuneration paid to Officer if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (iii) on account of any suit in which judgment is rendered against Officer for an accounting of profits made from the purchase or sale by Officer of securities of Corporation pursuant to the provisions of section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iv) on account of Officer's acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (v) on account of any proceeding (other than a proceeding referred to in Section 8(b) hereof) initiated by the Officer unless such proceeding was authorized by the Directors or the Corporation; (vi) if a final decision by a Court having jurisdiction in the matter shall determine that such indemnification is not lawful; or 2. 3 (vii) on account of any action, suit or proceeding commenced by the Officer against the Corporation or against any officer, director or shareholder of the Corporation unless authorized in the specific case by action of the Board of Directors; (b) In addition to those limitations set forth above in paragraph (a) of this Section 3, no indemnity pursuant to Section 2 hereof in an action by or in the right of Corporation shall be paid by Corporation for any of the following: (i) on account of acts or omissions that Officer believes to be contrary to the best interests of the Corporation or its shareholders or that involve the absence of good faith on the part of Officer; (ii) with respect to any transaction from which Officer derived an improper personal benefit; (iii) on account of acts or omissions that show a reckless disregard for Officer's duty to the Corporation or its shareholders in circumstances in which Officer was aware, or should have been aware, in the ordinary course of performing an officer's duties, of a risk of serious injury to Corporation or its shareholders; (iv) on account of acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of Officer's duty to the Corporation or its shareholders; (v) to the extent prohibited by Section 310 of the California Corporations Code, "Contracts In Which Officer Has Material Financial Interest"; (vi) to the extent prohibited by Section 316 of the California Corporations Code, "Corporate Actions Subjecting Officers To Joint And Several Liability" (for prohibited distributions, loans and guarantees); (vii) in respect to any claim, issue or matter as to which Officer shall have been adjudged to be liable to Corporation in the performance of Officer's duty to Corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Officer is fairly and reasonably entitled to indemnity for 3. 4 expenses and then only to the extent that the court shall determine; (viii) of amounts paid in settling or otherwise disposing of a pending action without court approval; or (ix) of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. 4. CONTRIBUTION. If the indemnification provided in 1 and 2 is unavailable and may not be paid to Officer for any reason other than those set forth in Section 3 (excluding subsections 3(b)(viii) and (ix), then in respect of any threatened pending or completed action, suit or proceeding in which Corporation is jointly liable with Officer (or would be if joined in such action, suit or proceeding), Corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Officer in such proportion as is appropriate to reflect (i) the relative benefits received by Corporation on the one hand and Officer on the other hand from the transaction from which such action, suit or proceeding arose, and (ii) the relative fault of Corporation on the one hand and of Officer on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of Corporation on the one hand and the Officer on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable consideration. 5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of Corporation contained herein shall continue during the period Officer is a director, officer, employee or agent of Corporation (or is or was serving at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue hereafter so long as Officer shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative by reason of the fact that Officer was an officer of Corporation or serving in any other capacity referred to herein. 6. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Officer of notice of the commencement of any action, suit or proceeding, Officer will, if a claim 4. 5 in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission so to notify Corporation will not relieve it from any liability which it may have to Officer otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which officer notifies Corporation of the commencement thereof; (a) Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to Officer. After notice from Corporation to Officer of its election so as to assume the defense thereof, Corporation will not be liable to Officer under this Agreement for any legal or other expenses subsequently incurred by Officer in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Officer shall have the right to employ its counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Officer unless (i) the employment of counsel by Officer has been authorized by Corporation, (ii) Officer shall have reasonably concluded that there may be a conflict of interest between Corporation and Officer in the conduct of the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Corporation or as to which Officer shall have made the conclusion provided for in (ii) above; and (c) Corporation shall not be liable to indemnify Officer under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on Officer without Officer's written consent. Neither Corporation nor Officer will unreasonably withhold its consent to any proposed settlement. 7. ADVANCEMENT AND PAYMENT OF EXPENSES. (a) In the event that Officer employs his own counsel pursuant to Section 6(b)(i) through (iii) above, Corporation shall advance to Officer, prior to any final disposition of any threatened or pending 5. 6 action, suit or proceeding, whether civil, criminal, administrative or investigative, any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding within ten (10) days after receiving copies of invoices presented to Officer for such expenses; and (b) Officer agrees that Officer will reimburse Corporation for all reasonable expenses paid by Corporation in defending any civil or criminal action, suit or proceeding against Officer in the event and only to the extent it shall be ultimately determined by a final judicial decision (from which there is no right of appeal) that Officer is not entitled, under applicable law, the by-laws, this Agreement or otherwise, to be indemnified by Corporation for such expenses. 8. ENFORCEMENT. (a) Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Officer to continue as an Officer of Corporation, and acknowledges that Officer is relying upon this Agreement in continuing in such capacity. (b) In the event Officer is required to bring any action to enforce rights or to collect monies due under this Agreement and is successful in such action, Corporation shall reimburse Officer for all of Officer's reasonable fees and expenses in bringing and pursuing such action. 9. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent or the others, so that if any provision hereof shall be held to be valid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. 10. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of California. 11. BINDING EFFECT. This Agreement shall be binding upon Officer and upon Corporation, its successors and assigns, and shall inure to the benefit of Officer, his heirs, personal representatives and assigns and to the benefit of Corporation, its successors and assigns. 12. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 6. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. GIGA-TRONICS, INCORPORATED By ______________________________________ ______________________________________ (Title) ______________________________________ ______________________________________ (Title) 7. EX-10.3 7 EXHIBIT 10.3 1 Exhibit 10.3 INDUSTRIAL LEASE between CALFRONT ASSOCIATES, as Landlord and GIGA-TRONICS INCORPORATED, as Tenant for 4650 NORRIS CANYON ROAD Dated as of December 6, 1993 12/6/93 2 SCHEDULE A BASIC LEASE INFORMATION PARAGRAPH REFERENCE Preamble LANDLORD: CalFront Associates, a California corporation Preamble TENANT: Giga-tronics Incorporated, a California corporation 1.3 BUILDING: building located at 4650 Norris Canyon Road, San Ramon, California within the project commonly known as Norris Technology Center, containing approximately 96,612 square feet of rentable area, as shown on the site plan attached as Exhibit A. 1.4; 2.1 PREMISES: the ground floor premises as outlined on the floorplan attached as Exhibit B. 1.5 NET RENTABLE AREA OF PREMISES: approximately 47,397 square feet 1.6 TENANT'S PERCENTAGE SHARE: approximately 49.05% of the Building approximately 18.76% of the Project 3.1 TERM: ten years 3.1 COMMENCEMENT DATE: later of April 15, 1994 or substantial completion 3.1 EXPIRATION DATE: expiration of ten years following Commencement Date 4.1 BASE MONTHLY RENT: Period of Term Monthly Base Rent *Commencement Date - Dec. 31, 1994 $29,553 ($0.86 per sq. ft., but with 13,000 sq. ft. rent free) *Jan. 1, 1995 - Apr 14, 1996 $40,733 ($0.86 per sq. ft.) *Apr. 15, 1996 - Apr 14, 1999 $49,259 ($1.04 " ) *Apr. 15, 1999 - Apr 14, 2002 $52,574 ($1.11 " ) *Apr. 15, 2002 - end of term $57,310 ($1.21 " ) * Based on estimated Net Rentable Area of 47,364 square feet. 4.3 BASE YEAR: calendar year 1994 20 SECURITY DEPOSIT: $40,000, subject to reduction of $10,000 each lease anniversary 5.1 PERMITTED USE: office, warehouse, light manufacturing and assembly, and uses incidental thereto
2. 3 5.2 CC&R's: Covenants, Conditions and Restrictions of Bishop Ranch recorded March 26, 1980 in Book 9787 at Pages 803 et seg. of the Official Records of Contra Costa County 14 TENANT'S BROKER, IF ANY: Cushman Realty Corporation, a California corporation 22 LANDLORD'S ADDRESS FOR CalFront Associates NOTICES: c/o Cushman & Wakefield of California, Inc. 160 Pine Street, Suite 710 San Francisco, California 94111 Attn: Asset Manager with a copy to: Carol Frizzell, Esq. Pacific Telesis Legal Department 130 Kearny St., 36th floor San Francisco, California 94108 22 TENANT'S ADDRESS FOR NOTICES: prior to occupancy: 2495 Estand Way P.O. Box 232015 Pleasant Hill, CA 94523 after occupancy: to the Premises 24 PARKING: 158 spaces 44, 45 OPTIONS: one 5-year renewal right at 95% of fair market value right to expand into vacant space until April 15, 1998 47 right of first offer 48 cancellation right at any time after the 7th lease year, if expansion needs cannot be met 49 MOVING ALLOWANCE: $1 per square foot of Net Rentable Area Exhibit C TENANT IMPROVEMENT $20 per square foot of Net Rentable ALLOWANCE Area
3. 4 TABLE OF CONTENTS
Page ---- 1. Definitions........................................... 6 2. Premises; Common Areas................................ 7 2.1 Premises..................................... 7 2.2 Common Areas................................. 7 3. Term.................................................. 7 3.1 Term......................................... 7 3.2 Delay in Commencement........................ 8 3.3 Early Possession............................. 8 4. Rent.................................................. 8 4.1 Base Rent.................................... 8 4.2 Additional Rent.............................. 8 4.3 Operating Expenses........................... 8 5. Use................................................... 11 5.1 Use.......................................... 11 5.2 Compliance with Law.......................... 11 5.3 Condition of Premises........................ 12 5.4 Hazardous Substances......................... 12 6. Maintenance, Repairs and Alterations.................. 13 6.1 Landlord's Obligations....................... 13 6.2 Tenant's Obligations......................... 14 6.3 Alterations.................................. 14 7. Indemnity; Insurance.................................. 15 7.1 Indemnity.................................... 15 7.2 Tenant's Insurance........................... 16 7.3 Landlord's Insurance......................... 16 7.4 Payment of Premium........................... 17 7.5 Waiver of Subrogation........................ 17 8. Damage or Destruction................................. 17 8.1 Definitions.................................. 17 8.2 Partial Damage - Insured Loss................ 17 8.3 Partial Damage - Uninsured Loss.............. 17 8.4 Total Destruction............................ 18 8.5 Damage Near End of Term...................... 18 8.6 Abatement of Rent; Tenant's Remedies......... 18 8.7 Termination - Advance Payments............... 19 8.8 Waiver....................................... 19 9. Real Property Taxes................................... 19 9.1 Payment of Tax............................... 19 9.2 Additional Improvements...................... 19 9.3 Definition of Real Property Tax.............. 19 9.4 Joint Assessment............................. 20 9.5 Personal Property Taxes...................... 20 10. Utilities............................................. 20 11. Assignment and Subletting............................. 20 11.1 Landlord's Consent Required.................. 20 11.2 Tenant Affiliate............................. 21
4. 5 11.3 No Release of Tenant......................... 21 11.4 Notice of Assignment or Subletting........... 21 11.5 Condition to Landlord's Consent.............. 21 11.6 Landlord's Expenses.......................... 21 12. Defaults; Remedies.................................... 22 12.1 Defaults..................................... 22 12.2 Remedies..................................... 22 12.3 Default by Landlord.......................... 23 12.4 Late Charges................................. 23 12.5 Landlord's Right to Cure Defaults............ 23 13. Condemnation.......................................... 24 14. Real Estate Brokers................................... 24 15. Estoppel Certificate.................................. 24 16. Landlord's Liability.................................. 24 17. Severability.......................................... 25 18. Interest on Past-de Obligations....................... 25 19. Time of Essence....................................... 25 20. Security Deposit...................................... 25 21. Incorporation of Prior Agreements; Amendments......... 25 22. Notices............................................... 25 23. Waivers............................................... 26 24. Parking............................................... 26 25. Holding Over.......................................... 26 26. Cumulative Remedies................................... 26 27. Binding Effect; Choice of Law......................... 26 28. Subordination......................................... 26 29. Attornment............................................ 27 30. Landlord's Access..................................... 27 31. Signs................................................. 27 32. Merger................................................ 27 33. No Light, Air or View Easement........................ 27 34. Consents.............................................. 27 35. Quiet Possession...................................... 27 36. Landlord's Rules and Regulations...................... 28 37. Security Measures..................................... 28
5. 6 38. Landlord's Reservation of Rights...................... 28 38.1 Easements.................................... 28 38.2 Building Rights.............................. 28 39. Authority............................................. 28 40. Conflict.............................................. 28 41. Attorneys' Fees....................................... 28 42. Exhibits.............................................. 29 43. Options............................................... 29 43.1 Options Personal............................. 29 43.2 Effect of Default on Options................. 29 44. Extension Option...................................... 29 45. Extended Term - Rent.................................. 29 46. Expansion Option...................................... 31 47. Right of First Offer.................................. 31 48. Cancellation Right.................................... 32 49. Moving Allowance...................................... 32
EXHIBITS A Site Plan B Premises C Initial Improvements of Premises D Rules and Regulations E Rules and Regulations for Tenant Contractors F CC&R's G Space to be Subordinated under Expansion Option and Right of First Offer 6. 7 THIS LEASE, dated as of December 6, 1993, is made by and between CalFront Associates, a California corporation (herein called "Landlord") and Giga-tronics Incorporated, a California corporation (herein called "Tenant"). 1. Definitions. 1.1 Base Monthly Rent: The amount specified on Schedule A which Tenant is to pay each month pursuant to Paragraph 4.1 and subject to adjustment as provided on Schedule A. 1.2 Commencement Date: The date on which the term of this Lease is to begin which shall be the date specified in Schedule A, subject to adjustment pursuant to Paragraphs 3.2 and 3.3. 1.3 Building: The building indicated on Schedule A. 1.4 Premises: That area located within the Building as indicated on Schedule A. 1.5 Net Rentable Area of Premises: That area comprising the Premises which is hereby stipulated for all purposes to contain the square footage indicated on Schedule A, as such square footage may be recalculated following the initial tenant improvements based on ANSI Publication Z65.1 (1980) (BOMA standard). The initial determination of Net Rentable Area shall be made by Landlord's architect following contruction of the initial tenant improvements in each portion of the Premises. Within thirty (30) days after Tenant takes possession of each portion of the Premises, Tenant may, at its expense, have its architect recalculate the Net Rentable Area of the applicable portion of the Premises. In the event the actual Net Rentable Area of the Demised Premises differs from the initial calculation of Landlord's architect, the Base Monthly Rent and all additional charges based on Net Rentable Area shall be proportionately adjusted as of the Commencement Date to reflect Tenant's actual Net Rentable Area. Tenant shall pay such rent and additional charges based on the initial calculation of Landlord's architect pending final determination of the actual Net Rentable Area. The parties shall execute an instrument acknowledging the actual Net Rentable Area once it has been finally determined. 1.6 Tenant's Percentage Share: The percentage indicated on Schedule A. Such Tenant's Percentage Share is derived by dividing the Net Rentable Area of the Premises by the total rentable area of the Building. Landlord shall initially calculate Tenant's Percentage Share based on the initial calculation of Net Rentable Area provided by Landlord in accordance with Paragraph 1.5 above, subject to later adjustment in the event of a redetermination of Net Rentable Area of the Premises. Landlord reserves the right, in the future, to readjust Tenant's Percentage Share to reflect the addition or removal of improvements to the total space on which expenses passed through to Tenant will be calculated. Any adjustments will be made on a reasonable basis and so as not to prejudice Tenant. 1.7 The following terms shall have the meanings specified where indicated: a. Additional Rent: Paragraph 4.2 b. Alterations: Paragraph 6.3 c. Common Areas: Paragraph 2.2(a) d. Expiration Date: Paragraph 3.1 e. Initial Improvements: Paragraph 6.1(b), Exhibit C f. Insured Loss: Paragraph 8.1(c) 7. 8 g. Operating Expenses: Paragraph 4.3(a) h. Premises Partial Damage; Premises Building Partial Damage: Paragraph 8.1(a) i. Premises Total Destruction; Premises Building Total Destruction: Paragraph 8.1(b) j. Real Property Tax: Paragraph 9.1 k. Utility Installations: Paragraph 6.3 2. Premises; Common Areas. 2.1 Premises. Landlord hereby leases to Tenant, and Tenant leases from Landlord the Premises on the terms and conditions set forth herein. 2.2 Common Areas. (a) As used herein, "Common Areas" shall mean all areas within the Building and the land upon which it is located which are provided and designated by Landlord from time to time for the general non-exclusive use of Landlord, Tenant and other tenants of the Building or the project, including, without limiting the foregoing, lobbies, corridors, windows, stairways, air shafts, mechanical shafts, elevators, service and mechanical rooms and closets, trash facilities, restrooms, entrances, walls and exterior roof, parking areas, driveways, sidewalks, loading areas, access and egress roads, landscaped and planted areas and improvements provided by Landlord for the common use of tenants. The Common Areas shall include an allocable portion of outside areas of the project. Landlord may from time to time change the size, location, nature and use of any of the Common Areas, including converting Common Areas into leasable areas and increasing or decreasing common area land, floor space and/or facilities; provided, however, that any such change in the Common Areas shall not unreasonably interfere with Tenant's use and enjoyment of the Premises or materially decrease the quality or level of Common Area services and facilities. (b) Tenant, its employees, agents, customers and business invitees shall have the nonexclusive right (in common with all others to whom Landlord has granted or may hereafter grant such rights) to use the Common Areas for the purposes intended, subject to such reasonable rules and regulations relating to such use as Landlord may from time to time establish. Landlord may at any time close any Common Areas to effect construction, repairs or changes thereto, or to prevent the acquisition of public rights in such areas, and reasonable may do such other acts in and to the Common Areas as in its reasonable judgment it deems appropriate, so long as reasonable access to the Premises remains available. Tenant shall not at any time unreasonably interfere with the rights of Landlord, other tenants, or of any other person entitled to use the Common Areas, to use any part thereof. 3. Term. 3.1 Term. This Lease shall be for the term specified on Schedule A, commencing on the Commencement Date specified on such Schedule A, or, if later, the date upon which the Initial Improvements to be installed by Landlord are substantially completed and the Premises ready for occupancy or use and expiring on the Expiration Date specified on such Schedule A unless sooner terminated pursuant to any provision hereof. The Initial Improvements shall be deemed to be substantially complete upon the earliest to occur of the following: (a) the date by which all improvements to be constructed by Landlord have been completed, except for punch list items which do not prevent Tenant from using the Premises for their intended use, and the relevant local authority has issued a certificate of temporary occupancy for the Premises or the equivalent (provided, however, that the issuance of such local authority approval shall be deemed to have occurred if denied solely by reason of the failure Tenant's Work to satisfy local authority requirements), or (b) the date Tenant opens for business in the Premises. The parties shall, after the Lease Commencement Date has occurred, execute an instrument specifying the actual Lease Commencement Date. 8. 