-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mi+XQZPGzLnTeUp0P9/60WlPd9TxyFbEfNmkUdgvVbVdKw0sD8xJgg2iJAFijE1T DSal4yL7DwXNPfDUe32Awg== 0000047035-98-000016.txt : 19981030 0000047035-98-000016.hdr.sgml : 19981030 ACCESSION NUMBER: 0000047035-98-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980802 FILED AS OF DATE: 19981029 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERLEY INDUSTRIES INC /NEW CENTRAL INDEX KEY: 0000047035 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 232413500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05411 FILM NUMBER: 98732852 BUSINESS ADDRESS: STREET 1: 10 INDUSTRY DR CITY: LANCASTER STATE: PA ZIP: 17603 BUSINESS PHONE: 7173972777 MAIL ADDRESS: STREET 1: 10 INDUSTRY DRIVE CITY: LANCASTER STATE: PA ZIP: 17603 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY INDUSTRIES INC DATE OF NAME CHANGE: 19831103 10-K 1 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 2, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ...............to ............... Commission File No. 0-5411 Herley Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 23-2413500 -------------------------------- ------------------- State or other jurisdiction (I.R.S. Employer of incorporation or organization Identification No.) 10 Industry Drive, Lancaster, Pennsylvania 17603 ------------------------------------------ ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (717) 397-2777 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $ .10 par value ----------------------------- (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. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] Based on the closing sale price of $8.8125 as of October 6, 1998 the aggregate market value of the voting stock held by non-affiliates of the registrant was $36,892,994. The number of shares outstanding of registrant's common stock, $ .10 par value as of October 6, 1998 was 5,313,040. Documents incorporated by reference: Registrant's definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934. HERLEY INDUSTRIES, INC. TABLE OF CONTENTS Page PART I Item 1 Business 1 Item 2 Properties 8 Item 3 Legal Proceedings 8 Item 4 Submission of Matters to a Vote of Security Holders 8 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6 Selected Financial Data 9 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A Quantitative and Qualitative Disclosures About Market Risk 15 Item 8 Financial Statements and Supplementary Data 15 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 PART III Item 10 Directors and Executive Officers of the Registrant 15 Item 11 Executive Compensation 15 Item 12 Security Ownership of Certain Beneficial Owners and Management 15 Item 13 Certain Relationships and Related Transactions 15 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8K 16 SIGNATURES 17 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES F-1 PART I Forward-Looking Statements All statements other than statements of historical fact included in this Annual Report, including without limitation statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations, are forward-looking statements. When used in this Annual Report, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, competitive factors and pricing pressures, changes in legal and regulatory requirements, technological change or difficulties, product development risks, commercialization and trade difficulties and general economic conditions. Such statements reflect the current views of the Company with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph. Item 1. Business Herley Industries, Inc., a Delaware corporation, ("Herley" or the "Company") is engaged in the design, development, manufacture and sale of flight instrumentation components and systems, and microwave products primarily to the U.S. government, foreign governments, and aerospace companies. Flight instrumentation products include command and control systems, transponders, flight termination receivers, telemetry transmitters and receivers, pulse code modulator ("PCM") encoders, and scoring systems. Flight instrumentation products are used to: (i) accurately track the flight of space launch vehicles, targets, and unmanned airborne vehicles ("UAVs"), (ii) communicate between ground systems and the airborne vehicle, (iii) if necessary, destroy the vehicle if it is veering from its planned trajectory, and (iv) train troops and test weapons. The Company's command and control systems are used on training and test ranges domestically and in foreign countries. The Company has an installed base of approximately 100 command and control systems around the world, which are either fixed installations, transportable units or portable units. Herley also manufactures microwave devices used in its flight instrumentation systems and products and in connection with the radar and defense electronic systems on tactical fighter aircraft. The Company has grown internally and through five strategic acquisitions. As a result, the Company has evolved from a components manufacturer to a systems and service provider and has leveraged its technical capabilities and expertise into domestic commercial and foreign defense markets. Since its inception in 1965, the Company has designed and manufactured microwave devices for use in various tactical military programs. In June 1986, the Company acquired a small engineering company, Mission Design, Inc., engaged in the design and development of transponders. This acquisition enabled the Company to enter the flight instrumentation business beginning with the design and manufacture of range safety transponders. In September 1992, the Company acquired substantially all of the assets of Micro-Dynamics, Inc. ("MDI") of Woburn, Massachusetts, a microwave subsystem designer and manufacturer. In June 1993, the Company acquired Vega Precision Laboratories, Inc. ("Vega") of Vienna, Virginia, a manufacturer of flight instrumentation products. In March 1994, the Company entered into an exclusive license agreement for the manufacture, marketing and sale of the Multiple Aircraft GPS Integrated Command & Control (MAGIC2) systems. In July 1995, the Company acquired certain assets and the business of Stewart Warner Electronics Corp. of Chicago, Illinois, a manufacturer of high frequency radio and IFF interrogator systems. In August 1 1997, the Company acquired Metraplex Corporation ("Metraplex") of Frederick, Maryland, which has enabled the Company to enter the airborne PCM and FM telemetry and data acquisition systems market. Products Command and Control Systems (C2) For over thirty years, Vega (a division of the Company) has been manufacturing products in the radar enhancement field. The Company's command and control systems have been used to fly remotely a large variety of unmanned aerial vehicles, typically aircraft used as target drones or Remotely Piloted Vehicles ("RPVs") and some surface targets. Operations have been conducted by users on the open ocean, remote land masses, and instrumented test and training ranges. The Company's command and control systems are currently in service throughout the world. The Company's pulse-positioned-coded ("PPC") concept enables the use of standard radar technology to track and control unmanned vehicles. Using the radar beacon mode, PPC pulse groups are transmitted and received for transfer of command and telemetry data while employing the location precision and advantages of radar techniques. Command and control systems permit a ground operator to fly a target or a UAV through a pre-planned mission. That mission may be for reconnaissance, where the vehicle is equipped with high definition TV sensors and the necessary data links to send information back to its command and control systems ground station. The UAV may also be used as a decoy, since the operator can direct the flight operations that will make the small drone appear to be a larger combat aircraft. With the 1994 licensing of the MAGIC2 system, the Company increased the selection of command and control systems. The 6104 TTCS (Target Tracking and Control System) unit is a line-of-sight command and control system with an installed base of equipment worldwide. The Company's engineers and marketers are now able to offer the MAGIC2 system as a supplement to, or replacement for, this installed base of equipment. The MAGIC2 system affords over-the-horizon command and control using GPS guidance and control of multiple targets from a single ground station. The ability to control multiple targets at increased distances represents a significant product improvement. The increasing demand for enhanced performance by the U.S. Navy as well as foreign navies in littoral warfare scenarios can be satisfied by the use of the MAGIC2 system. The new Model 6104 TTCS is a highly flexible, multiple processor design with high resolution graphics, which can be field configured within minutes to fly or control any selected vehicle for which it is equipped. The system is designed to operate with a large variety of vehicles. A basic TTCS configuration is normally supplied with a standard Company command panel and the software peculiar to one vehicle. Telemetry display software is embedded for the specified vehicle, and a magnetic hard drive is supplied with a mission map prepared in accordance with a customer supplied detailed map of the area. The TTCS is used in support of missile, aircraft and other weapons systems development and testing. Herley continues to provide this system to customers to support their requirement. The MAGIC2 system provides control of multiple targets from a single ground control system, and utilizes GPS to provide accurate position information. The MAGIC2 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. Military surveillance operations typically use UAVs, RPVs, or drones to avoid the cost and risk of manned surveillance vehicles in the event of an accident or if the vehicle is shot down. These inexpensive drones are controlled in flight by a Company command and control system, which may be mounted in a trailer that may be moved from place to place by helicopter or truck. The Company also manufactures portable command and control systems that are mounted on tripods 2 that can be easily transported by an operational team. The portable units permit