UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 3, 2003
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...............to ...............
Commission File No. 0-5411
Herley Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2413500
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
101 North Pointe Blvd., Lancaster, Pennsylvania 17601
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(Address of Principal Executive Offices ) (Zip Code)
Registrant's telephone number, including area code: (717) 735-8117
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .10 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the closing sale price of $18.29 as of October 17, 2003 the aggregate
market value of the voting stock held by non-affiliates of the registrant was
$233,720,429.
The number of shares outstanding of registrant's common stock, $ .10 par value
as of October 17, 2003 was 14,013,101.
Documents incorporated by reference:
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Registrant's definitive proxy statement to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934.
HERLEY INDUSTRIES, INC.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business. 1
Item 2. Properties. 11
Item 3. Legal Proceedings. 11
Item 4. Submission of Matters to a Vote of Security Holders. 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 12
Item 6. Selected Financial Data. 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 23
Item 8. Financial Statements and Supplementary Data. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 24
Item 9A. Controls and Procedures. 24
PART III
Item 10. Directors and Executive Officers of the Registrant. 25
Item 11. Executive Compensation. 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. 25
Item 13. Certain Relationships and Related Transactions. 25
Item 14. Principal Accountant Fees and Services 25
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8K. 26
SIGNATURES 28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
PART I
Forward-Looking Statements
All statements other than statements of historical fact included in this Annual
Report, including without limitation statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
regarding our financial position, business strategy and our plans and objectives
of management for future operations, are forward-looking statements.
Forward-looking statements involve various important assumptions, risks,
uncertainties and other factors which could cause our actual results to differ
materially from those expressed in such forward-looking statements.
Forward-looking statements in this Annual Report can be identified by words such
as "anticipate," "believe," "estimate," "expect," "plan," "intend" or the
negative of these terms or similar expressions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, performance or achievement. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
competitive factors and pricing pressures, changes in legal and regulatory
requirements, technological change or difficulties, product development risks,
commercialization and trade difficulties and general economic conditions.
You are cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date of this Annual Report or the date of any
document incorporated by reference, in this Annual Report. We are under no
obligation, and expressly disclaim any obligation, to update or alter any
forward-looking statements, whether as a result of new information, future
events or otherwise.
For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in Section 21E of the Securities Exchange
Act of 1934.
Item 1. Business
BACKGROUND
Herley is a leading supplier of microwave products and systems to defense and
aerospace entities worldwide. Our primary customers include large defense prime
contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing),
the U.S. government (including the Department of Defense, NASA and other U.S.
government agencies) and international customers (including the Egyptian,
German, Japanese and South Korean militaries and suppliers to international
militaries). We are a leading provider of microwave technologies for use in
command and control systems, flight instrumentation, weapons sensors and
electronic warfare systems. We have served the defense industry since 1965 by
designing and manufacturing microwave devices for use in high technology defense
electronics applications. Our products and systems are currently deployed on a
wide range of high profile military platforms, including the F-16 Falcon, the
F/A-18E/F Super Hornet, the RC-135 Rivet Joint, the E-2C Hawkeye, the AEGIS
class surface combatants, the EA-6B Prowler, the AMRAAM air to air missile, and
unmanned aerial vehicles, or UAVs, as well as high priority national security
programs such as National Missile Defense and the Trident II D-5.
ACQUISITIONS
We have grown internally and through strategic acquisitions over the past ten
years and have evolved from a component manufacturer to a systems and service
provider. We have successfully integrated these acquisitions by targeting
microwave technology companies and focusing their strengths into our existing
operations.
- - In September 1992, we acquired Micro-Dynamics, Inc. of Woburn, Massachusetts,
a microwave subsystem designer and manufacturer.
- - In June 1993, we acquired Vega Precision Laboratories, Inc. of Vienna,
Virginia, a manufacturer of flight instrumentation products.
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- - In July 1995, we acquired Stewart Warner Electronics Corp. of Chicago,
Illinois, a manufacturer of high frequency radio and IFF interrogator systems.
- - In August 1997, we acquired Metraplex Corporation of Frederick, Maryland, a
manufacturer of airborne PCM and FM telemetry and data acquisition systems.
- - In January 1999, we acquired General Microwave Corporation of Farmingdale, New
York, a manufacturer of microwave components and electronic systems.
- - In January 2000, we acquired Robinson Laboratories, Inc. of Nashua, New
Hampshire, a designer, developer and manufacturer of microwave components and
assemblies primarily for defense applications.
- - In September 2000, we acquired American Microwave Technology, Inc. of Anaheim,
California, a manufacturer of high power, solid state amplifiers for the
scientific and medical markets, which enabled us to enter these markets.
- - In September 2002, we acquired EW Simulation Technology, Limited ("EWST"), a
British company of Aldershot, UK. EWST designs, develops and produces electronic
warfare simulator systems for prime defense contractors and countries worldwide.
BUSINESS STRATEGY
Our goal is to continue to leverage our proprietary technology, microwave
expertise and manufacturing capabilities to further expand our penetration in
our market. Our strategies to achieve our objectives include:
- - INCREASE LEVELS OF COMPONENT INTEGRATION AND VALUE ADDED CONTENT. Due to
growth of engineering expertise, new product development, and acquisitions, we
have increased our capability to provide more component integration. Management
believes component integration adds value and will enable us to increase content
in defense platforms and systems, thereby increasing our revenue and
profitability.
- - MAINTAIN LEADERSHIP IN MICROWAVE TECHNOLOGY. We intend to pursue further
technological advances through continued investment in internally-funded and
customer-funded research and product development.
- - STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. We have developed mutually
beneficial relationships with various agencies of the U.S. government and
defense and commercial companies. We expect to continue to build and strengthen
these relationships with industry leaders by anticipating and recognizing their
needs and providing them with on-time and cost-effective solutions.
- - CAPITALIZE ON OUTSOURCING DYNAMICS IN THE AEROSPACE AND DEFENSE INDUSTRY.
Microwave technology has traditionally been an in-house resource of the prime
contractors. However, the prime contractors are beginning to outsource the
design and manufacture of this specialized engineering work to system
sub-contractors. We are well positioned to generate more business as prime
contractors continue to focus primarily on integration of defense electronics.
- - PURSUE STRATEGIC ACQUISITIONS. We intend to continue to augment our existing
technological base by acquiring specialized companies that complement or expand
our product offerings and market strategies. We believe that expansion of our
core competencies through the acquisition of such specialized technology
companies, when combined with our current technological and manufacturing
skills, will provide us with improved levels of horizontal and vertical
integration, leading to the creation of subsystems and complete system products.
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- - ENHANCE MANUFACTURING CAPABILITIES. We intend to continue to implement process
manufacturing automation and believe that our ability to develop a high level of
automated production and test capability will help to further improve our cost
effectiveness and time to market.
- - PURSUE SELECTIVE COMMERCIAL OPPORTUNITIES. We seek to identify and pursue
selected commercial applications for our products and technologies where we can
add value based on our microwave expertise.
COMPETITIVE STRENGTHS
Our competitive strengths include:
- - TECHNICAL EXPERTISE. We have developed a leading position in the field of
microwave technology through our 38 year focus on research and development and
our state-of-the-art design and production capabilities. We have recently
completed construction of state-of-the-art manufacturing facilities in
Lancaster, Pennsylvania, where we have a full range of capabilities including
long and short run production, hardware assembly and full-service engineering.
In addition, we have highly capable manufacturing facilities located in Woburn,
Massachusetts; Farmingdale, New York; Aldershot, England; and Jerusalem, Israel.
We continue to develop and reward our engineers in order to maintain our
expertise in-house.
- - HIGH PROPORTION OF LONG-TERM SOLE-PROVIDER PRODUCTION PROGRAMS. We generate a
significant proportion of our revenue from continuing, long-term programs, both
in the production and upgrade phases, and continue to target high growth, high
priority defense programs. Typically, on such long-term defense programs we are
the sole provider of microwave equipment.
- - DIVERSE PRODUCT AND CUSTOMER BASE. We have a diverse product and customer
base, with only the U.S. government, at approximately 25%, representing more
than 10% of our fiscal 2003 revenues. We are a first-tier supplier to all of the
prime defense contractors, as well as a direct supplier to all of the service
branches of the U.S. military, including products found on over 120 individual
platforms. Foreign customers accounted for approximately 36% of our revenues in
fiscal 2003.
- - LONG-STANDING INDUSTRY RELATIONSHIPS. We have established long-standing
relationships with the U.S. government and other key organizations in the
aerospace and defense industry after 38 years in the defense electronic
industry. Over this period, we have become recognized for our ability to develop
new technologies and meet stringent program requirements.
- - SUCCESSFUL ACQUISITION TRACK RECORD. We have demonstrated that we can
successfully integrate acquired companies. We are experienced at evaluating
prospective operations in order to increase efficiencies and capitalize on
market and technological synergies.
- - EMPHASIS ON RESEARCH AND DEVELOPMENT. In fiscal year 2003, we spent over $6.3
million on new product development, of which our customers funded approximately
$3.2 million. Our emphasis on new product development enables us to maintain our
technological leadership in current products and to develop new capabilities.
This spending helps solidify and strengthen our position on different programs
and may serve as a barrier to entry for competitors.
- - EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over 23 years
of experience in the defense electronics industry.
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PRODUCTS AND SERVICES
We operate in two markets: defense electronics and commercial technologies.
DEFENSE ELECTRONICS
We are a leading supplier of microwave products and systems to defense and
aerospace entities worldwide. We design and manufacture microwave components and
subassemblies which are embedded in a variety of radars, flight instrumentation,
weapons sensors, electronic warfare systems and guidance systems. Our microwave
devices are used on our subassemblies and integrated systems (e.g. command and
control systems, telemetry systems, transponders, flight termination receivers
and identification friend or foe, or IFF, interrogators), in addition to being
sold on a component basis.
The following are descriptions of our major systems and products:
Telemetry Systems. Telemetry systems provide wireless data transmission between
two or more sites for recording and analysis. Missile, UAV, or target testing on
domestic and international test ranges requires flight safety and performance
data transmission to maximize flight safety during the test operation.
Surveillance and intelligence gathering UAVs also require a data transmission
downlink and a command and control systems uplink to accomplish their mission.
We have developed a telemetry system capability that can be configured to meet
individual customers' needs. Various components of the system include data
encoders, transmitters and flight termination receivers. Each has a distinctive
role and each is key to the success of the mission.
We are a leading manufacturer of Pulse Code Modulation, or PCM, and Frequency
Modulation, or FM, telemetry and data acquisition systems for severe environment
applications, and our products are used worldwide for testing space launch
vehicle instrumentation, aircraft flight testing, and amphibian, industrial and
automotive vehicle testing. The product portfolio ranges in size and complexity
from miniature encoders to completely programmable data acquisition systems.
We offer a complete airborne data link system. With our digital capability in
data encoding and acquisition elements combined with our radio frequency
capability in providing telemetry transmitters and flight termination receivers,
we offer a full line of narrow and wide-band airborne telemetry systems to meet
a wide variety of industrial needs, both domestically and internationally.
Command and Control Systems. Our command and control systems have been used to
fly remotely a large variety of unmanned aerial vehicles, or UAVs, typically
aircraft used as target drones or Remotely Piloted Vehicles, or RPVs. Our
command and control systems also control surface targets. Operations have been
conducted by users on the open ocean, remote land masses, and instrumented test
and training ranges. Our command and control systems are currently in service
throughout the world. Command and control systems permit a ground operator to
fly a target or a UAV through a pre-planned mission. The mission may be for
reconnaissance, where the vehicle is equipped with high definition TV sensors
and the necessary data links to send information back to its command and control
systems ground station. The UAV may also be used as a decoy, since the operator
can direct the flight operations that will make the small drone appear to be a
larger combat aircraft.
Our MAGIC2 system affords over-the-horizon command and control using GPS
guidance and control of multiple targets from a single ground station. The
ability to control multiple targets at increased distances represents a
significant product improvement. The MAGIC2 is a highly flexible, multiple
processor design with high resolution graphics, which can be field-configured
within minutes to fly or control any selected vehicle for which it is equipped.
The MAGIC2 is used in support of missile, aircraft and other weapons systems
development and testing. The system meets a growing requirement to test against
multiple threats with the automated defense capabilities of ships like the AEGIS
cruiser and the E-2C aircraft.
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Transponders. We manufacture a variety of expendable transponders, including
range safety, IFF, command and control, and range scoring systems. Transponders
are small, expendable, electronic systems consisting of a transmitter, sensitive
receiver and internal signal processing equipment comprised of active and
passive components, including microwave subassemblies such as amplifiers,
oscillators and circulators. The transponder receives signals from radars,
changes and amplifies the frequency of the signals, and transmits back a reply
on a different frequency and signal level. This reply is a strong, noise-free
signal upon which the tracking radar can "lock," and one which is far superior
to skin reflection tracking, particularly under adverse weather conditions after
the launch.
In range safety applications, transponders enable accurate tracking of space
launch and unmanned aerial vehicles, missiles, and target drones so that
position and direction are known throughout its flight. In the case of several
defense and commercial space launch vehicles (i.e., Delta, Atlas, Titan and
Pegasus), our transponder is tracked by the ground launch team all the way to
space orbit, and in certain instances through several orbits, as a reference
location point in space to assure that the launch payload has been properly
placed in orbit.
IFF transponders, which are used in conjunction with the Federal Aviation
Authority Air Traffic Control System, enable ground controllers to identify the
unmanned targets, drones and cruise missiles on which these units fly and to
vector other manned aircraft safely away from the flight path of the unmanned
aerial vehicle.
Command and control transponders provide the link through the telemetry system
for relaying ground signals to direct the vehicle's flight. The uplink from the
ground control station, a series of coded pulse groups, carries the signals that
command the flight control guidance system of the vehicle. The downlink to the
ground provides both tracking signals for range safety, as well as
acknowledgment and status of the uplink commands and their implementation in the
vehicle. The transponder is therefore the means to fly the vehicle. Scoring
systems are mounted on both airborne and sea targets. Scoring systems enable
test and evaluation engineers to determine the "miss-distance" between a
projectile and the target at which it has been launched.
Flight Termination Receiver. A flight termination receiver, or FTR, is installed
in a test missile, UAV, target or space launch vehicle as a safety device. The
FTR has a built-in decoder that enables it to receive a complex series of audio
tones which, when appropriate, will set off an explosive charge that will
destroy the vehicle. A Range Safety Officer, or RSO, using the range safety
transponder will track the vehicle in flight to determine if it is performing as
required. If the RSO detects a malfunction in the test or launch vehicle that
causes it to veer from a planned trajectory in a manner that may endanger
personnel or facilities, the RSO will transmit a coded signal to the onboard FTR
to explode the vehicle.
HF Communications and IFF Interrogators. We design and manufacture high
frequency radio and IFF interrogators. This high frequency communications
equipment is used by the U.S. Navy and foreign navies that conduct joint
military exercises with the U.S. Navy. The IFF interrogators are used as part of
shipboard equipment and are also placed on coastlines, where they are employed
as silent sentries. We have been a significant supplier to the Republic of Korea
for over twenty years and have a large, established installed base of equipment.
We have been, and continue to be, a supplier to the Republic of Korea KDX
destroyer program.
High Power Amplifier. We design and manufacture high power amplifier systems
with frequencies ranging from 1.5 MHz to 12GHz with power levels from
multi-kilowatts up to 15W, depending on the frequency. Our high power amplifier
applications include but are not limited to defense communication, electronic
warfare, radar and avionics. We have an exclusive sales and marketing agreement
with EADS ewation, Grintek ewation, Sysdel Close Corporation and Indra regarding
high power amplifiers for monitoring, reconnaissance and countermeasures.
Microwave Integrated Circuits. We design and manufacture complex microwave
integrated circuits, or MICs, which consist of sophisticated assemblies that
perform many functions, primarily involving switching of microwave signals. Our
MICs are employed in many defense electronics systems and missile programs. We
also manufacture magnetrons, which are the power source utilized in the
production of our transponders.
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High/Low Power Integrated Assembly. Our high power microwave devices are used in
radar system transmitters and in long-range missiles. High power devices
frequently use small amounts of nuclear material to enhance breakdown of high
energy pulses, and we are one of very few companies with an active nuclear
license that permits the handling of these trace amounts of nuclear materials.
There are relatively few companies with the expertise or facilities to design,
manufacture and test high power devices. We also produce lower power, broad band
microwave integrated assemblies for the defense electronics industry. These
complex assemblies combine microwave functions such as amplification,
attenuation, switching of multiple signals, and phase and amplitude control.
