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 1, 2004
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.
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(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: None
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the Registrant's voting Common Stock held by
non-affiliates of the Registrant, based on the closing sale price of the Common
Stock of $21.80 as reported on the Nasdaq National Market as of February 1,
2004, the last business day of the Registrant's most recently completed second
fiscal quarter, was approximately $278,597,000.
The number of shares outstanding of Registrant's Common Stock, $ .10 par value
on October 4, 2004 was 14,282,857.
Documents incorporated by reference:
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Portions of the Registrant's definitive proxy statement for use in connection
with its Annual Meeting of Stockholders to be held in January 2005, to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, are
incorporated by reference into Part III of this Annual Report Form 10-K.
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. 12
Item 4. Submission of Matters to a Vote of Security Holders. 13
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities. 14
Item 6. Selected Financial Data. 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 25
Item 8. Financial Statements and Supplementary Data. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 26
Item 9A. Controls and Procedures. 26
Item 9B. Other Information 26
PART III
Item 10. Directors and Executive Officers of the Registrant. 27
Item 11. Executive Compensation. 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management. 27
Item 13. Certain Relationships and Related Transactions. 27
Item 14. Principal Accounting Fees and Services 27
PART IV
Item 15. Exhibits and Financial Statement Schedules. 27
SIGNATURES 29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
PART I
Item 1. Business
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," "may,"
"should" 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 as well as the factors set forth in our public filings with
the Securities and Exchange Commission.
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.
GENERAL
The Company's corporate offices are located at 101 North Pointe Boulevard,
Lancaster, Pennsylvania 17601. The telephone number of the Company at that
location is (717) 735-8117. The Company's web site is located at www.herley.com.
The Company makes its periodic and current reports available, free of charge, on
its web site as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission. The Company's Common Stock is listed on the NASDAQ national market
under the symbol "HRLY."
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.
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ACQUISITIONS
We have grown internally and through strategic acquisitions 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.
- - 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
company located in Aldershot, in the United Kingdom. EWST designs, develops and
produces electronic warfare simulator systems for prime defense contractors and
countries worldwide.
- - In March 2004, we acquired Communication Techniques, Inc. ("CTI"), of
Whippany, New Jersey. CTI designs, develops and produces state-of-the-art signal
generation components and integrated assemblies for digital radio, SONET,
SatCom, test and instrumentation, datacom, and wired and wireless applications
to 45 Gigahertz ("GHz") and 45 Gigabits Per Second ("Gb/s").
- - In September 2004, we acquired Reliable System Services Corporation ("RSS"),
of Melbourne, Florida, a manufacturer of satellite based command and control
systems for defense customers. The RSS Iridium based command and control system
provides secure (encryption, anti-spoof) global service coverage, allowing
multiple target operations, and is complementary with the Company's MAGIC2
command and control systems.
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.
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- - 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.
- - 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. In fiscal 2002 we
completed the expansion of our facilities in Lancaster, Pennsylvania, including
state-of-the-art manufacturing capacity, where we now 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; Whippany,
New Jersey; Melbourne, Florida; 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 17%, and Raytheon at
approximately 10%, representing 10% or more of our fiscal 2004 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 32% of our revenues in fiscal 2004.
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- - 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 2004, we spent
approximately $11.1 million on new product development, of which our customers
funded approximately $5.7 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.
PRODUCTS AND SERVICES
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 ("C2") systems principally
are 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 C2 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 C2 systems are currently in service throughout the world. C2 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
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TV sensors and the necessary data links to send information back to its C2
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 C2 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.
In September 2004, we closed on the purchase of Reliable System Services
Corporation ("RSS"). In addition to complementing and adding to our capabilities
in Telemetry, Electronic Warfare ("EW") Simulation Equipment, EW Jamming
Equipment and Range Safety Commanding applications, RSS will significantly
enhance our C2 capabilities for UAV platforms, in that RSS provides a C2 system
for UAVs that operates through the Iridium satellite system. The RSS Iridium
based C2 system provides secure (encryption, anti-spoof) global service
coverage, allowing multiple target operations. The addition of this RSS Iridium
based alternate for UAV C2 systems will enable us to provide a broader array of
systems configuration solutions to our defense industry customers.
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
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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 Megahertz (" MHz") to 12 GHz 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 through MRCM GmbH, Germany for high power amplifiers used in
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.
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. The system offers a fully
programmable ECM capability using Digital RF Memories ("DRFM") technology; and
offers fully coherent jamming in both range and velocity through the use of
8-bit DRFM technology together with GUI software. 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
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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.
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 Original Equipment
Manufacturers ("OEM"), system manufacturers and research centers.
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 OEM, 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 1, 2004, approximately 17% of our net sales
were attributable to contracts with offices and agencies of the U.S. Government,
and Raytheon accounted for approximately 10% of net sales. No other customers
accounted for shipments of 10% or more 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 2004, sales to foreign customers accounted for approximately 32%
of our net sales. Domestic sales to foreign customers accounted for 15% of net
sales. Sales from England were 7%, and Israel 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
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systems.
SALES AND MARKETING
We market our products worldwide to the United States Government, prime
contractors and various countries in defense markets, and to OEM, 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.
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.
8
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
Whippany, New Jersey (acquired in March 2004)
Melbourne, Florida (acquired in September 2004)
Jerusalem, Israel
Aldershot, England
BACKLOG
Our total backlog of orders was approximately $100 million on August 1, 2004 as
compared to approximately $90 million on August 3, 2003. Of our total backlog at
August 1, 2004, $71 million (71%) is attributable to domestic orders and $29
million (29%) is attributable to foreign orders. Management anticipates that
approximately 88% of this backlog will be shipped during the fiscal year ending
July 31, 2005.
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. We focus our primary efforts 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 $11.1 million in fiscal 2004, $6.3 million in fiscal 2003 and $5.6
million in fiscal 2002. The portion of these costs not reimbursed by customers
was approximately $5.4 million in fiscal 2004, $3.1 million in fiscal 2003 and
$2.3 million in 2002. These increases in development spending were undertaken to
continue to provide future business opportunities for the Company. Future
product development costs will depend on the availability of appropriate
development opportunities within the markets served by the Company.
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
9
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.
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 August 1, 2004 we had 832 employees. We believe that our employee
relations are satisfactory. None of our approximately 690 U.S. based employees
are represented by a labor union. Employment by functional area as of August 1,
2004 is as follows:
Executive 10
Administration 41
Manufacturing 578
Engineering 160
Sales and Marketing 43
----
Total 832
===
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 for our U.S. employees, and stock option plans.
10
OFFICERS OF THE REGISTRANT
Name Age Served as Officer Since Position(s) and Offices
- ---- --- ----------------------- -----------------------
Lee N. Blatt 76 1965 Chairman of the Board
Myron Levy 63 1988 Vice Chairman, Chief
Executive Officer, and
Director
John M. Kelley 51 1998 President
William Wilson 56 2002 Vice President and
Chief Operating Officer
Thomas V. Gilboy 50 2004 Vice President and
Chief Financial Officer
Rozalie Schachter 58 2000 Vice President - Business
Development
Anello C. Garefino 57 1993 Vice President - Finance
John A. Carroll 53 2003 Vice President - Human
Resources
Richard Poirier 39 2003 Vice President
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
Whippany, NJ (2) Production, engineering and administration 23,000 sq. ft. Leased
Melbourne, FL (3) Production, engineering and administration 12,000 sq. ft. Leased
Jerusalem, Israel Production, engineering and administration 20,000 sq. ft. Owned
Aldershot, England (4) 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 we 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) We entered into an agreement as of March 29, 2004 to acquire certain
assets and the business of Communication Techniques, Inc. as discussed in Note B
of the financial statements.
(3) As of September 1, 2004, we entered into an agreement to acquire
certain assets and the business of Reliable System Services Corporation as
discussed in Note S of the financial statements.
(4) As of September 1, 2002, we 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>
We believe that these facilities are adequate for our current and presently
anticipated future needs.
11
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 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 attorney's 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 did not appeal. 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 timely filed a response to RLI's brief and thereafter RLI
timely filed a response to Herley's brief. Oral argument was held on December
18, 2003.
By Summary Order on January 26, 2004, the Second Circuit affirmed the trial
court judgment in its entirety. On February 4, 2004, RLI submitted a letter
request to the trial court for relief from the judgment on RLI's claim for the
earn-out stock under Federal Rule of Civil Procedure 60. RLI contended that it
has "newly discovered evidence," first learned in August 2003, to justify its
requested relief. Herley submitted its response in opposition by letter dated
February 10, 2004. On February 26, 2004, the parties appeared before the Court
concerning the various applications and were directed to submit legal briefs on
various legal issues. By Order dated May 28, 2004 the trial court denied RLI's
Motion for a New Trial. The Court also denied Herley's request that it exercise
its general equitable power to hold Ben Robinson personally liable for any fees
Herley might recover against RLI.