ready deployment in rugged terrain and may also be used on ships during open ocean exercises. In recent years, teaming arrangements between prime military contractors and the Company have increased. Large companies bidding on major programs seek to align themselves with parts and systems manufacturers such as the Company for economic reasons as well as for the technical expertise afforded by such alliances. Teaming arrangements with Tracor Corporation and Northrop Grumman Corporation have resulted in recent awards to the Company for command and control systems in Australia and Singapore, and the Company is presently negotiating additional teaming arrangements. Telemetry Systems Missile, UAV, or target testing on domestic and international test ranges requires flight safety and performance data transmission to maximize flight safety during the test operation. Surveillance and intelligence gathering UAVs also require a data transmission downlink and a command and control systems uplink to accomplish their mission. The Company has developed a telemetry system capability that can be configured to meet individual customers' needs. Various components of the system include data encoders, transmitters and flight termination receivers. Each has a distinctive role and each is key to the success of the mission. In 1972, Metraplex began developing data encoding and acquisition, and signal conditioning equipment. Metraplex is now a leading manufacturer of PCM and FM telemetry and data acquisition systems for severe environment applications, whose 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. The Company's acquisition of Metraplex allows the Company to offer a complete airborne data link system. With the digital capability of Metraplex in data encoding and acquisition elements combined with the radio frequency capability of the Company in providing its telemetry transmitters and flight termination receivers, the Company offers a full line of narrow or wide band airborne telemetry systems to meet a wide variety of industrial needs, both domestically and internationally. Transponders The Company manufactures a variety of expendable transponders, including range safety, identification friend or foe ("IFF"), command and control, and scoring systems. Transponders are small, expendable, electronic systems consisting of a transmitter, sensitive receiver and internal signal processing equipment comprised of active and passive components, including microwave subassemblies such as amplifiers, oscillators and circulators. The transponder receives signals from radars, changes and amplifies the frequency of the signals, and sends back a reply on a different frequency and signal level. This reply will be a strong, noise free signal upon which the tracking radar can "lock," and one which is far superior to skin reflection tracking, particularly under adverse weather conditions after the launch. In range safety applications, transponders enable accurate tracking of space launch and unmanned aerial vehicles, missiles, and target drones so that position and direction are known throughout its flight. In the case of several defense and commercial space launch vehicles (i.e., Delta, Atlas, Titan and Pegasus), the Herley transponder is tracked by the ground launch team all the way to space orbit, and in certain instances through several orbits, as a reference location point in space to assure that the launch payload has been properly placed in orbit. 3 IFF transponders, which are used in conjunction with the FAA Air Traffic Control System, enable ground controllers to identify the unmanned targets, drones and cruise missiles on which these units fly and to vector other manned aircraft safely away from the flight path of the unmanned aerial vehicle. Command and control transponders provide the link through the telemetry system for relaying ground signals to direct the vehicle's flight. The uplink from the ground control station, a series of coded pulse groups, carries the signals that command the flight control guidance system of the vehicle. The downlink to the ground provides both tracking signals for range safety, as well as acknowledgment and status of the uplink commands and their implementation in the vehicle. The transponder is therefore the means to fly the vehicle. Scoring systems are mounted on both airborne and sea targets. Scoring systems enable test and evaluation engineers to determine the "miss-distance" between a projectile and the target at which it has been launched. Flight Termination Receiver A flight termination receiver ("FTR") is installed in a test missile, a UAV, a target or a space launch vehicle as a safety device. The FTR has a built-in decoder that enables it to receive a complex series of audio tones which, when appropriate, will set off an explosive charge that will destroy the vehicle. A Range Safety Officer ("RSO") using the range safety transponder will track the vehicle in flight to determine if it is performing as required. If the RSO detects a malfunction in the test or launch vehicle that causes it to veer from a planned trajectory in a manner that may endanger personnel or facilities, the RSO will transmit a coded signal to the onboard FTR to explode the vehicle harmlessly. Microwave Devices Herley manufactures solid state microwave devices in both Lancaster, Pennsylvania and at its MDI facility in Woburn, Massachusetts for use in its transponders and existing long-term military programs, both as part of new production and for spare parts and repair services. These microwave devices are used in a variety of radar, communications and missile applications, including airborne and shipboard navigation and missile guidance systems. In Woburn, the Company designs and manufactures complex microwave integrated circuits ("MICs"), which consist of sophisticated assemblies that perform many functions, primarily involving switching of microwave signals. MICs manufactured by the Company are employed in many defense electronics military systems as well as missile programs. The Company also manufactures magnetrons, which are the power source utilized in the production of the Company's transponders. The Company produces receiver protector devices. These high power devices protect a radar receiver from transient bursts of microwave energy and are employed in almost every military and commercial radar system. With the contraction of the defense business, the Company has only one significant competitor in this market. The Company also designs and manufactures high frequency radio and IFF interrogators. This high frequency communications equipment is used by the U.S. Navy and foreign navies that conduct joint military exercises with the U.S. Navy. The IFF interrogators are used as part of shipboard equipment and are also placed on coastlines, where they are employed as silent sentries. New Product Development and Applications The Company believes that its growth depends, in part, on its ability to renew and expand its technology, products, and design and manufacturing processes with an emphasis on cost effectiveness. The Company's primary efforts are focused on engineering design and product development activities rather than pure research. A substantial portion of the Company's development activities have been funded by the 4 Company's customers. Certain of the Company's officers and engineers are involved at various times and in varying degrees in these activities. The Company's policy is to assign the required engineering and support people, on an ad hoc basis, to new product development as needs require and budgets permit. The cost of these development activities, including employees' time and prototype development, net of amounts paid by customers, were approximately $1,562,000, $1,828,000, and $1,453,000 in fiscal 1998, 1997, and 1996, respectively. The new products and systems that the Company plans to design, manufacture and sell are data link systems, which include telemetry data encoders. Data link systems and data encoders are currently being sold by others to the Company's existing customers. With its acquisition of Metraplex in August 1997, the Company now offers data link systems to its customers, either directly or through teaming arrangements. Upon receipt of an order, the Company will customize the design of a system for its customer for delivery typically nine months after receipt of such order. Data Link Systems Data link systems contain transmitters, amplifiers, receivers and other components, and provide the means of communication between the control tower, the ground station and the test or launch vehicle. Data link systems are the equivalent of telephone links between the air and ground portions of launch vehicles or test and training ranges. The uplink communication to the airborne vehicle is transmitted via a telemetry signal from the ground to the vehicle. The telemetry signals are used to command the airborne vehicle through its command control transponder. The transponder will then change the flight control guidance system as directed. The downlink signals from the airborne telemetry transmitter to the ground telemetry receiver provide tracking signals for range safety, confirmation of the uplink command and their implementation by the vehicle and compilation of the data from on-board sensors gathered by the telemetry data encoder. Through the application of technology acquired from Metraplex, the Company manufactures data encoders. Airborne targets and flight test missiles must have many critical parameters simultaneously monitored from the ground to gain the data required for verification of satisfactory performance or for identification of details of hardware requiring design improvements. On-board sensors may measure temperature, strain levels, vibration level and frequency, acoustic noise levels, air pressure, air velocity, humidity and other parameters of interest. The function of the encoder system is to convert the output of each of these sensors to a signal form that may be sequentially sampled by an electronic switch (multiplexer) produced by the Company in a known sequence and rate so as to create a data stream that may be transmitted to the ground by the telemetry system. Commercial Lighting Over the past three years, the Company has been seeking commercial applications for the magnetron tubes produced by the Company's MDI division. In 1995, the Company signed agreements with a large lighting company to develop miniature cost-effective magnetron tubes, using electrode-less high density ("EHD") techniques, for medical and industrial lighting applications. Based on initial engineering results, prototype tubes were designed, manufactured and tested satisfactorily to the specifications required. The Company and this other company are currently planning limited production of magnetron tubes to be used in an EHD industrial lighting application. Government Contracts A substantial part of the Company's sales are made to U.S. government agencies, prime contractors or subcontractors on military or aerospace programs. Government contracts are awarded either on a competitive bid basis or on a negotiated sole source procurement basis. Contracts awarded on a bid basis involve several competitors bidding on the same program with the contract being awarded based upon price and ability to perform. Negotiated sole source procurement is utilized if the Company is deemed by the customer to have developed proprietary equipment not available from other parties or where there is a very stringent delivery schedule. 