Their applications include Rear Warning Receivers, or RWRs, Electronics
Countermeasure, or ECM, systems and highly sensitive receiver systems.
Solid State Receiver Protector. We have become a preeminent supplier of
solid-state receiver protector devices that are able to withstand high energy
pulses without the use of nuclear materials. These high power devices protect a
radar receiver from transient bursts of microwave energy and are employed in
almost every military and commercial radar system. For our engineering efforts
in designing solid-state receiver protectors for the F- 16, we received cash
awards from the United States Air Force as part of the government's value
engineering program.
Digitally Tuned Oscillators (DTO's). We produce microwave sources, which
generate signals that are used in microwave oscillators. Our microwave sources
are sold to the U.S. defense industry and to various foreign governments. We
specialize in digitally tuned oscillators, or DTOs, a critical component in many
ECM systems.
Simulation Equipment. EW Simulation Technology Limited ("EWST"), a U.K. company
and wholly owned subsidiary, designs and manufactures radar threat and
electronic countermeasures simulation equipment for electronic warfare training
and test and evaluation applications. Radar threat and countermeasures simulator
products include but are not limited to the following:
CHAMELEON is a real time electronic countermeasures ("ECM") jamming simulator.
It uses a variety of ECM techniques and radar target modeling for training and
testing of both radar and EW operators and systems. CHAMELEON offers a fully
programmable ECM capability using Digital RF Memories ("DRFM") technology. The
system offers fully coherent jamming in both range and velocity through the use
of 8-bit DRFM technology together with GUI software. Target modeling includes
Swerling fluctuations, cross-section synthesis and clutter generation. The
CHAMELEON is suited for ground-based and airborne ECM test and training systems.
The RSS8000 Series Radar Threat Simulator generates real-time user programmable
radar threats and provides output configurations in digital (On-board
trainer-OBT) and RF (RSS series) formats. The system can be used for EW system
test and evaluation as well as for EW operator training in laboratory and more
rugged environments. The RSS8000 equipment covers the 100MHz to 40 GHz range and
can be configured to suit any application from a portable single RF source unit
to a multiple RF source and multiple port DF system. The DF systems are
available in amplitude, DTOA and/or phase formats with the ports being capable
of angular rotation.
Mobile EW and Radar Test Systems ("MERTS") is a mobile EW and radar test system
providing complete jamming and radar threat test facility for field use. It
provides a turnkey test and evaluation equipment for field applications and
includes both the CHAMELEON and RSS8000 systems integrated into one operational
unit. The MERTS equipment is housed within an air-conditioned ISO container
mounted on a four-wheel drive truck that allows on-site test and evaluation of
radar and EW systems as well as operator training.
COMMERCIAL TECHNOLOGIES
Our commercial technologies are comprised of scientific products and medical
products.
Scientific Products. Our scientific products are used extensively in Nuclear
Magnetic Resonance (NMR) systems. These amplifiers, which have dual mode
capability and can be operated in either a pulsed or continuous wave, cover the
frequency ranges of 6 MHz to 950 MHz, with power levels as high as 2.0KW peak
power at 10% duty cycle. Scientific customers include OEM, system manufacturers
and research centers.
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Medical Products. Our medical products vary in complexity from single modules,
to rack mounted amplifiers, to complete systems. The rack-mounted amplifiers and
complete systems typically include detection/protection circuitry, built-in
power supplies, front panel metering and digital and/or analog interface
controls. Both forced air and/or water cooling are used, depending on the
customer's requirements. Our medical products are used in Magnetic Resonance
Imaging, or MRI, systems. All amplifiers have dual mode capability and can be
operated in either a pulsed or continuous wave mode, and cover the frequency
ranges of 10 MHz to 200 MHz with power levels as high as 12.0KW peak power at
10% duty cycle. Medical customers include both original equipment and systems
manufacturers, as well as universities and research centers.
All products feature highly reliable technical solutions designed for improved
production and reliability. Producibility is enhanced through the use of surface
mount components and circuit designs which eliminate the need for excessive
alignment during the production cycle. High reliability is achieved through the
implementation of conservative thermal and RF circuit design and sophisticated
self-protection schemes. Reliability is further enhanced during the design phase
by employing detailed environmental testing.
CUSTOMERS
During the fiscal year ended August 3, 2003, approximately 25% of our net sales
were attributable to contracts with offices and agencies of the U.S. government.
No other customers accounted for shipments in excess of 10% of net sales.
We provide defense electronics equipment to major defense prime contractors for
integration into larger platforms and systems. Some of our customers for defense
electronics equipment include:
Boeing BAE Systems Harris
Lockheed Martin Northrop Grumman Raytheon
During fiscal 2003, sales to foreign customers accounted for approximately 36%
of our net sales. Domestic sales to foreign customers accounted for 16% of net
sales. Sales from England and Israel each accounted for 10% of net sales to
foreign customers. The governments of Egypt, Japan, South Korea, Taiwan and the
United Kingdom are all significant customers of ours. All of our domestic
contracts with foreign customers are payable in U.S. dollars. Contracts with
customers originating in Israel and England are either in U.S. dollars or the
local functional currency. International sales are subject to numerous risks,
including political and economic instability in foreign markets, currency and
economic difficulties in the Pacific Rim, restrictive trade policies of foreign
governments, inconsistent product regulation by foreign agencies or governments,
imposition of product tariffs and burdens and costs of complying with a wide
variety of international and U.S. export laws and regulatory requirements. Our
international sales also are subject to us obtaining export licenses for certain
products and systems.
SALES AND MARKETING
We market our products worldwide to the United States government, prime
contractors and various countries in defense markets, and to OEMs, research
institutions and universities in commercial markets. Sales are primarily through
a sales force generally organized by geographic territory and markets. In
addition, we have contracts with manufacturers' representatives in the United
States and international representatives who are located in Western Europe, the
Middle East and Asia. As part of our marketing efforts, we advertise in major
trade publications and attend major industrial shows in the commercial, medical,
satellite communications and defense markets.
After we have identified key potential customers, we make sales calls with our
own sales, management and engineering personnel. In order to promote widespread
acceptance of our products and provide customers with support, our sales and
engineering teams work closely with our customers to develop tailored solutions
to their requirements. We believe that our customer engineering support provides
us with a key competitive advantage.
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We also produce microwave components that are sold through our catalog, which
for almost forty years has been an industry leader, and sell attenuating devices
and IQ modulation and phase shifters through the microwave engineer's handbook.
MANUFACTURING
We manufacture our products from standard components, as well as from items that
are manufactured by vendors to our specifications. A majority of our defense
electronics and commercial assemblies and subsystems contain proprietary
technology which is designed and tested by our engineers and technicians and is
manufactured at our own facilities.
We continue to invest in improving our proprietary manufacturing processes and
the automation of the manufacturing processes. Automation is critical in meeting
our customers' demands for price competitiveness, world class quality and
on-time delivery. We are also investing to enhance our responsiveness to the
production demands of our customers.
We purchase electronic components and other raw materials used in our products
from a large number of suppliers and all such materials are readily available
from alternate sources.
We maintain minimal levels of finished products inventory to meet the needs of
our medical products customers. We generally purchase raw materials for specific
contracts, and we purchase common components for stock based on our firm fixed
backlog.
There are no significant environmental control procedures required concerning
the discharge of materials into the environment that require us to invest in any
significant capital equipment or that would have a material effect on our
earnings or our competitive position.
Quality assurance checks are performed on manufacturing processes, purchased
items, work-in-process and finished products. Due to the complexity of our
products, final tests are performed on some products by highly skilled engineers
and technicians.
Our primary manufacturing facilities have earned the ISO 9001 Registration. The
ISO 9000 series standards are internationally recognized quality management
system requirements. ISO 9001, the most comprehensive Standard in the ISO 9000
Series, covers design, manufacturing, installation, and servicing systems.
Assembly, test, package and shipment of products are done at our manufacturing
facilities located in the following cities:
Lancaster, Pennsylvania
Farmingdale, New York
Woburn, Massachusetts
Jerusalem, Israel
Aldershot, England
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BACKLOG
Our total backlog of orders was approximately $89.9 million on August 3, 2003 as
compared to $82.7 million on July 28, 2002. Of our total backlog at August 3,
2003, $51.3 million (57%) is attributable to domestic orders and $38.6 million
(43%) is attributable to foreign orders. Management anticipates that
approximately $76.9 million of its backlog will be shipped during the fiscal
year ending August 1, 2004.
All of the orders included in backlog are covered by signed contracts or
purchase orders. Backlog is not directly indicative of future sales.
Accordingly, we do not believe that our backlog as of any particular date is
representative of actual sales for any succeeding period.
Substantially all of our contracts are fixed price contracts, some of which
require delivery over time periods in excess of one year. With this type of
contract, we agree to deliver products at a fixed price except for costs
incurred because of change orders issued by the customer.
In accordance with Department of Defense procedures, all contracts involving
government programs may be terminated by the government, in whole or in part, at
the government's discretion for cause or convenience. In the event of a
termination for convenience, prime contractors on such contracts are required to
terminate their subcontracts on the program, and the government or the prime
contractor is obligated to pay the costs incurred by us under the contract to
the date of termination plus a fee based on the work completed.
PRODUCT DEVELOPMENT
We believe that our growth depends, in part, on our ability to renew and expand
our technology, products, and design and manufacturing processes with an
emphasis on cost effectiveness. Our primary efforts are focused on engineering
design and product development activities rather than pure research. Our policy
is to assign the required engineering and support people, on an ad hoc basis, to
new product development as needs require and budgets permit. The cost of these
development activities, including employees' time and prototype development, was
approximately $6.3 million in fiscal 2003, $5.6 million in fiscal 2002 and $4.6
million in fiscal 2001, of which we paid approximately $3.1 million in fiscal
2003, $2.3 million in fiscal 2002 and $2.6 million in 2001. The remainder of
these costs were paid by some of our customers.
COMPETITION
The microwave component and subsystems industry is highly competitive and we
compete against many companies, both foreign and domestic. Many of these
companies are larger, have greater financial resources and are better known. As
a supplier, we also experience significant competition from the in-house
capabilities of our customers.
Competition is generally based upon technology, design, past performance and
price. Our ability to compete depends, in part, on our ability to offer better
design and performance than our competitors and our readiness in facilities,
equipment and personnel to complete the programs. Many of the programs in which
we participate are long standing programs in which we are the sole provider of
our product.
GOVERNMENT REGULATION
Because of our participation in the defense industry, we are subject to audits
by various government agencies for our compliance with government regulations.
We are also subject to a variety of local, state and federal government
regulations relating to, among other things, the storage, discharge, handling,
omission, generation, manufacture and disposal of toxic or other hazardous
substances used to manufacture our products. We believe that we operate our
business in material compliance with applicable laws and regulations. However,
any failure to comply with existing or future laws or regulations could have a
material adverse impact on our business, financial condition and results of
operations.
9
INTELLECTUAL PROPERTY
We rely primarily on a combination of trade secrets and employee and third-party
non-disclosure agreements to protect our intellectual property, as well as
limiting access to the distribution of proprietary information. We cannot assure
you that the steps taken to protect our intellectual property rights will be
adequate to prevent misappropriation of our technology or to preclude
competitors from independently developing such technology. Furthermore, we
cannot assure you that, in the future, third parties will not assert
infringement claims against us with respect to our products. Asserting our
rights or defending against third party claims could involve substantial costs
and diversion of resources, thus materially and adversely affecting our
business, financial condition and results of operations. In the event a third
party were successful in a claim that one of our products infringed its
proprietary rights, we may have to pay substantial royalties or damages, remove
that product from the marketplace or expend substantial amounts in order to
modify the product so that it no longer infringes on such proprietary rights,
any of which could have a material adverse effect on our business, financial
condition and results of operations.
EMPLOYEES
As of October 5, 2003, we employed 707 persons full time. Of these employees,
115 comprise the engineering staff, 504 constitute manufacturing personnel, 29
occupy sales and marketing positions, and 59 are in executive, management, and
support functions. None of our employees are covered by collective bargaining
agreements and we consider our employee relations to be satisfactory. We believe
that our future success will depend, in part, on our continued ability to
recruit and retain highly skilled technical, managerial and marketing personnel,
including microwave engineers. To assist in recruiting and retaining such
personnel, we have established competitive benefits programs, including a 401(k)
employee savings plan and stock option plans.
OFFICERS OF THE REGISTRANT
Served as
Name Age Officer Since Position(s) and Offices
- ---- --- ------------- -----------------------
Lee N. Blatt 75 1965 Chairman of the Board
Myron Levy 62 1988 Vice Chairman
Chief Executive Officer
and Director
John M. Kelley 50 1998 President
William Wilson 54 2002 Vice President
Chief Operating Officer
Rozalie Schachter 56 2000 Vice President
Business Development
Anello C. Garefino 56 1993 Vice President-Finance,
Treasurer and Chief
Financial Officer
John A. Carroll 52 2003 Vice President
Human Resources
Howard M. Eckstein 52 1998 Vice President
Mitchell Tuckman 53 1999 Vice President
Richard Poirier 38 2003 Vice President
David H. Lieberman 58 1985 Secretary and Director
10
Item 2. Properties
Our facilities are as follows:
Owned
or
Location Purpose of Property Area Leased
- -------- ------------------- ---- ------
Lancaster, PA Corporate headquarters 3,300 sq. ft. Leased
Lancaster, PA Production, engineering and administration 86,200 sq. ft. Owned
Woburn, MA Production, engineering and administration 60,000 sq. ft. Owned
Farmingdale, NY (1) Production, engineering and administration 46,000 sq. ft. Leased
14,000 sq. ft. Leased
Jerusalem, Israel Production, engineering and administration 20,000 sq. ft. Owned
Aldershot, England (2) Production, engineering and administration 6,300 sq. ft. Leased
Chicago, IL Engineering and administration 3,000 sq. ft. Leased
Lancaster, PA Land held for expansion 20.4 Acres Owned
- --------------
<FN>
(1) On September 23, 1999 the Company closed on the sale of its prior owned
facility in Amityville, NY and relocated the plant to this leased facility in
Farmingdale, NY. The Company entered into two 10 year lease agreements with a
partnership owned by the children of Messrs Blatt and Levy. The leases provide
for initial minimum annual rent of approximately $312,000 and $92,000,
respectively, in each case subject to escalation of approximately 4% annually
throughout the 10 year term.
(2) As of September 1, 2002, the Company entered into an agreement to
acquire all of the issued and outstanding common stock of EW Simulation
Technology, Limited as discussed in Note B of the financial statements.
</FN>
In addition to the above operating facilities, the Company has an idle facility
in Billerica, MA which is under sublease.
We believe that its facilities are adequate for its current and presently
anticipated future needs.
Item 3. Legal Proceedings
On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson
("Robinson") filed an Amended Complaint against Herley Industries, Inc.
("Herley"). Although the Amended Complaint sets forth fifteen counts, the core
allegations are (i) that Herley failed to issue 97,841 shares of common stock in
connection with certain earn out requirements contained in an Asset Purchase
Agreement dated February 1, 2000; (ii) that Herley breached an Employment
Agreement with Robinson by terminating his employment on August 5, 2001; and
(iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with
Robinson. RLI and Robinson asserted (i) violations of state and federal
securities laws; (ii) fraud claims; (iii) breach of contract claims; and (iv)
other equitable claims arising from the above core factual allegations.
On September 17, 2001, Herley filed an Answer, Affirmative Defenses and
Counterclaims in this matter. In the Answer and Affirmative Defenses, Herley
denied the material allegations of the Amended Complaint. Herley also filed
Counterclaims against both RLI and Robinson. In these counterclaims, Herley's
core allegations concern Robinson's misconduct (i) in connection with the manner
he attempted to satisfy RLI's earn out requirements; (ii) misrepresentations
made in connection with the Asset Purchase Agreement; (iii) wrongdoing as a
Herley employee leading to his termination and (iv) post-Herley employment
wrongdoing in connection with a new company known as RH Laboratories. In
addition to seeking a Declaratory Judgment pursuant to 28 U.S.C. ss. 2201 et.
seq., Herley also asserted claims for, among other things, fraud, breach of
contract, breach of fiduciary duty, unfair competition and tortious interference
with actual and prospective contractual relationships.
On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August
21, 2002 in which the jury determined, among other things, that (i) Herley was
not required to pay any additional stock; (ii) Herley breached
11
the Employment Agreement with Robinson and awarded Robinson $1.5 million in
damages; (iii) Herley breached the Lease Agreement with Robinson and awarded
Robinson approximately $552,000 in compensatory damages; (iv) Robinson breached
fiduciary duties to Herley and awarded Herley $400,000 in compensatory damages;
(v) Robinson and RLI breached indemnity obligations and awarded Herley $100,000
in damages; (vi) RLI breached representations and warranties given to Herley and
awarded Herley $320,000 in damages.