12
On June 28, 2004, Herley filed suit against Ben Robinson and Frank Holt in the
Superior Court of Hillsborough County, New Hampshire, asserting claims for
fraudulent conveyance and piercing the corporate veil to hold Robinson
personally liable for the fees incurred by Herley in defending RLI's claims
discussed above. In response, Robinson took steps to collect damages awarded to
him under the jury verdict. On July 21, 2004, Herley brought an Emergency Motion
for Injunctive Relief and moved for an immediate order from the New Hampshire
court allowing Herley to escrow the judgment owed to Robinson to be offset
against any award of fees to Herley. The court entered an order denying the
requested relief. On July 27, 2004, Herley paid $1,594,621 (including interest)
to Ben Robinson, an amount calculated by deducting Herley's award against
Robinson from the amounts awarded to Robinson on his claims under the Employment
Agreement and the Lease Agreement. On July 28, 2004, the parties filed a Notice
of Partial Satisfaction of Judgment. Herley's judgment against RLI remains
unsatisfied. Cross petitions for attorney's fees are still pending.
We are involved in various other legal proceedings and claims. While any legal
proceedings or claims contain an element of uncertainty, we believe that the
outcome of such legal proceedings or claims 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.
13
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities.
(a) Our 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 our Common
Stock for the periods indicated.
Common Stock
------------
High Low
---- ---
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............................................. 20.55 17.50
Second Quarter............................................ 22.85 18.24
Third Quarter............................................. 21.90 18.88
Fourth Quarter............................................ 21.92 18.50
Fiscal Year 2005
First Quarter (through October 11, 2004).................. 19.77 17.45
The closing price on October 11, 2004 was $18.89.
As of October 1, 2004, there were approximately 210 holders of record of
our Common Stock.
There have been no cash dividends declared or paid by us on our Common
Stock during the past two fiscal years.
(b) Not applicable.
(c) We did not repurchase any of our Common Stock during the fourth quarter
of fiscal 2004.
14
Item 6. Selected Financial Data (in thousands except per share data):
52 weeks 53 weeks 52 weeks ended
ended ended ----------------------------------
August 1, August 3, July 28, July 29, July 30,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net sales (3) $ 122,154 110,223 92,881 76,494 70,537
Income from continuing operations $ 13,673 13,937 10,730 7,573 7,639
Loss from discontinued operations $ - - (921) (168) -
Cumulative effect of adopting SFAS 142 $ - - (4,637) - -
Net income $ 13,673 13,937 5,172 7,405 7,639
Per share data from continuing operations (1) (2)
Basic $ .97 .97 .89 .75 1.05
Assuming Dilution $ .92 .93 .83 .69 .96
Total Assets $ 220,971 197,564 190,202 114,597 86,656
Total Current Liabilities $ 23,846 18,125 14,557 17,976 12,239
Long-Term Debt net of current portion $ 5,845 6,403 5,684 2,740 2,931
Other Long-Term Liabilities $ 932 849 706 756 544
<FN>
(1) Earnings per share from continuing operations are presented and
calculated before discontinued operations in 2002 and 2001, and before
cumulative effect of accounting change in 2002.
(2) No cash dividends have been distributed in any of the years presented.
(3) See "Acquisitions" under Item 1. "Business".
</FN>
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
We are 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.
The following table sets forth for the periods indicated certain financial
information derived from our 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.
52 weeks 53 weeks 52 weeks
ended ended ended
August 1, August 3, July 28,
2004 2003 2002
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 65.1% 66.4% 66.7%
----- ---- ----
Gross profit 34.9% 33.6% 33.3%
Selling and administrative expenses 17.3% 14.7% 14.3%
Litigation costs 1.6% 1.1% 2.2%
Plant closing costs - - 0.4%
---- ---- ----
Income from operations 16.0% 17.8% 16.4%
---- ---- ----
Other income (expense), net:
Investment income 0.6% 1.0% 0.8%
Interest expense (0.3)% (0.3)% (0.4)%
Foreign exchange (loss) (0.1)% - -
--- --- -----
0.1% 0.7% 0.4%
--- --- ----
Income from continuing operations before
income taxes 16.2% 18.5% 16.8%
Provision for income taxes 5.0% 5.9% 5.2%
---- ---- -----
Income from continuing operations 11.2% 12.6% 11.6%
Loss from discontinued operations - - 1.0%
---- ---- -----
Income before cumulative effect of change
In accounting principle 11.2% 12.6% 10.6%
Cumulative effect of adopting SFAS 142 - - (5.0)%
---- ---- -----
Net income 11.2% 12.6% 5.6%
==== ==== ===
16
Fiscal 2004 Compared to Fiscal 2003
Net sales for the 52 weeks ended August 1, 2004 were approximately $122,154,000
compared to $110,223,000 for fiscal 2003. The net sales increase of $11,931,000
(11%) is attributable to increased revenue in defense electronics microwave
systems and components of $9,426,000 (including $1,078,000 attributable to the
acquisition of CTI as of March 29, 2004). This increase also includes revenue
from products shipped under new programs as well as increases on legacy products
and programs. Net sales in commercial technologies increased by $2,505,000,
which includes revenue attributable to the acquisition of CTI of $3,045,000,
offset by a decrease of $540,000 in medical and scientific products due to the
decline in demand in the industry for Magnetic Resonance Imaging and Nuclear
Magnetic Resonance systems. As a result, we expect revenues in medical and
scientific products to remain relatively flat.
The gross profit margin for the 52 weeks ended August 1, 2004 was 35% as
compared to the margin of 34% in fiscal 2003. Gross profit increased $5,648,000
primarily as a result of increased volume over fiscal 2003 and greater
absorption of fixed costs. Margins also improved in microwave components due to
production efficiencies, including the automation of certain processes. This
improvement was offset by lower margins on revenue relating to engineering
programs which are essential for long-term technology development and future
revenue growth. In addition, consolidated gross profit margins were negatively
impacted by approximately one half percent due to revisions in total cost
estimates (including the effect of foreign exchange translations on non-
Sterling denominated contracts) at our EWST subsidiary in the UK.
Selling and administrative expenses for the fifty-two weeks ended August 1, 2004
were 17% of net sales as compared to 15% in fiscal 2003. There was a net
increase in expenses of $4,936,000 which includes expenses of CTI of
approximately $900,000, an increase in incentive compensation under employment
contracts and discretionary bonuses of $320,000, and additional administrative
and business development personnel and related costs of $2,019,000. The Company
reorganized and expanded its business development group to focus and capitalize
on worldwide market opportunities for all of its products. Other increases
include amortization of acquired intangibles of $90,000, sales representative
fees and commissions of $623,000, and $303,000 in consulting fees primarily in
connection with our Sarbanes-Oxley, Section 404 preparation which will continue
in fiscal 2005.
Litigation costs in fiscal 2004 increased $777,000 from the level incurred in
fiscal 2003. These costs are directly related to the Robinson Labs litigation
and include a payment of the jury award to Ben Robinson of approximately
$1,595,000 in July 2004. We do not anticipate our litigation costs in connection
with this matter to be significant in the future. (See Item 3. "Legal
Proceedings").
Income from operations for the year was $19,602,000 or 16% of net sales, as
compared to $19,667,000 or 18% of net sales in fiscal 2003. The decrease in
operating income is primarily attributable to the increases in selling and
administrative expenses and litigation costs as discussed above. In addition,
our foreign operations contributed $3,017,000 in operating income for the year
as compared to $4,250,000 in fiscal 2003. Revenues from our foreign operations
decreased by $520,000 as compared to fiscal 2003. The drop in revenue and
operating income within our foreign operations was due to revisions in total
cost estimates (including the effect of foreign exchange translations on
non-Sterling denominated contracts) at our EWST subsidiary in the UK.
Investment income decreased by $439,000 in fiscal 2004 as a result of a 29%
decline in the rate of interest earned on the investment of excess cash reserves
during the 2004 fiscal year as compared to interest rates in fiscal 2003, and a
decrease on average of approximately $6,655,000 in funds invested.
17
The net foreign exchange loss of $194,000 in fiscal 2004 is attributable to the
weaker U.S. Dollar during the fiscal year causing our foreign denominated
liabilities to increase in value, and the U.S. Dollar denominated contracts in
the United Kingdom to decrease in value. In addition, we recorded an unrealized
gain on U.S. Dollar denominated loans to EWST which are expected to be repaid
during fiscal 2005. The realized and unrealized exchange gains and (losses) are
as follows:
Gain (Loss)
---------------------
Unrealized Realized
---------- --------
Foreign denominated liabilities $ (212,000) $ (56,000)
U.S. Dollar denominated contracts
In the United Kingdom (102,000)
Other foreign exchange transactions 23,000
U.S. Dollar denominated loans to EWST 153,000
------- ------
$ (161,000) $ (33,000)
======= ======
The effective income tax rate for fiscal 2004 was 30.8% as compared to 31.8% in
fiscal 2003. The overall effective tax rate is lower than the statutory income
tax rate of 35% in fiscal 2004 due to various favorable tax benefits including a
lower effective tax rate on foreign-source income, the tax benefit attributable
to extra territorial income, and research and development credits.