9 3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any reason Landlord cannot deliver possession of the Premises to Tenant on said date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder, but, in such case, Tenant shall not be obligated to pay rent until the initial improvements are substantially complete in accordance with Paragraph 3.1 above, and the Expiration Date shall be automatically extended; provided, however, that if Landlord shall not have delivered possession of the Premises within 90 days from said Commencement Date, Tenant may, at Tenant's option, by notice in writing to Landlord within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided that such 90-day period shall be subject to extension for any delays (i) caused by Tenant requests for changes in Landlord's construction, if any, or due to fault or neglect of Tenant or Tenant's agents or contractors, or (ii) due to acts of God, strikes, fires, weather, casualty, war, acts of governmental bodies, inability to obtain labor or materials or other causes beyond Landlord's reasonable control. 3.3 Early Possession. Subject to any early occupancy for completion of Tenant's Work as specified in Paragraphs 4.1 and 6.1 of Exhibit C, if Tenant occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the Expiration Date, and Tenant shall pay rent for such period at the initial Base Monthly Rent set forth in Schedule A for the period following any free rent period. 4. Rent. 4.1 Base Rent. Tenant shall pay to Landlord, as Base Monthly Rent for the Premises, the amount specified on Schedule A. Rent shall be payable in advance, on or before the first day of each month of the term hereof. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment. Rent shall be payable in lawful money of the United States to Landlord without deduction, offset, prior notice or demand at the address stated herein or to such other persons or at such other places as Landlord may designate in writing. 4.2 Additional Rent. As rent for the Premises, in addition to the Base Monthly Rent, Tenant shall pay to Landlord, in the amounts and at the times provided, all of the other charges and payments provided for in this Lease ("Additional Rent"), such as (but not limited to) Operating Expenses over the Base Year (including any insurance premiums payable by Tenant, taxes payable by Tenant, jointly metered utility charges, common area costs), late charges, and interest ("Additional Rent"). Unless otherwise specified herein, all payments of Additional Rent shall be payable in full on the date that the next installment of Base Monthly Rent is payable. 4.3 Operating Expenses. (a) Tenant shall pay to Landlord as Additional Rent Tenant's Percentage Share (as specified on Schedule A) of all Operating Expenses as hereinafter defined during each calendar year or part thereof during the term of this Lease over the amount of Operating Expenses paid during the Base Year specified on Schedule A, in accordance with the following provisions. Subject to the exclusions in (e) below, "Operating Expenses" shall mean the total cost and expenses paid or incurred by Landlord in the exercise of its discretion in connection with the management, operation, maintenance and repair of the Building, including an allocable proportion of the shared cost and expenses of Common Areas and other costs of the project as allocated to the Building by Landlord in its reasonable good faith determination. Such Operating Expenses shall include, without limitation, (i) the cost of air conditioning, electricity, heating, mechanical, ventilating, elevator systems and all other utilities (to the extent not separately charged or metered to Tenant) and the cost of supplies and equipment and maintenance and service contracts in connection therewith (to the extent the heating, ventilating, and air conditioning systems in the Premises are not maintained by Tenant at Tenant's sole cost); (ii) all costs, charges and fees associated with all water and sewer service supplied but not separately metered to Tenant and all costs of any other utility not separately assessed to Tenant; (iii) the cost of watchmen, guards and security personnel and services; (iv) the cost of repairs (including, without limitation, roof repairs and 9. 10 maintenance and repair of the structural components of the Building), general maintenance, plumbing service, janitorial and cleaning service, and fire protection systems; (v) the cost of fire, extended coverage, boiler, sprinkler, public liability, property damage, rent, earthquake, and other insurance paid by Landlord; (vi) wages, salaries and other labor costs, including employee benefits; (vii) fees, charges and other costs, including management fees, consulting fees, legal fees and accounting fees, of all independent contractors engaged by Landlord or reasonably charged by Landlord if Landlord performs management services in connection with the Building or project; (viii) license, permit and inspection fees; (ix) supplies, materials, tools and equipment and the cost of supplying, replacing and cleaning employee uniforms; (x) the fair market rental value of Landlord's or the property manager's offices in any building used in the management of the Building or Common Areas; (xi) all costs and expenses of contesting by appropriate legal proceedings any matter concerning operating or managing the Building or Common Areas; (xii) depreciation on all personal property, fixtures and equipment used in the management, operation, maintenance and repair of the Building or Common Areas; (xiii) all costs associated with the operation, management, maintenance and repair of the Common Areas, including landscaping and gardening, signs, maintenance, repairs, resurfacing, repaving, painting, refinishing, lighting, cleaning, storm drainage and sanitary sewer systems, refuse removal, snow, ice and ash removal; (xiv) the cost of any capital improvements made to the Building or project after completion of its construction as a labor-saving device or to effect other economies in the operation or maintenance of the Building or project, or made to the Building or project after the date of this Lease that are required under any governmental law or regulation that was not applicable to the Building or project at the time that permits for the construction thereof were obtained, such cost to be amortized over the useful life of the improvement, provided, however, that in the case of a cost-saving capital improvement the amortization of the cost of such improvement shall be at a rate that shall not exceed the actual savings realized by such measure; (xv) the cost of all Real Property Tax paid by Landlord pursuant to Paragraph 9; (xvi) costs incurred to test, survey, clean up, contain, abate, remove or otherwise remedy Hazardous Substances from the Building or project except to the extent caused by Landlord's negligence or intentional acts or the proven negligence or intentional acts of any other tenant in the Building; and (xvii) any other expense of any other kind whatsoever reasonably incurred in managing, operating, maintaining and repairing the Building or project. Expenses shall be adjusted to reflect a ninety-five percent (95%) occupancy of the Building. The determination of Operating Expenses and their allocation shall be in accordance with generally accepted accounting principles applied on a consistent basis. If the Common Areas contain more than one building at any time during the Lease term, then the term "Operating Expenses" shall mean and include all of the Operating Expenses allocable to the Premises and a proportionate share (based on the square footage of gross rentable area in the Premises as a percentage of the total of square footage of gross rentable area of the buildings on the Common Areas at the time in question) of all Operating Expenses which are related to such buildings in general and are not allocated to any one building on the Common Areas. The specific examples of Operating Expenses stated in this Paragraph are in no way intended to and shall not limit the costs comprising Operating Expenses, nor shall such examples be deemed to obligate Landlord to incur such costs or to provide such services or to take such actions except as Landlord may be expressly required in other portions of this Lease, or except as Landlord, in its sole discretion, may elect. (b) Tenant shall pay to Landlord as Additional Rent during each calendar year or part thereof during the term of this Lease one-twelfth (1/12th) of Tenant's Percentage Share of the increase in Operating Expenses over the Base Year for each such calendar year or partial calendar year on or before the first day of each calendar month, in advance, in an amount estimated by Landlord and billed by Landlord to Tenant; provided that Landlord shall have the right initially to determine reasonable monthly estimates and to revise such estimates from time to time but not more often than twice per calendar year. With reasonable promptness, but no later than 90 days after the expiration of each calendar year, Landlord shall furnish Tenant with a statement (herein called "Landlord's Expense Statement"), setting forth in reasonable detail the Operating Expenses for such calendar year and Tenant's Percentage Share, if any, of the increase in such Operating Expenses. If the actual increase in Operating Expenses for the Building for such calendar year exceed the estimated increase in Operating Expenses paid by Tenant for such calendar year, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual increase in 10. 11 Operating Expenses within 30 days after the receipt of Landlord's Expense Statement, and if the total amount paid by Tenant for any such calendar year shall exceed the actual increase in Operating Expenses for such calendar year, such excess shall be credited against the next installment of rent, or at the end of the Term, reimbursed within 30 days of expiration or early termination of the Lease. (c) If for any calendar year any tenant of the Building (including Tenant) is separately metered for any utility, the utility for which such tenant is separately metered shall not be included in Operating Expenses for the computation of the Additional Rent to be paid by such tenant for such calendar year under this Paragraph. In such event, for purposes of computing the portion of each utility that is separately metered to any tenant to be paid by the tenants that are not separately metered, Tenant's Percentage Share shall be the percentage figure obtained by dividing the rentable area of the premises of each tenant that is not separately metered by the total rentable area of all the tenants that are not separately metered. In the event any utility is separately metered for only a portion of any calendar year, such charges shall be prorated on a daily basis based upon a thirty (30) day month in accordance with the foregoing formula. Such computations shall be shown on Landlord's Expense Statement for the applicable calendar year. (d) If the expiration date fixed for this Lease shall occur on a date other than the end of a calendar year, Tenant's Percentage Share of increased Operating Expenses for the calendar year in which the expiration date falls shall be prorated on an annual basis; provided, however, Landlord may, pending the determination of the amount of increased Operating Expenses for such partial calendar year, furnish Tenant with statements of estimated excess Operating Expenses and Tenant's Percentage Share thereof for such partial calendar year. Within 30 days after receipt of such estimated statement, Tenant shall remit to Landlord, as Additional Rent, the amount of Tenant's Percentage Share of such increase in Operating Expenses. After such Operating Expenses have been finally determined and Landlord's Expense Statement furnished to Tenant pursuant to this Paragraph, if there has been an underpayment of Tenant's Percentage Share of increased Operating Expenses, Tenant shall remit the amount of such underpayment to Landlord within 30 days of receipt of such statements and, if there has been an overpayment, Landlord shall remit the amount of any such overpayment to Tenant within 30 days of the issuance of such statement. (e) Notwithstanding anything in this Lease to the contrary, Operating Expenses shall not include the following: (i) legal fees, brokerage commissions, advertising costs, or other related expenses incurred in connection with the leasing of the Building or project; (ii) any capital improvements or alterations, except as expressly provided in (a) above; provided, however, that structural repairs or improvements costing less than $25,000 shall not be deemed capital, and that the costs of replacement or repair of the roof membrane amortized over its useful life may be included in Operating Expenses; (iii) depreciation or amortization of the Building; (iv) damage and repairs to the extent covered by the proceeds of any insurance policy carried by, or required to be carried by, Landlord in connection with the Building, project or Common Areas; (v) executive salaries; (vi) salaries of service personnel to the extent that the service personnel perform services not solely in connection with the management, operation, repair or maintenance of the Building, project or Common Areas; (vii) Landlord's general overhead expenses not related to the Building or project; (viii) payments of principal or interest on any mortgage or other encumbrance; (ix) legal fees, accountants' fees and other expenses incurred in connection with disputes with Tenant, tenants or other occupants or associated with the enforcement of any lease or defense of Landlord's title to or interest in the Building or project to the extent such defense does not benefit tenants of the Building; (x) costs (including permit, license and inspection fees) incurred in renovating or otherwise improving, decorating, painting or altering space for other tenants or other occupants or vacant space in the Building or project; (xi) interest, penalties or other costs arising out of Landlord's failure to make timely payment of its obligations; (xii) the cost of any service provided to Tenant or other occupants of the Building or project and not to Tenant for which Landlord is to be reimbursed separately; (xiii) overhead and profit paid to subsidiaries or affiliates of Landlord for management or other services for the project or Building or for supplies or other materials to the extent that the costs of the services, supplies or materials exceed the competitive costs of the services, supplies or materials if they were not provided by a subsidiary or an affiliate; (xiv) damage 11. 12 and repairs necessitated by the negligence or wilful misconduct of Landlord or Landlord's employees, contractors or agents; (xv) costs incurred due to a proven violation by any other tenant in the Building of the terms and conditions of any lease; (xvi) costs of operating and maintaining any portion of the Building or Common Areas which is used for parking and for which parking fees are charged; (xvii) property management fees to the extent they exceed customary and reasonable charges in the San Ramon/Pleasanton local area; (xviii) costs incurred in advertising and promotional activities for the Building (including gifts and promotional services to tenants or other parties); (xix) cost of capital improvements otherwise permitted to be passed through to Tenant hereunder in excess of the costs amortized over the useful life of the capital improvement (for which purposes repair or improvement costs shall be capitalized if over $25,000 in any one instance and otherwise expensed); and (xx) rent for space within the Building or other locations other than as expressly permitted in 4.3(a)(x). (f) Tenant shall have the right, at Tenant's expense, at all reasonable times upon ten days' prior written notice within one year following receipt of Landlord's statements (or, in the case of retroactive billings, within 12 months following receipt of Landlord's invoice), to audit Landlord's books and records relating to the Operating Expenses of the Building for the previous calendar year at the office where Landlord keeps such documents. If it is determined following such audit that payment adjustments are required, Landlord or Tenant, as the case may be, shall make the required payment within 30 days thereafter. In the event such audit reveals that Landlord's Expense Statement overstated actual Operating Expenses by more than five percent (5%) for any particular year, Landlord shall reimburse Tenant for the reasonable cost of such audit. (g) Landlord shall increase the Operating Expenses paid or incurred by Landlord during the Base Year to the extent there is a component of Operating Expenses incurred after the Base Year which (i) was not paid or incurred in the Base Year; (ii) is not the result of any requirement imposed by a governmental agency; and (iii) is not approved by Tenant. The amount of the increase in the Operating Expenses paid or incurred by Landlord during the Base Year as a result of an additional component of Operating Expenses shall be the amount which Landlord and Tenant reasonably determine would have been paid or incurred by Landlord in the Base Year in connection with the additional component. If increase shall be the amount of the Operating Expense paid in the first year the additional component is paid (i.e., a year after the Base Year), reduced by a percentage equal to the percentage increase in the Consumer Price Index between the Base Year and the first year the component is paid. 5. Use. 5.1 Use. The Premises shall be used and occupied only for the permitted use stated on Schedule A and for related purposes. 5.2 Compliance with Law and Restrictions. (a) Tenant shall comply promptly with all applicable statutes, ordinances, rules, regulations, orders, easements, covenants and restrictions of record, and requirements in effect during the term hereof applicable to the space within the Premises (or resulting from tenant improvements), regulating the use by Tenant of the Premises, including the Covenants, Conditions and Restrictions specified on Schedule A, a copy of which is attached as Exhibit F. The costs of Tenant's compliance shall be borne solely by Tenant except to the extent the costs (i) relate to any portion of the Building other than the space leased by Tenant or (ii) result from the failure of the Premises (other than the tenant improvements constructed by Tenant) to comply with the applicable statutes, etc., as of the Commencement Date. Notwithstanding the foregoing, Landlord shall at Landlord's expense be responsible for complying with the Americans with Disabilities Act as applicable to the Building and Premises on the Commencement Date. Tenant shall not use nor permit the use of the Premises in any manner that will tend to create waste or a nuisance or result in any increase in any insurance premiums payable on insurance carried on the Premises, or, if there shall be more than one tenant in the Building containing the Premises, shall tend to disturb such other 12. 13 tenants. Tenant shall not cause, maintain or permit any outside storage on or about the Premises. Tenant shall not conduct nor permit to be conducted any auction on the Premises without Landlord's prior written consent. 5.3 Condition of Premises. (a) Landlord shall deliver the Premises to Tenant clean and free of debris on the Lease Commencement Date (unless Tenant is already in possession). Except as otherwise provided in this Lease, Tenant shall be deemed to have accepted the Premises in their "as is" condition existing as of the Lease Commencement Date or the date Tenant takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Tenant acknowledges that neither Landlord nor any real estate broker or other agent of Landlord has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Tenant's business. (b) Landlord shall have no obligation to construct or install in the Premises any improvements, fixtures or equipment whatsoever, except to the extent otherwise provided in Exhibit C attached hereto, if any. By taking possession of the Premises, Tenant is deemed to have accepted Initial Improvements to be constructed by Landlord (if any) as being completed in accordance with the plans and specifications for such improvements, subject only to completion of items on Landlord's and Tenant's punch list, and except for patent defects which Tenant identified to Landlord within 30 days of the Commencement Date and latent defects not reasonably discoverable by Tenant within such 30-day period. 5.4 Hazardous Substances. Except in compliance with all government approvals, applicable Laws and regulations pertaining to Hazardous Materials (as defined below), and in accordance with the additional provisions of this Paragraph 5.4, Tenant shall not cause or permit the presence, use, handling, generation, emission, release, discharge, storage or disposal of any Hazardous Materials on, under, in or about the Premises; and shall not cause or permit the transportation of any Hazardous Materials to or from the Premises. Tenant shall indemnify, protect, defend, and hold harmless Landlord from and against all liability, and foreseeable consequential damages, penalties, expenses and costs of any required or necessary remediation, repair, removal, cleanup or detoxification, of the Premises and surrounding properties, and from and against the preparation of any cleanup, remediation, closure or other required plans, whether such action is required or necessary prior to or following the termination of this Lease, to the full extent that the same is attributable to the presence, use, handling, generation, emission, release, discharge, storage or disposal of Hazardous Materials by Tenant, its agents, employees, or contractors. Neither the written consent by Landlord to the handling, use, presence, generation, emission, release, discharge, storage, or disposal of Hazardous Materials nor the strict compliance by Tenant with all Laws and government approvals pertaining to Hazardous Materials shall excuse Tenant from Tenant's obligations of indemnification pursuant to this Paragraph. Tenant shall at all times notify Landlord of any Hazardous Materials present, used, generated, handled, emitted, released, discharged, stored or disposed of on or from the Premises. Notwithstanding the foregoing, notice shall not be required for Hazardous Materials present on the Premises in reasonable quantities which are commonly used in business offices including, but not limited to, cleaning materials, correcting fluids, and toner used in photocopy machines, provided such Hazardous Materials are used and disposed of in accordance with law. Tenant shall also observe any reasonable, additional requirements imposed by Landlord from time to time in the presence, use, handling, generation, emission, release, discharge, storage or disposal of Hazardous Materials, and shall institute operating procedures designed to handle Hazardous Materials consistent with prudent industry practice. Landlord shall have the right to inspect the Premises on 24- hours' prior notice for compliance with the provisions of this Paragraph. If Landlord in its reasonable judgment decides that the manner or extent of Tenant's activities involving Hazardous Materials so require or that Tenant is violating its obligations under this Paragraph in its handling of Hazardous Materials, Landlord may hire an independent expert to develop a Hazardous Materials program for Tenant and monitor 13. 