On October 18, 2002, the Court entered a final judgment consistent with the
above, and both parties filed post- trial motions. Additionally, as the
prevailing party in connection with the claims asserted by RLI relating to the
earn-out stock, as well as claims advanced relating to the various breaches of
the Asset Purchase Agreement, Herley filed a petition for fees and costs against
both RLI and Robinson on November 27, 2002 for approximately $2,000,000. RLI and
Robinson also filed petitions to recover attorneys fees of approximately
$240,000 for certain claims in which they contend that they were the prevailing
party. On February 5, 2003, the Court denied the post-trial motions filed by the
parties, thus leaving the jury verdict undisturbed.
At a proceeding on April 28, 2003, the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order dated May 6, 2003, the Court denied without prejudice all of the
parties' petitions. On May 12, 2003, Herley filed its appeal to the United
States Court of Appeals for the Second Circuit. On May 28, 2003, RLI filed a
notice of cross-appeal. Robinson has not appealed. Herley filed its brief in
support of its appeal before the Second Circuit on August 22, 2003. RLI timely
filed its brief in response to Herley's appeal and in support of RLI's
cross-appeal. Herley is now required to file a response to RLI's brief and
thereafter RLI will file a response to Herley's brief. Oral argument has not yet
been scheduled.
The Company is involved in various other legal proceedings and claims which
arise in the ordinary course of its business. While any litigation contains an
element of uncertainty, management believes that the outcome of such litigation
will not have a material adverse effect on the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
(a) The Company's Common Stock is traded in the NASDAQ National Market
under the symbol HRLY. The following table sets forth the high and
low closing sales price as reported by the NASDAQ National Market for
the Company's Common Stock for the periods indicated and gives
retroactive effect to the three-for-two stock split of the Common
Stock on September 10, 2001.
Common Stock
------------
High Low
---- ---
Fiscal Year 2002
First Quarter................................. $ 18.50 $ 11.17
Second Quarter................................ 17.13 13.10
Third Quarter................................. 24.49 14.96
Fourth Quarter................................ 22.33 17.55
Fiscal Year 2003
First Quarter................................. 21.30 14.50
Second Quarter................................ 18.54 14.00
Third Quarter................................. 17.43 13.06
Fourth Quarter................................ 18.56 14.50
Fiscal Year 2004
First Quarter (through October 17, 2003)...... 20.55 17.50
12
The closing price on October 17, 2003 was $18.29.
(b) As of October 17, 2003, there were approximately 222 holders of
record of the Company's Common Stock.
(c) There have been no cash dividends declared or paid by the Company on
its Common Stock during the past two fiscal years.
Item 6. Selected Financial Data (in thousands except per share data):
53 weeks 52 weeks ended
ended -----------------------------------------------
August 3, July 28, July 29, July 30, August 1,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net sales (4) $ 110,223 92,881 76,494 70,537 61,036
Income from continuing operations $ 13,937 10,730 7,573 7,639 7,862
Loss from discontinued operations $ - (921) (168) - -
Loss on extinguishment of debt $ - - - - (127)
Cumulative effect of adopting SFAS 142 $ - (4,637) - - -
Net income $ 13,937 5,172 7,405 7,639 7,735
Per share data from continuing operations (1),
(2), (3)
Basic $ .97 .89 .75 1.05 1.00
Assuming Dilution $ .93 .83 .69 .96 .92
Total Assets $ 197,564 190,202 114,597 86,656 74,056
Total Current Liabilities $ 18,974 15,263 18,732 12,783 10,513
Long-Term Debt net of current portion $ 6,403 5,684 2,740 2,931 15,437
<FN>
(1) As adjusted to give effect to a 3-for-2 stock split effective September
10, 2001.
(2) Earnings per share from continuing operations are presented and
calculated before extraordinary item in fiscal 1999, before discontinued
operations in 2002 and 2001, and before cumulative effect of accounting
change in 2002.
(3) No cash dividends have been distributed in any of the years presented.
(4) See "Acquisitions" under Item 1. "Business".
</FN>
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of income
expressed as a percentage of net sales. There can be no assurance that trends in
sales growth or operating results will continue in the future.
53 weeks 52 weeks ended
ended -----------------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 66.4% 66.7% 66.3%
------ ----- -------
Gross profit 33.6% 33.3% 33.7%
Selling and administrative expenses 14.7% 14.3% 19.0%
Litigation costs 1.1% 2.2% 0.3%
Plant closing costs - 0.4% -
------ ------ -------
Income from operations 17.8% 16.4% 14.4%
----- ----- -----
Other income (expense), net:
Investment income 1.0% 0.8% 0.9%
Interest expense (0.3)% (0.4)% (0.3)%
------ ------ ------
0.7% 0.4% 0.6%
----- ----- -----
Income from continuing operations before
income taxes 18.5% 16.8% 15.0%
Provision for income taxes 5.9% 5.2 % 5.1%
------ ------ -----
Income from continuing operations 12.6% 11.6% 9.9%
Loss from discontinued operations - 1.0% 0.2%
------ ----- -----
Income before cumulative effect of change
In accounting principle 12.6% 10.6% 9.7%
Cumulative effect of adopting SFAS 142 - (5.0)% -
------ ------ -----
Net income 12.6% 5.6% 9.7%
====== ====== =====
14
Fiscal 2003 Compared to Fiscal 2002
-----------------------------------
Net sales from continuing operations for the 53 weeks ended August 3, 2003 were
approximately $110,223,000 compared to $92,881,000 for fiscal 2002. The net
sales increase of $17,342,000 (18.7%) is attributable to increased revenue in
defense electronics of $23,131,000 (including $11,212,000 through the
acquisition of EWST); offset by a decrease of $5,789,000 in commercial
technologies.
Gross profit of 33.6% for the 53 weeks ended August 3, 2003 is slightly better
than the prior year of 33.3%. The Company benefitted from increased absorption
of fixed overhead costs and production efficiencies, including automation of
certain processes. Offsetting these benefits was the increased investment in
product development up from approximately $2.3 million in fiscal 2002 to $3.1
million in fiscal 2003. In addition, the margins on the EWST sales were lower
than the Company's historical margins.
Selling and administrative expenses for the 53 weeks ended August 3, 2003 were
14.7% of net sales as compared to 14.3% in fiscal 2002. There was a net increase
in expenses of $2,958,000 which includes expenses of EWST of $1,096,000, an
increase in incentive compensation under employment contracts of $1,072,000,
amortization of acquired intangibles of $217,000 related to EWST, increased
audit and tax fees of $134,000, payroll costs of $322,000, and travel expenses
of $121,000; offset by a decrease in commissions and fees of $174,000. Various
other line item expenses increased during the 53 weeks ended August 3, 2003 by
$170,000 on a net basis.
Litigation costs in fiscal 2003 decreased $932,000 from the level of fees
incurred in fiscal 2002. The litigation costs are directly related to the
Robinson Labs litigation which is currently in the appeals process. (See Item 3.
"Legal Proceedings").
Plant closing costs in connection with the facilities in Nashua, NH and Anaheim,
CA were accrued in October 2001 in the amount of $406,000 of which $389,000 was
paid as of August 3, 2003.
Other income increased on a net basis approximately $383,000 from the prior year
primarily due to interest earned on the investment of cash reserves including
the proceeds of approximately $64,812,000 received from the sale of common stock
to the public at the end of April 2002.
The effective income tax rate for fiscal 2003 was 31.8% as compared to 31.2% in
fiscal 2002. The overall effective tax rate is lower than the statutory income
tax rate of 34% due to various favorable tax benefits including a lower
effective tax rate on foreign-source income and the tax benefit attributable to
extra territorial income.
Fiscal 2002 Compared to Fiscal 2001
-----------------------------------
Net sales from continuing operations for the 52 weeks ended July 28, 2002 were
approximately $92,881,000 compared to $76,494,000 for fiscal 2001. The net sales
increase of $16,387,000 (21.4%) is attributable to increased revenue in defense
electronics of $18,638,000; offset by a decrease of $2,251,000 in commercial
technologies.
Gross profit of 33.3% for the 52 weeks ended July 28, 2002 is less than the
prior year of 33.7%. The decline in margin is due primarily to lower margins on
certain Robinson Labs contracts that were transferred to other facilities, and
the investment in new product development related to commercial applications.
The significant increase in net sales in defense electronics cushioned the
decline in gross profit.
Selling and administrative expenses for the 52 weeks ended July 28, 2002 were
$13,229,000 compared to $14,545,000 for fiscal 2001, a net decrease of
$1,316,000. In connection with the adoption of SFAS 142 as of July 30, 2001, the
Company ceased amortization of goodwill (See Note A.8.). Selling and
administrative expenses in fiscal 2001 included goodwill amortization of
$916,000. Cost savings associated with the relocation of the AMT facility
amounted to approximately $605,000. Other significant changes include an
15
increase in incentive compensation of $363,000 and a reduction in payroll and
related costs of $198,000.
Legal costs in fiscal 2002 increased $1,814,000 over fiscal 2001, directly
related to the Robinson Labs litigation. (See Item 3. "Legal Proceedings").
Plant closing costs in connection with the facilities in Nashua, NH and Anaheim,
CA were accrued in October 2001 in the amount of $406,000 of which $348,000 was
paid as of July 28, 2002.
Other income increased approximately $39,000 from the prior year primarily from
the investment of proceeds of approximately $64,812,000 from the sale of common
stock to the public on April 30, 2002, partially offset by lower interest rates.
Interest expense increased $100,000 as compared to fiscal 2001 due to the
$3,000,000 financing of the expansion of the Lancaster facility through
industrial revenue bonds and interest on temporary borrowings of $4,300,000
under the bank line of credit.
The effective income tax rate decreased to 31.2% in fiscal 2002 from 33.8% in
2001 due to various favorable tax benefits including a lower effective tax rate
on foreign-source income and recognition in the fourth quarter of the tax
benefit attributable to extra territorial income.
Discontinued operations
The Company entered into an agreement effective as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common stock of
Terrasat, Inc. ("Terrasat"), a California corporation for cash in the amount of
$6,000,000, $3,000,000 of which was paid in December 2000 and $3,000,000 of
which was paid in December 2001. In addition, the agreement provided for
additional cash payments in the future up to $2,000,000, based on gross revenues
through December 31, 2001. The targeted gross revenues under the agreement were
not achieved, therefore no additional cash payments were required.
In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets and for long- lived assets to
be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
retains the fundamental provisions of Statement 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. SFAS 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for segments of a business to be disposed of, but
retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. The provisions of
this statement were adopted by the Company effective on July 30, 2001.
In January 2002 the Board of Directors of the Company decided to discontinue the
operations of Terrasat and to seek a buyer for the business. The Company
believed that Terrasat would not be able to generate sufficient returns to
justify continued investment due to the overcapacity in the telecom industry and
deteriorating economic conditions in Terrasat's primary markets. Consequently,
the accompanying consolidated financial statements reflect Terrasat as
discontinued operations in accordance with SFAS No. 144. The assets and
liabilities of Terrasat at July 29, 2001 have been classified in the
accompanying balance sheet as "Assets held for sale," and "Liabilities held for
sale." Results of operations and cash flows of Terrasat have been classified as
"Loss from discontinued operations," and "Net cash provided by (used in)
discontinued operations," respectively.
The sale of certain assets and liabilities, and the business of Terrasat was
consummated on March 1, 2002, effective the close of business January 27, 2002,
to certain current employees of Terrasat for cash and a note which approximates
the carrying value of the net assets held for sale as of January 27, 2002 of
$878,000.
16
Change in accounting principle
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142 "Goodwill and Other Intangible Assets" which requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill will not be amortized
into results of operations, but instead will be reviewed for impairments which
will be charged to results of operations in the periods in which the recorded
value of goodwill is more than its fair value. The provisions of this statement
were adopted by the Company on July 30, 2001. The adoption of SFAS No.142
resulted in the Company's discontinuation of amortization of its goodwill as of
July 30, 2001.
In connection with the adoption of SFAS 142, the Company was required to assess
goodwill for impairment within six months of adoption, and completed its
assessment in the second quarter of fiscal 2002.
The Company operates as a single integrated business and as such has one
operating segment which is also the reportable segment as defined in SFAS 131.
Within the operating segment, the Company has identified two components as
reporting units as defined under SFAS 142, defense electronics and commercial
technologies. The Company has determined the carrying value of each reporting
unit by assigning assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of July 30, 2001. The Company has
determined that an impairment of goodwill in the commercial technologies unit
has occurred. Accordingly, a transition adjustment in the amount of $4,637,000
has been recorded as of July 30, 2001 as a cumulative effect of a change in
accounting principle. There is no tax benefit associated with the adjustment
since the impaired goodwill is not deductible for income tax purposes.
An impairment test was performed in the fourth quarter of fiscal 2003 based on
the current market capitalization of the Company. There was no impairment of
goodwill at August 3, 2003. An annual impairment test will be performed in the
fourth quarter of each fiscal year and any future impairment of goodwill will be
charged to operations.
Amortization of goodwill charged to continuing operations for the fiscal year
ended July 29, 2001 was approximately $1,296,000. Amortization of goodwill
charged to discontinued operations for the fiscal year ended July 29, 2001 was
approximately $208,000.
17
Quarterly Results
The following is a summary of the unaudited quarterly operations for the 53
weeks ended August 3, 2003 and for the 52 weeks ended July 28, 2002 (in
thousands, except for per share data).
November 3, February 2, May 4, August 3,
2002 2003 2003 2003
---- ---- ---- ----
Net sales $ 27,290 25,015 26,897 31,021
Gross profit 9,191 8,673 8,851 10,286
Income from continuing operations 3,352 3,287 3,359 3,939
------ ------ ------ -----
Net income $ 3,352 3,287 3,359 3,939
====== ====== ====== =====
Earnings per common share - Basic
Income from continuing operations $ .23 .23 .24 .28
--- --- --- ---
Net income $ .23 .23 .24 .28
=== === === ===
Basic weighted average shares 14,668 14,464 14,218 13,921
====== ====== ====== ======
Earnings per common share - Diluted
Income from continuing operations $ .22 .22 .23 .27
--- --- --- ---
Net income $ .22 .22 .23 .27
=== === === ===
Diluted weighted average shares 15,506 15,124 14,848 14,600
====== ====== ====== ======
October 28, January 27, April 28, July 28,
2001 2002 2002 2002
---- ---- ---- ----
Net sales $ 22,213 21,840 23,499 25,329
Gross profit 7,639 7,036 8,323 7,936
Income from continuing operations 2,439 2,393 2,692 3,206
Loss from discontinued operations (144) (777) - -
Cumulative effect of adopting SFAS 142 (4,637) - - -
------- ------- ------- ------
Net income (loss) $ (2,342) 1,616 2,692 3,206
======= ======= ======= ======
Earnings (loss) per common share - Basic
Income from continuing operations $ .23 .21 .23 .22
Loss from discontinued operations $ (.01) (.07) - -
Cumulative effect of adopting SFAS 142 $ (.43) - - -
------ ------ ---- ----
Net income (loss) $ (.22) .14 .23 .22
====== ====== ==== ====
Basic weighted average shares 10,695 11,238 11,559 14,671
====== ====== ====== ======
Earnings (loss) per common share - Diluted
Income from continuing operations $ .21 .20 .22 .21
Loss from discontinued operations $ (.01) (.06) - -
Cumulative effect of adopting SFAS 142 $ (.40) - - -
------ ---- ---- ---
Net income (loss) $ (.20) .13 .22 .21
====== ==== ==== ===
Diluted weighted average shares 11,695 11,986 12,495 15,580
====== ====== ====== ======
The gross profit margin from quarter to quarter is affected by the change in
product mix. Income from continuing operations in the fourth quarter of fiscal
2002 was favorably affected by the lower effective income tax rate due to the
recognition of the tax benefit attributable to extra territorial income, which
was offset by litigation costs (See Item. 3 "Legal Proceedings").
18
Liquidity and Capital Resources
As of August 3, 2003 and July 28, 2002, working capital was $128,323,000 and
$129,012,000, respectively, and the ratio of current assets to current
liabilities was 7.8 to 1 and 9.5 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
progress payments. In addition, it is customary for the Company to receive
advanced payments from customers on major contracts at the time a contract is
entered into. The unliquidated balance of these advanced payments was
approximately $856,000 at August 3, 2003, and $1,371,000 at July 28, 2002.