Fiscal 2003 Compared to Fiscal 2002
Net sales 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
(19%) 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 34% for the 53 weeks ended August 3, 2003 is slightly better
than the prior year of 33%. We benefited 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 our
historical margins.
Selling and administrative expenses for the 53 weeks ended August 3, 2003 were
15% of net sales as compared to 14% in fiscal 2002. There was a net increase in
expenses of $2,958,000 which includes expenses of EWST of $1,096,000, and
increases in: incentive compensation under employment contracts of $1,072,000,
amortization of acquired intangibles of $217,000 related to EWST, 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 fees incurred in
fiscal 2002. The litigation costs are 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 $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.
18
Discontinued operations
We 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,"
but 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 us effective on July 30, 2001.
In January 2002 we decided to discontinue the operations of Terrasat and to seek
a buyer for the business. We 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
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.
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 impairment 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 us on July 30, 2001. The adoption of SFAS No.142 resulted in our
discontinuation of amortization of goodwill as of July 30, 2001.
In connection with the adoption of SFAS 142, we were required to assess goodwill
for impairment within six months of adoption, and we completed our assessment in
the second quarter of fiscal 2002.
We operate as a single integrated business and as such have one operating
segment which is also the reportable segment as defined in SFAS 131. Within the
operating segment in fiscal 2001, we identified two components as reporting
units as defined under SFAS 142, 'defense electronics' and 'commercial
technologies.' We 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. In January 2002, we
decided to discontinue the operations of Terrasat (the only business in the
commercial technologies reporting unit), and to
19
seek a buyer for the business. In connection with this decision in fiscal 2002,
we determined that an impairment of goodwill in the commercial technologies unit
had occurred. 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 was no tax benefit associated with the adjustment
since the impaired goodwill is not deductible for income tax purposes.
An impairment test based on a single reporting unit was performed in the fourth
quarter of fiscal 2004 using our current market capitalization, which in an
active market for our common stock, we consider a reasonable indication of
implied fair value. Based on this initial step in the test for impairment, we
concluded there was no impairment of goodwill at August 1, 2004. An annual
impairment test will be performed in the fourth quarter of each fiscal year, or
when an indication of impairment exists, and any future impairment of goodwill
will be charged to operations.
Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the 52 weeks ended August 1, 2004 and for the 53 weeks ended August 3, 2003 (in
thousands, except for per share data).
2004
----
November 2, February 1, May 2, August 1,
2003 2004 2004 2004
---- ---- ---- ----
Net sales $ 28,267 29,408 30,233 34,246
Gross profit 10,642 10,363 10,768 10,876
Net income $ 3,941 3,546 3,876 2,310
======= ======= ======= =======
Earnings per common share - Basic $ .28 .25 .27 .16
=== === === ===
Basic weighted average shares 14,013 14,073 14,129 14,205
====== ====== ====== ======
Earnings per common share - Diluted $ .27 .24 .26 .15
=== === === ===
Diluted weighted average shares 14,782 14,880 14,932 14,962
====== ====== ====== ======
2003
----
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
Net income $ 3,352 3,287 3,359 3,939
======= ======= ======= =======
Earnings per common share - Basic $ .23 .23 .24 .28
=== ==== ==== ====
Basic weighted average shares 14,668 14,464 14,218 13,921
====== ====== ====== ======
Earnings per common share - Diluted $ .22 .22 .23 .27
==== ==== ==== ===
Diluted weighted average shares 15,506 15,124 14,848 14,600
====== ====== ====== ======
The fourth quarter has historically been our strongest quarter for shipments.
The third and fourth quarter of fiscal 2004 includes revenue attributable to the
acquisition of CTI of $1,116,000 and $3,007,000, respectively.
20
The gross margin percentage in the fourth quarter of 2004 was negatively
impacted (as compared to 2003) due to revisions in total cost estimates on
certain long term contracts at our EWST subsidiary, offset by an improvement in
margins at one of our other facilities in the U.S. due to costs incurred in last
year's fourth quarter in connection with the start up of a new product line at
that facility. In addition, the gross profit margin also varies from quarter to
quarter due to changes in product mix.
Included in the results of the fourth quarter of 2004 is a $1.6 million pretax
payment in connection with the Robinson Labs litigation. (See Item 3. "Legal
Proceedings").
Liquidity and Capital Resources
As of August 1, 2004 and August 3, 2003, working capital was $130,273,000 and
$128,462,000, respectively, and the ratio of current assets to current
liabilities was 6.5 to 1 and 8.1 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
progress payments. In addition, it is customary for us to receive advanced
payments from customers on major contracts at the time a contract is entered
into. The unliquidated balance of these advanced payments was approximately
$1,180,000 at August 1, 2004, and $856,000 at August 3, 2003.
Net cash provided by continuing operations was approximately $3,610,000 in
fiscal 2004 as compared to $14,567,000 in 2003. Significant items contributing
to the sources of funds include the following:
-------------------------------------- ----------------------------- -----------------------------------
Income from operations $17,917,000 in fiscal 2004 as As adjusted for depreciation and
compared to $18,239,000 in amortization.
fiscal 2003
-------------------------------------- ----------------------------- -----------------------------------
Increase in accounts payable and $3,431,000 Due to growth of business.
accrued expenses
-------------------------------------- ----------------------------- -----------------------------------
Increase in billings in excess of $1,303,000 Due to growth of business and in
costs incurred on certain contacts incorporating payments
uncompleted contracts in advance of costs incurred.
-------------------------------------- ----------------------------- -----------------------------------
The following major items offset the sources of funds noted above:
-------------------------- ------------- ---------------------------------------------------------------
Funds invested in $6,923,000 Due to growth of business.
increases in accounts
receivable
-------------------------- ------------- ---------------------------------------------------------------
Increase in costs incurred $7,250,000 Due to growth of business, including exercise of options on
and income recognized existing contracts, plus the impact of foreign exchange
in excess of billings on translation of costs on certain contacts at EWST to US
uncompleted contracts Dollars.
-------------------------- ------------- ---------------------------------------------------------------
Funds invested in $5,806,000 Due to growth of business, including engineering costs
increases in inventory incurred on new contracts with customers (such as the
ICAP program and certain high power amplifier contracts),
plus the impact of foreign exchange translation of inventory
costs at EWST to US Dollars.
-------------------------- ------------- ---------------------------------------------------------------
Costs incurred and income recognized in excess of billings on uncompleted
contracts are classified in the financial statements as current assets. We
expect to bill and collect substantially all costs incurred and income
recognized in excess of billings within one year. However, we anticipate that it
will incur additional costs and recognize income on uncompleted contracts in the
future, as new contracts are negotiated.
Net cash used in investing activities was approximately $20,724,000 in fiscal
2004 as compared to approximately $6,344,000 in fiscal 2003. Cash used in
investing activities in fiscal 2004 consists of $5,884,000 for capital
expenditures, and $14,914,000 for the acquisition of CTI. In connection with the
acquisition of
21
EWST as of September 1, 2002, we issued a note for 1,000,000 Pounds Sterling,
including interest at 1.8%, payable in annual installments of 333,334 Pounds
Sterling beginning October 1, 2003. Based on the spot rate of exchange at August
1, 2004 of 1.8183 the U.S. Dollar equivalent of the annual installments is
approximately $606,000.
During the fiscal year ended August 1, 2004, we received approximately
$2,458,000 from the exercise of common stock options by employees.
On May 30, 2003 we 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 1, 2004, we acquired approximately 940,000 shares of common
stock under this program at an aggregate cost of approximately $14,668,000.
In June 2002, we entered into a new $50,000,000 Revolving Credit Loan 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, 2006 (as amended). We may elect to
borrow up to a maximum of $5,000,000 with interest based on the 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. The Federal Funds Target
Rate and the LIBOR rate was 1.25% and 1.48%, respectively, at August 1, 2004.
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 under the line at August 1, 2004 and August 3, 2003. Stand-by
letters of credit were outstanding in the amount of $11,389,000 under the credit
facility at August 1, 2004.
We believe that presently anticipated future cash requirements will be provided
by internally generated funds, our existing unsecured credit facility, and
existing cash reserves. A significant portion of our revenue for fiscal 2005
will be generated from our existing backlog of sales orders. The backlog of
orders at August 1, 2004 was approximately $100 million. 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 our backlog, we will be required to rely more
heavily on cash reserves and our existing credit facility to fund our
operations. We are not aware of any events which are reasonably likely to result
in any cancellation of its government contracts. We have approximately
$38,611,000 available under our bank credit facility, net of outstanding
stand-by letters of credit of approximately $11,389,000, and cash reserves at
August 1, 2004 of approximately $66,181,000.
Contractual Obligations and Commitments
Our obligations and commitments to make future payments under contracts, such as
purchase orders, and debt and lease agreements, and under contingent
commitments, such as stand-by letters of credit are as follows:
We have outstanding an aggregate of approximately $16,448,000 in open purchase
orders as of August 1, 2004. These open purchase orders represent executory
contracts for the purchase of goods and services which will be substantially
fulfilled in the next six months.