14 Tenant's compliance therewith. Tenant shall reimburse Landlord for the reasonable cost of such independent consultant promptly upon demand. The term "Hazardous Materials" shall mean any toxic substance, hazardous substance, hazardous material, or hazardous waste, pollutant or contaminant which is or becomes regulated by any local governmental authority, the State of California, or the United States government, including, but not limited to, any material or substance which is (i) defined as a "hazardous waste", "extremely hazardous waste" or "restricted hazardous waste" under Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140 of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as a "hazardous substance" under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance Account Act), (iii) listed as a chemical known to cause cancer or reproductive toxicity pursuant to Section 25249.8 of the California Health and Safety Code, Division 20, Chapter 6.6 (Safe Drinking Water and Toxic Enforcement Act), (iv) designated as a "hazardous substance" pursuant to Section 6380 of the California Labor Code, Division 5, Chapter 2.5 (Hazardous Substances Information and Training Act); (v) defined as a "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), (vi) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601), or (vii) defined as a "hazardous material," "Hazardous substance," or "hazardous waste" under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and Inventory), (viii) defined as a "hazardous substance" under Section 25281 of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances), (ix) listed under Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20. 6. Maintenance, Repairs and Alterations. 6.1 Landlord's Obligations. (a) Subject to the provisions of Paragraphs 5, 6.2 and 8 and, except for damage caused by any negligent or intentional act or omission of Tenant, Tenant's agents, employees or invitees, in which event, Tenant shall repair the damage, Landlord shall keep in good order, condition and repair (i) the gross structural components of the Premises and the Building, namely the foundations, subflooring, exterior walls, bearing walls, and structural roof components; (ii) the Common Areas, including landscaping, driveways, parking lots, fences and signs located on the Building site and all sidewalks and parkways adjacent to the Building, (iii) Building systems and utility installations to the outlets, and (iv) the roof membrane; the expenses of which shall be recovered from Tenant for Tenant's Percentage Share as specified on Schedule A to the extent permitted by Paragraph 4.3. In addition, Landlord shall maintain the heating, ventilation and air conditioning systems serving the Premises, the expenses of which shall be included in Operating Expenses to the extent they are for portions of the heating, ventilation and air conditioning system up to and including the central heating, ventilation and air conditioning system equipment within Landlord's utility room, and the expenses of which shall be directly reimbursable by Tenant to the extent they are for portions of the heating, ventilation and air conditioning system from such utility room and within the Premises (which would otherwise be Tenant's obligation to maintain and repair). Landlord shall have no obligation to make repairs under this Paragraph 6.1 until a reasonable time after receipt of written notice of the need for such repairs. There shall be no abatement of rent or liability of Landlord on account of any injury or interference with Tenant's business with respect to any improvements, alterations or repairs made by Landlord to any part of the Building or the Premises. Tenant expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. Notwithstanding the foregoing, if Landlord fails to perform repairs and maintenance after reasonable notice from Tenant (but in no event less than 30 days), Tenant can repair and invoice Landlord for the actual reasonable cost therefor for payment within 30 days. 14. 15 (b) Landlord shall, prior to the Commencement Date hereof, construct certain Initial Improvements to the Premises in accordance with Exhibit C, if any. 6.2 Tenant's Obligations. (a) Subject to the provisions of Paragraphs 5, 6.1 and 8, Tenant, at Tenant's expense, shall keep in good order, condition and repair the Premises and every part thereof (whether or not the damaged portion of the Premises or the means of repairing the same are reasonably or readily accessible to Tenant) including, without limiting the generality of the foregoing, any and all telephone and telecommunications wiring and equipment, fixtures, interior walls, and interior surface of exterior walls, ceilings, windows, doors, plate glass, showcases, skylights and entrances located within the Premises, and the electrical, plumbing, lighting, heating and air conditioning systems (unless Landlord has elected to keep and maintain the heating, ventilation and air conditioning systems pursuant to Paragraph 6.1). (b) If Tenant fails to perform Tenant's obligations under this Paragraph 6.2 or under any other Paragraph of this Lease, Landlord may, at Landlord's option, enter upon the Premises after ten (10) days' prior written notice to Tenant (except in the case of emergency, in which case no notice shall be required), to perform such obligations on Tenant's behalf and put the Premises in good order, condition and repair, and the cost thereof together with interest thereon from the date of Landlord's expenditure at the rate specified in Paragraph 18 shall be due and payable as Additional Rent to Landlord within 30 days following Landlord's invoice to Tenant. (c) On the Expiration Date of the term hereof, or on any earlier termination, Tenant shall surrender the Premises to Landlord in the same condition as received, clean and free of debris, ordinary wear and tear excepted. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been avoided by good maintenance practices by Tenant. Tenant shall repair any damage to the Premises, occasioned by the installation or removal of its trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary stated in this Lease, Tenant shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, heating and air conditioning systems, window coverings, wall coverings, carpets, panelling, ceilings, and plumbing on the Premises in good order and operating condition. 6.3 Alterations. (a) Tenant shall not, without Landlord's prior written consent (which shall not be unreasonably withheld or delayed), make any Alterations or Utility Installations or repairs in, on or about the Premises or attach any fixtures or equipment thereto, except for interior decorative and nonstructural Alterations exceeding $20,000 in any instance during the term of this Lease. As used in this Paragraph 6.3, the term "Alterations" shall mean any alterations, additions, improvements, construction, maintenance, repair, replacement, installation, removal or decoration undertaken by Tenant in connection with the Premises. The term "Utility Installations" shall mean carpeting, window and wall coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing, and telephone and telecommunications wiring and equipment and any other system. Landlord may require that Tenant remove any or all of said Alterations or Utility Installations installed after Tenant's initial occupancy, at the expiration of the term, and restore the Premises to their prior condition, provided that Landlord notifies Tenant at the time Landlord consents to their installation that it reserves the right to require their removal. Should Tenant make any Alterations or Utility Installations without the prior approval of Landlord, Landlord may require that Tenant remove any and all of the same. (b) Any Alterations or Utility Installations in, on or about the Premises that Tenant shall desire to make and which requires the consent of the Landlord shall be presented to Landlord in written form, with complete plans and specifications. If Landlord shall give its consent, the consent shall be deemed conditioned upon Tenant acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to 15. 16 Landlord prior to the commencement of the work and the compliance by Tenant with all conditions of said permit in a prompt and expeditious manner. The contractor or person selected by Tenant to make such Alterations or Utility Installations must be approved in writing by Landlord (such approval not to be unreasonably withheld, conditioned, or delayed) prior to commencement of any work, and such contractor or person shall, at all times, be subject to Landlord's control while in the Building and shall comply with Landlord's Rules and Regulations for Tenant Contractors, the current version of which is attached hereto as Exhibit E. Tenant shall also require its contractor to maintain insurance in amounts and in such form as Landlord may reasonably require and naming Landlord as an additional insured. Any Alterations or Utility Installations shall be completed in substantial accordance with the plans and specifications approved by Landlord, shall be carried out in a good, workmanlike and prompt manner, shall be of good and sufficient quality and materials, shall comply with all applicable laws and shall be subject to reasonable supervision by Landlord or its authorized representatives. Without Landlord's prior written consent, which shall not be unreasonably withheld, Tenant shall not use any portion of the Common Areas in connection with the making of any Alterations or Utility Installations. Should any Alterations or Utility Installations on the Premises by Tenant interfere with the harmonious labor relations in existence in the Building, Tenant shall take all reasonable steps to halt such interference, including, if necessary, cessation of the work. (c) Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Tenant shall give Landlord not less than fifteen (15) days' notice prior to the commencement of any work in the Premises, and Landlord shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Tenant shall, in good faith, contest the validity of any such lien, claim or demand, then Tenant shall, at its sole expense, defend itself and Landlord against the same and shall pay and satisfy any adverse judgment that may be rendered thereon before the enforcement thereof against the Landlord or the Premises, upon the condition that if Landlord shall require, Tenant shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to such contested lien, claim or demand indemnifying Tenant against liability for the same and holding the Premises free from the effect of such lien or claim. In addition, Landlord may require Tenant to pay Landlord's attorneys' fees and costs in participating in such action if Landlord shall decide it is to its best interest to do so. (d) Unless Landlord requires their removal, as set forth in Paragraph 6.3(a), all Alterations and Utility Installations (whether or not they constitute trade fixtures of Tenant) which may be made on the Premises, including but not limited to the floor coverings, panelings, doors, drapes, built-ins, moldings, soundproofing and lighting and telephone or communications systems, conduit, wiring and outlets, shall become the property of Landlord and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of this Paragraph 6.3(d), Tenant's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Paragraph 6.2(a). (e) Tenant shall provide Landlord with as-built plans and specifications for any Alterations or Utility Installations. 7. Indemnity; Insurance. 7.1 Indemnity. (a) Tenant shall indemnify and hold harmless Landlord from and against any and all claims to the extent arising from Tenant's use or occupancy of the Premises, or from the conduct of Tenant's business or from any activity, work or things done, permitted or suffered by Tenant in, on or about the Premises other than claims to the extent arising primarily by reason of negligence or wilful acts of third parties or of Landlord, its agent, employees or contractors, and shall further indemnify and hold harmless Landlord from and against any and all claims to the extent arising from any breach or default in the performance 16. 17 of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from the negligent or intentional acts or omissions of the Tenant, or any of Tenant's agents, contractors, or employees, and from and against all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon; and in the case of any action or proceeding brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel satisfactory to Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of injury to Tenant's business, loss of income, damage to property or injury to persons, in, on or about the Premises arising from any cause and Tenant hereby waives all claims in respect thereof against Landlord. (b) Landlord shall defend, indemnify, hold and save Tenant harmless from and against any and all loss, costs, claims, liability or damage (including reasonable attorneys' fees or court costs) in connection with Landlord's ownership and management of the Premises, Building and project other than claims arising primarily by reason of the wilful misconduct or negligence of third parties or of Tenant, or Tenant's officers, contractors, agents or employees. 7.2 Tenant's Insurance. During the term of this Lease, Tenant shall at Tenant's expense, obtain and keep in force the following policies of insurance: (a) Comprehensive General Liability Insurance protecting Tenant against any liability for injury or death to any person or persons or damage to property arising out of Tenant's exclusive use, occupancy or maintenance of the Premises. The limits of such liability insurance shall not be less than Two Million Dollars ($2,000,000.00) combined single limit per occurrence, such limit to be increased upon Landlord's request whenever Landlord reasonably determines that such an increase is required adequately to protect Landlord from the matters insured against. (b) All-Risk Property Insurance covering loss or damage to Tenant's fixtures, equipment or tenant improvements. All insurance required under this Paragraph 7.2 shall be written on an occurrence basis and be (i) issued by such good and responsible companies qualified to do and doing business in the state where the Premises are located and with a Best's rating of B+XI or better, and (ii) name Landlord as a named additional insured by an additional insured endorsement. Tenant shall deliver to Landlord certificates evidencing the existence and amounts of insurance required above and, if requested by Landlord, copies of the insurance policies. No such policy shall be cancellable or subject to reduction of coverage except upon thirty (30) days' written notice to Landlord. Tenant shall, within thirty (30) days of expiration of such policies, furnish Landlord with certificates of renewal or "binders" therefor. 7.3 Landlord's Insurance. Landlord shall, at Tenant's expense, obtain and keep in force during the term of this Lease the following insurance: (a) Comprehensive General Liability Insurance covering bodily injury and property damage liabilities arising out of the Landlord's ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto in an amount not less than Two Million Dollars ($2,000,000.00) combined single limit per occurrence. (b) Property Insurance covering loss or damage to the Building, but not Tenant's fixtures, equipment or tenant improvements in an amount not less than 80% of the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification "all risk," as such term is used in the insurance industry, including vandalism and malicious mischief, but excluding flood or earthquake coverage unless required by a lender having a lien on the Premises. In addition, Landlord may obtain and keep in force during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Landlord, which insurance shall also cover all real estate taxes and insurance costs for said period. 17. 18 (c) Such other insurance (including flood or earthquake coverage) as Landlord reasonably deems necessary and prudent. 7.4 Payment of Premium. Tenant shall pay to Landlord during the term hereof, as Additional Rent, Tenant's Percentage Share of the increase over the Base Year of premiums for the insurance required under Paragraph 7.3, in accordance with Paragraph 4.3. 7.5 Waiver of Subrogation. Landlord and Tenant each hereby release and relieve the other, and waive their entire right of recovery against the other for loss or damage arising out of or incident to risks insured against under all policies of fire and extended coverage, public liability, workers' compensation and other insurance now or hereafter existing during the term hereof and covering any portion of the Premises or any operations therein, regardless of cause, including negligence of the other party, its agents, employees and contractors. Landlord and Tenant shall, upon obtaining the policies of insurance required hereunder, advise each insurance carrier that the foregoing mutual waiver of subrogation is contained herein, and each party covenants that no insurer shall hold any right of subrogation against such other party. 8. Damage or Destruction. 8.1 Definitions. (a) "Premises Partial Damage" shall herein mean damage or destruction to the Premises to the extent that the cost of repair is less than fifty percent (50%) of the fair market value of the Premises immediately prior to such damage or destruction. "Premises Building Partial Damage" shall herein mean damage or destruction to the Building of which the Premises are a part to the extent that the cost of repair is less than fifty percent (50%) of the fair market value of such Building as a whole immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall herein mean damage or destruction to the Premises to the extent that the cost of repair is fifty percent (50%) or more of the fair market value of the Premises immediately prior to such damage or destruction. "Premises Building Total Destruction" shall herein mean damage or destruction to the Building of which the Premises are a part to the extent that the cost of repair is fifty percent (50%) or more of the fair market value of such Building as a whole immediately prior to such damage or destruction. (c) "Insured Loss" shall herein mean damage or destruction which was caused by an event required to be covered by the insurance described in Paragraph 7.3(b). 8.2 Partial Damage - Insured Loss. Subject to the provisions of Paragraphs 8.4, 8.5 and 8.6, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of Premises Partial Damage or Premises Building Partial Damage, then Landlord shall, at Landlord's sole cost, repair such damage to the Building, and Tenant, at Tenant's sole cost, shall repair and restore Tenant's fixtures, equipment or tenant improvements, as soon as reasonably possible, and this Lease shall continue in full force and effect. 8.3 Partial Damage - Uninsured Loss. Subject to the provisions of Paragraphs 8.4, 8.5, and 8.6, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Tenant (in which event Tenant shall make the repairs at Tenant's expense), Landlord may, at Landlord's option, either (i) repair such damage as soon as reasonably possible at Landlord's expense, in which event this Lease shall continue in full force and effect with rent abatement during the period from the occurrence of the damage to the date of the restoration, or (ii) give written notice to Tenant within sixty (60) days after the date of the occurrence of such damage of Landlord's intention to cancel and terminate this Lease, as of the date of the occurrence of such damage. In the event this Lease does not terminate, Landlord shall repair and restore all portions of the Building and the Premises, excluding Tenant's fixtures, equipment and 18. 19 Tenant improvements, which Tenant shall repair and restore at Tenant's sole cost. In the event Landlord elects to give such notice of Landlord's intention to cancel and terminate this Lease, Tenant shall have the right within ten (10) days after the receipt of such notice to give written notice to Landlord of Tenant's intention to repair such damage at Tenant's expense, without reimbursement from Landlord, in which event, this Lease shall continue in full force and effect, and Tenant shall proceed to make such repair as soon as reasonably possible. If Tenant does not give such notice within such ten (10) day period, this Lease shall be cancelled and terminated as of the date of the occurrence of such damage. 8.4 Total Destruction. If at any time during the term of this Lease there is damage, whether or not an Insured Loss (including destruction required by any authorized public authority) which falls into the classification of Premises Total Destruction or Premises Building Total Destruction, Landlord may, at Landlord's option, either (i) repair such damage as soon as reasonably possible at Landlord's expense, in which event, this Lease shall continue in full force and effect with rent abatement during the period from the occurrence of the damage to the date of the restoration, or (ii) give written notice to Tenant within sixty (60) days after the date of the occurrence of such damage of Landlord's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event this Lease does not terminate, Landlord shall repair and restore all portions of the Building and the Premises, excluding Tenant's fixtures, equipment and Tenant improvements, which Tenant shall repair and restore at Tenant's sole cost. 8.5 Damage Near End of Term. (a) If at any time during the last six (6) months of the term of this Lease there is material damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage, either party may, at its option, cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to the other party of its election to do so within thirty (30) days after the date of occurrence of such damage. (b) Notwithstanding Paragraph 8.5(a), in the event that Tenant has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Tenant shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Partial Damage during the last six (6) months of the term of this Lease. If Tenant duly exercises such option during said twenty (20) day period, Landlord shall, at Landlord's expense, repair such damage as soon as reasonably possible, and this Lease shall continue in full force and effect. If Tenant fails to exercise such option during said twenty (20) day period, then Landlord may, at Landlord's option, terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Tenant of Landlord's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to contrary. 8.6 Abatement of Rent; Tenant's Remedies. (a) In the event of damage described in Paragraphs 8.2 or 8.3, and Landlord or Tenant repairs or restores the Premises pursuant to the provisions of this Paragraph 8, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the area of the Premises unusable for the period from occurrence of the damage to the date of the restoration. Except for abatement of rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of such damage, destruction, repair or restoration; provided, however, that nothing shall restrict Tenant's ability to pursue recovery from Tenant's insurer(s). (b) If Landlord shall be obligated to repair or restore the Premises under the provisions of this Paragraph 8 and such restoration and repair is not reasonably estimated to be capable of completion within 180 days after the damage or destruction or if Landlord shall not commence preparations for such repair or restoration within ninety (90) days after such obligations shall accrue, Tenant may, at Tenant's option, cancel and terminate this Lease by giving Landlord written notice of Tenant's election to do so at any time within 20 19. 20 days after Landlord notifies Tenant that (i) the restoration period will exceed 180 days or (ii) the end of the 90-day period, provided Landlord has not completed the repair or restoration before Tenant gives Landlord such notice. In such event, this Lease shall terminate as of the date of such notice. 