5 All of the Company's government contracts are fixed price contracts, some of which require delivery over time periods in excess of one year. With this type of contract, the Company agrees to deliver products at a fixed price except for costs incurred because of change orders issued by the customer. In accordance with Department of Defense procedures, all contracts involving government programs may be terminated by the government, in whole or in part, at the government's discretion. In the event of such a termination, prime contractors on such contracts are required to terminate their subcontracts on the program and the government or the prime contractor is obligated to pay the costs incurred by the Company under the contract to the date of termination plus a fee based on the work completed. Recent Developments As of August 21, 1998, the Company entered into an agreement to acquire all of the issued and outstanding common stock of General Microwave Corp., a New York corporation, for $18.00 per share and a three-year warrant to purchase one share of the Company's common stock at an aggregate purchase price of approximately $23,000,000. The warrant is exercisable at $14.40 per share through January 11, 1999, and thereafter at $15.60 per share, until expiration. General Microwave designs, manufactures and markets microwave components and subsystems, and related electronic test and measurement equipment. The company is headquartered in Amityville, New York, and operates two other facilities, one in Billerica, Massachusetts, and one in Israel. The transaction is subject to the approval of the stockholders of General Microwave Corp. The transaction will be accounted for under the purchase method. Marketing and Distribution The Company's marketing approach is to determine customer requirements in the developmental stages of a program. Marketing and engineering personnel work directly with the customer's engineering group to develop product specifications. The Company receives its awards based upon an evaluation of a number of factors, including technical ranking, price, overall capability and past performance. Follow-up contracts (including options) on the same program are normally negotiated with customers rather than being subject to a competitive bidding process. Backlog The Company's backlog of firm orders was approximately $38,724,000 on August 2, 1998 ($25,727,000 in domestic orders and $12,997,000 in foreign orders) as compared to approximately $36,911,000 on August 3, 1997 ($26,135,000 in domestic orders and $10,776,000 in foreign orders). Management anticipates that approximately $32,093,000 of the backlog will be shipped during the fiscal year ending August 1, 1999. There can be no assurance that the Company's backlog will result in sales in any particular period or at all, or that the contracts included in backlog that result in sales will be profitable. Manufacturing, Assembly and Testing Flight instrumentation devices manufactured by the Company for military and space launch applications are subject to testing procedures based upon customer requests. All of such testing is performed by the Company at its facilities. All electronic parts are procured in controlled lots that are subjected to physical inspection and screening at Herley facilities before use in products. Physical inspection may require the use of high power microscopes and laser scanned optical comparators, which match the characteristics of the part under inspection to previously stored images. The testing of high reliability space equipment is performed by complex computer controlled consoles that continuously monitor, analyze and measure operating parameters. Flight instrumentation products are tested over their full operating temperature range, after which the equipment is evaluated under combined vibration and temperature cycling. For initial design qualification, this 6 testing may extend for several months and include evaluation of electromagnetic interference behavior ("EMI"), ability to survive pyrotechnic shock (simulating explosive charge detonation for space vehicle stage separation) and the combined effects of external vacuum with heating and cooling. Electronic components and other raw materials used in the Company's products are purchased by the Company from a large number of suppliers and all of such materials are readily available from alternate sources, with the exception of one component part which, if unavailable, can be manufactured by the Company. The Company does not maintain any significant level of finished products inventory. Raw materials are generally purchased for specific contracts and common components are purchased for stock based on the Company's firm fixed backlog. There are no significant environmental control procedures required concerning the discharge of materials into the environment that would require the Company to invest in any significant capital equipment or that would have a material effect on the earnings of the Company or its competitive position. Competition The flight instrumentation and microwave products that the Company manufactures are subject to varied competition depending on the product and market served. Competition is generally based upon technology, design, price and past performance. The Company's ability to compete for defense contracts depends, in part, on its ability to offer better design and performance than its competitors and its readiness in facilities, equipment and personnel to undertake to complete the programs. In certain products or programs, the Company believes it is sole source, which means that all work is directed to a single manufacturer. In other cases, there may be other suppliers that have the capability to compete for the programs involved, but they can only enter or reenter the market if the government should choose to reopen the particular program to competition. Competition in follow-on procurements is generally limited after an initial award unless the original supplier has had performance problems. Many of Herley's competitors are larger and may have greater financial resources than the Company. Competitors include Aydin Corporation, L-3 Communications Corporation, Microsystems, Inc., AMP, Inc. and Remec, Inc. Employees As of October 4, 1998, the Company employed 306 full-time persons. A total of 228 employees were engaged in manufacturing, 38 in engineering, 19 in marketing, contract administration and field services and the balance in general and administrative functions. None of the Company's employees are covered by collective bargaining agreements and the Company considers its employee relations to be satisfactory. The Company believes that its future success will depend, in part, on its continued ability to recruit and retain highly skilled technical, managerial and marketing personnel. To assist in recruiting and retaining such personnel, the Company has established competitive benefits programs, including a 401k employee savings plan, and stock option plans. Intellectual Property The Company does not presently hold any significant patents applicable to its products. In order to protect its intellectual property rights, the Company relies on a combination of trade secret, copyright and trademark laws and certain employee and third-party nondisclosure agreements, as well as limiting access to and distribution of proprietary information. There can be no assurance that the steps taken by the Company to protect its intellectual property rights will be adequate to prevent misappropriation of the Company's technology or to preclude competitors from independently developing such technology. Trade secret and copyright laws afford the Company limited protection. 7 Item 2. Properties The Company's properties are as follows:
Area Owned Occupied or Location Purpose of Property (Sq. ft.) Leased - ----------------- ------------------------------------------ --------- ------ Lancaster, PA (1) Production, engineering, administrative 71,200 Owned and executive offices Woburn, MA Production, engineering and administration 60,000 Owned Chicago, IL Production, engineering and administration 9,700 Leased Frederick, MD Production, engineering and administration 11,000 Leased Lancaster, PA Land held for expansion 26 Acres Owned - -------------- (1) The Company's executive offices occupy approximately 4,000 sq. ft. of space at this facility with engineering and administrative offices occupying 10,000 sq. ft. each.
The Company believes that its facilities are adequate for its current and presently anticipated future needs. Item 3. Legal Proceedings The Company is not involved in any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholders Matters (a) The Company's Common Stock is traded in the Nasdaq National Market under the symbol HRLY. The following table sets forth the high and low sales price as reported by the Nasdaq National Market for the Company's Common Stock for the periods indicated and gives effect to the four-for-three stock split of the Common Stock on September 30, 1997.