22
Future payments required on long-term debt are as follows (in thousands):
During Industrial
fiscal Mortgage revenue EWST
year Total note bonds note Other
---- ----- ---- ----- ---- -----
2005 $ 804 $ 93 $ 105 $ 606 $ -
2006 817 101 110 606 -
2007 223 108 115 -
2008 236 116 120 - -
2009 198 73 125 - -
Future 4,371 2,033 2,230 - 108
----- ----- ----- ----- ---
$ 6,649 $ 2,524 $ 2,805 $ 1,212 $ 108
===== ===== ===== ===== ===
Minimum annual rentals under noncancellable operating leases are as follows (in
thousands):
During
fiscal
year Amount
---- ------
2005 $ 1,649
2006 1,513
2007 1,272
2008 1,206
2009 1,256
Future 856
Stand-by letters of credit expire as follows (in thousands):
During
fiscal
year Amount
---- ------
2005 $ 4,881
2006 2,437
2007 3,873
2008 30
2009 168
--------
$ 11,389
In addition, we have 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, 2015. The agreements provide for aggregate annual salaries as of
August 1, 2004 of $1,427,000 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.
The agreements also provide that, in the event there is a change in control of
the Company, 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 1, 2004, the amount payable
in the event of such termination would be approximately $16,318,000.
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.
23
Critical Accounting Policies and Estimates
Our 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 our oversight
responsibilities, we continually evaluate the propriety of our accounting
methods as new events occur. We believe that our policies are applied in a
manner which is intended to provide the user of our financial statements a
current, accurate and complete presentation of information in accordance with
accounting principles generally accepted in the United States of America.
Important accounting practices that require the use of assumptions and judgments
are outlined below.
We generally recognize revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable. Payments received from customers in advance of products
delivered are recorded as customer advance payments until earned. Substantially
all of our customer contracts are firm, fixed price contracts, providing for a
predetermined fixed price for the products sold, regardless of the costs
incurred. Approximately 13% to 16% of revenues over the last three fiscal years
were derived from long-term, fixed price contracts for which revenues and
estimated profits are recognized using the percentage of completion method of
accounting based on estimated completion to date (the total contract amount
multiplied by the percentage 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 to contract
performance. Selling, general and administrative costs are charged to expense as
incurred. 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 long-term contracts are based upon the anticipated excess
of 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 costs and contract terms.
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, or when an indication of impairment exists, and any impairment of goodwill
is charged to operations.
An impairment test based on a single reporting unit was performed in the fourth
quarter of fiscal 2004 using our current market capitalization, which in an
active market for our common stock, we consider a reasonable indication of
implied fair value. Based on this initial step in the test for impairment, we
concluded there was no impairment of goodwill at August 1, 2004.
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.
24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk associated with foreign currency exchange and
changes in interest rates. We have not entered into any market risk sensitive
instruments for trading purposes.
Since the acquisitions of General Microwave Corporation and EWST, we are subject
to movements in foreign currency rate changes related to our operations in
Israel and in England. The movements in the Israeli Shekel versus the U.S.
Dollar have not been significant. Movements in Pounds Sterling (the functional
currency at EWST) have been more significant.
Based on our historical results and expected future results, EWST accounts for
approximately 7% to 10% of our total revenues, based in part on the rate at
which EWST's Sterling denominated financial statements have been or will be
converted into U.S. dollars. Since its acquisition in fiscal year 2003, EWST has
contributed approximately 10% to our consolidated operating income. Having a
portion of our future revenue and income denominated in Sterling exposes us to
market risk with respect to fluctuations in the U.S. dollar value of future
Sterling denominated revenue and earnings. A 10% decline in the average value of
Sterling in fiscal 2004, for example, would have reduced sales by approximately
$910,000, and would have decreased our consolidated operating income by
approximately $75,000 (due to the reduction in the U.S. dollar value of EWST's
sales and operating income).
We have a foreign denominated liability as of August 1, 2004 of approximately
667,000 Pounds Sterling in connection with the acquisition of EWST that is
subject to foreign exchange rate fluctuations. Based on the spot rate of
exchange at August 1, 2004 of 1.818, the U.S. Dollar equivalent of the liability
is approximately $1,212,000.
We have made inter-company advances to EWST in the aggregate amount of
approximately $6 million at August 1, 2004 that were previously considered
long-term advances. However, since the advances are denominated in U.S. Dollars
and EWST anticipates reducing the amount of advances during fiscal year 2005,
the amount outstanding is subject to foreign exchange rate fluctuations.
In October 2001, we 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 our 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 $108,000 as of August 1, 2004. There was no material hedge
ineffectiveness related to cash flow hedges during the fiscal years presented to
be recognized in earnings.
We also have a $50,000,000 Revolving Credit Loan 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, 2006. We may elect to borrow up to a maximum of
$5,000,000 with interest based on the 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. The Federal Funds Target Rate and the LIBOR rate was 1.25% and
1.48%, respectively, at August 1, 2004. The credit line is reviewed on an annual
basis.
There were no borrowings outstanding under our revolving credit facility as of
August 1, 2004.
25
The table below provides information about our debt that is sensitive to changes
in interest rates. Future principal payment cash flows by maturity date as
required under the industrial revenue bonds, and corresponding fair value is as
follows:
Fiscal year ending: Bonds
------------------ -----
2005 $ 105
2006 110
2007 115
2008 120
2009 125
2010 and later 2,230
-----
$ 2,805
Fair value $ 2,913
=====
We do not anticipate any other material changes in its primary market risk
exposures in fiscal 2005.
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.
Under the supervision and with the participation of our management,
including our principal executive officer (Vice Chairman of the
Board/Chief Executive Officer) and principal financial officer (Vice
President/Chief Financial Officer), we have evaluated the effectiveness
of our 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 1, 2004 (the "Evaluation
Date"). Based on such evaluation, the principal executive officer and the
principal financial officer have concluded that, as of the Evaluation
Date, our disclosure controls and procedures are effective, and are
reasonably designed to ensure that all material information (including
our consolidated subsidiaries) required to be included in our 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 1, 2004, 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.
Item 9B. Other Information
Not applicable
26
PART III
The information required by Part III is incorporated by reference to our
definitive proxy statement in connection with our Annual Meeting of Stockholders
scheduled to be held in January 2005, to be filed with the Securities and
Exchange Commission within 120 days following the end of our fiscal year ended
August 1, 2004.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(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. (Exhibit 10.12 of Annual
Report on Form 10-K for the fiscal year ended August 3, 2003).
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 Asset Purchase Agreement dated as of March 29, 2004 between Registrant and
Communication Techniques, Inc.
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).
27
10.19 Amendment (dated April 2, 2004) to Loan Agreement dated June 19, 2002
among the Registrant, Manufacturers and Traders Trust Company, successor
in interest to Allfirst Bank, and Fulton Bank.
10.20 Asset Purchase Agreement dated as of September 1, 2004 between Registrant
and Reliable System Services Corp.
10.21 Amendment dated December 9, 2003 to Employment Agreement between Herley
Industries, Inc. and Myron Levy dated as of July 29, 2002.
10.22 Amendment dated December 9, 2003to Employment Agreement between Herley
Industries, Inc. and Lee N. Blatt dated as of July 29, 2002.
23.1 Consent of Deloitte & Touche LLP.
31.1 Certification of Myron Levy pursuant to Rule 13a-14(a).
31.2 Certification of Thomas V. Gilboy pursuant to Rule 13a-14(a).
32.1 Certification of Myron Levy pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Thomas V. Gilboy pursuant to 18 U.S.C. Section 1350.
(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 30.
28
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 15, 2004.
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 15, 2004 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 Director
Myron Levy (Principal Executive Officer)
By: /S/ Thomas V. Gilboy Vice President and
--------------------------------- Chief Financial Officer
Thomas V. Gilboy (Principal Financial Officer)
By: /S/ John A. Thonet Secretary and Director
---------------------------------
John A. Thonet
By: /S/ David H. Lieberman Director
---------------------------------
David H. Lieberman
By: /S/ Edward K. Walker, Jr. Director
---------------------------------
Edward K. Walker, Jr.
By: /S/ Robert M. Moore Director
---------------------------------
Robert M. Moore
By: /S/ Edward A. Bogucz Director
---------------------------------
Edward A. Bogucz
29
Schedule II - Valuation and Qualifying Accounts (in thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions Amount
-----------------------------
written
Balance at Charged to Recorded off Balance at
beginning costs and through against end of
Description of period expenses acquisitions reserve period
----------- --------- -------- ------------ ------- ------
Valuation accounts deducted from assets to which they apply:
August 1, 2004:
Inventory $ 2,739 $ 859 $ 715 (1) $ 901 $ 3,412
August 3, 2003:
Inventory $ 2,407 $ 526 $ - $ 194 $ 2,739
July 28, 2002:
Inventory $ 2,205 $ 202 $ - $ - $ 2,407
(1) Represents valuation reserves acquired through the acquisition of CTI.
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.