8.7 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 8, an equitable adjustment shall be made concerning advance rent and any advance payments made by Tenant to Landlord. Landlord shall, in addition, return to Tenant so much of Tenant's security deposit as has not theretofore been applied by Landlord. 8.8 Waiver. Landlord and Tenant waive the provisions of any statutes which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 9. Real Property Taxes. 9.1 Payment of Tax. Landlord shall pay the Real Property Tax, as defined in Paragraph 9.3, applicable to the Building and the land upon which it is located; provided, however, that Tenant shall pay, as an item of Operating Expenses, Tenant's Percentage Share of the increase in such Real Property Tax over that in the Base Year, in the manner provided for Operating Expenses in Paragraph 4.3, or, at Landlord's election, within thirty (30) days after receipt of Landlord's written statement setting forth the amount of such pro rata share. If the term of this Lease shall not expire concurrently with the expiration of the tax fiscal year, Tenant's liability for taxes for the last partial lease year shall be prorated on an annual basis. 9.2 Additional Improvements. Notwithstanding Paragraph 9.1 hereof, Tenant shall pay to Landlord within thirty (30) days of receipt of Landlord's demand therefor the entirety of any increase in Real Property Tax if assessed solely by reason of additional improvements placed upon the Premises by Tenant or at Tenant's request. 9.3 Definition of Real Property Tax. As used herein, the term "Real Property Tax" shall include (to the extent any of the following are not paid by Tenant pursuant to Paragraphs 9.2 and 9.5) any form of real estate tax or assessment, general, special, ordinary or extraordinary, any service payments in lieu of taxes, any personal property taxes, sales and/or use taxes, employee taxes, and any excises, license fee, commercial rental tax, improvement bond or bonds, transit charges, housing fund assessments or other housing charges, parking facilities assessments or other parking charges, environmental surcharges, levy or tax, foreseen or unforeseen (other than inheritance, personal income or estate taxes) imposed on the Premises and/or Common Areas by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Landlord in the Premises or in the real property of which the Premises are a part, as against Landlord's right to rent or other income therefrom, and as against Landlord's business of leasing the Premises. The term "Real Property Tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of Real Property Tax, or (ii) the nature of which was hereinbefore included within the definition of Real Property Tax, or (iii) all other governmental, quasi-governmental or special district impositions of any kind, present or future, whether or not customary or within the contemplation of the parties hereto and regardless of whether resulting from increased rate and/or valuation, or (iv) which is imposed as a result of a transfer, either partial or total, of Landlord's interest in the Premises and/or Common Areas or which is added to a tax or charge hereinbefore included within the definition of Real Property Tax by reason of such transfer, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof, and any interest or penalty charged on account of any such Real Property Tax. Real Property Tax shall also include Landlord's cost of contesting by appropriate proceedings the amount or validity of any such taxes. Notwithstanding the foregoing, Real Property Tax shall not include: (i) estate, inheritance, gift, Landlord's corporate franchise or Landlord's net income taxes; (ii) taxes assessed by reason of overstandard tenant improvements in the Building; (iii) gross receipts taxes; nor (iv) any 20. 21 increase in Real Property Tax due to a reassessment of the property following a change of ownership by CalFront Associates during the initial five years of the Term, provided, however, that at its option, in lieu of excluding such sums from the definition of Real Property Tax, Landlord may pay Tenant the net present value of such sum (discounted at the federal discount rate) at the time of the reassessment. 9.4 Joint Assessment. If the Building and the Common Areas are not separately assessed, Tenant's liability shall be an equitable proportion of the Real Property Tax for all of the land and improvements included within the tax parcel(s) assessed, such proportion to be determined by Landlord from the respective valuations assigned in the assessor's worksheets or such other information as may be reasonably available. Landlord's reasonable determination thereof, in good faith, shall be conclusive. 9.5 Personal Property Taxes. (a) Tenant shall pay, prior to delinquency, all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises. When possible, Tenant shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Landlord. (b) If any of Tenant's said personal property shall be assessed with Tenant's real property, Tenant shall pay Landlord the taxes attributable to Tenant within 30 days after receipt of a written statement setting forth the taxes applicable to Tenant's property. 10. Utilities and Services. (a) Tenant shall pay for all gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If such services are not separately metered to Tenant, Tenant shall pay a reasonable proportion of all charges jointly metered with other premises; such amount to be determined in good faith by Landlord. Tenant shall also contract separately for and pay the cost of all janitorial services to the Premises. (b) Any heating, ventilation and air conditioning service provided by Landlord to Tenant during other than ordinary business hours shall be furnished on 24 hours' prior written notice of Tenant and at Tenant's sole cost, which shall be an amount equal to Landlord's actual cost of supplying HVAC systems to the HVAC systems zone of which the Premises form a part (consisting of (i) Landlord's actual out-of-pocket third party costs; (ii) reasonable repair and maintenance costs; and (iii) reasonable charge for depreciation) not to exceed $35 per hour in the first year of the Term. 11. Assignment and Subletting. 11.1 Landlord's Consent Required. Tenant shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Tenant's interest in this Lease or in the Premises, without Landlord's prior written consent, which shall not be unreasonably withheld or delayed. Any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be voidable and shall, at Landlord's option, constitute a breach of this Lease that entitles Landlord to terminate this Lease. Tenant agrees that the instrument by which any assignment or subletting consented to by Landlord is accomplished shall be in a form satisfactory to Landlord and shall expressly provide that the assignee or subtenant will perform and observe all the agreements, covenants, conditions and provisions to be performed and observed by Tenant under this Lease as and when performance and observance is due, and that Landlord will have the right to enforce such agreements, covenants, conditions and provisions directly against such assignee or subtenant. Any subtenant shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Landlord, to have assumed and agreed to conform and comply with each and every obligation of Tenant hereunder, other than such obligations as 21. 22 are contrary to provisions contained in a sublease to which Landlord has expressly consented in writing. 11.2 Tenant Affiliate. Notwithstanding the provisions of Paragraph 11.1 hereof, Tenant may assign or sublet the Premises, or any portion thereof, without Landlord's consent, to any corporation which wholly controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant as a going concern of the business that is being conducted on the Premises, provided that said assignee assumes, in full, the obligations of Tenant under this Lease. Any such assignment shall not, in any way, affect or limit the liability of Tenant under the terms of this Lease. 11.3 No Release of Tenant. Regardless of Landlord's consent, no subletting or assignment shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder, whether accruing before or after such subletting or assignment, except as provided in Paragraph 11.6 below. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against said assignee. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to this Lease with assignees of Tenant without notifying Tenant or any successor of Tenant, and without obtaining its or their consent thereto, and such action shall not relieve Tenant of liability under this Lease. 11.4 Notice of Assignment or Subletting. Before entering into any assignment of this Lease or into a sublease of all or a part of the Premises for which Landlord's consent is required hereunder, Tenant shall give written notice to Landlord (a) identifying the intended assignee or subtenant by name and address, (b) describing the nature of the proposed business to be carried on in the Premises, (c) specifying the terms of the intended assignment or sublease, and (d) providing such financial and other business information as Landlord may reasonably request concerning the proposed assignee or subtenant (including, without limitation, a bank reference and financial statements for the two most recently completed fiscal years). Landlord shall respond to Tenant's request for consent within ten business days of submission of all requested information. Failure of Landlord to respond within the ten business day period shall be deemed a consent by Landlord to the request. 11.5 Condition to Landlord's Consent. As a condition to Landlord's consent to any assignment or subletting, Landlord shall be entitled to receive, in the case of a subletting, 50% of the rent (however denominated and paid) payable by the subtenant to Tenant in excess of that payable by Tenant to Landlord hereunder and, in the case of an assignment, 50% of the consideration given, directly or indirectly, by the assignee to Tenant in connection with such assignment, after Tenant has first recovered its unamortized costs of tenant improvements in the Premises (amortized over the remainder of the then-current Term) and any direct costs incurred by it in such assignment or sublease such as brokerage commissions and tenant improvements made for the sublessee or assignee. For purposes of this Paragraph, the term "rent" shall mean all consideration paid or given, directly or indirectly, for the use of the Premises or any portion thereof. The term "consideration" shall mean and include money, services, property or any other thing of value such as payment of costs, cancellation of indebtedness, discounts, rebates and the like. The rent or other consideration which is to be passed through to Landlord by Tenant pursuant to this Paragraph shall be paid to Landlord promptly upon receipt by Tenant and shall be paid in cash, irrespective of the form in which received by Tenant from any subtenant or assignee. If any rent or other consideration received by Tenant from a subtenant or assignee is in a form other than cash, Tenant shall pay to Landlord in cash the fair value of such consideration. 11.6 Landlord's Expenses. In the event Tenant shall assign or sublet the Premises or request the consent of Landlord to any assignment or subletting, then Tenant shall pay 22. 23 Landlord's reasonable costs and direct expenses incurred in connection therewith, not to exceed $1,000, including, without limitation, attorneys' fees, and Landlord may condition its consent on the payment thereof. 12. Defaults; Remedies. 12.1 Defaults. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant: (a) the abandonment of the Premises by Tenant; providing that the Premises shall not be deemed abandoned if vacated in such a manner that the Premises are properly secured and Landlord's insurance premiums do not increase; (b) the failure by Tenant to make payment of Base Monthly Rent, Additional Rent, or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of ten days after written notice thereof from Landlord to Tenant; (c) the failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant, other than described in Subparagraph (b) or (f), where such failure shall continue for a period of 30 days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than 30 days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said 30-day period and thereafter diligently prosecutes such cure to completion; (d) (i) the making by Tenant of any general arrangement or assignment for the benefit of creditors; (ii) Tenant's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Tenant, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this lease, where such seizure is not discharged within 30 days. In the event that any provision of this Paragraph 12.1(d) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Landlord that any financial statement given to Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any successor in interest of Tenant or any guarantor of Tenant's obligations hereunder, and any of them, was materially false, if Tenant (or its assignee or subtenant) knows that such financial information is false. (f) An assignment, subletting or other transfer or attempted transfer in violation of Paragraph 11. 12.2 Remedies. In the event of any such material default or breach by Tenant, Landlord may at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such default or breach: (a) Terminate Tenant's right to possession of the Premises by any lawful means, in which case, this Lease shall terminate, and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including, but not limited to, (i) the cost of recovering possession of the Premises; (ii) expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; (iii) the worth at the time of the award by the court having jurisdiction thereof of the unpaid rent earned at the time of termination of Tenant's right to possession of the Premises; (iv) the worth at the time of the award of the amount by which the unpaid rent that would have been earned after the date of termination of Tenant's 23. 24 right to possession until the time of award exceeds the amount of the loss of rent for the same period that Tenant proves could be reasonably avoided; (v) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; and (vi) that portion of any leasing commission paid by Landlord applicable to the unexpired term of the Lease. (b) Maintain Tenant's right to possession in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Tenant under the terms of this Lease shall bear interest from the date due at the rate specified in Paragraph 18. 12.3 Default by Landlord. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time but, in no event, later than thirty (30) days after written notice by Tenant to Landlord, specifying where Landlord has failed to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 12.4 Late Charges. Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten days after such amount shall be due, Landlord shall deliver a notice to Tenant of the delinquency and Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount; provided, however, that for the first late payment under this Lease no late charge shall be payable unless the payment is not made within 10 days following written notice that such payment is late, and thereafter that no such late charge shall be payable for the first late payment in any 12-month period. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall, in no event, constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. Any overdue rent and other payments due from Tenant under this Lease and not paid when due shall bear interest at the rate specified in Paragraph 18. 12.5 Landlord's Right to Cure Defaults. All agreements, covenants, conditions and provisions to be performed or observed by Tenant under this Lease shall be at its sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, Landlord may, but shall not be obligated to do so, and without having or releasing Tenant from any obligations of Tenant, make any such payment or perform any such other act on Tenant's part to be made or performed as provided in this Lease. All sums so paid by Landlord and all reasonably necessary incidental costs shall be deemed Additional Rent hereunder and shall be payable to Landlord on demand, together with interest thereon at the rate specified in Paragraph 18 per annum at the time of expenditure by Landlord from the date of expenditure to the date of repayment by Tenant, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the nonpayment thereof by Tenant as in the case of default by Tenant in the payment of rent. 24. 25 13. Condemnation. If the Premises or any portion thereof or of the Building are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than twenty-five percent (25%) of the floor area of the Premises is taken, or if so much of the Common Areas of the Building is taken as would render the Premises untenantable, as reasonably determined by Landlord, Tenant may, at Tenant's option, to be exercised in writing only within ten (10) days after Landlord shall have given Tenant written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession), terminate this Lease as of the date the condemning authority takes such possession. If Tenant does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. No reduction of rent shall occur if only Common Areas, areas not included in the Premises, or areas not within the Building are taken. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Tenant shall be entitled to any award for loss of or damage to Tenant's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such condemnation, Landlord shall, to the extent of severance damages received by Landlord in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Tenant has been reimbursed therefor by the condemning authority. 14. Real Estate Brokers. Tenant represents and warrants that it has not authorized or employed, or acted by implication to authorize or to employ, any real estate broker or salesman to act for Tenant in connection with this Lease, except as otherwise noted in Schedule A. Tenant shall hold Landlord harmless from and indemnify and defend Landlord against any and all claims by any other real estate broker or salesman for a commission or finder's fee as a result of Tenant's entering into this Lease. 15. Estoppel Certificate. (a) Tenant shall, at any time upon not less than ten (10) days' prior written request from Landlord, execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iii) certifying or acknowledging facts as to such other matters as Landlord may reasonably require. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. (b) At Landlord's option, Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant, (i) that this Lease is in full force and effect, without modification, except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, (iii) that not more than one month's rent has been paid in advance, and (iv) that such other matters as to which Landlord has requested information are as represented by Landlord, or such failure may be considered by Landlord as an uncurable default by Tenant under this Lease five days after written notice has been delivered to Tenant notifying Tenant of its failure to deliver the estoppel certificate. 16. Landlord's Liability. The term "Landlord" as used herein shall mean only the owner or owners at the time in question of the fee title or a tenant's interest in a ground lease of the Premises, and in the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Landlord's obligations thereafter to be performed, provided that any funds in the hands of Landlord or the then grantor at the time 25. 26 of such transfer, in which Tenant has an interest, shall be delivered to the grantee and provided that Landlord (i.e., the party who is the Landlord after the transfer) at the time of the transfer maintains $1.2 million of equity in the project (as determined by the valuation any third-party lender to the successor Landlord places upon the project). The obligations contained in this Lease to be performed by Landlord shall, subject as aforesaid, be binding on Landlord's successors and assigns only during their respective periods of ownership. 17. Severability. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 18. Interest on Past-Due Obligations. Except as otherwise expressly herein provided, any amount due to Landlord not paid when due shall bear interest at the rate of 4% over the Wall Street Journal Prime Rate for the date the payment is due, or, if less, the maximum rate then allowable by law, from the date due. Payment of such interest shall not excuse or cure any default by Tenant under this Lease, provided, however, that interest shall not be payable on late charges incurred by Tenant nor on any amounts upon which late charges are paid by Tenant. 19. Time of Essence. Time is of the essence. 20. Security Deposit. Upon execution of this Lease, Tenant shall deposit with Landlord the sum specified on Schedule A, if any, as security for Tenant's faithful performance of Tenant's, if any, obligations hereunder subject to reduction as provided below. If Tenant fails to make any payment when due hereunder, or otherwise defaults with respect to any provisions of this Lease, Landlord may use, apply or retain all or any portion of said deposit for the payment of such payment in default or for the payment of any other sum to which Landlord may become obligated by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of said deposit, Tenant shall within ten (10) days after written demand therefor deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount hereinabove stated, and Tenant's failure to do so shall be a breach of this Lease. If Tenant performs all of Tenant's obligations hereunder (except in case of a good faith dispute over Operating Expenses), Landlord shall (upon Tenant's request therefor) refund $10,000 of such security deposit on each of the first four anniversary dates of the Term, and Tenant shall not after the fourth anniversary be required to maintain any security deposit. If 0enant performs all of Tenant's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Landlord, shall be returned to Tenant (or at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) at the expiration of the term hereof, and after Tenant has vacated the Premises. Landlord shall not be required to keep this security deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. Upon termination of the original Landlord's or any successor Landlord's interest in the Premises, the original Landlord or such successor Landlord shall be relieved of further liability with respect to the security deposit, provided that the amount thereof in the hands of the original Landlord or such successor Landlord has been delivered to the new owner of the Premises. No trust relationship is created hereby between Landlord and Tenant with respect to said security deposit. 21. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements, oral or written, of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. There are no representations between Landlord and Tenant or between any real estate broker and Tenant other than those contained in this Lease. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. 22. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery, nationally recognized overnight delivery service, or by registered or certified mail, return receipt requested. If given personally, such notice shall be deemed sufficiently given if delivered to any person apparently in charge or authorized to receive mail, or if given by mail, shall be deemed sufficiently given if addressed to Tenant or to Landlord, at the address noted in Schedule A or, if sent to Tenant subsequent to Tenant's taking possession of the Premises, at the Premises. Any notice shall be deemed to 26. 