Common Stock --------------- High Low ---- --- Fiscal Year 1997 First Quarter.............................. 7.97 6.19 Second Quarter............................. 10.69 7.31 Third Quarter.............................. 8.91 6.09 Fourth Quarter............................. 10.69 6.19 Fiscal Year 1998 First Quarter.............................. 15.00 10.13 Second Quarter............................. 14.75 10.50 Third Quarter.............................. 14.69 10.88 Fourth Quarter............................. 14.25 8.63 Fiscal Year 1999 First Quarter (through October 20, 1998)... 10.38 7.63
The closing price on October 20, 1998 was $8.375. (b) As of October 1, 1998, there were approximately 1,000 record holders of the Company's Common Stock. (c) There have been no cash dividends declared or paid by the Company on its Common Stock during the past two fiscal years. Item 6. Selected Financial Data
52 Weeks 53 Weeks 52 Weeks ended Ended Ended ----------------------------------- August 2, August 3, July 28, July 30, July 31, 1998 (2) 1997 1996 1995 (3) 1994 ---------- ---------- ---------- ---------- ---------- Net sales $ 40,797,991 32,195,168 29,001,404 24,450,267 30,508,211 ========== ========== ========== ========== ========== Net income (loss) $ 5,496,608 4,803,659 3,668,956 (4,890,166) 1,861,429 ========= ========= ========= ========= ========= Earnings (loss) per common share (1) Basic $ 1.11 1.18 .97 (.98) .33 ==== ==== === === === Assuming Dilution $ 1.02 1.01 .86 (.98) .33 ==== ==== === === === Total Assets $ 57,552,529 39,257,186 42,508,942 42,229,282 53,752,454 Total Current Liabilities $ 9,843,041 9,813,376 7,559,306 9,973,866 10,217,598 Long-Term Debt net of current portion $ 4,110,885 2,890,000 11,021,000 10,525,000 14,822,834 - ------------------ (1) As adjusted to give effect to a 4-for-3 stock split effective September 30, 1997. (2) On August 4, 1997, the Company acquired Metraplex Corporation. See Note B of the financial statements. (3) Fiscal 1995 includes settlement costs, legal fees, and related expenses in the amount of approximately $5,447,000 in connection with the settlement of certain legal claims.
9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company is engaged in the design, manufacture and sale of flight instrumentation components and systems, and microwave products, primarily to the U.S. government, foreign governments, and aerospace companies. Flight instrumentation products include command and control systems, transponders, flight termination receivers, telemetry transmitters and receivers, PCM encoders, and scoring systems. Flight instrumentation products are used to: (i) accurately track the flight of space launch vehicles, targets, and UAVs, (ii) communicate between ground systems and the airborne vehicle, (iii) if necessary, destroy the vehicle if it is veering from its planned trajectory, and (iv) train troops and test weapons. Of the Company's total backlog of $38,724,000 at August 2, 1998, $25,727,000 is attributable to domestic orders and $12,997,000 is attributable to foreign orders. Management anticipates that approximately $32,093,000 of its backlog will be shipped during the fiscal year ending August 1, 1999. The Company includes in its backlog only firm orders for which it has accepted a written purchase order. In accordance with Department of Defense procedures, all contracts involving government programs may be terminated by the government, in whole or in part, at the government's discretion. In the event of such a termination, prime contractors on such contracts are required to terminate their subcontracts on the program and the government or the prime contractor is obligated to pay the costs incurred by the Company under the contract to the date of termination plus a fee based upon work completed. Substantially all of the Company's contracts are fixed price contracts, wherein sales and related costs are generally recorded as deliveries are made. Many of these contracts include options exercisable by the customer for additional products or systems at a fixed price. Certain costs under long-term fixed price contracts, principally directly or indirectly with the U.S. Government, which include non-recurring engineering, are deferred until these costs are contractually billable. The failure to anticipate technical problems, estimate costs accurately or control costs during a fixed price contract, including with respect to any option for additional products or systems, may reduce the Company's profitability or cause a loss under the contract. Revenue under certain long-term, fixed price contracts, principally command and control shelters, is recognized using the percentage of completion method of accounting. Revenue recognized on these contracts is based on estimated completion to date, which is the total contract amount multiplied by percent of performance, based on total costs incurred in relation to total estimated cost at completion. As of August 2, 1998, costs incurred and income recognized in excess of billings on uncompleted contracts was $1,665,008. There were no long-term contracts of this nature as of August 3, 1997. Losses, if any, on contracts are recorded when first reasonably determined. The Company believes that its growth depends on its ability to renew and expand its technology, products, and design and manufacturing processes with an emphasis on cost effectiveness. The Company's primary efforts are focused on engineering design and product development activities, rather than pure research. The cost of these development activities, including employees' time and prototype development, net of amounts paid by customers, was approximately $1,562,000,$1,828,000, and $1,453,000 in fiscal years 1998, 1997 and 1996, respectively. Costs of the Company's internally funded product development efforts are included in the Company's operating expenses as cost of products sold. Revenue from customer funded product development is included in net sales and the related product development costs also are included in cost of products sold. The Company's effective tax rate for fiscal 1998 and 1997 was 34.8% and 9.1%, respectively. The low effective rate in 1997 reflects the utilization of prior year net operating loss carryforwards and the reversal of a valuation allowance established in 1995. The valuation allowance was established based on management's uncertainty that past performance would be indicative of future 10 earnings. In August 1997, the Company established a foreign sales corporation as part of an overall domestic tax strategy to reduce its effective income tax rate. Results of Operations The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statements of income expressed as a percentage of net sales. There can be no assurance that trends in sales growth or operating results will continue in the future.
52 weeks 53 weeks 52 weeks ended ended ended August 2, August 3, July 28, 1998 1997 1996 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of products sold 59.2% 64.5% 68.3% ----- ----- ----- Gross profit 40.8% 35.5% 31.7% Selling and administrative expenses 20.4% 19.5% 20.1% ----- ----- ----- Operating income 20.3% 16.0% 11.6% ----- ----- ----- Other income, net: Net gain on available-for-sale securities and other investments 0.3% 1.3% 3.1% Dividend and interest income 1.1% 0.8% 1.3% Interest expense (1.1)% (1.7)% (3.0)% ----- ----- ----- 0.3% 0.4% 1.4% ----- ----- ----- Income before income taxes 20.7% 16.4% 13.0% Provision for income taxes 7.2% 1.5% 0.4% ----- ----- ----- Net income 13.5% 14.9% 12.7% ===== ===== =====
Fiscal 1998 Compared to Fiscal 1997 Net sales for the 52 weeks ended August 2, 1998 were approximately $40,798,000 compared to $32,195,000 for fiscal 1997. The sales increase of $8,603,000 (26.7%) is primarily attributable to the acquisition of Metraplex Corporation as of August 4, 1997 which contributed $4,015,000 in revenues in fiscal 1998, an increase of approximately $3,542,000 in flight instrumentation products, and an increase of approximately $1,046,000 in microwave components. Gross profit of 40.8% for the 52 weeks ended August 2, 1998 exceeded the prior year of 35.5% due to an increase of $2,545,000 in higher margin foreign sales from $9,398,000 in 1997 to $11,943,000 in 1998, and improved margins in microwave components, as well as an increase in absorption of fixed costs due to the higher sales volume. 11 Selling and administrative expenses for the 52 weeks ended August 2, 1998 were $8,339,000 compared to $6,293,000 for fiscal 1997, an increase of $2,046,000. The addition of Metraplex Corporation added $1,195,000 in selling and administrative expenses in fiscal 1998. In addition, $304,000 of the change is attributable to increased representative fees on foreign sales, $415,000 is due to increased personnel and related expenses, including additional travel expenses, and $350,000 relates to increased consulting fees primarily for software changes addressing the year 2000 computer software issues. Such increases were offset by cost savings of $243,000 related to the transfer of substantially all of the production from the Stewart Warner facilities in Chicago to the Company's facilities in Lancaster, Pennsylvania. As a percentage of net sales, selling and administrative expenses increased from 19.5% in 1997 to 20.4% in 1998. Other income, net, for the 52 weeks ended August 2, 1998 was consistent with the prior year. The effective tax rate in 1998 was 34.8% as compared to 9.1% in fiscal 1997. The 1997 tax provision reflects the utilization of prior year net operating loss carryforwards. In 1995 a valuation allowance had been provided to reduce deferred tax assets to their net realizable value primarily based on management's uncertainty that past performance would be indicative of future earnings. In 1997 the valuation allowance was reversed through the deferred tax provision. A determining factor