30
Item 8. Financial Statements and Supplementary Data
HERLEY INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets, August 1, 2004 and August 3, 2003 F-3
Consolidated Statements of Income for the 52 weeks ended August 1, 2004, the
53 weeks ended August 3, 2003, and 52 weeks ended July 28, 2002 F-4
Consolidated Statements of Shareholders' Equity for the 52 weeks ended August 1,
2004, the 53 weeks ended August 3, 2003 and 52 weeks ended July 28, 2002 F-5
Consolidated Statements of Cash Flows for the 52 weeks ended August 1, 2004,
the 53 weeks ended August 3, 2003, and the 52 weeks ended July 28, 2002 F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Herley Industries, Inc.
Lancaster, Pennsylvania
We have audited the accompanying consolidated balance sheets of Herley
Industries, Inc. and subsidiaries (the "Company") as of August 1, 2004 and
August 3, 2003, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended August 1,
2004. Our audits also included the financial statement schedule listed in the
Index at Item 15. These 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 audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of August 1, 2004
and August 3, 2003, and the results of its operations and its cash flows for
each of the three years in the period ended August 1, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, 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."
DELOITTE & TOUCHE LLP
Baltimore, Maryland
October 14, 2004
F-2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
August 1, August 3,
2004 2003
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 66,181 $ 81,523
Trade accounts receivable 24,664 16,525
Costs incurred and income recognized in excess
of billings on uncompleted contracts 14,210 6,960
Other receivables 576 827
Inventories, net of allowance of $3,412 in 2004
and $2,739 in 2003 44,909 37,545
Deferred taxes and other 3,579 3,207
--------- ---------
Total Current Assets 154,119 146,587
Property, Plant and Equipment, net 25,968 22,406
Goodwill 35,165 25,729
Intangibles, net of accumulated amortization of $752 in 2004
and $403 in 2003 4,555 1,542
Available-For-Sale Securities 147 75
Other Investments 117 162
Other Assets 900 1,063
--------- ---------
$ 220,971 $ 197,564
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 804 $ 686
Accounts payable and accrued expenses 17,514 13,177
Billings in excess of costs incurred and
income recognized on uncompleted contracts 1,303 -
Income taxes payable 2,091 2,670
Reserve for contract losses 954 736
Advance payments on contracts 1,180 856
--------- ---------
Total Current Liabilities 23,846 18,125
Long-term Debt 5,845 6,403
Other Long-term Liabilities 932 849
Deferred Income Taxes 4,848 4,945
--------- ---------
35,471 30,322
--------- ---------
Commitments and Contingencies (Note F)
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
14,220,508 in 2004 and 13,969,151 in 2003 1,422 1,397
Additional paid-in capital 107,671 104,551
Retained earnings 75,151 61,478
Accumulated other comprehensive income (loss) 1,256 (184)
--------- ---------
Total Shareholders' Equity 185,500 167,242
--------- ---------
$ 220,971 $ 197,564
========= =========
The accompanying notes are an integral part of these financial statements.
F-3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
52 weeks 53 weeks 52 weeks
ended ended ended
August 1, August 3, July 28,
2004 2003 2002
--------- --------- ---------
Net sales $ 122,154 $ 110,223 $ 92,881
--------- --------- ---------
Cost and expenses:
Cost of products sold 79,505 73,222 61,947
Selling and administrative expenses 21,123 16,187 13,229
Litigation costs 1,924 1,147 2,079
Plant closing costs - - 406
--------- --------- ---------
102,552 90,556 77,661
--------- --------- ---------
Income from operations 19,602 19,667 15,220
Other income (expense), net
Investment income 674 1,113 718
Interest expense (326) (344) (332)
Foreign exchange (loss) (194) - -
--------- --------- ---------
154 769 386
--------- --------- ---------
Income from continuing operations
before income taxes 19,756 20,436 15,606
Provision for income taxes 6,083 6,499 4,876
--------- --------- ---------
Income from continuing operations 13,673 13,937 10,730
Loss from discontinued operations
(including net loss on sale of $1,166)
net of income tax benefit - - (921)
--------- --------- ---------
Income before cumulative effect of change
in accounting principle 13,673 13,937 9,809
Cumulative effect of adopting SFAS 142 - - (4,637)
--------- --------- ---------
Net income $ 13,673 $ 13,937 $ 5,172
========= ========= =========
Earnings (loss) per common share - Basic
Income from continuing operations $ .97 $ .97 $ .89
Loss from discontinued operations - - (.08)
Cumulative effect of adopting SFAS 142 - - (.39)
---- ---- ----
Net earnings $ .97 $ .97 $ .43
==== ==== ====
Basic weighted average shares 14,105 14,317 12,041
====== ====== ======
Earnings (loss) per common share - Diluted
Income from continuing operations $ .92 $ .93 $ .83
Loss from discontinued operations - - (.07)
Cumulative effect of adopting SFAS 142 - - (.36)
---- ---- ----
Net earnings $ .92 $ .93 $ .40
==== ==== ====
Diluted weighted average shares 14,896 15,031 12,978
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
52 weeks ended August 1, 2004, and 53 weeks ended August 3, 2003,
and the 52 weeks ended July 28, 2002
(In thousands except share data)
Accumulated
Additional Other
Common Stock Paid-in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Income (loss) Total
---------- -------- ----------- ---------- -------- ------------- -------
Balance at July 30, 2001 10,537,289 $ 1,054 45,250 42,369 - - $ 88,673
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 -
---------- ------- ----------- ---------- -------- ------------- -------
Subtotal 14,680,960 1,468 116,579 42,369 - - 160,416
---------- ------- ----------- ---------- -------- ------------- -------
Net income 5,172 5,172
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)
--------
Comprehensive income 4,942
---------- ------- ----------- ---------- -------- ------------- -------
Balance at July 28, 2002 14,680,960 $ 1,468 116,579 47,541 - (230) $165,358
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 -
---------- ------- ----------- ---------- -------- ------------- -------
Subtotal 13,969,151 1,397 104,551 47,541 - (230) 153,259
---------- ------- ----------- ---------- -------- ------------- -------
Net income 13,937 13,937
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)
-------
Comprehensive income 13,983
---------- ------- ----------- ---------- -------- ------------- -------
Balance at August 3, 2003 13,969,151 $ 1,397 104,551 61,478 - (184) $167,242
Exercise of stock options 251,357 25 2,433 2,458
Tax benefit upon exercise of stock
options 687 687
---------- ------- ----------- ---------- -------- ------------- -------
Subtotal 14,220,508 1,422 107,671 61,478 - (184) 170,387
---------- ------- ----------- ---------- -------- ------------- -------
Net income 13,673 13,673
Other comprehensive income (loss) net of tax:
Unrealized gain on
available-for-sale securities 49 49
Unrealized (loss) on interest rate swap (23) (23)
Foreign currency translation gain 1,414 1,414
-------
Comprehensive income 15,113
---------- ------- ----------- ---------- -------- ------------- -------
Balance at August 1, 2004 14,220,508 $ 1,422 107,671 75,151 - 1,256 $185,500
========== ======= =========== ========== ======== ============= =======
The accompanying notes are an integral part of these financial statements.
F-5
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
52 weeks 53 weeks 52 weeks
ended ended ended
August 1, August 3, July 28,
2004 2003 2002
-------- -------- --------
Cash flows from operating activities:
Income from continuing operations $ 13,673 $ 13,937 $ 10,730
-------- -------- --------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 4,244 4,302 3,917
Foreign exchange loss 753 - -
(Gain) loss on sale of fixed assets - (17) 45
Equity in income of limited partnership (10) (16) (48)
(Increase) in deferred tax assets (316) (232) (712)
(Decrease) increase in deferred tax liabilities (109) 1,048 (471)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (6,923) (2,039) 1,583
(Increase) in costs incurred and income
recognized in excess of billings on
uncompleted contracts (7,250) (1,258) (6,341)
Decrease (increase) in other receivables 251 (380) (2)
(Increase) in inventories (5,806) (3,846) (1,974)
Decrease (increase) in prepaid expenses and other 31 (52) -
Increase in accounts payable
and accrued expenses 3,431 491 429
Increase (decrease) in billings in excess of
costs incurred and income recognized
on uncompleted contracts 1,303 - (531)
Increase in income taxes payable 108 3,627 5,351
(Decrease) increase in reserve for contract losses (240) (668) 348
Increase (decrease) in advance payments on contracts 324 (515) 1,110
Other, net 146 185 (295)
-------- -------- --------
Total adjustments (10,063) 630 2,409
-------- -------- --------
Net cash provided by continuing operations 3,610 14,567 13,139
-------- -------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (14,914) (2,542) -
Payment of deferred purchase price of acquired business - - (3,000)
Investment in technology license - - (500)
Proceeds from sale of fixed assets 19 25 85
Partial distribution from limited partnership 55 49 626
Capital expenditures (5,884) (3,876) (5,488)
-------- -------- --------
Net cash used in investing activities (20,724) (6,344) (8,277)
-------- -------- --------
Cash flows from financing activities:
Borrowings under bank line of credit - - 4,300
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 2,458 1,994 3,984
Payments under lines of credit - - (4,300)
Payments of long-term debt (686) (236) (201)
Purchase of treasury stock - (14,668) (3,847)
-------- -------- --------
Net cash provided by (used in) financing activities 1,772 (12,910) 67,748
-------- -------- --------
Net cash provided by discontinued operations - - 559
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (15,342) (4,687) 73,169
Cash and cash equivalents at beginning of period 81,523 86,210 13,041
-------- -------- --------
Cash and cash equivalents at end of period $ 66,181 $ 81,523 $ 86,210
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
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.