27 have been given upon the date of personal delivery or, if mailed, three (3) days after the date of mailing as provided herein. Either party may by notice to the other specify a different address for notice purposes. A copy of all notices required or permitted to be given to Landlord hereunder shall be concurrently transmitted to such party or parties at such addresses as Landlord and Tenant may from time to time hereafter designate, by notice, to the other party. 23. Waivers. No waiver by Landlord or Tenant of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Landlord or Tenant of the same or any other provision. Landlord's consent to, or approval of any act, shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of any provision hereof, other than the failure of Tenant to pay the particular rent, so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 24. Parking. Tenant shall be entitled to park in common with other tenants of Landlord and shall have the nonexclusive right to use of the number of parking places set forth on Schedule A, or any lesser number which is now or hereafter required under applicable laws or regulations affecting parking space requirements. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in the use of parking facilities. Landlord reserves the right in its absolute discretion to determine whether parking facilities are becoming crowded and, in such event, to allocate or reallocate parking spaces among Tenant and other tenants. 25. Holding Over. If Tenant, with Landlord's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month at a rental in the amount of 150% the last Base Monthly Rent installment, plus all other Additional Rent and charges payable hereunder during the option term, and upon all the other provisions of this Lease pertaining to the obligations of Tenant, but all options and rights of first refusal, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. Each party shall give the other written notice at least one month prior to the date of termination of such monthly tenancy of its intention to terminate. 26. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 27. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Tenant and subject to the provisions of Paragraph 16, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State of California. 28. Subordination. (a) This Lease, at Landlord's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation for security now or hereafter placed upon the real property of which the Premises are a part, or to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant shall pay the rent and observe and perform all the provisions of this Lease unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Tenant agrees to execute any documents containing nondisturbance provisions as described in Paragraph 28(a) reasonably required to acknowledge or effectuate an attornment, a subordination or to make this Lease prior to the lien of any mortgage, deed of 27. 28 trust or ground lease, as the case may be, and failing to do so within ten (10) days after written demand does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney in fact and in Tenant's name, place and stead, to do so. 29. Attornment. In the event of foreclosure or the exercise of the power of sale under any deed of trust made by Landlord covering the Premises (or a transfer under a deed in lieu of foreclosure), Tenant shall attorn to the purchaser upon any such foreclosure or sale (or to the grantee of such deed in lieu of foreclosure), and Tenant shall recognize such purchaser or grantee as Landlord under this Lease, provided such purchaser or grantee agrees in writing to recognize all of Tenant's rights hereunder and to perform all of Landlord's obligations hereunder from the date of the attornment. 30. Landlord's Access. Landlord and Landlord's agents shall have the right to enter the Premises at reasonable times (including, in an emergency, immediate entry without notice) for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or tenants, making such alterations, repairs, improvements or additions to the Premises or to the Building as Landlord may deem necessary or desirable, and the erecting, use and maintenance of utilities, services, pipes and conduits through the Premises, as long as there is no material adverse effect upon Tenant's use of the Premises. Landlord may at any time place on or about the Premises any ordinary "For Sale" signs, and Landlord may, at any time during the last ninety (90) days of the term hereof, place on or about the Premises any ordinary "For Lease" signs, all without rebate of rent or liability to Landlord. Landlord shall retain a key to all locked portions of the Premises (except vaults and locked file or storage cabinets) at all times and shall have the right to unlock all doors. Tenant may not change locks upon the Premises unless Tenant furnishes Landlord with a key thereto. Tenant waives any claim or charges for damages or interference with Tenant's property or business, any loss of quiet enjoyment or other loss occasioned by Landlord's entry. Except in an emergency, Landlord shall effect such entry in compliance with Tenant's reasonable security procedure. 31. Signs. Tenant may install on the Premises signs which identify Tenant and the business Tenant conducts on the Premises, provided Tenant's signs comply with (a) applicable requirements of governmental authorities, (b) applicable recorded restrictions, and (c) Landlord's reasonable requirements, which may include limitations on the number and placement of signs. Subject to compliance with the foregoing requirements, Tenant may place a monument sign at the Camino Ramon entrance to the Premises. In addition, subject to compliance with the foregoing requirements, so long as Tenant leases the entire ground floor of the Building, Landlord shall not allow any other tenant (or other person or entity) to place a sign on the parapet of the Building. Tenant shall not install its signs without Landlord's prior written approval which shall not be unreasonably withheld or delayed. Tenant shall maintain its signs in neat condition and repair throughout the Lease term. Tenant shall repair any damage which maintenance, alterations or renovation of its signs may cause during or at the expiration of the Lease term. Landlord agrees not to permit another tenant to install parapet signs on the exterior top of the Building unless and until Tenant ceases to lease the entire ground floor of the Building. 32. Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, or a termination by Landlord, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 33. No Light, Air or View Easement. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Premises shall in no way affect this Lease or impose any liability on Landlord. 34. Consents. In any case in which either Landlord or Tenant is required to give consent or approve any action of the other party under this Lease, such consent shall not be unreasonably withheld or delayed. 35. Quiet Possession. Upon Tenant paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed 28. 29 and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Landlord represent and warrant to Tenant that they are fully authorized and legally capable of executing this Lease on behalf of Landlord, and that such execution is binding upon all parties holding an ownership interest in the Premises. 36. Landlord's Rules and Regulations. Tenant agrees that it will abide by, keep and observe all reasonable rules and regulations which Landlord may make from time to time for the management, safety, care and cleanliness of the Building and grounds, the parking of vehicles and the preservation of good order therein as well as for the convenience of other occupants and tenants of the Building. Landlord's current Rules and Regulations, if any, are attached as Exhibit D to this Lease, and Tenant shall faithfully comply with all such rules and regulations and all reasonable modifications thereof and additions thereto from time to time promulgated in writing by Landlord. The violation of any such rules and regulations by Tenant shall be deemed a material breach of this Lease. Landlord shall not be responsible to Tenant for the nonperformance of any such rules and regulations by any other tenant of the Building or another Building within the same complex. 37. Security Measures. Tenant hereby acknowledges that the rental payable to Landlord hereunder does not include the cost of guard service or other security measures, and that Landlord shall have no obligation whatsoever to provide the same. Tenant assumes all responsibility for the protection of Tenant, its agents and invitees from acts of third parties. Nothing contained herein shall prevent Landlord, at Landlord's sole option, from providing security protection for the Building or any part thereof, in which event, the cost thereof shall be included within the definition of Operating Expenses as set forth in Paragraph 4.3. 38. Landlord's Reservation of Rights. 38.1 Easements. Landlord reserves to itself the right, from time to time, to grant such easements, rights and dedications that Landlord deems necessary or desirable and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Tenant. Tenant shall sign any of the aforementioned documents upon request of Landlord and failure to do so shall constitute a material breach of this Lease. 38.2 Building Rights. Landlord shall have the right to (i) change the name, address or title of the Building upon at least sixty (60) days' prior written notice to Tenant, providing Landlord pays Tenant's reasonable costs of printing new stationery reflecting such change; (ii) to, at Tenant's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Landlord deems appropriate; (iii) to permit any tenant the exclusive right to conduct any business as long as such exclusive right does not conflict with any rights expressly granted herein; and (iv) to place such signs, notices or displays as Landlord deems appropriate upon or about the exterior of the Building or the Common Areas. 39. Authority. If Tenant is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of such entity. 40. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 41. Attorneys' Fees. In the event of any action or proceeding at law or in equity between Landlord and Tenant to enforce any provision of this Lease or to protect or establish any right or remedy of either Landlord or Tenant hereunder, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including reasonable attorneys' fees, incurred in such action or proceeding and in any appeal in connection therewith, and if such prevailing party shall recover judgment 29. 30 in any such action, proceeding or appeal, such costs, expenses and attorneys' fees shall be included in and as part of such judgment. 42. Exhibits. The following exhibits are attached to this Lease and herein incorporated by reference: Exhibit A (Site Plan); Exhibit B (Premises); Exhibit C (Initial Improvements of Premises); Exhibit D (Rules and Regulations); Exhibit E (Rules and Regulations for Tenant Contractors); and Exhibit F (CC&R's). 43. Options. 43.1 Options Personal. Any options ("Options") granted to Tenant in this Lease (including, without limitation, the renewal option granted in Paragraph 44, expansion rights granted in Paragraph 46, the cancellation right granted in Paragraph 48, and the right of first offer granted in Paragraph 47) are personal to Tenant and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Tenant; provided, however, that any Option may be exercised by or assigned to any Tenant Affiliate as defined in Paragraph 11.2 of this Lease and provided further than any Option other than the expansion rights granted in Paragraph 46 may be assigned in conjunction with an approved assignment of this Lease. 43.2 Effect of Default on Option. (a) Tenant shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Landlord gives to Tenant a notice of default pursuant to Paragraph 12.1(c) and continuing until the default alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Landlord is due from Tenant and unpaid (without any necessity for notice thereof to Tenant) continuing until the obligation is paid, (except if there exists a bona fide dispute as to whether such amounts are payable) or (iii) at any time after an event of default described in Paragraph 12.1(a), 12.1(d), 12.1(e) or 12.1(f) (without any necessity of Landlord to give notice of such default to Tenant), or (iv) in the event there have been three or more defaults under Paragraph 12.1(b) during the prior 12 months (except if there exists a bona fide dispute as to whether such amounts are payable) where a late charge becomes payable under Paragraph 12.4 for each of such defaults, and/or notices of default under Paragraph 12.1(c), whether or not the defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise an Option because of the provisions of Subparagraph (a) above. (c) All rights of Tenant under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Tenant's due and timely exercise of the Option, if any of the circumstances specified in (a) above occurs after such exercise but prior to the time the Option takes effect. 44. Extension Option. Landlord hereby grants to Tenant the option to extend the term of this Lease (the "Extension Option") for one additional five-year period. Tenant shall exercise such Extension Option by giving written notice of exercise to Landlord at least six (6) months prior to the Expiration Date. All of the terms and conditions of this Lease shall govern such extended term insofar as applicable, and all references in this Lease to the term hereof shall be deemed to include such extended term unless the context clearly indicates to the contrary. 45. Extended Term - Rent (Fair Market Value Determination). (a) The Base Monthly Rent for the Extension Option term shall be 95% of the fair market rate for comparable space in the San Ramon and Pleasanton areas as of the commencement of the Extension Option term as determined by the agreement of the parties or, if the parties are unable to agree on or before ninety (90) days prior to the expiration of the term, then by an appraisal conducted pursuant to Subparagraph (b) below. The Base Monthly Rent shall take into account the duration of the extension term and may provide for reasonable periodic rental increases during such term. 30. 31 (b) If it becomes necessary to determine the fair market rate for the Premises by appraisal, then real estate appraiser(s), all of whom shall be members of the American Institute of Real Estate Appraisers and shall have at least two years' experience appraising commercial and industrial real property located within the vicinity of the Premises, shall be appointed and shall act in accordance with the following procedures: (i) If Landlord and Tenant are unable to agree on the Monthly Base Rent for the Extension Option term, then either party may demand an appraisal by giving written notice to the other party which demand to be effective must state the name, address and qualifications of an appraiser selected by the party demanding an appraisal (the "Notifying Party"). Within ten (10) days following the Notifying Party's appraisal demand, the other party (the "Non-Notifying Party") shall either approve the appraiser selected by the Notifying Party or select a second properly qualified appraiser by giving written notice of the name, address and qualifications of said appraiser to the Notifying Party. If the Non-Notifying Party fails to select an appraiser within the ten (10) day period, then the appraiser selected by the Notifying Party shall be deemed selected by both parties and no other appraiser shall be selected. If two appraisers are selected, they shall select a third appropriately qualified appraiser. If the two appraisers fail to select a third qualified appraiser within ten (10) days, then, upon application by either party, the third appraiser shall be appointed by the President (or person serving in comparable position, if there is no President) of the local Real Estate Board (or any successor entity or body of comparable standing if such Board does not then exist) or the person to whom the President may delegate that function. (ii) If only one appraiser is selected, then that appraiser shall notify the parties in simple letter form of its determination of the fair market rate for the Premises within thirty (30) days of his selection, which appraisal shall be conclusively determinative and binding on the parties as the fair market rent for the Premises. (iii) If multiple appraisers are selected, then the appraisers shall meet not later than ten (10) days following selection of the last appraiser. At such meeting, the appraisers shall attempt to determine the fair market rate for the Premises as of the commencement date of the Option period by the agreement of at least two of the appraisers. (iv) The appraisers' determination of the fair market rate shall be based on a building of the same age, construction, size and location as the Premises and shall take into account Tenant's obligation to pay additional rent under the terms of this Lease. In determining the fair market rate, the appraisers shall not consider any improvements, alterations, additions, fixtures or equipment installed in the Premises at Tenant's expense, but shall include improvements, alterations, additions, fixtures of equipment installed at Landlord's expense. If two or more of the appraisers agree on the fair market rate for the Premises at the initial meeting, then such agreement shall be determinative and binding on the parties hereto, and the agreeing appraisers shall, in simple letter form executed by the agreeing appraisers, forthwith notify both Landlord and Tenant of the amount set by such agreement. (v) If multiple appraisers are selected and the agreement of at least two appraisers cannot be obtained within ten (10) days after the initial meeting, then, within five (5) days after the expiration of said ten (10) day period, all appraisers shall submit to Landlord and Tenant and independent appraisal, in simple letter form, of the fair market rent for the Premises. The parties shall then determine the appraised fair market rent for the Premises by averaging the appraisals; provided, however, that (i) if the lowest appraisal is less than eighty-five percent (85%) of the middle appraisal, then such lowest appraisal shall be disregarded, and (ii) if the highest appraisal is greater than one hundred fifteen percent (115%) of the middle appraisal, then such highest appraisal shall be disregarded. If any appraisal is so disregarded, then the average shall be determined by computing the average of the appraisals that have not been disregarded. (vi) Nothing contained herein shall prevent Landlord and Tenant from jointly selecting a single appraiser to determine the fair market rate of the Premises, in which 31. 32 event, the determination of such appraisal shall be conclusively deemed to be the fair market rate of the Premises for the Extension Option term in question. (vii) If only one appraiser is selected, then each party shall pay half of the fees and expenses of that appraiser. If three appraisers are selected, then each party shall bear the fees and expenses of the appraiser it selects, plus half of the fees and expenses of the third appraiser. 46. Expansion Option. Landlord hereby grants to Tenant the option (the "Expansion Option") to lease from Landlord, in addition to the Premises, any other portion of the Building in which the Premises are situated or, after its initial lease-up, any portion of the building located at 4550 Norris Canyon Road (hereinafter called the "Expansion Space"), at any time on or prior to April 15, 1998 that such space becomes available for Lease. Tenant's rights pursuant to this Expansion Option shall be subordinate to any rights held by SBE or Biogenex with respect to certain space consisting of approximately 9600 square feet located at 4550 Norris Canyon Road, more specifically described and set forth in Exhibit G, attached hereto ("Subordinated Space"). This expansion right shall terminate immediately as to the building located at 4550 Norris Canyon Road upon a sale or other transfer of such building to an unaffiliated third party. When any such space becomes available, Landlord shall notify Tenant in writing of its availability. Tenant shall exercise its Expansion Option by written notice delivered to Landlord within ten days of receipt of Landlord's notice of availability. If Tenant exercises its option to lease such Expansion Space, the parties shall perform whatever acts are necessary to execute a lease thereof (or an addendum hereto adding such Expansion Space to the Premises) within 30 days after Tenant notifies Landlord of the exercise of Tenant's Expansion Option. Any such lease by Tenant of any Expansion Space shall expire co- terminously with the original Lease and shall be at the same rental per square foot of floor space and upon all of the other terms and conditions of this Lease then in effect; provided, however, that the tenant improvement allowance specified in Exhibit C shall be reduced proportionately to the reduced initial term of this Lease as it applies to the Expansion Space. If Tenant fails within the aforesaid ten-day period to exercise its option to lease such Expansion Space hereunder, it shall be conclusively presumed at the end of such ten-day period that Tenant has waived its right to exercise such Expansion Option, but Tenant shall thereafter retain its Right of First Offer under Paragraph 47 with respect to such space. Such Expansion Option shall not be applicable to any space in the Building which is subject to expansion or renewal options, or prior rights of first offer or first refusal existing on the execution date hereof. Landlord shall not be liable to Tenant for any failure of an existing occupant to vacate Expansion Space leased by Tenant in a timely manner. 47. Right of First Offer. (a) [intentionally deleted] (b) Grant of Right of First Offer. Landlord hereby agrees to notify Tenant in writing, specifying the terms set forth in Subparagraph (c) below, each time at least two thousand (2,000) contiguous square feet of space in the Building becomes available for lease from Landlord (hereinafter the "Right of First Offer"); provided, however, that such Right of First Offer shall not be applicable to any space in the Building which is subject to expansion or renewal options, or prior rights of first offer or first refusal existing on the execution date hereof. Such Right of First Offer shall be nonexclusive. Landlord shall be permitted to offer the space available to present or future tenants in the Building whose leases contain similar rights of first offer at the same time as such space is being offered to Tenant. In the event one or more other tenants exercise rights of first offer and there is insufficient space available to satisfy the requirements of all tenants, the space available shall be offered to each tenant in proportion to the space requested in each tenant's Requirements Notice. Furthermore, Tenant's rights pursuant to this Right of First Offer shall be subordinate to any rights held by SBE and Biogenex with respect to the Subordinated Space. (c) Offering Notice. Each notice made by landlord pursuant to Subparagraph (b) above (the "Offering Notice") shall specify (i) the number of square feet of space available 32. 