Net cash provided by continuing operations was approximately $14,567,000 in
fiscal 2003 as compared to $13,139,000 in 2002. Significant items contributing
to the sources of funds include income from operations of $18,239,000 (adjusted
for depreciation and amortization), a net increase in deferred taxes of
$816,000, and an increase in income taxes of $3,627,000. Offsetting these
sources of funds are increases in accounts receivable of $2,039,000, costs
incurred and income recognized in excess of billings on uncompleted contracts of
$1,258,000, and an increase in inventory of $3,846,000.
Net cash used in investing activities consists of $3,876,000 for capital
expenditures, and $2,542,000 for the acquisition of EWST. The Company has a note
payable of $1,500,000, including interest at 1.8%, in connection with the
acquisition of EWST payable in annual installments of $500,000 beginning October
1, 2003.
During the fiscal year ended August 3, 2003, the Company received approximately
$1,994,000 from the exercise of common stock options by employees.
On May 30, 2003 the Company announced an expansion of the stock repurchase
program initially announced in October 2002 from 1,000,000 to an aggregate of
2,000,000 shares. As of August 3, 2003, the Company acquired approximately
940,000 shares of common stock under this program at an aggregate cost of
approximately $14,668,000.
In June 2002, the Company entered into a new $50,000,000 Revolving Credit Loan
Syndication agreement with two banks on an unsecured basis which may be used for
general corporate purposes, including business acquisitions. The revolving
credit facility requires the payment of interest only on a monthly basis and
payment of the outstanding principal balance on January 31, 2005. The Company
may elect to borrow up to a maximum of $5,000,000 with interest based on the
FOMC Federal Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a
maximum of $45,000,000 with interest based on LIBOR plus a margin of 1.35% to
1.65%. The applicable incremental margin is based on the ratio of total
liabilities to tangible net worth, as those terms are defined in the agreement,
ranging from less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal
Funds Target Rate and the LIBOR rate was 1.00% and 1.10%, respectively, at
August 3, 2003. There is a fee of 15 basis points per annum on the unused
portion of the $45,000,000 LIBOR based portion of the credit facility payable
quarterly. There were no borrowings outstanding as of August 3, 2003 and July
28, 2002. During the fiscal year ended July 28, 2002, the Company borrowed and
repaid $4,300,000 under the credit facility for working capital needs. There
were no borrowings during fiscal year 2003. Stand-by letters of credit were
outstanding in the amount of $12,454,000 under the credit facility at August 3,
2003.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds, its existing unsecured credit facility,
and the approximately $64,812,000 net proceeds from the sale of 3,000,000 shares
of common stock to the public on April 30, 2002 (See Note M of the financial
statements). A significant portion of the Company's revenue for fiscal 2004 will
be generated from its existing backlog of sales orders. The backlog of orders at
August 3, 2003 was approximately $89,949,000. All orders included in backlog are
covered by signed contracts or purchase orders. Nevertheless, contracts
involving government programs may be terminated at the discretion of the
government. In the event of the cancellation of a significant amount of
government contracts included in the Company's backlog, the Company will be
required to rely more heavily on cash reserves and its existing credit facility
to fund its operations. The Company is not aware of any events which are
reasonably likely to result in any cancellation of its government
19
contracts. The Company has $37,546,000 available under its bank credit facility,
net of outstanding stand-by letters of credit of $12,454,000, and cash reserves
at August 3, 2003 of approximately $81,811,000.
Future payments required on long-term debt are as follows (in thousands):
During Industrial
fiscal Mortgage revenue EWST
year Total note bonds note Other
---- ----- ---- ----- ---- -----
2004 $ 686 $ 86 $ 100 $ 500 $ -
2005 698 93 105 500 -
2006 711 101 110 500 -
2007 223 108 115 - -
2008 236 116 120 - -
Future 4,535 2,106 2,355 - 74
----- ----- ----- ----- --
$ 7,089 $ 2,610 $ 2,905 $ 1,500 $ 74
===== ===== ===== ===== ==
Stand-by letters of credit expire as follows:
During
fiscal
year Amount
---- ------
2004 $ 7,365
2005 211
2006 1,930
2007 2,948
------
$ 12,454
======
Minimum annual rentals under noncancellable operating leases are as follows (in
thousands):
During
fiscal
year Amount
---- ------
2004 $ 1,121
2005 1,033
2006 978
2007 957
2008 932
Future 1,143
Critical Accounting Policies and Estimates
The Company's established policies are outlined in the footnotes to the
Consolidated Financial Statements entitled "Summary of Significant Accounting
Policies" (contained in Part II, Item 8 of this Form 10-K). As part of its
oversight responsibilities, management continually evaluates the propriety of
its accounting methods as new events occur. Management believes that its
policies are applied in a manner which is intended to provide the user of the
Company's financial statements a current, accurate and complete presentation of
information in accordance with Generally Accepted Accounting Principles in the
United States of America. Important accounting practices that require the use of
assumptions and judgments are outlined below.
Revenue under certain long-term, fixed price contracts is recognized using the
percentage of completion method of accounting. Revenue recognized on these
contracts is based on estimated completion to date (the total contract amount
multiplied by percent of performance, based on total costs incurred in relation
to total estimated cost at completion). Contract costs include all direct
material and labor costs and those indirect costs related
20
to contract performance. Risks and uncertainties inherent in the estimation
process could affect the amounts reported in our financial statements. The key
assumptions used in the estimate of costs to complete relate to labor costs and
indirect costs required to complete the contract. The estimate of rates and
hours as well as the application of overhead costs is reviewed on a regular
basis. If our business conditions were different, or if we used different
assumptions in the application of this and other accounting policies, it is
likely that materially different amounts would be reported on our financial
statements.
Prospective losses on contracts are based upon the anticipated excess of
manufacturing costs over the selling price of the units to be delivered under
the contract and are recorded when first reasonably determinable. Actual losses
could differ from those estimated due to changes in the ultimate manufacturing
costs.
Inventories are stated at lower of cost (principally first-in, first-out) or
market. A valuation allowance for obsolete and slow-moving inventory is
established based upon an aging of raw material components. Current requirements
for raw materials are evaluated based on current backlog of orders for products
in which the components are used and anticipated future orders.
Under the non-amortization approach in accounting for goodwill under SFAS No.
142, goodwill is not amortized into results of operations but instead is
reviewed for impairment and written down and charged to results of operations in
the period in which the recorded value of goodwill is more than its fair value.
An annual impairment test is performed in the fourth quarter of each fiscal year
and any impairment of goodwill is charged to operations.
Provisions for federal, foreign, state and local income taxes are calculated on
reported financial statement pretax income based on current tax law and also
include the cumulative effect of any changes in tax rates from those used
previously in determining deferred tax assets and liabilities. Such provisions
differ from the amounts currently payable because certain items of income and
expense are recognized in different time periods for financial reporting
purposes than for income tax purposes.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. Management adopted this standard on
July 29, 2002 and has determined that the adoption did not have a significant
impact on the financial position, results of operations or cash flows of the
Company.
In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets and for long- lived assets to
be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and retains the fundamental provisions of Statement 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. SFAS 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for segments of a business to be disposed of, but
retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. The provisions of
this statement were adopted by the Company effective on July 30, 2001.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement is effective for fiscal years beginning after May 15, 2002. SFAS
145 requires, among other things, eliminating reporting debt extinguishments as
an extraordinary item in the income statement. Management adopted this standard
on July 29, 2002 and has
21
determined that the adoption did not have a significant impact on the financial
position, results of operations or cash flows of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement is effective for fiscal years
beginning after December 31, 2002. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Management does
not believe the adoption of this standard will have a material impact on the
Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires the recognition of
liabilities for guarantees that are issued or modified subsequent to December
31, 2002. The liabilities should reflect the fair value, at inception, of the
guarantors' obligations to stand ready to perform, in the event that the
specified triggering events or conditions occur. The Company is currently
evaluating the provisions of this interpretation; however, it does not believe
they will have a material effect on the Company's future results of operations
or financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123."
The new statement is effective, with respect to the transition provisions, for
fiscal years ending after December 15, 2002; and with respect to the disclosure
provisions, for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. SFAS No. 148 provides
transition alternatives for companies adopting the fair value recognition
provisions of FASB Statement No. 123 for stock-based employee compensation; and
requires the pro forma disclosures of SFAS No. 123 in interim condensed
financial statements for companies continuing to rely on APB Opinion No. 25 as
if the provisions of SFAS No. 123 had been adopted. The statement also requires
that the pro-forma disclosures of the impact on earnings and earnings-per-share
be provided in a tabular format and included in the Summary of Significant
Accounting Policies or equivalent.
The effect of the adoption of SFAS No. 148 was the inclusion of the required
disclosures in the Company's condensed consolidated interim financial
statements, and the addition of a significant accounting policies note included
in this Annual Report Form 10K for the year ended August 3, 2003 (See Note
A.14).
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." The
Interpretation clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
Interpretation applies immediately to variable interest entities created after
January 31, 2003, or in which the Company obtains an interest after that date.
The Interpretation is effective July 1, 2003 to variable interest entities in
which the Company holds a variable interest acquired before February 1, 2003.
The Company is in the process of assessing the impact of adopting this
Interpretation; however, it does not believe it will have a material effect on
its financial position or future results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The Statement is effective for contracts entered into or modified
after June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003.
The provisions of Statement 149 that relate to Statement 133 implementation
issues that have been effective for fiscal quarters that began prior to June 15,
2003, will continue to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist, will apply to
existing contracts, as well as new contracts entered into after June 30, 2003.
Management has determined that the adoption of this Statement will not have a
significant
22
impact on the financial position, results of operations or cash flows of the
Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. Many of such instruments were previously classified as equity. The
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. The Statement is to be implemented
by reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance of the date of the Statement
and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. Management believes that the adoption of this
Statement will not have a significant impact on the financial position, results
of operations or cash flows of the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in interest rates,
and foreign currency exchange. The Company has not entered into any market risk
sensitive instruments for trading purposes.
In October 2001, the Company entered into an interest rate swap with a bank
pursuant to which it exchanged floating rate interest in connection with the
Bonds discussed in Note H of the financial statements on a notional amount of
$3,000,000 for a fixed rate of 4.07% for a 10 year period ending October 1,
2011. The notional amount reduces each year in tandem with the annual
installments due on the Bonds. The fixing of the interest rate for this period
offsets the Company's exposure to the uncertainty of floating interest rates on
the Bonds, and as such has been designated as a cash flow hedge. The hedge is
deemed to be highly effective and any ineffectiveness will be recognized in
interest expense in the reporting period. The fair value of the interest rate
swap was a liability of approximately $74,000 as of August 3, 2003. There was no
material hedge ineffectiveness related to cash flow hedges during the fiscal
years presented to be recognized in earnings. There was no gain or loss
reclassified from accumulated other comprehensive income into earnings during
the fiscal year ended August 3, 2003 as a result of the discontinuance of a cash
flow hedge due to the probability of the original forecasted transaction not
occurring.
The Company also has a $50,000,000 Revolving Credit Loan Syndication agreement
with two banks on an unsecured basis which may be used for general corporate
purposes, including business acquisitions. The revolving credit facility
requires the payment of interest only on a monthly basis and payment of the
outstanding principal balance on January 31, 2005. The Company may elect to
borrow up to a maximum of $5,000,000 with interest based on the FOMC Federal
Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of
$45,000,000 with interest based on LIBOR plus a margin of 1.35% to 1.65%. The
applicable incremental margin is based on the ratio of total liabilities to
tangible net worth, as those terms are defined in the agreement, ranging from
less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal Funds Target
Rate and the LIBOR rate was 1.00% and 1.10%, respectively, at August 3, 2003.
The credit line is reviewed on an annual basis.
Since the acquisitions of GMC and EWST, the Company is subject to movements in
foreign currency rate changes related to the Company's operations in Israel and
in England.
The Company does not anticipate any other material changes in its primary market
risk exposures in fiscal 2004.
23
The table below provides information about the Company's debt that is sensitive
to changes in interest rates. Future principal payment cash flows by maturity
date as required under the mortgage and the industrial revenue bonds, and
corresponding fair values are as follows:
Fiscal year ending: Bonds
------------------ -----
2004 $ 100
2005 105
2006 110
2007 115
2008 120
2009 and later 2,355
-----
$2,905
=====
Fair value $2,905
=====
The Company does not consider the market risk exposure relating to foreign
currency exchange or interest rates to be material.
There were no borrowings outstanding under the revolving credit facility as of
August 3, 2003.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in the Index on Page F-1
are filed as a part of this report.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not applicable
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Company, under the supervision and with the participation of its
management, including the Registrant's principal executive officer (Vice
Chairman of the Board/Chief Executive Officer) and principal financial
officer (Vice President Finance/Chief Financial Officer), has evaluated
the effectiveness of the Company's disclosure controls and procedures (as
such term is defined in Rules 13a- 15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
August 3, 2003 (the "Evaluation Date"). Based on such evaluation, the
principal executive officer and the principal financial officer have
concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective, and are reasonably designed to
ensure that all material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission.
(b) Changes in Internal Control Over Financial Reporting.
During the quarter ended August 3, 2003, there were no changes in the
Company's internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, such internal
control over financial reporting.
24
PART III
The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in January 2004, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended August 3, 2003.
25
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation, as amended (Exhibit 3(a) of Form S-1
Registration Statement No. 2- 87160).
3.2 By-Laws, as amended August 7, 2001 (Exhibit 3.2 of Annual Report on
Form 10-K for the fiscal year ended July 29, 2001).
10.1 1996 Stock Option Plan (Exhibit 10.1 of Annual Report on Form 10-K
for the fiscal year ended July 28, 1996).
10.2 1997 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated
June 10, 1997).
10.3 1998 Stock Option Plan (Exhibit 10.3 of Annual Report on Form 10-K
for the fiscal year ended August 1, 1999).
10.4 2000 Stock Option Plan (Exhibit 4.1 of Report on Form S-8 dated
October 12, 2001).
10.5 2003 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated
June 11, 2003).
10.6 Employment Agreement between Herley Industries, Inc. and Lee N.
Blatt dated as of July 29, 2002. (Exhibit 10.5 of Annual Report on
Form 10-K for the fiscal year ended July 28, 2002).
10.7 Employment Agreement between Herley Industries, Inc. and Myron Levy
dated as of July 29, 2002. (Exhibit 10.6 of Annual Report on Form
10-K for the fiscal year ended July 28, 2002). 10.8 Agreement and
Plan of Reorganization dated as of July 8, 1997 among the Company,
Metraplex Acquisition Corporation and Metraplex Corporation (Exhibit
2.1 of Registration Statement Form S-3 dated September 4, 1997).
10.9 Agreement and Plan of Merger dated as of August 21, 1998 among
General Microwave Corp., Eleven General Microwave Corp.,
Shareholders, GMC Acquisition Corporation and Registrant (Exhibit 1
of Schedule 13D dated August 28, 1998).
10.10 Lease Agreement dated September 1, 1999 between Registrant and RSK
Realty LTD. (Exhibit 10.8 of Annual Report on Form 10-K for the
fiscal year ended August 1, 1999).
10.11 Loan Agreement dated June 19, 2002 among the Registrant, Allfirst
Bank and Fulton Bank. (Exhibit 10.10 of Annual Report on Form 10-K
for the fiscal year ended July 28, 2002).
10.12 Amendment (dated May 2, 2003) to Loan Agreement dated June 19, 2002
among the Registrant, Manufacturers and Traders Trust Company,
successor in interest to Allfirst Bank, and Fulton Bank.
10.13 Asset Purchase Agreement dated as of February 1, 2000 between
Registrant and Robinson Laboratories, Inc. (Exhibit 10.2 of Form
10-Q dated March 13, 2000).
10.14 Asset Purchase Agreement dated as of October 12, 2000 between
Registrant and American Microwave Technology Inc. (Exhibit 10.1 of
Form 10-Q dated December 12, 2000).
10.15 Common Stock Purchase Agreement dated as of December 4, 2000 between
Registrant and Terrasat, Inc. (Exhibit 10.2 of Form 10-Q dated
December 12, 2000).
10.16 Lease Agreement dated March 1, 2000 between Registrant and RSK
Realty LTD (Exhibit 10.13 of Annual Report on Form 10-K for the
fiscal year ended July 30, 2000).
10.17 Common Stock Purchase Agreement dated as of September 20, 2002
between Registrant and EW Simulation Technology, Limited. (Exhibit
10.17 of Annual Report on Form 10-K for the fiscal year ended July
28, 2002).