6. Costs Incurred and Income Recognized in Excess of Billings on Uncompleted
Contracts
Costs incurred and income recognized in excess of billings on uncompleted
contracts are classified in the financial statements as current assets. We
generally expect to bill and collect substantially all costs incurred and
income recognized in excess of billings within one year.
7. 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
F-7
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.
8. 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.
The Company reviews the recoverability of its long-lived assets when events
or changes in circumstances occur that indicate the carrying value of the
assets may not be recoverable. The measurement of possible impairment is
based on the Company's ability to recover the carrying value of the asset
from the expected future undiscounted cash flows generated. The measurement
of impairment requires management to use estimates of expected future cash
flows. If an impairment loss existed, the amount of the loss would be
charged to operations. It is possible that future events or circumstances
could cause these estimates to change.
9. 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 at least annually 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.
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 as
defined in SFAS 131. In fiscal 2001, within the operating segment, the
Company 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. In January 2002 the Company
decided to discontinue the operations of Terrasat (the only business in the
commercial technologies reporting unit), and to seek a buyer for the
business. In connection with this decision in fiscal 2002, the Company
determined that an impairment of goodwill in the commercial technologies
unit had occurred. Accordingly, a transition adjustment in the amount of
$4,637,000 was recorded as of the beginning of fiscal year 2002 as a
cumulative effect of a change in accounting principle. There was no tax
benefit associated with the adjustment since the impaired goodwill is not
deductible for income tax purposes.
An impairment test based on a single reporting unit was performed in the
fourth quarter of fiscal 2004 using the current market capitalization of
the Company, which in an active market for the Company's common stock, the
Company considers a reasonable indication of implied fair value. Based on
this initial step in the test for impairment, the Company concluded there
was no impairment of goodwill at August 1, 2004. An annual impairment test
will be performed in the fourth quarter of each fiscal year, or when an
indication of impairment exists, and any future impairment of goodwill will
be charged to operations.
F-8
The change in the carrying amount of goodwill for the years ended August 1,
2004 and August 3, 2003, based upon the fair value of assets acquired and
liabilities assumed related to the acquisition of CTI in fiscal 2004 and
EWST in fiscal 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
Goodwill acquired during period 8,725
Foreign currency translation adjustment 711
--------
Balance at August 1, 2004 $ 35,165
======
Intangibles consist of the following (in thousands):
August 1, August 3, Estimated
2004 2003 useful life
---- ---- -----------
Technology (1) $ 3,421 $ 1,021 15 years
Drawings (2) 800 - 15 years
Backlog (3) 325 325 2 years
Non-compete (3) 31 31 5 years
Foreign currency translation
adjustment (3) 162 -
Patents 568 568 14 years
----- -----
5,307 1,945
Accumulated amortization 752 403
----- -----
$ 4,555 $ 1,542
===== =====
- ---------
(1) Includes $1,021 and $2,400 related to the acquisitions of EWST and CTI,
respectively (See Note B.)
(2) Related to the acquisition of CTI (See Note B.)
(3) Related to the acquisition of EWST (See Note B.)
Amortization expense for the fiscal periods ended August 1, 2004, August 3,
2003 and July 28, 2002 was approximately $349,000, $258,000 and $41,000,
respectively.
Estimated aggregate amortization expense for each of the next five fiscal
years is as follows (in thousands):
2005 $ 342
2006 329
2007 328
2008 322
2009 322
The carrying amount of intangibles is reviewed for recoverability when
events or changes in circumstances occur that indicate that the carrying
value of the assets may not be recovered.
10. 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. 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 income or loss. Realized
gains and losses and declines in value judged
F-9
to be other-than-temporary are included in other income (expense), net. The
cost of securities sold is based on the specific identification method.
Interest and dividends on securities are included in other income.
11. 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.)
12. Revenue and Cost Recognition
The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement
exists and the sales price is fixed or determinable. Payments received from
customers in advance of products delivered are recorded as customer advance
payments until earned. Substantially all of our customer contracts are
firm, fixed price contracts, providing for a predetermined fixed price for
the products sold, regardless of the costs incurred. Approximately 13% to
16% of revenues over the last three fiscal years were derived from
long-term, fixed price contracts for which revenues and estimated profits
are recognized using the percentage of completion method of accounting
based on estimated completion to date (the total contract amount multiplied
by the percentage 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 to contract
performance. Selling, general and administrative costs are charged to
expense as incurred.
Prospective losses on long-term contracts are based upon the anticipated
excess of 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
costs and contract terms.
13. 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
$5,422,000, $3,083,000, and $2,269,000 in fiscal 2004, 2003, and 2002,
respectively, and are included in cost of products sold.
14. 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.
15. Stock-Based Compensation
The Company has various fixed stock option plans which reserve shares of
common stock for issuance to executives, key employees and directors.
Statement of Financial Accounting Standards ("SFAS") 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 ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly,
F-10
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. 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 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 Company has adopted the disclosure-only provisions of SFAS 123 and SFAS
148. 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 during each of the fiscal years ended August 1, 2004, August
3, 2003, and July 28, 2002:
Expected life of options 1.51 years
Volatility .68
Risk-free interest rate 2.8%
Dividend yield zero
Had compensation cost for stock options granted in fiscal years 2004, 2003,
and 2002 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):
2004 2003 2002
---- ---- ----
Net income - as reported $ 13,673 $ 13,937 $ 5,172
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (627) (1,926) (4,425)
------ ------ ------
Net income - pro-forma $ 13,046 $ 12,011 $ 747
====== ====== ======
Earnings per share - as reported
Basic $ .97 $ .97 $ .43
Diluted .92 .93 .40
Earnings per share - pro-forma
Basic $ .92 $ .84 $ .06
Diluted .88 .80 .06
F-11
The effects of applying the pro-forma disclosures of SFAS 123 and 148 may
not be representative of the effects on reported net income for future
years due to the various vesting schedules.
16. Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared in their
respective functional currencies and translated into U. S. 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
'Other comprehensive income (loss)' in the accompanying consolidated
statements of shareholders' equity.
17. 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.
NOTE B - ACQUISITIONS
The Company entered into an agreement as of March 29, 2004 to acquire
certain assets and the business, subject to the assumption of certain
liabilities, of Communication Techniques, Inc., a Delaware corporation
doing business in Whippany, New Jersey. The facility operates as a
wholly-owned subsidiary of the Company as Herley-CTI, Inc. ("CTI"). CTI
designs, develops and produces state-of-the-art signal generation
components and integrated assemblies for digital radio, SONET, SatCom, test
and instrumentation, datacom, and wired and wireless applications to 45 Ghz
and 45 Gb/s. Having a worldwide reputation for phase locked sources with
low phase noise, the acquisition of CTI is a strategic fit for the Company.
CTI recently developed a fast frequency changing direct synthesizer which
when combined with the capabilities of Herley-Israel puts the Company at
the forefront of producing broadband microwave sources for radar,
communication, electronic warfare, and microwave test systems. In addition,
CTI is complementary to our existing customer base, expands our technical
engineering team, complements the Company's core technology, and will
enable the Company to leverage the combined capabilities into new markets.
The transaction provides for a net payment of $14,914,000 in cash and the
assumption of certain liabilities. 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 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 of identified intangible assets is as follows:
Aggregate purchase price $ 14,914
======
Current assets 2,861
Furniture and equipment 1,492
Technology 2,400
Drawings 800
Goodwill 8,725
Current liabilities (1,364)
F-12
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. The transaction, which closed on
September 20, 2002, provides for payment of $3,000,000 in cash and a note
for 1,000,000 Pounds Sterling, including interest at 1.8% based on LIBOR at
the date of acquisition, payable in annual installments of 333,334 Pounds
Sterling beginning October 1, 2003. Based on the spot rate of exchange at
the date of acquisition of 1.50, the U.S. Dollar equivalent of the note was
$1,500,000. The note has a balance of $1,212,000 at August 1, 2004
(adjusted for foreign exchange rate fluctuations) payable in two remaining
installments annually on October 1, 2004 and October 1, 2005 of $606,000.