33 and the location of such space, (ii) the market rent and other charges at which Landlord intends to offer such space, (iii) the value of leasehold improvements or tenant allowance to be provided by Landlord for such space, if any, and (iv) the estimated date that such space will be available for occupancy by Tenant. Landlord hereby agrees that space offered to Tenant pursuant to this Right of First Offer shall be offered at the rent and on the terms which Landlord in good faith intends to offer to the general public. Tenant shall have fifteen (15) days after receipt of the Offering Notice to accept or reject such space on the terms specified in the Offering Notice. If Tenant rejects space offered pursuant to an Offering Notice, Landlord's obligation to offer the particular such space in question to Tenant in the future pursuant to this Right of First Offer shall terminate. (d) Acceptance of Space. If Tenant desires to lease the space offered, then Tenant shall have thirty (30) days to enter into a lease of such space on the terms and conditions set forth in the Offering Notice and on such other terms and conditions as Landlord offers to the general public (including any increased rental or premium as a result of space rendered less marketable due to Tenant's leasing of additional space) (hereinafter an "Expansion Lease"); provided, however, that (a) the term of any such Expansion Lease shall be coterminous with the Lease (including any options to extend the term of the Lease), and (b) if three (3) or less years remain in the term or any extended term of the Lease (and Tenant has not exercised any remaining options to extend the terms of the Lease) then (i) the rent provided in such Expansion Lease shall be adjusted to reflect the cost of any tenant improvements or alterations borne by Landlord amortized over the remaining term of the Lease at an interest rate of 10%, or (ii) Tenant shall agree to pay to Landlord, at the end of the term of such Expansion Lease, an amount equal to the portion of the cost of such tenant improvements not recovered by Landlord pursuant to such Expansion Lease (amortized at an interest rate of 10%). (e) Restrictions. Any space occupied pursuant to an Expansion Lease shall be used and occupied only for the same uses permitted under this Lease, except as otherwise agreed by Landlord. This Right of First Offer shall, automatically and without notice, terminate upon (i) the termination of the Lease for any reason; (ii) the subletting by Tenant at any one time of more than 25% of the Net Rentable Area of the Premises; (iii) the sale to an unaffiliated third party of all or any portion of the Building by Landlord with regard to the portion so sold. Furthermore, Tenant may not exercise any Right of First Offer, and Landlord shall have no obligation to make such first offer to Tenant at any time that Tenant is in default (as defined in Paragraph 12.1) of any of its obligations under this Lease. 48. Cancellation Right. (a) If, effective at any time from and after the end of the seventh Lease year, Landlord fails to give Tenant notice of the availability of additional space anywhere within the project commonly known as Norris Technology Center sufficient to meet any expansion needs within 30 days of receipt of Tenant's good faith written notification of its expansion requirements, Tenant may elect to terminate this Lease upon at least 30 days' prior written notice. Tenant shall exercise such election following the seventh anniversary of the Commencement Date and within 30 days following Landlord's acknowledgement to Tenant that it is unable to meet Tenant's expansion needs, by written notice to Landlord specifying the intended Lease termination date and by making the payment required by Subsection (b) below. (b) If Tenant exercises its right to terminate this Lease as provided above, Tenant shall pay CalFront Associates (and not any successor landlord that hereafter becomes Landlord under this Lease) on or prior to the termination date: (i) unamortized leasing commissions; plus (ii) the unamortized portion of Landlord's cost of Tenant's Initial Improvements constructed pursuant to Exhibit C. Amortization shall be computed on a straight-line basis over the initial ten-year term on the basis of the applicable principal amounts without interest. 49. Moving Allowance. As an additional inducement to Tenant to enter into this Lease, Landlord shall pay Tenant $1 per square foot of Net Rentable Area of the Premises as a moving allowance to cover certain direct out-of-pocket costs related to Tenant's relocation to 33. 34 the Premises from its existing premises. Such allowance shall be payable upon the initial Premises leased hereunder and any Expansion Space leased by the Tenant pursuant to Paragraph 46 hereof. Such costs shall include the cost of moving services and of replacing Tenant's existing supplies of stationery. Landlord shall pay Tenant such amount within 30 days following submission of invoices therefor in form reasonably satisfactory to Landlord. (Signature Page Follows) 34. 35 IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date first above written. LANDLORD: CALFRONT ASSOCIATES By:______________________________________ Title:___________________________________ Date:____________________________________ By:______________________________________ Title:___________________________________ Date:____________________________________ TENANT:__________________________________ GIGA-TRONICS INCORPORATED By:______________________________________ Title:___________________________________ Date:____________________________________ By:______________________________________ Title:___________________________________ Date:____________________________________ 35. 36 EXHIBIT A Exhibit A consists of a Site Plan drawing of Building and Parking Lots. 37 EXHIBIT A PARCEL 1: LOTS 1 THROUGH 4, AS SAID LOTS ARE SHOWN ON THE MAP OF TRACT 5692, FILED , IN BOOK OF MAPS, PAGE CONTRA COSTA COUNTY RECORDS. PARCEL 2: PORTION OF LOT 5, AS SAID LOT IS SHOWN ON THE MAP OF TRACT 5692, FILED , IN BOOK OF MAPS, PAGE CONTRA COSTA COUNTY RECORDS, DESCRIBED AS FOLLOWS: BEGINNING AT A POINT IN THE WESTERLY LINE OF LOT 5, AS SAID LOT IS SHOWN ON THE AFOREMENTIONED TRACT 5692, DISTANT THEREON SOUTH 20(degree) 52' 07" EAST 800 FEET FROM THE MOST WESTERLY CORNER THEREOF; THENCE NORTH 20(degree) 52' 07" WEST, 800 FEET; NORTH 62(degree) 48' 40" EAST, 188.42 FEET; NORTH 58(degree) 11' 11" EAST, 89.25 FEET, NORTH 63(degree) 40' 05" EAST, 2508.37 FEET; THENCE ALONG THE ARC OF A CURVE TO THE LEFT WITH A RADIUS OF 642 FEET, AN ARC DISTANCE OF 44.97 FEET; THENCE SOUTH 28(degree) 49' 41" EAST, 800 FEET; THENCE SOUTHWESTERLY IN A DIRECT LINE TO THE POINT OF BEGINNING. 38 [Notary Attestation] 39 EXHIBIT C Tenant Improvements Work Letter Agreement 1. Landlord's Work. 1.1 Landlord, through its general contractor, South Bay Construction Company, shall furnish and install within the Premises those items of general construction finally approved by Landlord and Tenant to build out the Premises in accordance with the space plan attached as Exhibit ____ ("Landlord's Work") as shown on the plans and specifications to be developed by Landlord's architect or engineer (the "Final Plans and Specifications"), using Landlord's Building standard materials, finishes and installations. 1.2 Landlord's subcontractors for mechanical, electrical and fire systems shall be selected by mutual agreement of Landlord and Tenant. The construction contract shall require major subcontracts other than those for mechanical, electrical and fire systems to be selected after three bids have been obtained. 2. Cost of Landlord's Work. 2.1 As its contribution to the cost of Landlord's Work, Landlord shall provide to Tenant a tenant improvement allowance equal to the cost of Landlord's Work as shown on the Final Plans and Specifications as approved in Paragraph 1.1 above, up to $20 per square foot of Net Rentable Area. Tenant shall pay the cost of all Landlord's Work in excess of such tenant improvement allowance as provided in this Article 2. The cost of demolishing existing improvements and of installing grade level loading doors shall be paid through the application of such tenant improvement allowance except for the costs of demolishing existing improvements in the portion of the space delineated on Attachment I as "former DoD Space", which Landlord shall demolish at its sole cost. In addition, Landlord shall bear the cost of any code compliance work required as a condition to obtaining a building permit and not required by Tenant's special uses of the Premises and the cost of providing a separate heating, ventilation and air conditioning system to the Premises, which shall not be offset against the tenant improvement allowance. If the Initial Improvement costs are less than the full amount of Landlord's allowance, any unexpended balance up to $5 per square foot of Net Rentable Area shall be credited towards Tenant's first payments of Base Monthly Rent due under the Lease. 2.2 Tenant shall bear the cost of Landlord's Work to the extent such costs result from changes requested by Tenant to Final Plans and Specifications or for requests for materials which cause the cost of Landlord's Work to exceed the tenant improvement allowance. 2.3 Landlord's obligation to perform Landlord's Work shall not require Landlord to incur overtime costs and expenses and shall be subject to unavoidable delays due to acts of God, governmental restrictions, strikes, labor disturbances, shortages of material or supplies and any other cause or event beyond Landlord's reasonable control. 2.4 Tenant shall promptly pay Landlord during the course of construction the cost of the work to be paid by Tenant under this Article 2, based on invoices submitted by Landlord's contractor and certified by Landlord's architect, so as to enable Landlord to pay Landlord's contractor without advancing Landlord's funds for the cost of the work to be paid by Tenant. 2.5 It is understood and agreed by Tenant that any minor changes from any plans and specifications that may be reasonably necessary during construction of the Premises shall not affect, change or invalidate this Lease. 1. 40 3. Plans and Specifications. 3.1 Landlord, through its architect and engineer, shall furnish all architectural and engineering plans and specifications ("Plans and Specifications") required to complete Final Plans and Specifications for the construction of Landlord's Work. 3.2 Tenant shall be furnished a copy of Final Plans and Specifications and shall request any Tenant changes within seven days of submission to Tenant by Landlord. 3.3 Landlord shall bear the cost of architectural services for Landlord's Work except as provided in Paragraph 3.4 below. 3.4 Tenant shall pay the cost of any engineering services for Landlord's Work. In addition, Tenant shall pay for any revisions required by Tenant to Plans and Specifications previously approved by Tenant. The tenant improvement allowance may be applied towards such architectural and engineering costs. 4. Tenant's Work. 4.1 Any items or work not shown in the approved Final Plans and Specifications, such as telephone service, furnishings or floor coverings for which Tenant contracts separately (hereinafter "Tenant's Work") shall be subject to Landlord's policies and schedules and shall be conducted in such as way as not to hinder, cause any disharmony with, or delay work in the Building(s). Tenant's suppliers, contractors, workmen and mechanics shall be subject to approval by Landlord prior to the commencement of their work (which approval shall not be unreasonably withheld or delayed) and shall be subject to Landlord's administrative control while performing their work. If at any time any supplier, contractor, workman or mechanic performing Tenant's Work hinders or delays any other work in the Building(s) or performs any work which may or does impair the quality, integrity or performance of any portion of the Building(s), Tenant shall cause such supplier, contractor, workman or mechanic to leave the Building(s) and remove all his tools, equipment and materials immediately upon Landlord's notice delivered to Tenant. Tenant shall reimburse Landlord for any repairs or corrections of Landlord's Work or of Tenant's Work or of any portion of the Building(s) caused by or resulting from the work of any supplier, contractor, workman or mechanic with whom Tenant contracts. Tenant shall bear the cost of Landlord's expenses resulting from the performance of Tenant's Work, including without limitation the cost of hoisting, cleaning, security, administration and coordination by Landlord or Landlord's contractor. Tenant shall reimburse Landlord for Landlord's reasonable direct out-of-pocket costs for design reviews and approvals and reviews of construction progress, and for the cost of all utilities and the services provided by Landlord to or for the Premises during the performance of Tenant's Work. Landlord shall provide access to Tenant's suppliers, contractors, workmen and mechanics so as to achieve timely completion and occupancy of the Premises, if Landlord's construction schedule permits such early entry and Tenant's early entry does not interfere with Landlord's construction. 5. [RESERVED] 6. Completion Date. 6.1 Landlord shall, when construction progress so permits, notify Tenant, in advance, when it may enter the Premises for purposes of constructing Tenant's Work as specified in Paragraph 4.1 of this Exhibit C, which shall be at least 15 days prior to substantial completion of Landlord's Work in order to allow Tenant to install Tenant's cabling, furniture and equipment. Landlord shall also, when construction progress so permits, notify Tenant in advance of the approximate date on which Landlord's Work will be substantially completed and will notify Tenant when Landlord's Work is, in fact, substantially completed, which latter notice shall constitute delivery of possession of the Premises to Tenant. If any dispute shall arise as to whether the Premises are substantially completed and ready for Tenant's occupancy, a certificate furnished by Landlord's architect certifying the date of substantial completion shall be conclusive of that fact and date and 2. 41 binding upon Landlord and Tenant. If the Commencement Date is delayed because Landlord is delayed in substantially completing said work as a result of: (a) Tenant's failure to furnish complete and timely instructions or approvals, (b) Tenant's changes to any Plans and Specifications after approval thereof, (c) Tenant's request for materials, finishes or installations other than Landlord's Building standard, except as expressly provided in approved Plans and Specifications, or (d) Hindrance or disruption of the work of Landlord's contractor resulting from Tenant's Work, then the Commencement Date under the Lease shall be advanced by the number of days of such delay. 6.2 Failure by Tenant to meet any of the time requirements specified in this Exhibit C shall, at Landlord's option, constitute a a default under the Lease. Tenant shall not be entitled to a cure period with respect to any such default. 6.3 Except as expressly provided in the Lease, failure of Landlord to deliver possession of the Premises within the time and in the condition provided for in the Lease will not give rise to any claim for damages by Tenant against Landlord or Landlord's contractor. 6.4 Upon Landlord's delivery to Tenant of the notice of substantial completion specified in Paragraph 6.1, Landlord and Tenant shall together hold a walkthrough of the Premises. Landlord and Tenant shall identify those items contained in the Final Plans and Specifications which are not completed in accordance with such Final Plans and Specifications or not done in a good and workmanlike manner and a "punchlist" (as such term is used is the construction industry) of such items shall be jointly developed within 30 days of delivery of possession. Landlord shall commence correction of the items on such punchlist within 30 days thereafter and shall diligently pursue such corrective work to completion to the reasonable satisfaction of both Tenant and Landlord. 7. Payment. 7.1 Tenant shall pay to Landlord all amounts due from or payable by Tenant under the terms of this Exhibit C within 30 days following delivery of Landlord's invoice therefor, and the provisions of the Lease with respect to late charges and interest on late payments shall apply as to interest payable on amounts not paid within such period. 8. Time Periods. 8.1 All time periods referred to in this Exhibit C shall be computed on a calendar basis with no allowance for holidays, weekends or other customs. 9. Base Building Design. 9.1 Tenant may request changes to Base Building Design (as hereinafter defined). Landlord shall have no obligation to make any such changes. If Landlord, in its sole discretion, shall agree to any such change, Landlord shall prepare Plans and Specifications and obtain an estimate of the cost for approval by Tenant. Tenant shall pay, in advance, Landlord's estimate of any and all costs of such changes (including without limitation the costs of labor, materials, equipment, supervision and a management fee) subject to adjustment of costs upon completion. 9.2 "Base Building Design" for purposes of the Article 9 shall be as described in the Plans and Specifications for the Building current as of the date of the Lease. 3. 42 occupied during the regular hours when janitorial service is provided. Window cleaning shall be done only at the regular and customary times determined by Landlord for such services provided such times will be consistent with other comparable office buildings in the vicinity of the Building. 10. The requirements of Tenants will be attended to only upon application of Landlord. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 11. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees shall have caused it. 12. Each Tenant shall store all its trash and garbage within its premises. No material shall be place in the hallways or in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of office building trash and garbage in the City of San Ramon without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways provided for such purposes and at such times as Landlord may reasonably designate. 13. Tenant shall not park or attach any bicycle or motor driven cycle on or to any part of the Building. No animals or birds shall be brought to or kept in the Premises or Building with the exception of laboratory rodents. Said rodents must be contained within Tenant's Premises. 14. The Tenant will keep all door openings to the exterior of the Building, all fire doors and all smoke doors closed at all times. 15. Tenant agrees that it shall comply with all reasonable fire and security regulations that may be issued from time-to-time by Landlord and upon request Tenant also shall provide Landlord with the name of a designated responsible employee to represent Tenant in all matters pertaining to such fire or security regulations. 16. Landlord will furnish Tenant free of charge two keys to each door lock provided within the premises by Landlord. Landlord may make a reasonable charge for any additional keys. No additional locks shall be placed by the Tenant on any door in the Building unless written consent of the Landlord shall first have been obtained. A reasonable number of keys to the demised premises and the toilet rooms will be furnished by the Landlord, and neither the Tenant, its agents or employees shall have any duplicate key made excepting that the Landlord shall when deemed reasonable grant the Tenant the right to duplicate keys. At the termination of this tenancy, the Tenant shall promptly return to the Landlord all keys to doors in the Building. 17. Except as consented to in writing by Landlord or in accordance with Building Standard Improvements, no draperies, curtains, blinds, shades, screens or other devices shall be hung at or used in connection with any window or exterior door or doors of the Building. Tenant acknowledges that violation of this rule will directly and adversely affect the exterior appearance of the Building. 18. Tenant will not place objects on window sills or otherwise obstruct the exterior wall window covering. 19. (a) Furniture, equipment, large items or large quantities of items shall be moved in or out of the Building only upon the advance notification to the Landlord, and then only during such hours and in such manner as may reasonably be prescribed by Landlord. The purpose of this rule is to minimize disruption to other tenants during Ordinary Business Hours. 1. 43 (b) No safe or article, the weight of which may constitute a hazard or danger to the Building or its equipment, shall be moved into the premises. (c) Safes and other equipment, the weight of which is not excessive, shall be moved into, from, or about the Building only during such hours and in such a manner as shall be prescribed by the Landlord, and the Landlord shall have the right to designated the location of such articles in the Premises. 20. Canvassing, soliciting, distribution of handbills or any other written material and peddling in the Building are prohibited, and each Tenant shall cooperate to prevent the same. 21. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building. 22. The bulletin board or directory of the Building shall be used primarily for display of the name and location of Tenants and Landlord reserves the right to exclude other names therefrom, to limit the number of names associated with Tenant to be placed thereon at rates applicable to all Tenants provided that Tenant's name shall be listed on the floor directory. 23. Landlord shall have the right, exercisable without notice and without liability to any Tenant, to change the name or street address of the Building provided Landlord reimburses Tenant's reasonable costs associated therewith (e.g., changing letterhead and business cards) not to exceed $500.00. Without the written consent of Landlord, Tenant shall not use the name of the Building complex in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 24. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the agreements, covenants, conditions and provisions of any lease of premises in the Building. 25. Landlord reserves the right to make such other rules and regulations as in its judgment may from time-to-time be needed for the safety, care and cleanliness of the Building and for the preservation of good order therein, reasonably and uniformly enforced. 26. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular Tenant or Tenants, by no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other Tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all Tenants of the Building. 27. Tenant shall be liable to Landlord and to each other Tenant of the Building for any loss, cost, expense, damage or liability, including attorneys' fees, caused or occasioned by the failure of Tenant to comply with these rules, but Landlord shall have no liability for failure or for failing or being unable to enforce compliance therewith by any Tenant and such failure by Landlord of non-compliance by any other Tenant shall not be a ground for termination by Tenant of the lease to which these rules and regulations are attached. 28. Subject to paragraph 4.4 of the Lease, all approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord. 29. Tenant's lighting and electrical load shall not exceed the lesser of 8 watts per square foot of usable area or the maximum allowed by law. 2. 44 30. In the event of any inconsistency between the provisions of the Lease and these Rules and Regulations the Lease Provisions shall prevail. 3. 