10.18 Trust Indenture dated as of October 19, 2001 between Registrant, and
East Hempfield Township Industrial Development Authority and
Allfirst Bank, as Trustee. (Exhibit 10.18 of Annual Report on Form
10-K for the fiscal year ended July 28, 2002).
23.1 Consent of Deloitte & Touche LLP.
31.1 Certification of Myron Levy pursuant to Rule 13a-14(a).
31.2 Certification of Anello C. Garefino pursuant to Rule 13a-14(a).
32.1 Certification of Myron Levy pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Anello C. Garefino pursuant to 18 U.S.C. Section
1350.
26
(b) Financial Statements
(1) See Index to Consolidated Financial Statements at Page F-1.
(2) Schedule II - Valuation and Qualifying Accounts filed as part of
this Form 10-K at page 29.
(c) Reports on Form 8-K
During the fourth quarter of fiscal 2003, the Registrant filed the
following report under Form 8-K:
The Company filed a report on June 9, 2003 in connection with the
release of its financial results for the third quarter and nine months
ended May 4, 2003.
27
SIGNATURES:
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on October 31, 2003.
HERLEY INDUSTRIES, INC.
By: /S/ Lee N. Blatt
-----------------------------------
Lee N. Blatt, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on October 31, 2003 by the following persons in the
capacities indicated:
By: /S/ Lee N. Blatt Chairman of the Board
-----------------------------------------
Lee N. Blatt
By: /S/ Myron Levy Vice Chairman of the Board
----------------------------------------- Chief Executive Officer and
Myron Levy Director
(Principal Executive Officer)
By: /S/ Anello C. Garefino Vice President Finance,
----------------------------------------- CFO, Treasurer
Anello C. Garefino (Principal Financial Officer)
By: /S/ David H. Lieberman Secretary and Director
-----------------------------------------
David H. Lieberman
By: /S/ Edward K. Walker, Jr. Director
-----------------------------------------
Edward K. Walker, Jr.
By: /S/ John A. Thonet Director
-----------------------------------------
John A. Thonet
By: /S/ Robert M. Moore Director
-----------------------------------------
Robert M. Moore
By: /S/ Edward A. Bogucz Director
-----------------------------------------
Edward A. Bogucz
28
Schedule II - Valuation and Qualifying Accounts (in thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------------------------- Amount
Charged to written
Balance at Charged to other off Balance at
beginning costs and accounts - against end of
Description of period expenses describe reserve period
----------- ---------- ---------- ---------- ------- ----------
Valuation accounts deducted from assets to which they apply:
August 3, 2003:
Inventory $ 2,407 $ 526 $ - $ 194 $ 2,739
July 28, 2002:
Inventory $ 2,205 $ 202 $ - $ - $ 2,407
July 29, 2001:
Inventory $ 1,891 $ 515 $ 153 (1) $ 354 $ 2,205
<FN>
(1) Reserve established in connection with the acquisition of AMT.
</FN>
All other Schedules have been omitted since they are either not required, not
applicable, or the information is otherwise included in this Annual Report on
Form 10-K.
29
Item 8. Financial Statements and Supplementary Data
HERLEY INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets, August 3, 2003 and July 28, 2002 F-4
Consolidated Statements of Income for the 53 weeks ended
August 3, 2003, and the 52 weeks ended July 28, 2002
and July 29, 2001 F-5
Consolidated Statements of Shareholders' Equity for the 53 weeks
ended August 3, 2003, and the 52 weeks ended July 28, 2002
and July 29, 2001 F-6
Consolidated Statements of Cash Flows for the 53 weeks ended
August 3, 2003, and the 52 weeks ended July 28, 2002
and July 29, 2001 F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Herley Industries, Inc.
We have audited the accompanying consolidated balance sheets of Herley
Industries, Inc. and Subsidiaries ("the Company") as of August 3, 2003 and July
28, 2002, and the related consolidated statements of income, shareholders'
equity, and cash flows for the years then ended. Our audit also included the
financial statement schedule listed in the Index at Item 15 as it relates to the
years ended August 3, 2003 and July 28, 2002. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. The
financial statements of the Company for the year ended July 29, 2001 were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report dated
October 3, 2001, except with respect to disclosures regarding discontinued
operations, now included in Note Q to the financial statements, as to which
their report was dated March 1, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of August 3, 2003
and July 28, 2002, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule as it relates to the years ended August 3, 2003 and July 28, 2002, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note A to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill by adopting Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ DELOITTE & TOUCHE LLP
October 24, 2003
Baltimore, Maryland
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Herley Industries, Inc.
We have audited the accompanying consolidated balance sheets of Herley
Industries, Inc and Subsidiaries as of July 30, 2000 and July 29, 2001, and the
related consolidated statements of income, shareholders' equity and cash flows
for the 52 weeks ended August 1, 1999, July 30, 2000 and July 29, 2001. 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 auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Herley
Industries, Inc. and Subsidiaries as of July 30, 2000 and July 29, 2001, and the
consolidated results of their operations and their cash flows for the 52 weeks
ended August 1, 1999, July 30, 2000 and July 29, 2001 in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Lancaster, PA
October 3, 2001 (except with respect to the matters discussed in Note P, as to
which the date is March 1, 2002.)
NOTE - This report represents a copy of the predecessor auditor's report
included in the Company's Form S-3 dated April 4, 2002 and does not represent a
reissuance of the report. Note P, as identified in the auditor's report,
represents the Company's previous disclosure regarding discontinued operations
which is included in Note Q of the current notes to the consolidated financial
statements.
F-3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
August 3, July 28,
2003 2002
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 81,523 $ 86,210
Accounts receivable 16,525 14,486
Costs incurred and income recognized in excess
of billings on uncompleted contracts 6,960 6,882
Other receivables 827 274
Inventories, net of allowance of $2,739 in 2003
and $2,407 in 2002 37,545 33,371
Prepaid income taxes - 382
Deferred taxes and other 3,207 2,670
-------- --------
Total Current Assets 146,587 144,275
Property, Plant and Equipment, net 22,406 22,231
Goodwill 25,729 21,665
Intangibles, net of accumulated amortization of $403 in 2003
and $145 in 2002 1,542 423
Available-For-Sale Securities 75 46
Other Investments 162 195
Other Assets 1,063 1,367
-------- --------
$ 197,564 $ 190,202
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 686 $ 215
Accounts payable and accrued expenses 14,026 12,857
Income taxes payable 2,670 -
Reserve for contract losses 736 820
Advance payments on contracts 856 1,371
-------- --------
Total Current Liabilities 18,974 15,263
Long-term Debt 6,403 5,684
Deferred Income Taxes 4,945 3,897
-------- --------
30,322 24,844
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
13,969,151 in 2003 and 14,680,960 in 2002 1,397 1,468
Additional paid-in capital 104,551 116,579
Retained earnings 61,478 47,541
Accumulated other comprehensive loss (184) (230)
-------- --------
Total Shareholders' Equity 167,242 165,358
-------- --------
$ 197,564 $ 190,202
======== ========
The accompanying notes are an integral part of these financial statements.
F-4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
52 weeks ended
53 weeks ended --------------
August 3, July 28, July 29,
2003 2002 2001
-------- -------- --------
Net sales $ 110,223 $ 92,881 $ 76,494
-------- -------- --------
Cost and expenses:
Cost of products sold 73,222 61,947 50,691
Selling and administrative expenses 16,187 13,229 14,545
Litigation costs 1,147 2,079 265
Plant closing costs - 406 -
-------- -------- --------
90,556 77,661 65,501
-------- -------- --------
Income from operations 19,667 15,220 10,993
Other income, net 769 386 447
-------- -------- --------
Income from continuing operations
before income taxes 20,436 15,606 11,440
Provision for income taxes 6,499 4,876 3,867
-------- -------- --------
Income from continuing operations 13,937 10,730 7,573
Loss from discontinued operations
(including net loss on sale of $1,166)
net of income tax benefit - (921) (168)
-------- -------- --------
Income before cumulative effect of change
in accounting principle 13,937 9,809 7,405
Cumulative effect of adopting SFAS 142 - (4,637) -
-------- -------- --------
Net income $ 13,937 $ 5,172 $ 7,405
======== ======== ========
Earnings (loss) per common share - Basic
Income from continuing operations $ .97 $ .89 $ .75
Loss from discontinued operations - (.08) (.02)
Cumulative effect of adopting SFAS 142 - (.39) -
--- --- ---
Net earnings $ .97 $ .43 $ .73
=== === ===
Basic weighted average shares 14,317 12,041 10,082
====== ====== ======
Earnings (loss) per common share - Diluted
Income from continuing operations $ .93 $ .83 $ .69
Loss from discontinued operations - (.07) (.02)
Cumulative effect of adopting SFAS 142 - (.36) -
--- --- ---
Net earnings $ .93 $ .40 $ .68
=== === ===
Diluted weighted average shares 15,031 12,978 10,956
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-5
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
53 weeks ended August 3, 2003, and the 52 weeks ended July 28, 2002 and July 29, 2001
(In thousands except share data)
Accumulated
Common Stock Additional Other
------------ Paid-in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Loss Total
------ ------ ------- -------- ----- ---- -----
Balance at July 30, 2000 5,993,870 $ 599 29,808 34,964 - - $ 65,371
Net income 7,405 7,405
Exercise of warrants issued in
connection with business acquired
in 1999 946,349 95 14,664 14,759
Exercise of stock options
and warrants 94,134 10 1,239 1,249
Tax benefit upon exercise of stock
options 83 83
Purchase of 10,800 shares
of treasury stock (194) (194)
Retirement of treasury shares (10,800) (1) (193) 194 -
Three-for-two stock split 3,513,736 351 (351) -
---------- ----- ------- ------ ------ --- ------
Balance at July 29, 2001 10,537,289 $ 1,054 45,250 42,369 - - $ 88,673
Net income 5,172 5,172
Net proceeds of public offering
of 3,000,000 shares of common stock 3,000,000 300 64,512 64,812
Exercise of stock options
and warrants 1,143,671 178 11,832 (11,873) 137
Tax benefit upon exercise of stock
options 6,794 6,794
Retirement of treasury shares (64) (11,809) 11,873 -
Other comprehensive loss, net of tax:
Unrealized loss from
available-for-sale securities (66) (66)
Unrealized loss on interest rate swap (97) (97)
Foreign currency translation loss (67) (67)
---------- ----- ------- ------ ------ --- -------
Balance at July 28, 2002 14,680,960 $ 1,468 116,579 47,541 - (230) $ 165,358
Net income 13,937 13,937
Exercise of stock options 227,799 23 1,971 1,994
Tax benefit upon exercise of stock
options 575 575
Purchase of 939,608 shares of treasury stock (14,668) (14,668)
Retirement of treasury shares (939,608) (94) (14,574) 14,668 -
Other comprehensive income (loss) net of tax:
Unrealized gain on
available-for-sale securities 18 18
Unrealized gain on interest rate swap 47 47
Foreign currency translation (loss) (19) (19)
---------- ----- ------- ------ ------ --- -------
Balance at August 3, 2003 13,969,151 $ 1,397 104,551 61,478 - (184) $ 167,242
========== ===== ======= ====== ====== === =======
The accompanying notes are an integral part of these financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
52 weeks ended
53 weeks ended --------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Income from continuing operations $ 13,937 $ 10,730 $ 7,573
------ ------ ------
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 4,302 3,917 4,772
(Gain) loss on sale of fixed assets (17) 45 4
Equity in income of limited partnership (16) (48) (49)
(Increase) decrease in deferred tax assets (232) (712) 962
Increase (decrease) in deferred tax liabilities 1,048 (471) (1,119)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,039) 1,583 (547)
(Increase) in costs incurred and income
recognized in excess of billings on
uncompleted contracts (1,258) (6,341) (395)
(Increase) decrease in other receivables (380) (2) 133
(Increase) in inventories (3,846) (1,974) (6,880)
Decrease in prepaid expenses and other (52) - 25
Increase in accounts payable
and accrued expenses 491 429 1,088
(Decrease) increase in billings in excess of
costs incurred and income recognized
on uncompleted contracts - (531) 531
Increase (decrease) in income taxes payable 3,627 5,351 (281)
(Decrease) increase in reserve for contract losses (668) 348 (1,201)
(Decrease) increase in advance payments on contracts (515) 1,110 (745)
Other, net 185 (295) (13)
------ ------ ------
Total adjustments 630 2,409 (3,715)
------ ------ ------
Net cash provided by continuing operations 14,567 13,139 3,858
------ ------ ------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (2,542) - (8,373)
Payment of deferred purchase price of acquired business - (3,000) -
Investment in technology license - (500) -
Proceeds from sale of fixed assets 25 85 16
Partial distribution from limited partnership 49 626 296
Capital expenditures (3,876) (5,488) (3,679)
------ ------ ------
Net cash used in investing activities (6,344) (8,277) (11,740)
------ ------ ------
Cash flows from financing activities:
Borrowings under bank line of credit - 4,300 7,100
Proceeds from industrial revenue bond financing - 3,000 -
Net proceeds from public offering of common stock - 64,812 -
Proceeds from exercise of stock options and warrants, net 1,994 3,984 16,008
Payments under lines of credit - (4,300) (7,100)
Payments of long-term debt (236) (201) (908)
Purchase of treasury stock (14,668) (3,847) (194)
------ ------ ------
Net cash provided by (used in) financing activities (12,910) 67,748 14,906
------ ------ ------
Net cash provided by (used in) discontinued operations - 559 (1,648)
------ ------ ------
Net increase in cash and cash equivalents (4,687) 73,169 5,376
Cash and cash equivalents at beginning of period 86,210 13,041 7,665
------ ------ ------
Cash and cash equivalents at end of period $ 81,523 $ 86,210 $ 13,041
====== ====== ======
Supplemental cash flow information:
Cashless exercise of stock options $ - $ 8,026 $ -
====== ====== ======
Tax benefit related to stock options $ 575 $ 6,794 $ 83
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Operations
The Company, a Delaware corporation, is engaged in research, engineering,
product development, and manufacturing of complex microwave radio frequency
(RF) and millimeter wave components and subsystems for defense and
commercial customers worldwide.
2. Fiscal Year
The Company's fiscal year ends on the Sunday closest to July 31. Normally
each fiscal year consists of 52 weeks, but every five or six years the
fiscal year will consist of 53 weeks. Fiscal year 2003 consisted of 53
weeks and all other fiscal years presented consisted of 52 weeks.
3. Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Herley
Industries, Inc. and its subsidiaries, all of which are wholly-owned. All
significant inter-company accounts and transactions have been eliminated in
consolidation. The presentation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements as well as revenues
and expenses during the period. Actual results could differ from those
estimates.
4. Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of
three months or less at the date of acquisition to be cash equivalents.
Short-term investments are recorded at the amortized cost plus accrued
interest which approximates market value. The Company limits its credit
risk to an acceptable level by evaluating the financial strength of
institutions at which significant investments are made and based upon
credit ratings.
5. Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of trade accounts receivable. Accounts receivable are
principally from the U.S. Government, major U.S. Government contractors,
several foreign governments, and domestic customers in the defense,
aerospace, and medical industries. Credit is extended based on an
evaluation of the customer's financial condition and generally collateral
is not required. In many cases irrevocable letters of credit accompanied by
advanced payments are received from foreign customers, and progress
payments are received from domestic customers. The Company performs
periodic credit evaluations of its customers and maintains reserves for
potential credit losses.
6. Inventories
Inventories, other than inventory costs relating to long-term contracts and
programs, are stated at lower of cost (principally first-in, first-out) or
market. Inventory costs relating to long-term contracts and programs are
stated at the actual production costs, including factory overhead, reduced
by amounts identified with revenue recognized on units delivered or
progress completed.
Inventory costs relating to long-term contracts and programs are reduced by
any amounts in excess of estimated realizable value.
F-8
7. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided principally by the straight-line method over the
estimated useful lives of the related assets. Gains and losses arising from
the sale or disposition of property, plant and equipment are included in
income from operations.
8. Goodwill and Other Intangible Assets
The Company adopted the provisions of SFAS No. 142 "Goodwill and Other
Intangible Assets" on July 30, 2001. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain
intangibles are not amortized into results of operations, but instead are
reviewed for impairment and written down and charged to results of
operations in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The adoption of SFAS
No.142 resulted in the Company's discontinuation of amortization of its
goodwill and certain intangible assets. The Company was required to assess
its goodwill for impairment under the new standard within six months of
adoption and completed its assessment in the second quarter of fiscal 2002.