in assessing the change was the cumulative income in recent years Fiscal 1997 Compared to Fiscal 1996 Net sales for the 53 weeks ended August 3, 1997 were approximately $32,195,000 compared to $29,001,000 for fiscal 1996. The sales increase of $3,194,000 (11%) is primarily attributable to an increase in the sales of flight instrumentation products, including a Target Tracking Control System for the Republic of Korea. Gross profit of 35.5% for the 53 weeks ended August 3, 1997 exceeded the prior year of 31.7% due to an increase of $2,842,000 in higher margin foreign sales from $6,556,000 in 1996 to $9,398,000 in 1997, as well as an increase in absorption of fixed costs due to the higher sales volume. Selling and administrative expenses for the 53 weeks ended August 3, 1997 were $6,293,000 compared to $5,832,000 for fiscal 1996, an increase of $461,000 of which $360,000 was attributable to settlement and litigation costs involving two class action law suits, $325,000 to performance incentives, and $52,000 to additional travel costs. These increases were offset by a reduction in representative fees on foreign sales of $205,000 (partially due to a negotiated decrease in the rate paid), and a reduction of $75,000 in personnel and related expenses. As a percentage of net sales, selling and administrative expenses decreased from 20.1% in 1996 to 19.5% in 1997. Other income, net, for the 53 weeks ended August 3, 1997 decreased $265,000 from the prior year due to decreases in gains on the sale of investments and dividend and interest income of $488,000 and $118,000, respectively, offset by a decrease in interest expense of $341,000. The effective tax rate in 1997 was 9.1%. The 1997 and 1996 tax provisions reflect the utilization of prior year net operating loss carryforwards. In 1995 a valuation allowance had been provided to reduce deferred tax assets to their net realizable value primarily based on management's uncertainty that past performance would be indicative of future earnings. In 1997 the valuation allowance was reversed through the deferred tax provision. A determining factor in assessing the change was the cumulative income in recent years. See Note I entitled "Income Taxes" to the Consolidated Financial Statements. Subsequent Event As of August 21, 1998, the Company entered into an agreement to acquire all of the issued and outstanding common stock of General Microwave Corp., a New York corporation , for $18.00 per share and a three-year warrant to purchase one share of the Company's common stock at an aggregate purchase price of 12 approximately $23,000,000. The warrant is exercisable at $14.40 per share through January 11, 1999, and thereafter at $15.60 per share, until expiration. General Microwave designs, manufactures and markets microwave components and subsystems, and related electronic test and measurement equipment. The company is headquartered in Amityville, New York, and operates two other facilities, one in Billerica, Massachusetts, and one in Israel. The transaction is subject to the approval of the stockholders of General Microwave Corp. at a meeting to be held in December 1998. The transaction will be accounted for under the purchase method. As of October 20, 1998, the Company has acquired 362,400 shares of General Microwave in the open market for approximately $6,217,000. Liquidity and Capital Resources As of August 2, 1998 and August 3, 1997, working capital was approximately $26,593,000 and $10,662,000, respectively, and the ratio of current assets to current liabilities was 3.70 to 1 and 2.09 to 1, respectively. At August 2, 1998, the Company had cash and cash equivalents of approximately $10,689,000, primarily from the proceeds received from the public stock offering discussed below. On August 4, 1997, the Company completed the acquisition of Metraplex Corporation , a Maryland corporation for 313,139 (as adjusted) shares of common stock of the Company, with a fair market value of $3,170,471, in exchange for all of the issued and outstanding common stock of Metraplex. As is customary in the defense industry, inventory is partially financed by advance payments. The unliquidated balance of these advance payments was approximately $1,825,000 in 1998, and $3,091,000 in 1997. The decrease in the current fiscal year is directly attributable to shipments under the related contracts. Net cash provided by (used in) operations and investing activities was approximately $3,647,000, and $6,159,000,respectively in 1997, and approximately $4,571,000 and ($1,051,000) , respectively in 1998. Net cash provided by financing activities in fiscal 1998 consists of net proceeds of $7,452,000 from the sale of 700,000 shares of common stock, and 1,265,000 Common Stock Purchase Warrants to the public. Net borrowings under a bank line of credit provided $1,500,000 in financing. The Company received a partial distribution of $592,824 from its M.D. Sass Municipal Finance Partners-I limited partnership investment. Cash was used in financing activities for payments of long-term debt of $2,257,000 and the purchase of treasury stock of $1,084,000 Cash provided by investing activities in 1997 resulted primarily from the liquidation of all the available-for-sale securities, and the sale of the Company's interest in the M.D. Sass Re/Enterprise-II, L.P., limited partnership. The Company used approximately $9,715,000 of these funds in financing activities primarily for the net payment of outstanding bank debt of $7,250,000, and the purchase of treasury stock for $2,783,000. The Company maintains a revolving credit facility with a bank for an aggregate of $21,000,000, which expires January 31, 2000. As of August 2, 1998, the Company had borrowings outstanding of $1,500,000. No borrowings were outstanding on this line at August 3, 1997. In January 1998, the Company purchased 89,888 shares of its outstanding common stock for $1,084,326 from certain officers of the Company based on the fair market value of the stock on the date acquired. During the fiscal year ended August 3, 1997 the Company acquired 244,519 shares of its outstanding common stock for $2,782,686 through open market purchases, pursuant to a stock purchase plan to acquire up to 300,000 pre-split shares of Common Stock, which was terminated in June 1997. The Company also acquired 42,016 and 463,639 shares of common stock in 1998 and 1997, respectively, valued at $538,376 and $6,429,124, respectively, in connection with certain "stock-for-stock" exercises of stock options by which certain employees elected to surrender "mature" shares owned in settlement of the option price. Such exercises are treated as an exercise of a stock option and the acquisition of treasury shares by the Company. See "Management - Stock Plans." The Company believes that presently anticipated future cash requirements will be provided by internally generated funds and existing credit facilities, as well as the proceeds received from the public stock offering. 13 Year 2000 Readiness The "Year 2000" problem relates to computer systems that have time and date-sensitive programs that were designed to read years beginning with "19", but may not properly recognize the year 2000. If a computer system or software application used by the Company or a third party dealing with the Company fails because of the inability of the system or application to properly read the year 2000 the results could have a material adverse effect on the Company. A substantial part of the Company's revenues are derived from firm fixed price contracts with U.S. government agencies, prime contractors or subcontractors on military or aerospace programs, and many foreign governments. If the Company is unable to perform under these contracts due to a Year 2000 problem, the customer could terminate the contract for default. While lost revenue s from such an event are a concern for the Company, the greater risks are the consequential damages for which the Company could be liable for failure to perform under the contracts. Such damages could have a material adverse impact on the Company's results of operations and financial position. The most likely reason for a customer to terminate a contract for default would be due to the Company's inability to manufacture and deliver product under the contract. Breakdowns in any number of the Company's computer systems and applications could prevent the Company from being able to manufacture and ship its products. Examples are failures in the Company's manufacturing application software, computer chips embedded in engineering test equipment, lack of supply of materials from its suppliers, or lack of power, heat, or water from utilities servicing its facilities. The Company's products do not contain computer devices that require remediation to meet Year 2000 requirements. A review of the Company's status with respect to remediating its computer systems for Year 2000 compliance is presented below. For its information technology, the Company currently utilizes a Hewlett Packard HP3000-based computing environment. The HP3000 hardware is in compliance with Year 2000 requirements. The Company's financial, manufacturing, and other software applications related to the HP3000 have been updated to comply with Year 2000 requirements at a cost of approximately $350,000. Certain modules have been fully tested, with the remaining modules to be tested by the end of fiscal 1999. In addition, the Company utilizes a wide area network ("WAN") to connect its operating facilities to the HP3000. The WAN has been updated to comply with Year 2000 requirements. A local area network ("LAN") is used to supplement the HP3000 environment and has also been upgraded and is fully Year 2000 compliant. The Company is also reviewing its utility systems (heat, light, phones, liquid nitrogen, etc.) for the impact of Year 2000, as well as determining the state of readiness of its material