45 EXHIBIT E RULES & REGULATIONS FOR TENANT'S CONTRACTOR(S) 1. Tenant's contractor will be responsible for making arrangements with Landlord as to time for the use of services required. The delivery of materials, equipment, etc., to the site must be coordinated with Landlord, and the building debris box is not to be used for waste removal. 2. Tenant's contractor shall not interfere with the landlord's contractor and sub-trades in any way and will cooperate fully with same. 3. All contractor's garbage must be removed from the premises and site regularly and promptly. All combustible garbage must be stored in a covered, fire-proof container prior to removal. 4. Tenant's contractor and sub-trades shall take all precautions to ensure the security and the site condition of the Premises and Building in which the work is being performed, including their own tools, equipment and materials, and are responsible for any damage caused by employees and sub-trades to any part of the building. 5. Under no circumstances may the washrooms or janitor's sinks be used for cleaning tools, equipment, etc. 6. Tenant's contractor will carry out the work during the hours reasonably specified by Landlord and shall not create or cause any obstructions to other contractors or tenants in the building. Tenant's contractor will perform the work in such a manner that is not conflicting with the normal building operations or procedures. Tenant's contractor shall not in any way overload the structure and, in particular, shall not stack materials thoughtlessly in this regard. Materials shall not be stored in the Common Areas. 7. Tenant's contractor shall remove and properly replace underfloor duct access covers as required for Tenant's trades and services. 8. Tenant's contractor must provide their own fire protection equipment, have same on premises at all times and conform to any requirements of Landlord or Landlord's contractor regarding fire protection. 9. Tenant's contractor shall carry out all work in compliance with all Federal, State, County and City Building Codes and applicable Acts, Ordinances and Statutes. 10. Tenant's contractor shall provide all their own protective devices and coverings, so as to protect the building finishes provided by Landlord in the Building. 11. No attachments to or use of window frames an mullions, ceiling systems or building frame, will be permitted without the expressed written consent of Landlord. 12. Tenant's contractors, employees and trades must be confined to the area in which work is being performed. 1. 46 EXHIBIT F BISHOP RANCH CC&R'S 2. 47 below the land surface, including but not limited to, buildings, utility systems, walkways, driveways, parking areas, loading areas, landscaping items, fences, walls, decks, stairs, poles, landscaping vegetation, signs, exterior fixtures and any other structure of any type or kind. 1.5 "Lot" shall mean any numbered lot or parcel shown upon a recorded subdivision map or recorded parcel map of all or a portion of the Properties. 1.6 "Mortgage" - "Mortgagee" - "Mortgagor." A mortgage shall mean any mortgage or deed of trust or other conveyance of a Lot to secure the performance of an obligation which will be void and reconveyed upon completion of such performance. Reference in this Declaration to a mortgagee shall be deemed to include the beneficiary of a deed of trust; reference to a mortgagor shall be deemed to include the trustor of a deed of trust. 1.7 "Owner" shall mean the person, including Declarant, holding fee simple interest of record to any Lot, including sellers under recorded executory contracts of sale, but excluding those having such interest merely as security for the performance of an obligation. For purposes of Section 3 only, unless the context otherwise requires, Owner shall also include the guests, invitees, licensees and lessees of any Owner. 1.8 "Person" shall mean a natural individual or any other entity with the legal right to hold title to real property. 1.9 "Properties" shall mean all the real property described in Exhibit A to this Declaration. 1.10 "Record" - "File" shall mean, with respect to any document, the recordation thereof, and with respect to any map, the filing thereof, in the Office of the Recorder of Contra Costa County, State of California. 1.11 "Street" shall mean any street, drive way, lane, place or other thoroughfare either as shown on a recorded subdivision map or recorded parcel map of all or a portion of the Properties. 2. ANNEXATION OF ADDITIONAL PROPERTY 2.1 Description. Declarant may, at any time during the term of this Declaration, add all or a portion of the real property, owned by it or the affiliated entities, described in Exhibit B and incorporated herein by this reference, to the Properties which are covered by this Declaration upon the filing of a Notice of Annexation as provided for in Paragraph 2.2. In addition to the affiliated entities described in Exhibit B "affiliated entities" shall include any persons having any ownership interest in Declarant or any corporation, partnership, or other entity in which ten percent (10%) or more of the ownership interests are held by Declarant or any of the persons having an ownership in Declarant. 2.2 Notice of Annexation. The Notice of Annexation shall contain the following information: (a) A reference to this Declaration and applicable recording information; (b) A statement that the provisions of this Declaration, or some specified provisions thereof, shall apply to such annexed real property; (c) A legal description of the real property being annexed; and (d) Such other or different covenants, conditions and restrictions, if any, as may be specified by Declarant in its sole discretion, to regulate and control the use, occupancy and improvement of the real property being annexed. 3. 48 3. USE RESTRICTIONS 3.1 Permitted Uses. All Lots in the Properties shall be used for the following purposes: (a) Agricultural: crop and tree farming, truck farming, horticulture, viticulture and grazing; (b) Administrative offices; (c) Medical and dental offices and clinics, and professional offices of architects, attorneys and engineers; (d) Research laboratories and institutes; (e) Electronic products manufacturing; (f) Electrical products and instrument manufacturing; (g) Bookbinding, printing and lithography; (h) Cartography; (i) Editorial and designing; (i) Photographic printing, finishing and processing; (k) Household pottery; (l) Storage warehouses; (m) Finished paper products; (n) Garment manufacturing; (o) Furniture upholstering. Any other use consistent and harmonious to the foregoing uses, and otherwise lawful under C-M Zoning (Controlled Manufacturing) may be permitted as determined, in its sole discretion, by the Architectural Control Committee. No part of the Properties shall ever be used or caused to be used or allowed or authorized in any way, directly or indirectly, for any residential or other nonbusiness purpose. All permitted uses shall be performed and carried out entirely within a building in such a manner that the enclosed operations and uses do not cause or produce a nuisance to other portions of the Properties, such as, but not limited to, vibration, sound, electromechanical disturbance and radiation, electromagnetic disturbance, radiation, air or water pollution, dust or emission of odors, toxic or nontoxic matter. 3.2 Other Operations and Uses. Operations and uses that are not specifically authorized by this Declaration may be permitted if written operational plans and specifications for such operations or uses, containing such information as may be requested by the Architectural Control Committee, are submitted to and approved in writing by the Architectural Control Committee, which approval shall be based upon analysis of the anticipated effect of such operations or uses upon other Lots, upon other real property in the vicinity of the Properties, and upon the occupants thereof, but shall be in the sole discretion of the Architectural Control Committee. 3.3 Nuisances. No noxious or offensive trade or activity shall be carried on upon any Lot or any part of the Properties, nor shall anything be done thereon which may be, or may become, an annoyance or nuisance to the neighborhood, or which shall in any way 4. 49 interfere with the quiet enjoyment of each of the Owners of his respective Lot. In this regard, all noises, sounds and vibrations shall be appropriately muffled in such a manner so as not to be objectionable as to intermittent beat, frequency, shrillness or volume. Every use shall be operated in such a manner that the ground vibration, heat and glare inherently and recurrently generated from such use is not perceptible beyond the foundation or perimeter line of the building in which the use is located. Spotlights, floodlights and other methods of illumination may be used to illuminate buildings, landscaping areas, signs and parking areas, provided that such devices are equipped with proper lenses concentrating the illumination upon such structures and areas preventing any bright or direct illumination upon adjacent Lots or upon any Street, whether public or private, and provided further that any such illumination shall first be approved by the Architectural Control Committee. No livestock, poultry or animals of any kind shall be raised, bred, kept, slaughtered, or rendered upon any portion of the Properties. A "nuisance" shall include, without limitation, any of the following conditions: (a) Emission of dust, sweepings, dirt, or cinders into the atmosphere, or discharges of liquid, solid wastes, or other harmful matter into any stream, river, or other body of water if such emission or discharge may adversely affect the use or intended use of any property or may adversely affect the health, safety, or comfort of persons in the vicinity, or discharge of waste or any substance or material of any kind into any public or privately maintained sewer serving the Properties, or any part thereof, in violation of any law, rule, or regulation of any public body having jurisdiction thereof; (b) Escape or discharge of fumes, odors, gases, vapors, acids, or other substances into the atmosphere if such escape or discharge may be detrimental to the health, safety, or welfare of persons, may interfere with the comfort of persons within the vicinity, or may be harmful to property or vegetation; (c) The perception, at any point outside the boundaries of a building on any Lot, whether at, above or below ground level, of noise from any activity, machine, device, or combination thereof located on that Lot that unreasonably interferes with the use or enjoyment of any other Lot, except noise from motor vehicles; (d) Wind-borne dust, sprays, or mists and visible emissions of smoke originating on a Lot in unreasonable amounts, excluding the exhausts emitted by motor vehicles, but including emissions from the disposal of trash and waste materials; or (e) Ground vibrations inherently and recurrently generated on a Lot that are perceptible without instruments at any point outside the boundaries of the building located on such Lot, whether at, above or below ground level. 3.4 Signs. No sign, poster, billboard or other advertising of any kind shall be permitted on any portion of the Properties, except such signs as are approved in writing by the Architectural Control Committee, provided that Declarant reserves the right to locate on the Properties or any portion thereof such signs identifying the name, business or products of the businesses located on the Properties. Declarant by such reservation is not obligated to provide any such signs. Signs subject to the approval of Architectural Committee may identify the name, business or products of each such business and shall only be of a size, design, color, style and illumination as shall be specifically approved in writing by the Architectural Control Committee. Each Owner shall have the right to display upon his Lot or building a sign of reasonable dimensions, as determined in advance by the Architectural Control Committee, advertising that the Lot or some portion thereof is for sale, lease, or exchange. 3.5 Mineral Exploration. No oil development operations, oil refining, quarrying or mining operations of any kind shall be permitted upon or in any Lot, nor shall oil wells, tanks, tunnels or mineral excavations or shafts be permitted upon or below the surface of any Lot unless commencing at least five hundred (500) feet below the surface of the Properties. 3.6 Antennae. No television, radio or other electronic antenna or device of any type shall be erected, constructed, placed or permitted to remain on any of the buildings, 5. 50 structures or other Improvements constructed on the Lots unless and until the same shall have been approved in writing by the Architectural Control Committee. 3.7 Drainage. There shall be no interference with the established drainage pattern over any portion of the Properties unless adequate provision is made for proper drainage and is approved by the Architectural Control Committee. For the purposes hereof, "established" drainage is defined as the drainage which exists at the time the Properties are improved pursuant to the terms and conditions of any plans approved by the Architectural Control Committee. 3.8 Refuse. All rubbish, trash, garbage and other waste (collectively "refuse") shall be regularly removed from each Lot. All outdoor refuse collection areas shall be visually screened so as not to be visible from any street and from any of the Lots. The location of all refuse areas shall be approved by the Architectural Control Committee. No refuse collection areas shall be permitted between a street and the front of a building. 3.9 Temporary Structures and Obstructions. No structure of a temporary character, trailer, camper, boat or similar equipment shall be permitted to remain upon any Lot, without the prior written approval of the Architectural Control Committee. There shall be no obstruction of any walkway or driveway in the Properties which would interfere with the circulation of foot or automobile traffic except such obstruction as may be reasonably required in connection with repairs of such driveways and walkways. 3.10 Leases. This Declaration is intended to be binding upon any lessee or tenant of any Lot, or portion thereof. In order to ensure the binding effect on tenants and lessees, each Owner agrees, by acceptance of a deed by which he acquires a title to a Lot, not to rent or lease all or any portion of his Lot to any person, partnership, corporation, trust, or other entity except pursuant to a written lease or rental agreement that (a) expressly refers to this Declaration and contains a covenant by the lessee or tenant that he accepts the leasehold estate subject to this Declaration, and (b) contains either a covenant that the lessee or tenant agrees to perform and comply with the restrictions herein or adequate provisions to permit entry and other actions by the lessor for the purpose of performing and complying with these restrictions. 4. ARCHITECTURAL, DEVELOPMENT AND LANDSCAPING PROVISIONS 4.1 Architectural Control Committee. So long as Declarant owns a Lot subject to this Declaration, the functions of the Architectural Control Committee shall be performed by Declarant. The provisions of Paragraphs 4.2 through 4.6 shall not apply to Declarant so long as Declarant is performing the function of the Architectural Control Committee. Declarant may delegate such functions to one or more individuals, each individual having the full power to bind Declarant In performing the functions of the Architectural Control Committee. Such individual or individuals shall be designated in a written notice recorded by Declarant, which notice shall refer to this Declaration and shall further specify that the named individuals are being named pursuant to the provisions of this Paragraph 4.1. At such time that Declarant no longer owns a Lot subject to this Declaration or at such earlier time that Declarant no longer desires to perform the functions of the Architectural Control Committee, then upon the occurrence of either event, Declarant shall record and concurrently mail to each Owner a written notice of such event. Such notice shall also designate three (3) individuals who will be the initial members of the Architectual Control Committee. Such individuals shall have the qualifications as provided for in Paragraph 4.3. 4.2 Number, Selection and Term of Members of Architectural Control Committee. After Declarant ceases to perform the functions of the Architectual Control Committee, the Architectual Control Committee shall be composed of three (3) members, with the first members being selected by Declarant pursuant to Paragraph 4.1. Each member shall continue on the Architectual Control Committee until removed or replaced as provided for in this Declaration. 4.3 Removal and Selection of Members By Owners. Owners of at least sixty-six and two-thirds percent (66-2/3%) of the Properties then subject to this Declaration based 6. 51 upon the total number of acres owned as compared to the total number of acres subject to this Declaration (excluding dedicated streets) shall have the right, by recorded written notice executed by such owners, to remove and select one or more of the members of the Architectual Control Committee, or to fill a vacancy that occurs pursuant to Paragraph 4.5 and remains unfilled for a period of thirty (30) days. Such recorded written notice shall specify the member being replaced and the name and address of the individual selected to the Architectual Control Committee and a copy shall be mailed to all Owners not a party to such notice. 4.4 Qualifications of Members. Each member of the Architectural Control Committee shall be an Owner, or an officer, director, shareholder, manager or employee of an Owner or shall be a qualified architect, engineer or land planner. No Owner shall have more than one member on the Architectual Control Committee. No Member shall receive any salary or compensation for his services as a Member but may be reimbursed for out-of-pocket expenses incurred in performing duties on behalf of the Architectural Control Committee. 4.5 Vacancies. A vacancy in the Architectural Control Committee shall exist in the event of the death or resignation of any member or if the authorized number of members is increased by an amendment to this Declaration. The members of the Architectural Control Committee shall have the right to declare an office of a member vacant by a vote of more than fifty percent (50%) of the other members, if a member is found to be of unsound mind by a court, convicted of a felony, or if within thirty (30) days after his election fails to accept such office in writing. Any vacancy occurring may be filled by a vote of a majority of more than fifty percent (50%) of the remaining members, even though they are less than a quorum. Written notice of any change in the members of the Architectural Control Committee shall be recorded and a copy mailed to each Owner. Such recorded written notice shall specify the member being replaced and the name and address of the individual selected to the Architectural Control Committee. 4.6 Meetings, Quorum and Rules. Meetings may be called by any member of the Committee as reasonably necessary to perform the functions of the Architectural Control Committee under this Declaration. Any matters required to be reviewed or approved by the Architectural Control Committee may be presented to any member who shall then call a meeting of the Architectural Control Committee upon at least forty-eight (48) hours prior notice to the other members either by written notice or telephonic communication. A majority of the authorized number of members constitutes a quorum of the Architectural Control Committee and every act or decision done or made by a majority of the members present is the act of the Architectural Control Committee. The members may adopt by a majority vote of all the members such additional rules and procedures for the running of the Architectural Control Committee, which rules shall be made available to all Owners upon request. 4.7 Approval of Plans. No improvement shall be erected, placed, altered, remodeled, modified, removed, maintained or permitted to remain on any of the Properties subject to this Declaration until plans and specifications shall have been submitted to and approved in writing by the Architectural Control Committee. Such plans and specifications shall be submitted in writing in duplicate over the authorized signature of the Owner, lessee, licensee or other occupant of the Lot or his authorized agent. Such plans and specifications shall be in such form and shall contain such information as may be required by the Architectural Control Committee, but in any event shall include: (a) A site development plan of the Lot showing the nature, grading scheme, drainage plan, shape, materials and location with respect to the particular Lot (including proposed front, rear and side setback lines) of all structures, the location thereof with reference to structures on adjoining portions of the property, and the number and location of all parking spaces and driveways on the site; (b) a landscaping plan for the particular site; (c) A signing and lighting plan; and 7. 52 (d) A building elevation plan showing dimensions, materials and exterior color scheme and be in no less detail than required by the appropriate governmental authority for the issuance of a building permit. Any changes in approved plans which materially affect building size, placement or external appearance shall be similarly submitted to and approved by the Architectural Control Committee. No improvement or structure shall be erected or placed on any Lot resulting from the rearrangement or resubdivision of any of the Lots initially subject to this Declaration or annexed pursuant to Section 2 unless approved by the Architectual Control Committee in its sole discretion, provided that two or more Lots or portions thereof may be combined to create one Lot and provided that three or more Lots may be combined and resubdivided into Lots none of which shall contain a lesser amount of square footage or less frontage than the smallest of such Lots prior to such resubdivision. 4.8 Basis for Approval. Approval shall be based, among other things, on adequacy of site dimensions, coverage, adequacy of structural design, conformity and harmony of external design with neighboring structures, effect of location and use of proposed improvements on neighboring sites, proper facing of main elevation with respect to nearby streets, adequacy of screening of mechanical air conditioning or other roof top installations, and conformity of the plans and specifications to the purpose and general plan and intent of this Declaration. No plans will be approved which do not provide for the underground installation of power, electrical, telephone and other utility lines from the property line to buildings. The Architectural Control Committee shall not arbitrarily or unreasonably withhold its approval of such plans and specifications. 4.9 Approval Process. Upon approval by the Architectural Control Committee of any plans and specifications submitted hereunder, a copy of such plans and specifications as approved, shall be deposited for permanent record with the Architectural Control Committee, and a copy of such plans and specifications bearing such approval, in writing, shall be returned to the applicant submitting the same. If the Architectural Control Committee fails either to approve or disapprove such plans and specifications within thirty (30) days after the same have been submitted to it, it shall be conclusively presumed that the Architectural Control Committee has approved said plans and specifications; provided, however, that if within said 30-day period, the Architectural Control Committee gives written notice of the fact that more time is required for the approval of such plans and specifications, there shall be no presumption that the same are approved until the expiration of a reasonable period of time as set forth in said notice. 