The Company operates as a single integrated business and as such has one
operating segment which is also the reportable segment as defined in SFAS
131. Within the operating segment, the Company has identified two
components as reporting units as defined under SFAS 142, defense
electronics and commercial technologies. The Company determined the
carrying value of each reporting unit by assigning assets and liabilities,
including the existing goodwill and intangible assets, to those reporting
units as of July 30, 2001. The Company determined that an impairment of
goodwill in the commercial technologies unit had occurred due to the
overcapacity in the telecom industry and deteriorating economic conditions.
Accordingly, a transition adjustment in the amount of $4,637,000 was
recorded as of July 30, 2001 as a cumulative effect of a change in
accounting principle. There is no tax benefit associated with the
adjustment since the impaired goodwill is not deductible for income tax
purposes.
The change in the carrying amount of goodwill, based upon the fair value of
assets acquired and liabilities assumed related to the acquisition of EWST
(See Note B), for the year ended August 3, 2003 is as follows (in
thousands):
Balance at July 28, 2002 $ 21,665
Goodwill acquired during period 4,064
------
Balance at August 3, 2003 $ 25,729
======
An annual impairment test is performed in the fourth quarter of each fiscal
year and any future impairment of goodwill will be charged to operations.
There was no impairment in goodwill at August 3, 2003 based on current
market capitalization of the Company.
Amortization of goodwill charged to continuing operations for the fifty-two
weeks ended July 29, 2001 was approximately $1,296,000. Amortization of
goodwill charged to discontinued operations for the fifty-two weeks ended
July 29, 2001 was approximately $208,000. Pro forma income from continuing
operations and net income and earnings per share in connection with the
adoption of SFAS 142 is as follows (in thousands except per share data):
F-9
Income from continuing operations:
53 weeks Fifty-two weeks ended
ended -----------------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Income from continuing operations
as reported $ 13,937 $ 10,730 $ 7,573
Add goodwill amortization, net of
income tax benefit - - 850
------ ------ -----
Adjusted income from continuing
operations $ 13,937 $ 10,730 $ 8,423
====== ====== =====
Earnings per common share-basic:
From continuing operations as reported $ .97 $ .89 $ .75
Goodwill amortization - - .08
--- --- ---
Adjusted $ .97 $ .89 $ .83
=== === ===
Earnings per common share-diluted:
From continuing operations as reported $ .93 $ .83 $ .69
Goodwill amortization - - .08
--- --- ---
Adjusted $ .93 $ .83 $ .77
=== === ===
Net income :
53 weeks Fifty-two weeks ended
ended ---------------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Net income as reported $ 13,937 $ 5,172 $ 7,405
Add goodwill amortization, net of
income tax benefit - - 987
------ ----- -----
Adjusted net income $ 13,937 $ 5,172 $ 8,392
====== ===== =====
Earnings per common share-basic:
As reported $ .97 $ .43 $ .73
Goodwill amortization - - .10
--- --- ---
Adjusted $ .97 $ .43 $ .83
=== === ===
Earnings per common share-diluted:
As reported $ .93 $ .40 $ .68
Goodwill amortization - - .09
--- --- ---
Adjusted $ .93 $ .40 $ .77
=== === ===
F-10
Intangibles consist of the following (in thousands):
August 3, July 28, Estimated
2003 2002 useful life
---- ---- -----------
Technology (1) $ 1,021 $ - 15 years
Backlog (1) 325 - 2 years
Non-compete (1) 31 - 5 years
Patents 568 568 14 years
----- ---
1,945 568
Accumulated amortization 403 145
----- ---
$ 1,542 $ 423
===== ===
- ---------
(1) Related to the acquisition of EWST (See Note B.)
Amortization expense for the fifty-three and fifty-two weeks ended August
3, 2003 and July 28, 2002, was approximately $258,000 and $41,000,
respectively.
Estimated aggregate amortization expense for each of the next five fiscal
years is as follows (in thousands):
2004 $ 277
2005 129
2006 116
2007 115
2008 109
The carrying amount of intangibles is evaluated on a recurring basis.
9. Marketable Securities
The Company accounts for its investments in marketable securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance
sheet date. Debt securities are classified as held-to- maturity when the
Company has the positive intent and ability to hold the securities to
maturity. Marketable equity securities and debt securities not classified
as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair market value with net
unrealized holding gains or losses, net of income taxes, reported as a
separate component of other comprehensive loss. Realized gains and losses
and declines in value judged to be other-than-temporary are included in
other income, net. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities are included in
other income, net.
10. Other Investments
The Company is a limited partner in a nonmarketable limited partnership in
which it owns approximately a 10% interest. The investment is accounted for
under the equity method (See Note D.)
11. Revenue and Cost Recognition
Substantially all of our customer contracts are firm, fixed price
contracts, providing for a predetermined fixed price for the products that
we sell, regardless of the costs we incur. Under fixed-price contracts,
revenue and related costs are recorded primarily as deliveries are made.
Certain costs under long-term, fixed-price contracts (principally either
directly or indirectly with the U.S. Government), which include non-
recurring billable engineering, are deferred until these costs are
contractually billable. Revenue under
F-11
certain long-term, fixed price contracts is recognized using the percentage
of completion method of accounting. Revenue recognized on these contracts
is based on estimated completion to date (the total contract amount
multiplied by percent of performance, based on total costs incurred in
relation to total estimated cost at completion). Prospective losses on
long-term contracts are based upon the anticipated excess of inventoriable
manufacturing costs over the selling price of the remaining units to be
delivered and are recorded in the period when first determinable. Actual
losses could differ from those estimated due to changes in the ultimate
manufacturing costs and contract terms.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred.
12. Product Development
The Company's primary efforts are focused on engineering design and product
development activities rather than pure research. The cost of these
development activities, including employees' time and prototype
development, net of amounts paid by customers, was approximately
$3,083,000, $2,269,000, and $2,588,000 in fiscal 2003, 2002, and 2001,
respectively, and are included in cost of products sold.
13. Income Taxes
Income taxes are accounted for by the asset/liability approach in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred taxes represent the expected future
tax consequences when the reported amounts of assets and liabilities are
recovered or paid. They arise from temporary differences between the
financial reporting and tax bases of assets and liabilities and are
adjusted for changes in tax laws and tax rates when those changes are
enacted. The provision for income taxes represents the total of income
taxes paid or payable for the current year, plus the change in deferred
taxes during the year.
14. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock. Because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123." The new statement is effective, with respect to the transition
provisions, for fiscal years ending after December 15, 2002; and with
respect to the disclosure provisions, for financial reports containing
condensed financial statements for interim periods beginning after December
15, 2002. SFAS No. 148 provides transition alternatives for companies
adopting the fair value recognition provisions of FASB Statement No. 123
for stock-based employee compensation; and requires that the pro-forma
disclosures of the impact on earnings and earnings- per-share for companies
continuing to rely on APB No. 25 be provided in a tabular format and
included in the Summary of Significant Accounting Policies or equivalent as
if the provisions of SFAS No. 123 had been adopted.
The effect of the adoption of SFAS No. 148 was the inclusion of the
required disclosures in the Company's condensed consolidated interim
financial statements, and the addition of the following information in the
significant accounting policies note for the year ended August 3, 2003.
F-12
The Company has various fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. The Company
continues to use the intrinsic value method in accordance with the
recognition and measurement principles of APB Opinion No. 25 and related
Interpretations in accounting for these plans. Statement of Financial
Accounting Standards No.123, "Accounting for Stock-Based Compensation"
("SFAS 123") was issued by the FASB in 1995 and , if fully adopted, changes
the methods for recognition of cost on plans similar to those of the
Company. The Company has adopted the disclosure-only provisions of SFAS 123
and SFAS 148. Accordingly, no stock- based employee compensation cost has
been recognized for options granted under the stock option plans. Pro forma
information regarding net income and earnings per share as required by
Statements 123 and 148 has been determined as if the Company had accounted
for its employee stock options under the fair value method of Statement
123.
The fair value for options granted is estimated at the date of grant using
a Black-Scholes option pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility.
For purposes of computing pro forma (unaudited) consolidated net earnings,
the following assumptions were used to calculate the fair value of each
option granted:
53 weeks Fifty-two weeks ended
ended ---------------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Expected life of options 1.51 years 1.51 years .73 years
Volatility .68 .68 .70
Risk-free interest rate 2.8% 2.8% 3.4%
Dividend yield zero zero zero
Had compensation cost for stock options granted in fiscal years 2003, 2002,
and 2001 been determined based on the fair value at the grant date
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below using the statutory income tax rate of 34% (in thousands
except per share data):
2003 2002 2001
---- ---- ----
Net income - as reported $13,937 $5,172 $7,405
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (1,926) (4,425) (1,610)
------ ----- -----
Net income - pro forma $12,011 $ 747 $5,795
====== ===== =====
Earnings per share - as reported
Basic $.97 $.43 $.73
Diluted .93 .40 .68
Earnings per share - pro forma
Basic $.84 $.06 $.57
Diluted .80 .06 .53
The effects of applying the pro forma disclosures of SFAS 123 are not
likely to be representative of the effects on reported net income for
future years due to the various vesting schedules.
F-13
15. Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared in their
respective functional currencies and translated into United States dollars
at the current exchange rates for assets and liabilities and a monthly
average rate during the year for revenues, costs and expenses. Net gains or
losses resulting from the translation of foreign financial statements are
charged or credited directly to the 'Foreign currency translation'
component of 'Accumulated other comprehensive loss' in the accompanying
consolidated statements of shareholders' equity.
16. Derivatives
The Company recognizes all derivatives on the balance sheet at fair value.
On the date the derivative instrument is entered into, the Company
generally designates the derivative as either (1) a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment
("fair value hedge") or (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized
asset or liability ("cash flow hedge"). The Company entered into an
interest rate swap in October 2001 with a bank, which it recognized as a
cash flow hedge. Changes in the fair value of a derivative that is
designated as, and meets all the required criteria for, a cash flow hedge
are recorded in accumulated other comprehensive income (loss) and
reclassified into earnings as the underlying hedged item affects earnings.
17. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long- lived assets and the associated asset retirement costs. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002.
Management adopted this standard on July 29, 2002 and has determined that
the adoption did not have a significant impact on the financial position,
results of operations or cash flows of the Company.
In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and retains the fundamental provisions of Statement 121 for (a)
recognition and measurement of the impairment of long- lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS 144 also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of, but retains the requirement of Opinion 30 to
report discontinued operations separately from continuing operations and
extends that reporting to a component of an entity that either has been
disposed of (by sale, by abandonment, or in a distribution to owners) or is
classified as held for sale. The provisions of this statement were adopted
by the Company effective on July 30, 2001.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement is effective for fiscal years beginning after
May 15, 2002. SFAS 145 requires, among other things, eliminating reporting
debt extinguishments as an extraordinary item in the income statement.
Management adopted this standard on July 29, 2002 and has determined that
the adoption did not have a significant impact on the financial position,
results of operations or cash flows of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The statement is effective
for fiscal years beginning after December 31, 2002. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred
F-14
rather than at the date of a commitment to an exit or disposal plan.
Management does not believe the adoption of this standard will have a
material impact on the Company's financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified
subsequent to December 31, 2002. The liabilities should reflect the fair
value, at inception, of the guarantors' obligations to stand ready to
perform, in the event that the specified triggering events or conditions
occur. The Company is currently evaluating the provisions of this
interpretation; however, it does not believe they will have a material
effect on the Company's future results of operations or financial
condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123." The new statement is effective, with respect to the transition
provisions, for fiscal years ending after December 15, 2002; and with
respect to the disclosure provisions, for financial reports containing
condensed financial statements for interim periods beginning after December
15, 2002. SFAS No. 148 provides transition alternatives for companies
adopting the fair value recognition provisions of FASB Statement No. 123
for stock-based employee compensation; and requires the pro forma
disclosures of SFAS No. 123 in interim condensed financial statements for
companies continuing to rely on APB Opinion No. 25 as if the provisions of
SFAS No. 123 had been adopted. The statement also requires that the pro
forma disclosures of the impact on earnings and earnings per share be
provided in a tabular format and included in the Summary of Significant
Accounting Policies or equivalent.
The effect of the adoption of SFAS No. 148 was the inclusion of the
required disclosures in the Company's condensed consolidated interim
financial statements and the addition of the following information in the
significant accounting policies note for the year ended August 3, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities."
The Interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities
in which the equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated
financial support from other parties. The Interpretation applies
immediately to variable interest entities created after January 31, 2003,
or in which the Company obtains an interest after that date. The
Interpretation is effective July 1, 2003 to variable interest entities in
which the Company holds a variable interest acquired before February 1,
2003. The Company is in the process of assessing the impact of adopting
this Interpretation; however, it does not believe it will have a material
effect on its financial position or future results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. The Statement is effective for contracts
entered into or modified after June 30, 2003, except as stated below and
for hedging relationships designated after June 30, 2003.
The provisions of Statement 149 that relate to Statement 133 implementation
issues that have been effective for fiscal quarters that began prior to
June 15, 2003, will continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to
forward purchases or sales of when- issued securities or other securities
that do not yet exist, will apply to existing contracts, as well as new
contracts entered into after June 30, 2003. Management has determined that
the adoption of this Statement will not have a significant impact on the
financial position, results of operations or cash flows of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with
F-15
Characteristics of both Liabilities and Equity." The Statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances) because that financial instrument embodies an
obligation of the issuer. Many of such instruments were previously
classified as equity. The statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities. The Statement is to be implemented by reporting the cumulative
effect of a change in accounting principle for financial instruments
created before the issuance of the date of the Statement and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. Management believes that the adoption of this Statement will not
have a significant impact on the financial position, results of operations
or cash flows of the Company.
NOTE B - ACQUISITIONS
The Company entered into an agreement as of September 1, 2002, to acquire
all of the issued and outstanding common stock of EW Simulation Technology,
Limited ("EWST"), a British company of Aldershot, UK, which operates as a
wholly-owned subsidiary of the Company. EWST designs, develops and produces
electronic warfare simulator systems for prime defense contractors and
countries worldwide. The acquisition of EW Simulation Technology was driven
by a two part strategic initiative: a) to leverage the Company's microwave
expertise vertically into the international threat and jamming simulator
markets, and b) to increase the amount of microwave content supplied by the
Company on each simulator platform. This strategy is expected to expand
international revenues from new sources and increase content to existing
customers. The transaction, which closed on September 20, 2002, provides
for payment of $3,000,000 in cash and a note for $1,500,000, including
interest at 1.8% based on LIBOR at the date of acquisition, payable in
annual installments of $500,000. The transaction has been accounted for in
accordance with the provisions of SFAS No. 141, "Business Combinations",
which requires that all business combinations be accounted for using the
purchase method. The Company engaged an independent third party to complete
a valuation of the intangible assets of EWST as of the acquisition date.
The allocation of the aggregate purchase price, based on a detailed review
of the fair value of assets acquired and liabilities assumed, including the
fair value appraisal of identified intangible assets is as follows:
Aggregate purchase price $4,658
=====
Current assets $1,407
Furniture and equipment 251
Technology 1,021
Backlog 325
Non-compete 31
Goodwill 4,064
Current liabilities (2,441)
The Company entered into an agreement as of September 1, 2000 to acquire
certain assets and the business, subject to the assumption of certain
liabilities, of American Microwave Technology, Inc., ("AMT"), a California
corporation, which operates as a division of Herley Industries, Inc. The
transaction provided for the payment of $5,400,000 in cash, and the
assumption of approximately $1,153,000 in liabilities. In addition, the
Company entered into an exclusive license agreement for certain products
providing for a royalty of 10% on the net shipments of such products
through October 2004. The transaction has been accounted for under the
purchase method.
The Company entered into an agreement, as of January 3, 2000, to acquire
substantially all of the assets of Robinson Laboratories, Inc. ("Robinson"
or "Robinson Labs"), a New Hampshire corporation, which
F-16
operates as a division of Herley Industries, Inc. The transaction provided
for the payment of $6,000,000 in cash, the issuance of 50,762 (as adjusted)
shares of Common Stock of the Company valued at $10.125 per share, and the
assumption of approximately $3,140,000 in liabilities. In addition, the
agreement provided for the issuance of additional shares of Common Stock up
to a maximum of 146,761 shares (as adjusted) based on new orders booked
through January 2001. The Company determined that new orders booked through
January 2001 did not meet the earn out provisions of the Asset Purchase
Agreement (See Note F "Litigation"). The transaction has been accounted for
under the purchase method.