suppliers. The Company will develop a questionnaire to be sent to its significant suppliers, and to its test equipment manufacturers concerning embedded technology, regarding their compliance and attempt to identify any problem areas with respect to them. This process will be ongoing and the Company's efforts with respect to specific problems identified, and future costs associated with them, will depend in part upon its assessment of the risk that any such problems may cause a disruption in manufacturing or other problem which the Company believes would have a material adverse impact on its operations. However, the Company cannot control the conduct of its suppliers. Therefore, there can be no guarantee that Year 2000 problems originating with a supplier will not occur. The Company has not yet developed contingency plans in the event of a Year 2000 failure caused by a supplier or third party, but would intend to do so if a specific problem is identified through the process described above. The Company has developed multiple sources for a substantial portion of its raw material requirements and, therefore, does not believe there would be a significant disruption in supply. The information set forth above identifies the key steps taken by the Company to address the Year 2000 problem. There can be no absolute assurance that third parties will convert their systems in a timely manner. The Company believes that its actions will minimize these risks and that any additional cost of Year 2000 compliance for its information and production systems will not be material to its consolidated results of operations and financial position. 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with changes in interest rates and stock prices. The Company has not entered into any derivative financial instruments to manage the above risks and the Company has not entered into any market risk sensitive instruments for trading purposes. The Company's debt consists of a working capital line of credit with a bank having an interest rate that floats with the FMOC Target Rate (7.15% as of August 2, 1998), and a mortgage on its facilities in Lancaster, Pa. at a fixed rate of 10.4% The credit line is reviewed on an annual basis. After the proposed acquisition of General Microwave Corp. the Company will be subject to potentially adverse movements in foreign currency rate changes. The Company does not anticipate any other material changes in its primary market risk exposures in fiscal 1999. As of August 2, 1998, the Company holds an investment in the common stock of a public company that is exposed to price risk with a cost basis and a fair market value basis of $143,330. The table below provides information about the Company's debt that is sensitive to changes in interest rates. The table presents principal cash flows by maturity date. Future principal payments required under the mortgage and line of credit, and corresponding fair values are as follows:
Fiscal year ending during: Mortgage Line of Credit ------------------------- --------- -------------- 1999 $ 370,000 $ 2000 410,000 1,500,000 2001 450,000 2002 500,000 2003 550,000 2004 610,000 --------- --------- $2,890,000 $1,500,000 ========= ========= Fair value $2,908,000 $1,500,000 ========= =========
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 PART III The information required by Part III is incorporated by reference to the Company's definitive proxy statement in connection with its Annual Meeting of Stockholders scheduled to be held in January 1999, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year ended August 2, 1998. 15 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Exhibits 3.1 Certificate of Incorporation, as amended (Exhibit 3(a) of Form S-1 Registration Statement No. 2-87160). 3.2 By-Laws, as amended (Exhibit 3(b) of Form S-1 Registration Statement No. 2-87160). 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 Employment Agreement between Herley Industries, Inc. and Lee N. Blatt dated as of October 1, 1998. 10.4 Employment Agreement between Herley Industries, Inc. and Myron Levy dated as of October 1, 1998. 10.6 (a) Revised Non-Negotiable Promissory Note of Lee N. Blatt dated June 2, 1997 (Exhibit 10.4 of Report on Form 10-Q dated June 10, 1997). (b) Revised Non-Negotiable Promissory Note of Gerald I Klein dated June 2, 1997 (Exhibit 10.5 of Report on Form 10-Q dated June 10, 1997). (c) Revised Non-Negotiable Promissory Note of Myron Levy dated June 2, 1997 (Exhibit 10.6 of Report on Form 10-Q dated June 10, 1997). 10.7 Loan Agreement between Registrant and Allstate Municipal Income Opportunities Trust (Exhibit 10.6 of Annual Report on Form 10-K for the fiscal year ended July 31, 1989). 10.8 Asset Purchase Agreement dated as of September 1, 1992 between Micro-Dynamics, Inc. and Herley Industries, Inc. (Exhibit 7(c) of Report on Form 8-K dated October 22, 1992). 10.9 Stock Purchase Agreement dated as of June 1, 1993 between Herley Industries, Inc., Herley Interim Corp., Milton C. Barnard, Edward M. Webber, Marvin Adler and Carlton Industries, Inc. (Exhibit 7(c) of Report on Form 8-K dated June 18, 1993). 10.10 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). 10.11 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). 23. Consent of Independent Public Accountants. 27. Financial Data Schedule (for electronic submission only). (b) Financial Statements See Index to Consolidated Financial Statements at Page F-1. (c) Reports on Form 8-K None 16 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 the 26th day of October, 1998. 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 26, 1998 by the following persons in the capacities indicated: By: /S/ Lee N. Blatt Chairman of the Board ---------------------- (Principal Executive Officer) Lee N. Blatt By: /S/ Myron Levy President and Director ---------------------- Myron Levy By: /S/ Anello C. Garefino Vice President Finance, CFO, Treasurer -------------------------- (Principal Financial Officer) Anello C. Garefino By: /S/ David H. Lieberman Secretary and Director -------------------------- David H. Lieberman By: /S/ Thomas J. Allshouse Director --------------------------- Thomas J. Allshouse By: /S/ John A. Thonet Director ------------------------ John A. Thonet By: /S/ Alvin M. Silver Director ----------------------- Alvin M. Silver By: /S/ Edward K. Walker, Jr. Director ---------------------------- Edward K. Walker, Jr. 17 Item 8. Financial Statements and Supplementary Data HERLEY INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets, August 2, 1998 and August 3, 1997. F-3 Consolidated Statements of Income for the 52 Weeks Ended August 2, 1998, 53 Weeks Ended August 3, 1997 and 52 Weeks Ended July 28, 1996. F-4 Consolidated Statements of Shareholders' Equity for the 52 Weeks Ended August 2, 1998, 53 Weeks Ended August 3, 1997 and 52 Weeks Ended July 28, 1996. F-5 Consolidated Statements of Cash Flows for the 52 Weeks Ended August 2, 1998, 53 Weeks Ended August 3, 1997 and 52 Weeks Ended July 28, 1996. F-6 Notes to Consolidated Financial Statements. F-7 Schedules have been omitted as not applicable. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Herley Industries, Inc.: We have audited the accompanying consolidated balance sheets of Herley Industries, Inc. and Subsidiaries as of August 2, 1998, and August 3, 1997, and the related consolidated statements of income, shareholders' equity and cash flows for the 52 weeks ended August 2, 1998, the 53 weeks ended August 3, 1997, and the 52 weeks ended July 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Herley Industries, Inc. and Subsidiaries as of August 2, 1998, and August 3, 1997, and the consolidated results of their operations and cash flows for the 52 weeks ended August 2, 1998, the 53 weeks ended August 3, 1997, and the 52 weeks ended July 28, 1996 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Lancaster, PA September 17, 1998 F-2 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
August 2, August 3, 1998 1997 --------------- -------------- ASSETS Current Assets: Cash and cash equivalents $ 10,689,193 $ 1,194,650 Accounts receivable 6,193,947 5,176,523 Notes receivable-officers - 2,100,913 Costs incurred and income recognized in excess of billings on uncompleted contracts 1,665,008 - Other receivables 248,298 152,148 Prepaid income taxes 377,448 - Inventories 15,068,618 9,790,382 Deferred taxes and other 2,194,004 2,061,066 --------------- -------------- Total Current Assets 36,436,516 20,475,682 Property, Plant and Equipment, net 12,549,343 11,704,755 Intangibles, net of amortization of $1,524,393 in 1998 and $1,133,750 in 1997 6,080,218 4,308,136 Available-for-sale Securities 143,330 - Other Investments 849,324 1,313,502 Other Assets 1,493,798 1,455,111 =============== ============== $ 57,552,529 $ 39,257,186 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 404,984 $ 335,000 Note payable to related party - 846,000 Accounts payable and accrued expenses 6,468,183 4,986,740 Income taxes payable - 76,635 Reserve for contract losses 1,145,128 478,000 Advance payments on contracts 1,824,746 3,091,001 --------------- -------------- Total Current Liabilities 9,843,041 9,813,376 Long-term Debt 4,110,885 2,890,000 Deferred Income Taxes 3,158,353 2,696,394 Excess of fair value of net assets of business acquired over cost, net of accumulated amortization of $973,667 in 1997 - 486,833 --------------- -------------- 17,112,279 15,886,603 --------------- -------------- Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 5,266,159 in 1998 and 4,209,365 in 1997 526,616 420,936 Additional paid-in capital 20,323,895 8,856,516 Retained earnings 19,589,739 14,093,131 --------------- -------------- Total Shareholders' Equity 40,440,250 23,370,583 =============== ============== $ 57,552,529 $ 39,257,186 =============== ============== The accompanying notes are an integral part of these financial statements.