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 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)
NOTE C - INVENTORIES
The major components of inventories are as follows (in thousands):
August 1, August 3,
2004 2003
---- ----
Purchased parts and raw materials $ 23,031 $ 19,690
Work in process 22,878 18,646
Finished products 2,412 1,948
------- -------
48,321 40,284
Less reserve 3,412 2,739
------- -------
$ 44,909 $ 37,545
====== ======
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 1, 2004 and August 3, 2003 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 partnership
is in the process of being liquidated and accordingly the Company received
partial distributions of approximately $55,000 and $49,000 from the
Partnership in fiscal 2004 and 2003, respectively. As of
F-13
August 1, 2004 the Company's limited partnership interest had a carrying
value of approximately $117,000, 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 1, August 3, Estimated
2004 2003 Useful Life
---- ---- -----------
Land $ 3,781 $ 2,908
Building and building improvements 10,043 9,291 10-40 years
Machinery and equipment 43,225 37,802 5- 8 years
Furniture and fixtures 1,347 1,186 5-10 years
Automobiles 7 - 3 years
Leasehold improvements 1,526 1,385 5-10 years
------- -------
59,929 52,572
Less accumulated depreciation 33,961 30,166
------ ------
$ 25,968 $ 22,406
====== ======
Depreciation charges totaled approximately $3,796,000, $3,944,000, and
$3,776,000 in fiscal 2004, 2003, and 2002, respectively.
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 52 weeks ended August 1, 2004, and the 53 weeks ended
August 3, 2003 and 52 weeks ended July 28, 2002, was approximately
$1,749,000, $1,393,000, and $1,244,000, respectively. Minimum annual
rentals under noncancellable operating leases are as follows (in
thousands):
Amount
------
Year ending fiscal 2005 $ 1,649
2006 1,513
2007 1,272
2008 1,206
2009 1,256
Future 856
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, 2015 (as amended December 9, 2003). The agreements provide for
aggregate annual salaries as of August 1, 2004 of $1,427,000 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 $2,214,000 (including a supplemental payment of $650,000 for
fiscal 2003), and $1,571,000 was charged to expense in fiscal years 2004
and 2003, respectively.
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
F-14
average of the three highest annual bonuses awarded during the ten
preceding years) for the remainder of the employment term. As of August 1,
2004, the amount payable in the event of such termination would be
approximately $16,318,000.
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.
Eight officers of the Company have severance agreements providing for an
aggregate lump-sum payment of $2,830,000 through September 30, 2006 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 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
F-15
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 did not appeal. 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 timely filed a response to RLI's
brief and thereafter RLI timely filed a response to Herley's brief. Oral
argument was held on December 18, 2003.
By Summary Order on January 26, 2004, the Second Circuit affirmed the trial
court judgment in its entirety. On February 4, 2004, RLI submitted a letter
request to the trial court for relief from the judgment on RLI's claim for
the earn-out stock under Federal Rule of Civil Procedure 60. RLI contends
that it has "newly discovered evidence," first learned in August 2003, to
justify its requested relief. Herley submitted its response in opposition
by letter dated February 10, 2004. On February 26, 2004, the parties
appeared before the Court concerning the various applications and were
directed to submit legal briefs on various legal issues. By Order dated May
28, 2004 the trial court denied RLI's Motion for a New Trial. The Court
also denied Herley's request that it exercise its general equitable power
to hold Ben Robinson personally liable for any fees Herley might recover
against RLI.
On June 28, 2004, Herley filed suit against Ben Robinson and Frank Holt in
the Superior Court of Hillsborough County, New Hampshire, asserting claims
for fraudulent conveyance and piercing the corporate veil to hold Robinson
personally liable for the fees incurred by Herley in defending RLI's claims
discussed above. In response, Robinson took steps to collect damages
awarded to him under the jury verdict. On July 21, 2004, Herley brought an
Emergency Motion for Injunctive Relief and moved for an immediate order
from the New Hampshire court allowing Herley to escrow the judgment owed to
Robinson to be offset against any award of fees to Herley. The court
entered an order denying the requested relief. On July 27, 2004, Herley
paid $1,594,621 (including interest) to Ben Robinson, an amount calculated
by deducting Herley's award against Robinson from the amounts awarded to
Robinson on his claims under the Employment Agreement and the Lease
Agreement. On July 28, 2004, the parties filed a Notice of Partial
Satisfaction of Judgment. Herley's judgment against RLI remains
unsatisfied. Cross petitions for attorney's fees are still pending.
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, 2006. At August 1, 2004 stand-by letters of
credit aggregating approximately $11,389,000 were outstanding under this
facility.
Outstanding Purchase Commitments
The Company has outstanding an aggregate of approximately $16,448,000 in
open purchase orders as of August 1, 2004. These open purchase orders
represent executory contracts for the purchase of goods and services which
will be substantially fulfilled in the next six months.
F-16
NOTE G - INCOME TAXES
Income tax expense consisted of the following (in thousands):
52 weeks ended 53 weeks ended 52 weeks ended
August 1, August 3, July 28,
2004 2003 2002
---- ---- ----
Current
Federal $ 5,514 $ 5,465 $ 5,333
State 549 533 520
Foreign 431 379 204
----- ----- -----
6,494 6,377 6,057
----- ----- -----
Deferred
Federal (372) (233) (1,090)
State (44) (23) (106)
Foreign 5 378 15
----- ----- ------
(411) 122 (1,181)
----- ----- ------
$ 6,083 $ 6,499 $ 4,876
===== ===== ======
The Company paid income taxes of approximately $5,496,000, $4,164,000, and
$680,000 in fiscal 2004, 2003, and 2002, respectively. The following is a
reconciliation of the U. S. statutory income tax rate and the effective tax
rate on pretax income:
52 weeks 53 weeks 52 weeks
ended ended ended
August 1, August 3, July 28,
2004 2003 2002
---- ---- ----
Statutory income tax rate 35.0 % 34.0 % 34.0 %
State income taxes, net of
federal income tax benefit 1.7 1.7 0.9
Benefit of extra territorial income (1.4) (1.0) (2.4)
Non-deductible expenses 0.6 0.6 0.2
Benefit of foreign and
foreign-source income (3.9) (3.4) (1.4)
Research and development credits (1.0) - -
Other, net (0.2) (0.1) (0.1)
---- ---- ----
Effective tax rate 30.8 % 31.8 % 31.2 %
==== ==== ====
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-17
The tax effects of significant items comprising deferred income taxes are
as follows (in thousands):
August 1, 2004 August 3, 2003
--------------------------- ---------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Intangibles $ - $ 2,186 $ - $ 2,298
Accrued vacation pay 335 - 260 -
Accrued bonus 583 - 516 -
Accrued warranty and other expenses 297 - 194 -
Inventory 1,256 - 1,125 -
Depreciation - 2,662 - 2,647
Contract losses 221 - 183 -
Net operating loss
carry-forwards 230 - 230 -
Other 267 - 365 -
----- ----- ----- -----
$ 3,189 $ 4,848 $ 2,873 $ 4,945
===== ===== ===== =====
As of August 1, 2004 the Company has available net operating loss
carry-forwards for state income tax purposes of approximately $1,300,000
which expire through fiscal 2020.
NOTE H- LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
August 1, August 3,
Rate 2004 2003
-------------------- ---- ----
Revolving loan facility (a) 2.75% and 3.28% $ - $ -
Mortgage note (b) 7.43% 2,524 2,610
Industrial Revenue Bonds (c) 4.07% 2,805 2,905
Note for acquired business (d) 1.8% 1,212 1,500
Other - 108 74
----- -----
6,649 7,089
Less current portion 804 686
----- -----
$ 5,845 $ 6,403
===== =====
(a) In June 2002, the Company entered into a new $50,000,000 Revolving
Credit Loan 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, 2006 (as amended). The Company may
elect to borrow up to a maximum of $5,000,000 with interest based on
the 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. The Federal Funds Target Rate and
the LIBOR rate was 1.25% and 1.48%, respectively, at August 1, 2004.
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 1, 2004
and August 3, 2003.
The agreement contains various financial covenants, including, among
other matters, minimum tangible net worth, total liabilities to
tangible net worth, debt service coverage, and restrictions on other
borrowings. The Company is in compliance with all covenants at August
1, 2004.
F-18
(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 $1,653,000.
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 1, 2004. 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 1, 2004 and August 3, 2003, 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 1, 2004 was 1.23%. 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 Pennsylvania, 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 $1,749,000 at August 1, 2004.
(d) In connection with the acquisition of EWST as of September 1, 2002,
the Company issued a note for 1,000,000 Pounds Sterling, including
interest at 1.8%, payable in annual installments of 333,334 Pounds
Sterling beginning October 1, 2003. Based on the spot rate of exchange
at August 1, 2004 of 1.8183 the U.S. Dollar equivalent of the annual
installments is approximately $606,000.
The Company paid interest in 2004, 2003 and 2002 of approximately $314,000,
$355,000 and $316,000, respectively.
Future payments required on long-term debt are as follows (in thousands):
Fiscal year ending during: Amount
------------------------- ------
2005 $ 804
2006 817
2007 223
2008 236
2009 198
Future 4,371
-----
$ 6,649
F-19
NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following (in thousands):
August 1, August 3,
2004 2003
---- ----
Accounts payable $ 10,089 $ 7,152
Accrued payroll costs and bonuses 4,987 4,257
Accrued commissions 692 508
Accrued royalties 8 284
Accrued legal and accounting fees 240 20
Accrued warranty costs 580 359
Accrued rent expense 197 189
Unearned income 81 86
Other accrued expenses 640 322
------ ------
$ 17,514 $ 13,177
====== ======
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 $618,000,
$513,000 and $533,000 under the Plan for the 52 weeks ended August 1, 2004,
and the 53 weeks ended August 3, 2003 and 52 weeks ended July 28, 2002,
respectively.