NOTE C - INVENTORIES
The major components of inventories are as follows (in thousands):
August 3, July 28,
2003 2002
---- ----
Purchased parts and raw materials $19,690 $ 18,680
Work in process 18,646 15,707
Finished products 1,948 1,391
------- -------
40,284 35,778
Less reserve 2,739 2,407
------- -------
$ 37,545 $ 33,371
====== ======
NOTE D - OTHER INVESTMENTS
In July 1994, the Company invested $1,000,000 for a limited partnership
interest in M.D. Sass Municipal Finance Partners-I, a Delaware limited
partnership. The objectives of the partnership are the preservation and
protection of its capital and the earning of income through the purchase of
certificates or other documentation that evidence liens for unpaid local
taxes on parcels of real property. At August 3, 2003 and July 28, 2002 the
percentage of ownership was approximately 10%. The Company's interest in
the partnership may be transferred to a substitute limited partner, upon
written notice to the managing general partners, only with the unanimous
consent of both general partners at their sole discretion. The Company
received partial distributions of approximately $49,000 and $626,000 from
the Partnership in fiscal 2003 and 2002, respectively. As of August 3, 2003
the Company's limited partnership interest had a carrying value of
$162,000, based on the equity method of accounting.
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following (in
thousands):
August 3, July 28, Estimated
2003 2002 Useful Life
---- ---- -----------
Land $ 2,908 $ 2,908
Building and building
improvements 9,291 9,857 10-40 years
Machinery and equipment 37,802 33,698 5- 8 years
Furniture and fixtures 1,186 1,058 5-10 years
Automobiles - 91 3 years
Tools - 25 5 years
Leasehold improvements 1,385 1,589 5-10 years
------- ------
52,572 49,226
Less accumulated depreciation 30,166 26,995
------ ------
$ 22,406 $ 22,231
====== ======
Depreciation charges totaled $3,944,000, $3,776,000, and $3,127,000 in
fiscal 2003, 2002, and 2001, respectively.
F-17
NOTE F - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, production and warehouse space as well as
computer equipment and automobiles under noncancellable operating leases.
Rent expense for the 53 weeks ended August 3, 2003, and the 52 weeks ended
July 28, 2002 and July 29, 2001, was approximately $1,393,000, $1,244,000,
and $1,506,000, respectively. Minimum annual rentals under noncancellable
operating leases are as follows (in thousands):
Amount
------
Year ending fiscal 2004 $ 1,121
2005 1,033
2006 978
2007 957
2008 932
Future 1,143
Employment Agreements
The Company has employment agreements with certain executives of the
Company which expire December 31, 2008, subject to extension for additional
one-year periods annually each January 1 with a final expiration date of
December 31, 2010. The agreements provide for aggregate annual salaries as
of August 3, 2003 of $1,364,000 and provide for a semi-annual cost of
living adjustment based on the consumer price index. The agreements also
provide for incentive compensation at 7% in the aggregate of pretax income
of the Company. Incentive compensation in the amount of $1,571,000 and
$956,000 was charged to expense in fiscal years 2003 and 2002,
respectively. The executives waived their incentive compensation for fiscal
2001.
The agreements also provide that, in the event there is a change in control
of the Company, as defined, the executives have the option to terminate the
agreements and receive a lump-sum payment equal to the sum of the salary
payable for the remainder of the employment term, plus the annual bonuses
(based on the average of the three highest annual bonuses awarded during
the ten preceding years) for the remainder of the employment term. As of
August 3, 2003, the amount payable in the event of such termination would
be approximately $13,729,000.
The agreements also provide for consulting periods, one for five and one
for ten years, at the end of the employment period at an annual
compensation equivalent to one-half of the executive's annual salary at the
end of the employment period, subject to annual cost of living adjustments.
An employment contract of a retired executive provides for a consulting
period which became effective October 1, 1998, and terminates December 31,
2010 at the annual rate of compensation of $100,000.
Six officers of the Company have severance agreements providing for an
aggregate lump-sum payment of $2,070,000 through September 30, 2004 in the
event of a change of control of the Company as defined in the agreements.
Litigation
On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson
("Robinson") filed an Amended Complaint against Herley Industries, Inc.
("Herley"). Although the Amended Complaint sets forth fifteen counts, the
core allegations are (i) that Herley failed to issue 97,841 shares of
common stock in connection with certain earn out requirements contained in
an Asset Purchase Agreement dated February 1, 2000; (ii) that Herley
breached an Employment Agreement with Robinson by terminating his
employment
F-18
on August 5, 2001; and (iii) that Herley breached a Stock Option Agreement
dated January 31, 2000, with Robinson. RLI and Robinson asserted (i)
violations of state and federal securities laws; (ii) fraud claims; (iii)
breach of contract claims; and (iv) other equitable claims arising from the
above core factual allegations.
On September 17, 2001, Herley filed an Answer, Affirmative Defenses and
Counterclaims in this matter. In the Answer and Affirmative Defenses,
Herley denied the material allegations of the Amended Complaint. Herley
also filed Counterclaims against both RLI and Robinson. In these
counterclaims, Herley's core allegations concern Robinson's misconduct (i)
in connection with the manner he attempted to satisfy RLI's earn out
requirements; (ii) misrepresentations made in connection with the Asset
Purchase Agreement; (iii) wrongdoing as a Herley employee leading to his
termination and (iv) post-Herley employment wrongdoing in connection with a
new company known as RH Laboratories. In addition to seeking a Declaratory
Judgment pursuant to 28 U.S.C. ss. 2201 et. seq., Herley also asserted
claims for, among other things, fraud, breach of contract, breach of
fiduciary duty, unfair competition and tortious interference with actual
and prospective contractual relationships.
On August 5, 2002, a jury trial commenced. A jury verdict was rendered on
August 21, 2002 in which the jury determined, among other things, that (i)
Herley was not required to pay any additional stock; (ii) Herley breached
the Employment Agreement with Robinson and awarded Robinson $1.5 million in
damages; (iii) Herley breached the Lease Agreement with Robinson and
awarded Robinson approximately $552,000 in compensatory damages; (iv)
Robinson breached fiduciary duties to Herley and awarded Herley $400,000 in
compensatory damages; (v) Robinson and RLI breached indemnity obligations
and awarded Herley $100,000 in damages; (vi) RLI breached representations
and warranties given to Herley and awarded Herley $320,000 in damages.
On October 18, 2002, the Court entered a final judgment consistent with the
above, and both parties filed post-trial motions. Additionally, as the
prevailing party in connection with the claims asserted by RLI relating to
the earn-out stock, as well as claims advanced relating to the various
breaches of the Asset Purchase Agreement, Herley filed a petition for fees
and costs against both RLI and Robinson on November 27, 2002 for
approximately $2,000,000. RLI and Robinson also filed petitions to recover
attorneys fees of approximately $240,000 for certain claims in which they
contend that they were the prevailing party. On February 5, 2003, the Court
denied the post-trial motions filed by the parties, thus leaving the jury
verdict undisturbed.
At a proceeding on April 28, 2003, the Court decided to delay ruling on all
of the petitions for fees and costs until after appeals are exhausted.
Accordingly, by Order dated May 6, 2003, the Court denied without prejudice
all of the parties' petitions. On May 12, 2003, Herley filed its appeal to
the United States Court of Appeals for the Second Circuit. On May 28, 2003,
RLI filed a notice of cross-appeal. Robinson has not appealed. Herley filed
its brief in support of its appeal before the Second Circuit on August 22,
2003. RLI timely filed its brief in response to Herley's appeal and in
support of RLI's cross-appeal. Herley is now required to file a response to
RLI's brief and thereafter RLI will file a response to Herley's brief. Oral
argument has not yet been scheduled.
The Company is involved in various other legal proceedings and claims which
arise in the ordinary course of its business. While any litigation contains
an element of uncertainty, management believes that the outcome of such
litigation will not have a material adverse effect on the Company's
financial position or results of operations.
Stand-by Letters of Credit
The Company maintains a letter of credit facility with a bank that provides
for the issuance of stand-by letters of credit and requires the payment of
a fee of 1.0% per annum of the amounts outstanding under the facility. The
facility expires January 31, 2005. At August 3, 2003 stand-by letters of
credit aggregating approximately $12,454,000 were outstanding under this
facility.
F-19
NOTE G - INCOME TAXES
Income tax expense consisted of the following (in thousands):
53 weeks Fifty-two weeks ended
ended ---------------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Current
Federal $ 5,465 $ 5,333 $ 3,050
State 533 520 275
Foreign 379 204 202
----- ----- -----
6,377 6,057 3,527
----- ----- -----
Deferred
Federal (233) (1,090) 248
State (23) (106) 92
Foreign 378 15 -
----- ----- -----
122 (1,181) 340
----- ----- -----
$ 6,499 $ 4,876 $ 3,867
===== ===== =====
The Company paid income taxes of approximately $4,164,000, $680,000, and
$4,427,000 in fiscal 2003, 2002, and 2001, respectively. The following is a
reconciliation of the U. S. statutory income tax rate and the effective tax
rate on pretax income:
53 weeks Fifty-two weeks ended
ended ---------------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Statutory income tax rate 34.0 % 34.0 % 34.0 %
State income taxes, net of
federal income tax benefit 1.7 0.9 2.4
Benefit of foreign sales corporation - - (2.6)
Benefit of extra territorial income (1.0) (2.4) -
Non-deductible expenses 0.6 0.2 2.5
Benefit of foreign and
foreign-source income (3.4) (1.4) (2.3)
Other, net (0.1) (0.1) 0.4
---- ---- ----
Effective tax rate 31.8 % 31.2 % 34.4 %
==== ==== ====
Income taxes have not been provided on undistributed earnings of foreign
subsidiaries. If remitted as dividends, these earnings could become subject
to additional tax. The Company's intention is to reinvest non-remitted
earnings of subsidiaries outside the United States permanently.
F-20
The tax effects of significant items comprising deferred income taxes are
as follows (in thousands):
August 3, 2003 July 28, 2002
------------------- -------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
Intangibles $ - $ 2,298 $ - $ 1,738
Accrued vacation pay 260 - 386 -
Accrued bonus 516 - 53 -
Warranty costs 88 - 136 -
Inventory 1,125 - 1,101 -
Depreciation - 2,647 - 2,159
Contract losses 302 - 362 -
Net operating loss
carry-forwards 230 - 230 -
Other 352 - 120 -
----- ----- ----- -----
$ 2,873 $ 4,945 $ 2,388 $ 3,897
===== ===== ===== =====
As of August 3, 2003 the Company has available net operating loss
carry-forwards for federal and state income tax purposes of approximately
$489,000 and $2,800,000, respectively which expire through 2020. The
Federal net operating loss arose through the acquisition of Terrasat and
its utilization is subject to certain limitations.
NOTE H- LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
August 3, July 28,
Rate 2003 2002
--------------- ---- ----
Revolving loan facility (a) 2.50% and 2.90% $ - $ -
Mortgage note (b) 7.43% 2,610 2,691
Industrial Revenue Bonds (c) 4.07% 2,905 3,000
Note for acquired business (d) 1.8% 1,500 -
Other - 74 208
----- -----
7,089 5,899
Less current portion 686 215
----- -----
$ 6,403 $ 5,684
===== =====
(a) In June 2002, the Company entered into a new $50,000,000 Revolving
Credit Loan Syndication agreement with two banks on an unsecured
basis which may be used for general corporate purposes, including
business acquisitions. The revolving credit facility requires the
payment of interest only on a monthly basis and payment of the
outstanding principal balance on January 31, 2005 (as amended). The
Company may elect to borrow up to a maximum of $5,000,000 with
interest based on the FOMC Federal Funds Target Rate plus a margin of
1.50% to 1.80%, or up to a maximum of $45,000,000 with interest based
on LIBOR plus a margin of 1.35% to 1.65%. The applicable incremental
margin is based on the ratio of total liabilities to tangible net
worth, as those terms are defined in the agreement, ranging from less
than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal Funds
Target Rate and the LIBOR rate was 1.00% and 1.10%, respectively, at
August 3, 2003. There is a fee of 15 basis points per annum on the
unused portion of the $45,000,000 LIBOR based portion of the credit
facility payable quarterly. There are no borrowings under the line at
August 3, 2003 and July 28, 2002.
The agreement contains various financial covenants, including, among
other matters, minimum tangible net worth, total liabilities to
tangible net worth, debt service coverage, and restrictions on
F-21
other borrowings. The Company is in compliance with all covenants at
August 3, 2003.
(b) The mortgage loan is for a term of ten years commencing February 16,
1999 with fixed monthly principal and interest installments of
$23,359, including interest at a fixed rate of 7.43%, and is based
upon a twenty year amortization. The loan is secured by a mortgage on
the Company's land and building in Lancaster, Pennsylvania having a
net book value of approximately $1,770,000.
The mortgage note agreement contains various financial covenants,
including, among other matters, the maintenance of specific amounts
of tangible net worth, debt to tangible net worth, debt service
coverage, and restrictions on other borrowings. The Company is in
compliance with all covenants at August 3, 2003. In connection with
this loan, the Company paid approximately $45,000 in financing costs.
Such costs are included in Other Assets in the accompanying
consolidated balance sheets at August 3, 2003 and July 28, 2002, and
are being amortized over the term of the loan (10 years).
(c) On October 19, 2001, the Company received $3,000,000 in proceeds from
the East Hempfield Township Industrial Development Authority Variable
Rate Demand/Fixed Rate Revenue Bonds Series of 2001 (the "Bonds").
The Bonds are due in varying annual installments through October 1,
2021. The initial installment of $95,000 was paid October 1, 2002 and
increases each year until the final payment of $225,000 in 2021. The
interest rate on the Bonds is reset weekly at the prevailing market
rate of the BMA Municipal index. The initial rate of interest was
2.1%, which, after giving effect to a ten year interest rate swap
agreement (See Note O) becomes a fixed rate of 4.07%. The interest
rate at August 3, 2003 was 1.00%. The bond agreement requires a
sinking fund payment on a monthly basis to fund the annual Bonds
redemption installment. Proceeds from the Bonds were used for the
construction of a 15,000 square foot expansion of the Company's
facilities in Lancaster PA, and for manufacturing equipment.
The Bonds are secured by a letter of credit expiring October 18, 2006
and a mortgage on the related properties pledged as collateral. The
net book value of the land and building covered by the mortgage is
approximately $1,776,000 at August 3, 2003.
(d) In connection with the acquisition of EWST as of September 1, 2002,
the Company issued a note for $1,500,000, including interest at 1.8%,
payable in annual installments of $500,000 beginning October 1, 2003.
The Company paid interest in 2003, 2002 and 2001of approximately $355,000,
$316,000 and $289,000, respectively.
Future payments required on long-term debt are as follows (in thousands):
Fiscal year ending during: Amount
------------------------- ------
2004 $ 686
2005 698
2006 711
2007 223
2008 236
Future 4,535
-----
$ 7,089
=====
F-22
NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following (in thousands):
August 3, July 28,
2003 2002
---- ----
Accounts payable $ 7,152 $ 5,832
Accrued payroll costs and bonuses 4,257 3,906
Accrued commissions 508 666
Accrued royalties 284 43
Accrued interest - 11
Accrued legal expenses 20 1,018
Accrued warranty costs 359 235
Accrued severance 849 706
Accrued rent expense 189 163
Lease termination cost 17 58
Unearned income 86 108
Other accrued expenses 305 111
------ ------
$ 14,026 $ 12,857
====== ======
NOTE J - EMPLOYEE BENEFIT PLANS
In August 1985, the Board of Directors approved an Employee Savings Plan
("Plan") which qualified as a thrift plan under Section 401(k) of the
Internal Revenue Code. This Plan, as amended and restated, allows employees
to contribute between 2% and 15% of their salaries to the Plan. The
Company, at its discretion can contribute 100% of the first 2% of the
employees' contribution and 25% of the next 4%. Additional Company
contributions can be made depending on profits. The aggregate benefit
payable to an employee is dependent upon his rate of contribution, the
earnings of the fund, and the length of time such employee continues as a
participant. The Company has recognized expenses of approximately $513,000,
$533,000 and $164,000 under the Plan for the 53 weeks ended August 3, 2003,
and the 52 weeks ended July 28, 2002 and July 29, 2001, respectively.
Employees of General Microwave Corporation (" GMC") became eligible to
participate in the Plan as of May 1, 1999. The existing savings and
investing plan of GMC did not provide for company matching contributions
and has been frozen.
At the time of the acquisition, GMC also had a noncontributory defined
benefit pension plan covering all eligible employees of the company. As
part of the acquisition plan, the Company froze all benefits under the plan
effective April 30, 1999 and elected to terminate the plan as of November
1, 1999. All plan assets were liquidated and distributed to plan
participants or used to purchase annuities on their behalf. Excess plan
assets in the amount of approximately $470,000 were transferred in January
2001 directly into the Plan discussed above and inured to the benefit of
Plan employees.