F-3 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
52 weeks 53 weeks 52 weeks ended ended ended August 2, August 3, July 28, 1998 1997 1996 ------------------ ------------------ ----------------- Net sales $ 40,797,991 $ 32,195,168 $ 29,001,404 ------------------ ------------------ ----------------- Cost and expenses: Cost of products sold 24,169,034 20,753,707 19,798,692 Selling and administrative expenses 8,338,789 6,293,199 5,831,830 ------------------ ------------------ ----------------- 32,507,823 27,046,906 25,630,522 ------------------ ------------------ ----------------- Operating income 8,290,168 5,148,262 3,370,882 ------------------ ------------------ ----------------- Other income, net: Net gain on available-for-sale securities and other investments 133,147 409,399 897,919 Dividend and interest income 453,402 257,676 376,007 Interest expense (446,109) (531,678) (873,452) ------------------ ------------------ ----------------- 140,440 135,397 400,474 ------------------ ------------------ ----------------- Income before income taxes 8,430,608 5,283,659 3,771,356 Provision for income taxes 2,934,000 480,000 102,400 ------------------ ------------------ ----------------- Net income $ 5,496,608 $ 4,803,659 $ 3,668,956 ================== ================== ================= Earnings per common share - Basic $ 1.11 $ 1.18 $ .97 ================== ================== ================= Weighted average shares outstanding 4,969,248 4,063,505 3,786,176 ================== ================== ================= Earnings per common share - Diluted $ 1.02 $ 1.01 $ .86 ================== ================== ================= Weighted average shares outstanding - Assuming Dilution 5,407,283 4,733,682 4,253,785 ================== ================== ================= 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 2, 1998, 53 weeks ended August 3, 1997 and 52 weeks ended July 28, 1996
Unrealized Gain Additional (Loss) on Available- Common Stock Paid-in Retained for-sale Treasury Shares Amount Capital Earnings Securities Stock Total Balance at July 30, 1995 3,015,988 $ 301,599 13,040,622 5,620,516 25,000 - $ 18,987,737 Net income 3,668,956 3,668,956 Exercise of stock options 406,432 40,643 2,577,360 (2,483,552) 134,451 Unrealized loss on available-for-sale securities (25,000) (25,000) Purchase of 270,339 shares of treasury stock (1,734,233) (1,734,233) Retirement of treasury shares (486,298) (48,630) (4,169,155) 4,217,785 - ------------ ---------- ------------ ----------- ----------- ------------ ------------ Balance at July 28, 1996 2,936,122 $ 293,612 11,448,827 9,289,472 - - $ 21,031,911 Net income 4,803,659 4,803,659 Exercise of stock options and warrants 929,060 92,906 6,653,917 (6,429,124) 317,699 Four-for-three stock split 1,052,341 105,234 (105,234) - Purchase of 244,519 shares of treasury stock (2,782,686) (2,782,686) Retirement of treasury shares (708,158) (70,816) (9,140,994) 9,211,810 - ------------ ---------- ------------ ----------- ----------- ------------ ------------ Balance at August 3, 1997 4,209,365 $ 420,936 8,856,516 14,093,131 - - $ 23,370,583 Net income 5,496,608 5,496,608 Net proceeds from public offering of 700,000 shares of common stock and 1,265,000 warrants 700,000 70,000 7,381,579 7,451,579 Issuance of common stock in connection with business acquired 313,139 31,314 3,139,157 3,170,471 Exercise of stock options and warrants 175,559 17,556 885,289 (538,376) 364,469 Tax benefit upon exercise of stock options 1,670,866 1,670,866 Purchase of 89,888 shares of treasury stock (1,084,326) (1,084,326) Retirement of treasury shares (131,904) (13,190) (1,609,512) 1,622,702 - ------------ ---------- ------------ ----------- ----------- ------------ ------------ Balance at August 2, 1998 5,266,159 $ 526,616 20,323,895 19,589,739 - - $ 40,440,250 ============ ========== ============ =========== =========== ============ ============ The accompanying notes are an integral part of these financial statements.
F-5 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
52 weeks 53 weeks 52 weeks ended ended ended August 2, August 3, July 28, 1998 1997 1996 -------------- -------------- -------------- Cash flows from operating activities: Net Income $ 5,496,608 $ 4,803,659 $ 3,668,956 -------------- -------------- -------------- Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 1,869,459 1,538,283 1,563,354 (Gain) on sale of available-for-sale securities and other investments - (409,572) (1,018,643) Equity in income of limited partnership (128,646) - - Decrease (increase) in deferred tax assets 1,207,090 - (393,389) Increase in deferred tax liabilities 173,245 773,336 376,723 Unrealized loss on available-for-sale securities - - 121,550 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (767,997) (1,927,298) 1,430,692 Decrease (increase) in notes receivable-officers 2,100,913 (17,370) (2,083,543) (Increase) in costs incurred and income recognized in excess of billings on uncompleted contracts (1,665,008) - - (Increase) decrease in other receivables (23,132) (27,156) 38,410 (Increase) in prepaid income taxes (377,448) - - (Increase) decrease in inventories (3,757,660) (1,779,695) 1,319,366 (Increase) in prepaid expenses and other (55,200) (371,078) (25,940) Increase (decrease) in accounts payable and accrued expenses 773,399 (137,128) (513,649) Increase (decrease) in income taxes payable 468,847 (89,660) 166,295 Increase (decrease) in reserve for contract losses 667,128 (11,110) (6,890) (Decrease) increase in advance payments on contracts (1,363,870) 1,610,968 3,393 Other, net (46,509) (309,500) 40,000 -------------- -------------- -------------- Total adjustments (925,389) (1,156,980) 1,017,729 -------------- -------------- -------------- Net cash provided by operations 4,571,219 3,646,679 4,686,685 -------------- -------------- -------------- Cash flows from investing activities: Purchase of available-for-sale securities and other investments - (159,364) (11,077,331) Proceeds from sale of fixed assets 1,100 15,468 - Partial distribution from limited partnership 592,824 - - Proceeds from sale of available-for-sale securities and other investments - 7,164,538 11,879,157 Capital expenditures (1,645,204) (862,129) (643,330) -------------- -------------- -------------- Net cash (used in) provided by investing activities (1,051,280) 6,158,513 158,496 -------------- -------------- -------------- Cash flows from financing activities: Net proceeds from public offering of common stock 7,451,579 - - Borrowings under bank line of credit 4,050,000 2,825,000 9,875,000 Proceeds from exercise of stock options 364,469 317,699 134,451 Payments under lines of credit (2,550,000) (9,775,000) (9,925,000) Payments under litigation settlement - - (2,000,000) Payments of long-term debt (2,257,118) (300,000) (363,709) Purchase of treasury stock (1,084,326) (2,782,686) (1,734,233) -------------- -------------- -------------- Net cash provided by (used in) financing activities 5,974,604 (9,714,987) (4,013,491) -------------- -------------- -------------- Net increase in cash and cash equivalents 9,494,543 90,205 831,690 Cash and cash equivalents at beginning of period 1,194,650 1,104,445 272,755 -------------- -------------- -------------- Cash and cash equivalents at end of period $ 10,689,193 $ 1,194,650 $ 1,104,445 ============== ============== ============== Supplemental cash flow information: Cashless exercise of stock options $ 538,376 $ 6,429,124 $ 2,483,552 ============== ============== ============== Stock issued for business acquired $ 3,170,471 - - ============== ============== ============== Tax benefit related to stock options $ 1,670,866 - - ============== ============== ============== 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 the design, development, manufacture and sale of flight instrumentation components and systems, and microwave products, primarily to aerospace companies, the U.S. government, and several foreign governments. The Company's main products include a variety of transponders which are used to enhance radar signals to accurately track the flight of space launch vehicles and aircraft, as well as microwave devices and command and control systems. 2. Fiscal Year The Company's fiscal year ends on the Sunday closest to July 31. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year will consist of 53 weeks. Fiscal years 1998 and 1996 consisted of 52 weeks, and fiscal year 1997 consisted of 53 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 generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates. 4. 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 aerospace and defense industries. Credit is extended based on an evaluation of the customer's financial condition and generally collateral is not required. In many cases irrevocable letters of credit accompanied by advanced payments are received from foreign customers, and progress payments are received from domestic customers. The Company performs periodic credit evaluations of its customers and maintains reserves for potential credit losses. 