4.10 Proceeding With Work. Upon receipt of approval from the Architectural Control Committee pursuant to this Section 4, the Owner or lessee to whom the same is given shall as soon as practicable, satisfy all conditions thereof and diligently proceed with the commencement and completion of all approved construction, refinishing, alterations and excavations. In all cases work shall be commenced within one (1) year from the date of such approval, if there is a failure to comply with this Paragraph 4.10, then the approval given shall be deemed revoked unless the Architectural Control Committee upon request made prior to the expiration of said one (1) year period extends the time for commencing work. 4.11 Completion of Work. In any event, reconstruction, refinishing or alteration of any improvement shall be completed within two (2) years after the commencement thereof except for so long as such completion is rendered impossible or would result in great hardship due to strikes, fires, national emergencies, natural calamities or other supervening forces beyond the control of the Owner, lessee, licensee or occupant or his agents. Failure to comply with this paragraph shall constitute a breach of this Declaration and subject the defaulting party or parties to all enforcement procedures set forth in this Declaration and any other remedies provided by law or in equity. 4.12 Liability. The Architectural Control Committee shall not be liable for any damage, loss or prejudice suffered or claimed on account of: (a) The approval or disapproval of any plans, drawings and specifications, whether or not defective; 8. 53 (b) The construction or performance of any work, whether or not pursuant to approved plans, drawings and specifications; or (c) the development of any property within the Properties. 4.13 Review Fee. An architectural review fee shall be paid to the Architectural Control Committee at such time as plans and specifications are submitted for approval and in such amounts as shall be established by a schedule adopted from time to time by the Architectural Control Committee based on reasonable costs incurred by the Architectural Control Committee for such review. 4.14 Construction Without Approval. If any improvement shall be altered, erected, placed or maintained upon any Lot, or any new use commenced on any lot, otherwise than in accordance with the approval by the Architectural Control Committee pursuant to the provisions of this Section 4, such alteration, erection, maintenance or use shall be deemed to have been undertaken in violation of this Section 4 and without the approval required herein, and upon written notice from the Architectural Control Committee, any such structure so altered, erected, placed or maintained upon any lot in violation hereof shall be removed or re-altered, and any such use shall be terminated so as to extinguish such violation. If within fifteen (15) days after the notice of such violation the Owner of the Lot upon which such violation exists shall not have taken reasonable steps toward the removal or termination of the same, the Architectural Control Committee shall have the right, through its agents and employees, to enter upon such Lot, subject to any security controls imposed by the Government of the United States (or any agency thereof) with respect to any operation being conducted thereon, and to take such steps as may be necessary to extinguish such violation. The Architectural Control Committee or any such agent shall not thereby be deemed to have trespassed upon such Lot and shall be subject to no liability to the Owner or occupant of such Lot for such entry and any action taken in connection with the removal of any violation. The cost of any abatement or removal hereunder shall be a binding personal obligation of such Owner as well as a lien (enforceable in the same manner as a mortgage) upon the Lot in question. The lien provided in this Section shall not be valid as against a bona-fide purchaser (or bona fide mortgagee) of a Lot in question unless a suit to enforce said lien shall have been filed in a court of record in Contra Costa County, California, prior to the recordation of the deed (or mortgage) conveying the Lot in question to such purchaser (or subjecting the same to such mortgage). 4.15 Minimum Setback Lines. No improvements of any kind, and no part thereof, shall be placed closer than permitted by the Architectural Control Committee to an interior property line but in no event closer than twenty (20) feet. No improvements of any kind, and no part thereof, shall be placed closer than thirty (30) feet from a property line fronting on any street as shown on a map for all or a portion of the Properties. 4.16 Exceptions to Setback Requirements. The following structures and improvements are specifically excluded from the foregoing setback requirements: (a) Roof overhang subject to the specific approval of the Architectural Control Committee in writing, provided it does not extend more than six (6) feet into the setback area; (b) Steps and walks; (c) Paving and associated curbing except that vehicle parking area shall not be permitted within five (5) feet of a property line fronting any street; (d) Fences, except that no fence shall be placed within the street setback area unless specific approval is given by the Architectural Control Committee in writing; (e) Landscaping; (f) Planters, not to exceed three (3) feet in height, unless specific approval is given by the Architectural Control Committee in writing; 9. 54 (g) Signs identifying the Owner, lessee or occupant subject to the specific approval of the Architectural Control Committee in writing; and (h) Lighting facilities, subject to the specific approval of the Architectural Control Committee in writing. 4.17 Landscaping. Every Lot on which a building shall have been placed shall be landscaped in accordance with plans and specifications submitted to and approved by the Architectural Control Committee pursuant to Section 4. Landscaping as approved by the Architectural Control Committee shall be installed within ninety (90) days of occupancy or completion of the building, whichever occurs first, unless the Architectural Control Committee approves in writing another completion date. After completion such landscaping shall be maintained in a sightly and well-kept condition. The area of each site between any street and any minimum setback line as defined by Paragraphs 4.15 and 4.16 shall be landscaped with an effective combination of street trees, trees, ground cover and shrubbery. All other areas fronting on a street that are not utilized for parking or driveways shall be landscaped in a similar manner. All areas of each site not fronting on a street and not used for parking or storage shall be landscaped utilizing ground cover and/or shrub and tree materials. Undeveloped areas proposed for future expansion shall be maintained in a weed-free condition and shall be landscaped if requested by the Architectural Control Committee. Unpaved areas between the street curb line and the property line adjoining any street shall be landscaped and maintained by Owner. 4.18 Maintenance of Landscaping. If, in the opinion and sole discretion of the Architectural Control Committee, the required landscaping is not maintained in a sightly and well-kept condition, the Architectural Control Committee shall have the right, through its agents and employees, to enter onto any site and to take such steps as may be necessary to maintain the landscaping in a sightly and well-kept condition. The Architectural Control Committee, or any such agent or employee, shall not thereby be deemed to have trespassed upon such site and shall be subject to no liability to the Owner or occupant of such site for such entry and any action taken in connection with such necessary maintenance. The cost of any such maintenance hereunder shall be a binding personal obligation of such Owner, as well as a lien (enforceable in the same manner as a mortgage) upon the site in question. The lien provided in this Section shall not be valid as against a bona fide purchaser (or bona fide mortgagee) of a site in question unless a suit to enforce said lien shall have been filed in a court of record in Contra Costa County, California, prior to the recordation of a deed (or mortgagee) conveying the site in question to such purchaser (or subjecting the same to such mortgage). 4.19 Adequate Parking Areas. Adequate off-street parking shall be provided to accommodate all parking needs for employee, visitor and company vehicles on the Lot. The intent of this provision is to eliminate the need for any on-street parking; provided that this provision does not prohibit on-street parking of public transportation vehicles. If parking requirements increase as a result of a change in use or number of employees, additional off-street parking shall be provided to satisfy the intent of this Paragraph. Required off-street parking shall be provided on the site of the use served. Where parking is provided on other than the Lot concerned, a recorded document shall be filed with the Architectural Control Committee and signed by the Owners of the alternate site stipulating to the permanent reservation of the use of the site for said parking. 4.20 Paved Parking Areas. Parking areas shall be paved so as to provide dust- free, all-weather surfaces. Each parking space provided shall be designated by lines painted on the paved surfaces and shall be adequate in area, and all parking areas shall provide, in addition to parking spaces, adequate driveways and space for the movement of vehicles. The number of parking spaces required for each site, and the specific location of the same, shall be designated in plans for each Lot which have been submitted and approved in the manner set forth herein. In determining the number of parking spaces and the location thereof of each site, the Architectural Control Committee shall consider the exact nature of the use proposed for the site; the anticipated number and manner of employment of persons on the site; the nature and location of proposed structures on the site; and such other matters as the Architectural Control Committee shall deem relevant. No parking spaces shall be located on, 10. 55 and no parking shall be permitted by the Architectural Control Committee within designated setback areas adjacent to any street except that parking may be permitted by the Architectural Control Committee within said setback area when such parking is screened from view from the street by approved trees, screen wall, shrubbery or berms. 4.21 Storage and Loading Areas. Unless specifically approved by the Architectural Control Committee in writing, no materials, supplies or equipment, including company-owned or operated trucks and motor vehicles, shall be stored in any area on a site except inside a closed building, or behind a visual barrier screening such areas so that they are not visible from the neighboring properties or public streets to a person six (6) feet tall standing at ground level on such neighboring properties or public streets. Any storage areas screened by visual barriers shall be located on the rear portions of the site, unless approved by the Architectural Control Committee in writing. No storage areas shall extend into setback lines as established herein unless approved by the Architectural Control Committee in writing. All provisions for vehicle loading shall be provided on the site with on-street vehicle loading not permitted. No loading dock or trucking activity shall be permitted between the structure and any street, and no loading area shall encroach into setback areas unless specifically approved by the Architectural Control Committee. Loading dock areas shall be set back and screened so as not to be visible from neighboring properties and streets. No storage areas, loading docks, truck or loading activity shall be permitted on a Lot adjoining Interstate Highway 680 unless specifically approved by the Architectural Control Committee. 5. PROTECTION OF FIRST MORTGAGEES A breach of any of the provisions, covenants, restrictions or limitations hereof, or the recordation of any assessment lien or the pursuit of any remedy hereunder, shall not defeat or render invalid the lien of any first Mortgage of record (meaning any recorded Mortgage or deed of trust with first priority or security over other Mortgages or deeds of trust) made with an Owner in good faith and for value upon the Lot of such Owner. All of the provisions herein shall be binding upon and effective against any Owner whose title to said Lot is hereafter acquired through foreclosure or trustee's sale. Each first Mortgagee of a Mortgage encumbering any Lot in the Properties, which obtains title to such Lot pursuant to the remedies provided in such Mortgage, by judicial foreclosure or by deed or assignment in lieu of foreclosure, shall take title to such Lot free and clear of any claims for unpaid assessments or charges, if any, against such Lot which accrued prior to the time such holder acquires title to such Lot. 6. DURATION AND AMENDMENT 6.1 Duration. This Declaration shall continue in full force for a term of fifty (50) years from the date hereof, after which time the same shall be automatically extended for successive periods of ten (10) years, unless a Declaration of Termination is recorded in the Official Records, Contra Costa County, California, meeting the requirements of an amendment to this Declaration as set forth in Paragraph 6.2. 6.2 Amendment. This Declaration or any provision thereof, or any covenant, condition or restriction contained herein may be terminated, extended, modified or amended, as to all or any portion of the Properties, with the written consent of the Owners of sixty-six and two-thirds percent (66-2/3%) of the real property then subject to this Declaration based on the number of acres owned as compared to the total number of acres subject to this Declaration (excluding dedicated streets), provided, however, that so long as Declarant owns a Lot subject to the Declaration or for a period of fifteen (15) years from the date of recordation of this Declaration, whichever period is longer, no such termination, extension, modification or amendment shall be effective without the written consent of the Declarant thereto. No such termination, extension, modification or amendment shall be effective until a proper instrument in writing has been executed, acknowledged and recorded. Notwithstanding the foregoing, any of the following modifications or amendments, to be effective, must be approved in writing by all of the institutional Mortgagees holding first Mortgages encumbering the Lots in the Properties: 11. 56 (a) Any amendment or modification which affects or purports to affect the validity or priority of encumbrances or the rights, or protection granted to encumbrancers as provided in Section 5 hereof; or (b) Any amendment or modification which would or could result in an encumbrance being cancelled by forfeiture. 7. GENERAL PROVISIONS 7.1 Legal Proceedings. Failure to comply with any of the terms of this Declaration, by an Owner, his guests, employees, invitees or tenants, shall be grounds for relief which may include, without limitation, an action to recover sums due for damages, injunctive relief, foreclosure of lien, or any combination thereof, which relief may be sought by Declarant, the Architectural Control Committee, or, if appropriate, by an aggrieved Owner. Failure to enforce any provision hereof shall not constitute a waiver of the right to enforce said provision, or any other provision hereof. The Declarant, the Architectural Control Committee, any Owner (not at the time in default hereunder), shall be entitled to bring an action for damages against any defaulting Owner, and in addition may enjoin any violation of this Declaration. Any judgment rendered in any action or proceeding pursuant thereto shall include a sum for attorneys' fees in such amount as the Court may deem reasonable, in favor of the prevailing party. Each remedy provided for in this Declaration shall be cumulative and not exclusive or exhaustive. 7.2 Severability. The provisions hereof shall be deemed independent and severable, and a determination of invalidity or partial invalidity or unenforceability of any one provision or portion hereof by a court of competent jurisdiction shall not affect the validity or enforceability of any other provisions hereof. 7.3 Interpretation. The provisions of this Declaration shall be liberally construed to effectuate its purpose of creating a uniform plan for the creation and operation of an industrial and business park development and any violation of this Declaration shall be deemed to be a nuisance. The section and paragraph headings, titles and captions have been inserted for convenience only, and shall not be considered or referred to in resolving questions of interpretation or construction. As used herein, the singular shall include the plural and the masculine, feminine and neuter shall mean the same. This Declaration shall be construed and enforced in accordance with the laws of the State of California. 7.4 Construction and Sales by Declarant. Nothing in this Declaration shall limit, and no Owner shall do anything which shall interfere with, the right of Declarant to complete any construction of improvements on the Lots owned by Declarant, or to alter the foregoing and its construction plans and designs, or to construct such additional improvements on such Lots as Declarant deems advisable prior to completion and sale of the last Lot in the Properties. Each Owner by accepting a deed to a Lot hereby acknowledges that the activities of Declarant may constitute a temporary inconvenience or nuisance to the Owners and hereby consents to such inconvenience or nuisance. Each Owner hereby grants, upon acceptance of his deed to his Lot, an irrevocable, special power of attorney to Declarant to execute and record all documents and maps necessary to allow Declarant to exercise its rights under this Paragraph 7.4. Such right shall include, but shall not be limited to, erecting, constructing and maintaining on the Properties such structures and displays as may be reasonably necessary for the conduct of its business of completing the work and disposing of the same by sale, lease or otherwise. Declarant may use any Lots owned by Declarant in the Properties as models or real estate sales or leasing offices. This Declaration shall not limit the right of Declarant at any time prior to acquisition of title to the last Lot in the Properties by a purchaser from Declarant, to establish on the Lots owned by Declarant easements, reservations and rights-of-way to itself, to utility companies, or to other Persons as may from time to time be reasonably necessary to the proper development and disposal of the Properties. Such easements may be created for the construction, installation, maintenance, removal, replacement, operation and use of utilities, including without limitation, sewers, water and gas pipes and systems, drainage lines and systems, electric power and conduit lines and wiring, telephone conduits, lines and wires, and other utilities, public or private, beneath the ground surface (except vaults, vents, access structures and other facilities 12. 57 required to be above ground surface by good engineering practice), including the right to dedicate, grant or otherwise convey easements or rights-of-way to any public utility or government entity for such purposes. All or any portion of the rights of Declarant hereunder may be assigned to any successor or successors to all or part of Declarant's respective interest in the Properties, or to any other person designated by Declarant by an express written assignment recorded in the Office of the Contra Costa County Recorder. Declarant need not seek or obtain the approval of the Architectural Control Committee in connection with any improvements constructed or altered by Declarant in the Properties. 7.5 No Public Right or Dedication. Nothing contained in this Declaration shall be deemed to be a gift or dedication of all or any part of the Properties to the public, or for any public use. 7.6 Designation of Owners Representative. Upon the conveyance of a Lot to an Owner and on July 1, of each year, Owner shall provide by written notice to the Architectual Control Committee the name of an individual and his address who shall be the Owner's Representative. The Owner's Representative shall be deemed to have the power to bind the Owner in connection with any matter arising under this Declaration and any notice delivered to the Owner's Representative shall be deemed notice to the Owner. Each Owner shall have the right to designate a replacement Representative by compliance with the provisions of this Paragraph 7.6. 7.7 Notices. Except as otherwise provided in this Declaration, in each instance in which notice is to be given to an Owner, the same shall be in writing and may be delivered personally to the Owner's Representative, as designed pursuant to Paragraph 7.6. In the event that a Representative for an Owner has not been designated, personal delivery of such notice to one or more co-owners of a Lot or to any general partner of a partnership owning a Lot shall be deemed delivery to all co-owners or to the partnership, as the case may be and personal delivery of such notice to any officer or agent for the service of process on a corporation shall be deemed delivery to the corporation. In lieu of the foregoing, such notice may be delivered by regular United States mail, postage prepaid, addressed to the Owner's Representative at the most recent address furnished by such Owner or to the street address of such Owner's Lot. Such notice shall be deemed delivered at the beginning of the second day after the day of such mailing. THIS DECLARATION has been executed on the date first written above. GRANADA SALES, INC., a California corporation By _____________________________________ Alexander R. Mehran Chief Executive Officer By _____________________________________ Loree Cornwell Secretary/Treasurer 13. 58 EXHIBIT G Exhibit G consists of a drawing of the Building Interior Layout. 14. EX-23.2 8 EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Giga-tronics Incorporated We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP San Jose, California June 19, 1996 EX-23.3 9 EXHIBIT 23.3 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS The Board of Directors ASCOR Incorporated We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP San Jose, California June 19, 1996 EX-23.4 10 EXHIBIT 23.4 1 EXHIBIT 23.4 CONSENT OF WOOD, WARREN & CO. We hereby consent to the inclusion in the Proxy Statement forming part of this Registration Statement of our opinion dated on or about May 2, 1996 to the Board of Directors of Giga-tronics Incorporated, attached as Annex E to such Proxy Statement, and the references to such opinion contained therein. In giving such consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"), and we do not thereby admit that we are experts with respect to any part of this Registration Statement within the meaning of the term "expert" as used in the Securities Act. WOOD, WARREN & CO. By: /s/ J. Roger Wood -------------------------- -----END PRIVACY-ENHANCED MESSAGE-----