NOTE K - RELATED PARTY TRANSACTIONS
On January 16, 2001, the Board of directors approved the purchase of an
industrial parcel of land adjacent to the existing facility in Lancaster,
PA for $747,000 from a partnership of which the Chairman is general
partner. Settlement on the property was on July 27, 2001. The Company used
this land for a 15,000 square foot addition.
In connection with the move of the Amityville facilities of GMC in fiscal
1999, the Company entered into a 10 year lease agreement with a partnership
owned by the children of certain officers of the Company. The lease
provides for initial minimum annual rent of $312,000 subject to escalation
of approximately 4% annually throughout the 10 year term. Additionally, in
March 2000, The Company entered into another 10
F-23
year lease with the same partnership for additional space. The initial
minimum annual rent of $92,000 is subject to escalation of approximately 4%
annually.
NOTE L - COMPUTATION OF PER SHARE EARNINGS
The following table shows the components used in the calculation of basic
earnings per share and earnings per share assuming dilution (in thousands
except per share data):
53 weeks Fifty-two weeks ended
ended ---------------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Numerator:
Income from continuing operations $ 13,937 $ 10,730 $ 7,573
Loss from discontinued operations - (921) (168)
Cumulative effect of adopting SFAS 142 - (4,637) -
------ ------ ------
Net Income $ 13,937 $ 5,172 $ 7,405
====== ====== ======
Denominator:
Basic weighted-average shares 14,317 12,041 10,082
Effect of dilutive securities:
Employee stock options and warrants 714 937 874
------ ------ ------
Diluted weighted-average shares 15,031 12,978 10,956
====== ====== ======
Stock options and warrants not included in computation 702 126 544
=== === ===
The number of stock options and warrants not included in the computation of
diluted EPS relates to stock options and warrants having exercise prices
ranging from $17.12 to $19.52 which are greater than the average market
price of the common shares during the period, and therefore, are
antidilutive. The options and warrants, which were outstanding as of August
3, 2003, expire at various dates through October 3, 2008.
NOTE M - SHAREHOLDERS' EQUITY
The authorized shares of Common Stock of the Company is 20,000,000 shares.
On April 30, 2002, the Company completed the sale of 3,000,000 shares of
common stock to the public at $23.00. The Company received net proceeds of
approximately $64,812,000 after underwriting discounts and commissions and
other expenses of the offering.
On August 7, 2001 the Board of Directors declared a 3-for-2 stock split
effected as a stock dividend payable September 10, 2001 to holders of
record on August 28, 2001. The distribution increased the number of shares
outstanding from 7,027,553 to 10,541,329. The amount of $351,373 was
transferred from the additional paid-in capital to the common stock account
to record this distribution. All share and per share data (other than
common stock issued and outstanding on the 2000 Consolidated Balance Sheet
and 1999 and 2000 Consolidated Statements of Shareholders' Equity),
including stock options and warrants, included in this annual report have
been restated to reflect the stock split on a retroactive basis.
The Company has various fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. The Company
continues to use the intrinsic value method in accordance with the
recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting
for these plans. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock. Because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date
F-24
of grant, no compensation expense is recognized.
Statement of Financial Accounting Standards No.123, "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and ,
if fully adopted, changes the methods for recognition of cost on plans
similar to those of the Company. In December 2002, the FASB issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS No. 148 provides transition
alternatives for companies adopting the fair value recognition provisions
of FASB Statement No. 123 for stock-based employee compensation; and
requires pro forma disclosures of the impact on earnings and
earnings-per-share for companies continuing to rely on APB No. 25. The
Company has adopted the disclosure-only provisions of SFAS 123 and SFAS
148. Accordingly, no stock- based employee compensation cost has been
recognized for options granted under the stock option plans. Pro forma
information regarding net income and earnings per share as required by
Statements 123 and 148 has been determined as if the Company had accounted
for its employee stock options under the fair value method of Statement
123.
The fair value for options granted is estimated at the date of grant using
a Black-Scholes option pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility.
For purposes of computing pro forma (unaudited) consolidated net earnings,
the following assumptions were used to calculate the fair value of each
option granted:
53 weeks Fifty-two weeks ended
ended -----------------------
August 3, July 28, July 29,
2003 2002 2001
---- ---- ----
Expected life of options 1.51 years 1.51 years .73 years
Volatility .68 .68 .70
Risk-free interest rate 2.8% 2.8% 3.4%
Dividend yield zero zero zero
Had compensation cost for stock options granted in fiscal years 2003, 2002,
and 2001 been determined based on the fair value at the grant date
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below using the statutory income tax rate of 34% (in thousands
except per share data):
2003 2002 2001
---- ---- ----
Net income - as reported $13,937 $5,172 $7,405
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (1,926) (4,425) (1,610)
------ ----- -----
Net income - pro forma $12,011 $ 747 $5,795
====== ===== =====
Earnings per share - as reported
Basic $.97 $.43 $.73
Diluted .93 .40 .68
Earnings per share - pro forma
Basic $.84 $.06 $.57
Diluted .80 .06 .53
The effects of applying the pro forma disclosures of SFAS 123 and 148 are
not likely to be representative of the effects on reported net income for
future years due to the various vesting schedules.
F-25
In March 2003, the Board of Directors approved the 2003 Stock Option Plan
which covers 1,000,000 shares of the Company's common stock. Options
granted under the plan are non-qualified stock options. Under the terms of
the plan, the exercise price for options granted under the plan will be the
fair market value at the date of grant. The nature and terms of the options
to be granted are determined at the time of grant by the compensation
committee or the board of directors. The options expire no later than ten
years from the date of grant, subject to certain restrictions. No options
have been granted under the plan.
In September 2000, the Board of Directors approved the 2000 Stock Option
Plan which covers 1,500,000 shares of the Company's common stock. Options
granted under the plan are non-qualified stock options. Under the terms of
the plan, the exercise price for options granted under the plan will be the
fair market value at the date of grant. The nature and terms of the options
to be granted are determined at the time of grant by the compensation
committee or the board of directors. The options expire no later than ten
years from the date of grant, subject to certain restrictions. Options for
108,500 and 1,010,250 shares were granted during the fiscal years ended
August 3, 2003 and July 28, 2002, respectively.
In April 1998, the Board of Directors approved the 1998 Stock Option Plan
which covers 2,250,000 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the plan, the exercise price for options
granted under the plan will be the fair market value at the date of grant.
Prices for incentive stock options granted to employees who own 10% or more
of the Company's stock are at least 110% of market value at date of grant.
The nature and terms of the options to be granted are determined at the
time of grant by the compensation committee or the board of directors. The
options expire no later than ten years from the date of grant, subject to
certain restrictions. Options for 368,342 and 440,250 shares were granted
during the fiscal years ended July 28, 2002 and July 29, 2001,
respectively. No options were granted under this plan during the fiscal
year ended August 3, 2003.
In May 1997, the Board of Directors approved the 1997 Stock Option Plan
which covers 2,500,000 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the plan, the exercise price for options
granted under the plan will be the fair market value at the date of grant.
Prices for incentive stock options granted to employees who own 10% or more
of the Company's stock are at least 110% of market value at date of grant.
The nature and terms of the options to be granted are determined at the
time of grant by the compensation committee or the board of directors. The
options expire no later than ten years from the date of grant, subject to
certain restrictions. Options for 21,151 and 14,250, shares were granted
during the fiscal years ended July 28, 2002 and July 29, 2001,
respectively. No options were granted under this plan during the fiscal
year ended August 3, 2003.
In October 1995, the Board of Directors approved the 1996 Stock Option Plan
which covers 1,000,000 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of grant.
Prices for incentive stock options granted to employees who own 10% or more
of the Company's stock are at least 110% of market value at date of grant.
The nature and terms of the options to be granted are determined at the
time of grant by the compensation committee or the board of directors. If
not specified, 100% of the shares can be exercised one year after the date
of grant. The options expire ten years from the date of grant. Options for
7,007 shares were granted during the fiscal year ended July 28, 2002. No
options were granted under this plan during the fiscal year ended August 3,
2003.
F-26
A summary of stock option activity under all plans for the 53 weeks ended
August 3, 2003 and the 52 weeks ended July 28, 2002 and July 29, 2001 is as
follows:
Non-Qualified Stock Options
-------------------------------------------------------------------------
Weighted Warrant Agreements
Average ----------------------
Number Price Range Exercise Number Price per
of shares per share Price of shares share
--------- ------------- ----- ---------- ---------
Outstanding July 30, 2000 3,014,140 $ 4.06 - 11.91 $ 8.43 320,000 $ 3.09
Granted 829,500 8.38 - 14.25 8.99
Exercised (37,254) 4.06 - 10.46 6.72
Canceled (48,600) 4.31 - 14.25 10.76
--------- ------------- ----- ------- ----
Outstanding July 29, 2001 3,757,786 $ 4.06 - 13.67 $ 8.55 320,000 $ 3.09
Granted 1,406,750 11.90 - 19.52 16.05
Exercised (1,454,660) 4.06 - 13.67 7.50 (320,000) 3.09
Cancelled (282,700) 7.63 - 13.15 10.31
--------- ------------- ----- ------- ----
Outstanding July 28, 2002 3,427,176 $ 4.06 - 19.52 $ 11.92 -
Granted 108,500 14.50 - 19.03 17.68
Exercised (227,799) 4.06 - 13.10 8.80
Cancelled (9,650) 8.38 - 13.10 11.36
--------- ------------- ----- ------- ----
Outstanding August 3, 2003 3,298,227 $ 4.06 - 19.52 $ 12.33 -
========= =======
Options Outstanding and Exercisable by Price Range as of August 3,2003,
with expiration dates ranging from May 12, 2005 to June 6, 2013 are as
follows:
Options Outstanding
----------------------------------------------- Options Exercisable
Weighted --------------------------
Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------- ----------- ---------------- -------------- ----------- --------------
$ 4.06 - $ 8.08 211,877 4.7 $ 6.23 209,477 $ 6.21
8.38 - 10.20 865,750 5.5 8.66 674,050 8.71
10.46 - 11.92 729,050 5.3 10.51 696,450 10.49
13.10 - 13.10 732,050 7.0 13.10 574,650 13.10
14.50 - 19.52 759,500 7.7 19.22 588,200 19.36
--------- --- ----- --------- -----
$ 4.06 - $ 19.52 3,298,277 6.2 $ 12.33 2,642,827 $ 12.24
========= =========
In December 1995, common stock warrants were issued to certain officers for
the right to acquire 440,000 shares of common stock of the Company at the
fair market value of $3.09 per share at date of issue. The warrants vest
immediately and expire December 13, 2005. The remaining warrants for
320,000 shares outstanding at July 29, 2001 were exercised during the
fiscal year ended July 28, 2002.
NOTE N - SIGNIFICANT SEGMENTS, MAJOR CUSTOMERS, EXPORT SALES, AND GEOGRAPHIC
INFORMATION
The Company's chief operating decision makers are considered to be the
Chairman and the Chief Executive Officer (CEO). The Company's Chairman and
CEO evaluate both consolidated and disaggregated financial information,
primarily gross revenues, in deciding how to allocate resources and assess
performance. The Chairman and CEO also use certain disaggregated financial
information for the Company's product groups. The Company does not
determine a measure of operating income or loss by product group. The
Company's product groups have similar long-term economic characteristics,
such as application, and are similar in regards to (a) nature of products
and production processes, (b) type of customers, and (c) method used to
distribute products. Accordingly, the Company operates as a single
integrated business and as such has one operating segment as a provider of
complex microwave radio frequency (RF) and millimeter wave components and
subsystems for defense and commercial customers worldwide. All of the
Company's revenues result from sales of its products.
F-27
Revenues for fiscal years 2003, 2002 and 2001 were as follows: defense
electronics, $103,746,000, $80,615,000 and $61,977,000, respectively; and
commercial technologies, $6,477,000, $12,266,000, and $14,517,000,
respectively. Defense electronics includes revenue of $11,212,000
attributable to the EWST acquisition.
Net sales to the U.S. Government in fiscal 2003, 2002 and 2001 accounted
for approximately 25%, 17% and 19% of net sales, respectively. No other
customer accounted for shipments in excess of 10% of consolidated net sales
during the period. Foreign sales amounted to approximately $39,646,000
(including $11,212,000 in sales for EWST), $30,070,000 and $20,683,000 in
fiscal 2003, 2002 and 2001, respectively.
Geographic net sales based on place of contract performance were as follows
(in thousands):
2003 2002 2001
---- ---- ----
United States $ 88,294 $ 82,432 $67,597
Israel 10,717 10,449 8,897
England 11,212 - -
------- ------ ------
$ 110,223 $ 92,881 $ 76,494
======= ====== ======
Net property, plant and equipment by geographic area was as follows (in
thousands):
2003 2002
---- ----
United States $ 18,945 $ 19,351
Israel 3,071 2,880
England 390 -
------ ------
$ 22,406 $ 22,231
====== ======
NOTE O - DERIVATIVE FINANCIAL INSTRUMENTS
In October 2001, the Company entered into an interest rate swap with a bank
pursuant to which it exchanged floating rate interest in connection with
the Bonds discussed in Note H on a notional amount of $3,000,000 for a
fixed rate of 4.07% for a 10 year period ending October 1, 2011. The
notional amount reduces each year in tandem with the annual installments
due on the Bonds. The fixing of the interest rate for this period offsets
the Company's exposure to the uncertainty of floating interest rates on the
Bonds, and as such has been designated as a cash flow hedge. The hedge is
deemed to be highly effective and any ineffectiveness will be recognized in
interest expense in the reporting period. The fair value of the interest
rate swap was a liability of $74,000 as of August 3, 2003. There was no
material hedge ineffectiveness related to cash flow hedges during the
period to be recognized in earnings. There was no gain or loss reclassified
from accumulated other comprehensive income into earnings during the fiscal
year ended August 3, 2003 as a result of the discontinuance of a cash flow
hedge due to the probability of the original forecasted transaction not
occurring.
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the
balance sheet for cash and cash equivalents approximated its
fair value.
Available-for-sale securities: The fair value of
available-for-sale securities was based on quoted market prices.
Long-term debt: The fair value of the mortgage note and
industrial revenue bonds (including the related interest rate
swap) were estimated using discounted cash flow analyses, based
on the
F-28
Company's current incremental borrowing rate for similar types of
borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
are presented below (in thousands):
August 3, 2003
---------------------------
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $ 81,523 $ 81,523
Available-for-sale securities 75 75
Long-term debt 6,403 7,333
NOTE Q - DISCONTINUED OPERATIONS
The Company entered into an agreement effective as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common
stock of Terrasat, Inc. ("Terrasat"), a California corporation for cash in
the amount of $6,000,000, $3,000,000 of which was paid in December 2000 and
$3,000,000 of which was paid in December 2001. In addition, the agreement
provided for additional cash payments in the future up to $2,000,000, based
on gross revenues through December 31, 2001. The targeted gross revenues
under the agreement were not achieved, therefore no addition cash payments
were required.
In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," retains the fundamental provisions of Statement 121 for (a)
recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS 144 also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of, but retains the requirement of Opinion 30 to
report discontinued operations separately from continuing operations and
extends that reporting to a component of an entity that either has been
disposed of (by sale, by abandonment, or in a distribution to owners) or is
classified as held for sale. The provisions of this statement were adopted
by the Company effective on July 30, 2001.
In January 2002 the Board of Directors of the Company decided to
discontinue the operations of Terrasat and to seek a buyer for the
business. The Company believed that Terrasat would not be able to generate
sufficient returns to justify continued investment due to the overcapacity
in the telecom industry and deteriorating economic conditions in Terrasat's
primary markets. Consequently, the accompanying consolidated financial
statements reflect Terrasat as discontinued operations in accordance with
SFAS No. 144. Results of operations and cash flows of Terrasat have been
classified as "Loss from discontinued operations", and "Net cash provided
by (used in) discontinued operations", respectively.
The sale of certain assets and liabilities, and the business of Terrasat
was consummated on March 1, 2002, effective the close of business January
27, 2002, to certain current employees of Terrasat for cash and a note
which approximates the carrying value of the net assets held for sale as of
January 27, 2002 of $878,000.
F-29
Summarized below are the results of discontinued operations:
52 weeks ended
-----------------------
July 28, July 29,
2002 2001
---- ----
Net sales $ 2,147 $ 4,103
----- -----
Loss from discontinued operations (1,395) (147)
Income tax (benefit) provision (474) 21
----- ---
Net loss from discontinued operations $ (921) $ (168)
=== ===
************
F-30