The Company's Israeli subsidiary provides for employee severance
liabilities pursuant to the Israeli severance pay law and labor agreements.
The Company's liability is fully provided for by monthly payments deposited
with insurers and by a reserve established by the Company to cover the
portion of this liability not covered by the Company's deposits. In
addition to recognizing an expense for the funding to the insurance
programs for this severance obligation, the Company also records as expense
the net increase in its unfunded severance liability. The liability for
this unfunded severance obligation is carried in Other Long-term
Liabilities on the accompanying Consolidated Balance Sheets and was
$932,000 and $849,000 at August 1, 2004 and August 3, 2003, respectively.
The total expense recognized for employee severance programs in Israel
(both the funded and unfunded portion of the program) was approximately
$313,000, $353,000 and $226,000 for fiscal years 2004, 2003 and 2002,
respectively.
NOTE K - RELATED PARTY TRANSACTIONS
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 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.
F-20
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):
52 weeks 53 weeks 52 weeks
ended ended ended
August 1, August 3, July 28,
2004 2003 2002
---- ---- ----
Numerator:
Income from continuing operations $ 13,673 $ 13,937 $ 10,730
Loss from discontinued operations - - (921)
Cumulative effect of adopting SFAS 142 - - (4,637)
------ ------ -----
Net Income $ 13,673 $ 13,937 $ 5,172
====== ====== =====
Denominator:
Basic weighted-average shares 14,105 14,317 12,041
Effect of dilutive securities:
Employee stock options and warrants 791 714 937
------ ------ ------
Diluted weighted-average shares 14,896 15,031 12,978
====== ====== ======
Stock options and warrants not included in computation 4 702 126
= === ===
The number of stock options not included in the computation of diluted EPS
relates to stock options having exercise prices ranging from $17.12 to
$20.45 which are greater than the average market price of the common shares
during the period, and therefore, are antidilutive. The options, which were
outstanding as of August 1, 2004, expire at various dates through May 14,
2009.
NOTE M - SHAREHOLDERS' EQUITY
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.
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. No options
have been granted under the plan during fiscal year ended August 1, 2004.
Options for 108,500 shares were granted during the fiscal year ended August
3, 2003.
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
F-21
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. Non-qualified stock options for 40,000 shares were
granted during the fiscal year ended August 1, 2004. 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. Non-qualified stock options for 7,500 shares were
granted during the fiscal year ended August 1, 2004. No options were
granted under this plan during the fiscal year ended August 3, 2003.
A summary of stock option activity under all plans for the 52 weeks ended
August 1, 2004 and the 53 weeks ended August 3, 2003 and the 52 weeks ended
July 28, 2002 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, 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 - -
Granted 53,500 17.32 - 20.45 19.38
Exercised (253,598) 4.06 - 19.52 9.88
Canceled (77,200) 8.38 - 17.67 11.91
----------- ------------ ----- ------- ----
Outstanding August 1, 2004 3,020,929 $ 4.06 - 20.45 $ 12.66 - -
========= ======= ====
Options Outstanding and Exercisable by Price Range as of August 1,2004,
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 - $ 8.38 657,879 4.6 $ 8.01 554,979 $ 7.94
8.42 - 10.20 269,550 4.6 9.18 267,150 9.17
10.46 - 11.92 636,650 4.7 10.49 580,850 10.48
13.10 - 13.10 683,850 6.2 13.10 578,400 13.10
14.25 - 20.45 773,000 6.7 19.23 615,200 19.30
--------- --- ----- --------- -----
$ 4.06 - $ 20.45 3,020,929 5.5 $ 12.66 2,596,579 $ 12.48
========= =========
F-22
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 - SEGMENT REPORTING, 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 and cash generated, 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.
Revenues for fiscal years 2004, 2003 and 2002 were as follows: defense
electronics, $113,172,000, $103,746,000 and $80,615,000, respectively; and
commercial technologies, $8,982,000, $6,477,000, and $12,266,000,
respectively. Defense electronics includes revenues of $1,078,000, and
commercial technologies includes revenue of $3,045,000, from March 29, 2004
attributable to the acquisition of CTI (See Note B.)
Net sales to the U.S. Government in fiscal 2004, 2003 and 2002 accounted
for approximately 17%, 25% and 17% of net sales, respectively. The Raytheon
Company accounted for approximately 10% of net sales in fiscal 2004. No
other customer accounted for shipments in excess of 10% of consolidated net
sales during the periods presented. Foreign sales amounted to approximately
$39,697,000 (including $9,103,000 in sales for EWST), $39,646,000
(including $11,212,000 in sales for EWST), and $30,070,000 in fiscal 2004,
2003 and 2002, respectively.
Geographic net sales based on place of contract performance were as follows
(in thousands):
2004 2003 2002
---- ---- ----
United States $ 100,746 $ 88,294 $ 82,432
Israel 12,305 10,717 10,449
England 9,103 11,212 -
------- ------- ------
$ 122,154 $ 110,223 $ 92,881
======= ======= ======
Net property, plant and equipment by geographic area was as follows (in
thousands):
2004 2003
---- ----
United States $ 21,544 $ 18,945
Israel 3,499 3,071
England 925 390
------ ------
$ 25,968 $ 22,406
====== ======
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
F-23
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 $108,000 as of August 1, 2004. There was no material hedge
ineffectiveness related to cash flow hedges during the period to be
recognized in earnings.
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 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 1, 2004
--------------
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $ 66,181 $ 66,181
Available-for-sale securities 147 147
Long-term debt 5,845 6,644
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.
F-24
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.
Summarized below are the results of discontinued operations (in thousands):
52 weeks ended
July 28,
2002
----
Net sales $ 2,147
-----
Loss from discontinued operations (1,395)
Income tax (benefit) provision (474)
-----
Net loss from discontinued operations $ (921)
===
F-25
NOTE R - QUARTERLY RESULTS
The following is a summary of the unaudited quarterly results of operations
for the 52 weeks ended August 1, 2004 and for the 53 weeks ended August 3,
2003 (in thousands, except for per share data).
2004
----
November 2, February 1, May 2, August 1,
2003 2004 2004 2004
---- ---- ---- ----
Net sales $ 28,267 29,408 30,233 34,246
Gross profit 10,642 10,363 10,768 10,876
Net income $ 3,941 3,546 3,876 2,310
======= ======= ======= =======
Earnings per common share - Basic $ .28 .25 .27 .16
=== === === ===
Basic weighted average shares 14,013 14,073 14,129 14,205
====== ====== ====== ======
Earnings per common share - Diluted $ .27 .24 .26 .15
=== === === ===
Diluted weighted average shares 14,782 14,880 14,932 14,962
====== ====== ====== ======
2003
----
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
Net income $ 3,352 3,287 3,359 3,939
======= ======= ======= =======
Earnings per common share - Basic $ .23 .23 .24 .28
=== ==== ==== ====
Basic weighted average shares 14,668 14,464 14,218 13,921
====== ====== ====== ======
Earnings per common share - Diluted $ .22 .22 .23 .27
==== ==== ==== ===
Diluted weighted average shares 15,506 15,124 14,848 14,600
====== ====== ====== ======
The fourth quarter has historically been the Company's strongest quarter
for shipments. The third and fourth quarter of fiscal 2004 includes revenue
attributable to the acquisition of CTI of $1,116,000 and $3,007,000,
respectively.
The gross profit margin in the fourth quarter of 2004 was affected by the
investment in engineering programs, which are essential for long-term
technology development and future revenue growth. Changes in total cost
estimates on uncompleted contracts at EWST, also contributed to the decline
in gross profit in the fourth quarter of fiscal 2004. The gross profit
margin also varies from quarter to quarter due to changes in product mix.
Included in the results of the fourth quarter of 2004 is a $1.6 million
pretax payment in connection with the Robinson Labs litigation. (See Note
F).
F-26
NOTE S - SUBSEQUENT EVENT
The Company entered into an agreement as of September 1, 2004 to purchase
the majority of the assets and assume the majority of the liabilities of
Reliable System Services Corporation ("RSS"), of Melbourne, Florida for an
aggregate of $3,725,000 in cash. The Company expects to operate the RSS
business as a wholly-owned subsidiary under the name Herley-RSS, Inc.
Herley-RSS designs, develops and produces satellite-based command and
control systems for prime defense contractors and entities worldwide.
Consideration paid for the purchase, which closed on September 20, 2004,
was entirely in cash. The transaction will be 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 allocation of the aggregate estimated purchase price will be
determined based on detailed reviews of the fair value of assets acquired,
including identified intangible assets, and liabilities assumed. Any
remaining excess cost over the fair value of net assets acquired will be
recognized as goodwill.
************
F-27