6. Inventories Inventories, other than inventory costs relating to long-term contracts and programs, are stated at lower of cost (principally first-in, first-out) or market. Inventory costs relating to long-term contracts and programs are stated at the actual production costs, including factory overhead, reduced by amounts identified with revenue recognized on units delivered or progress completed. F-7 Inventory costs relating to long-term contracts and programs are reduced by any amounts in excess of estimated realizable value. The costs attributed to units delivered under long-term contracts and programs are based on the average costs of all units produced. 7. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are provided principally by the straight-line method over the estimated useful lives of the related assets. Gains and losses arising from the sale or disposition of property, plant and equipment are recorded in income. 8. Intangibles Intangibles are comprised of customer lists, installed products base, drawings, patents, licenses, certain government qualifications and technology and goodwill in connection with the acquisitions of Metraplex Corporation in 1997, and Vega Precision Laboratories, Inc. in 1993. Intangibles are being amortized over twenty years. The carrying amount of intangibles is evaluated on a recurring basis. Current and future profitability as well as current and future undiscounted cash flows of the acquired businesses are primary indicators of recoverability. For the three fiscal years ended August 2, 1998, there were no adjustments to the carrying amount of the cost in excess of net assets acquired resulting from these evaluations. 9. Marketable Securities The Company accounts for its investments in marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary are included in other income , net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities are included in other income, net. 10. Other Investments The Company is a limited partner in a nonmarketable limited partnership in which it owns approximately a 10% interest. Beginning in 1997 other investments are accounted for under the equity method. Previously, the cost method was utilized as the amount was not significantly different from the equity method. 11. Revenue and Cost Recognition Under fixed-price contracts, revenue and related costs are recorded primarily as deliveries are made. Certain costs under long-term, fixed-price contracts (principally either directly or indirectly with the U.S. Government), which include non-recurring billable engineering, are deferred until these costs are contractually billable. Revenue under certain long-term, fixed price contracts, principally command and control shelters, is recognized using the percentage of completion method of accounting. Revenue recognized on these contracts is based on estimated completion to date (the total contract amount multiplied by percent of performance, based on total costs incurred in relation to total estimated cost at completion). Prospective losses on long-term contracts are based F-8 upon the anticipated excess of inventoriable manufacturing costs over the selling price of the remaining units to be delivered and are recorded when first reasonably determined. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs and contract terms. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. 12. 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. 13. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 14. Earnings Per Common Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which replaced APB No. 15 to conform earnings per share with international standards as well as to simplify the complexity of the computation under APB No. 15. The previous primary earnings per share ("EPS") calculation is replaced with a basic EPS calculation. The basic EPS differs from the primary EPS calculation in that the basic EPS does not include any potentially dilutive securities. Fully dilutive EPS is replaced with diluted EPS and should be disclosed regardless of dilutive impact to basic EPS. In accordance with SFAS 128, all earnings per share amounts for all periods presented have been restated (reflective of a 4-for-3 stock split on September 30, 1997). 15. Product Development The Company's primary efforts are focused on engineering design and product development activities rather than pure research. The cost of these development activities, including employees' time and prototype development, net of amounts paid by customers, was approximately $1,562,000, $1,828,000, and $1,453,000 in fiscal 1998, 1997, and 1996, respectively. 16. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Segment Information", which is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 amends the requirements for public enterprises to report financial and descriptive information about its reportable operating segments. Operating segments, as defined in SFAS No. 131, are components of an enterprise for which separate financial information is required to be reported on the basis that is used internally F-9 for evaluating the segment performance. The Company believes it operates in one business segment, and as this standard relates entirely to disclosure, the adoption of this standard will not have a material impact on the Company's financial statements. NOTE B - ACQUISITIONS On August 4, 1997, the Company completed the acquisition of Metraplex Corporation , a Maryland corporation for 313,139 (as adjusted) shares of common stock of the Company, with a fair market value of $3,170,471, in exchange for all of the issued and outstanding common stock of Metraplex. Metraplex is a leading manufacturer of pulse code modulation and frequency modulation, telemetry and data acquisition systems for severe environment applications. The transaction has been accounted for by the purchase method. Accordingly, the consolidated balance sheet includes the assets and liabilities of Metraplex at August 2, 1998, and the consolidated statements of income include the results of Metraplex operations from August 4, 1997. The acquisition resulted in excess of cost over fair value of net assets acquired of $2,162,725 which is being amortized over twenty years. On the basis of a pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of fiscal 1997, unaudited consolidated net sales, net income, basic earnings per share, and diluted earnings per share for the year ended August 3, 1997 would have been approximately $36,589,333, $4,686,236, $1.07, and $.93, respectively. The pro forma information includes adjustments for additional depreciation based on the fair market value of the property and equipment acquired, and the amortization of intangibles arising from the transaction. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected at the beginning of fiscal 1997. In July 1995, the Company entered into an agreement effective as of the close of business June 30, 1995, to acquire certain assets and the business (consisting principally of inventories and trade receivables) of Stewart Warner Electronics Corporation, a Delaware corporation. The transaction, which closed on July 28, 1995, provided for the payment of $250,000 in cash and the assumption of approximately $915,000 in liabilities and has been accounted for by the purchase method. The acquisition resulted in excess of fair value over cost of net assets acquired of $1,460,500 which is being amortized over a three-year period. NOTE C - NOTES RECEIVABLE-OFFICERS In fiscal 1996 the Company loaned $1,400,000, $300,000, and $300,000 to certain officers, as authorized by the Board of Directors, pursuant to the terms of nonnegotiable promissory notes. The notes were initially due November 1996, November 1996 and March 1997, respectively. The notes were extended by the Company in fiscal 1997 and were due April 30, 1998, January 31, 1998, and January 31, 1998, respectively. The loans were paid in full with accrued interest as of December 19, 1997. NOTE D - INVENTORIES The major components of inventories are as follows:
August 2, August 3, 1998 1997 ----------- ---------- Purchased parts and raw materials $ 7,377,882 $ 4,780,336 Work in process 7,303,533 4,899,551 Finished products 387,203 110,495 ---------- ---------- $ 15,068,618 $ 9,790,382 ========== ==========
F-10 NOTE E - AVAILABLE-FOR-SALE SECURITIES In September 1996, the Company liquidated all of its available-for-sale securities for approximately $4,912,000 and used the proceeds to reduce its long-term bank debt. A provision for unrealized losses of $121,550 is included in the statement of operations for fiscal year 1996. The fair value of available-for-sale securities at July 28, 1996 was $4,912,387. NOTE F - OTHER INVESTMENTS In April 1996, the Company acquired a limited partnership interest in M.D. Sass Re/Enterprise-II, L.P., a Delaware limited partnership for $2,000,000. The objective of the partnership is to achieve superior long-term capital appreciation through investments consisting primarily of securities of companies that are experiencing significant financial or business difficulties. In April 1997, the Company sold its investment and terminated its limited partnership interest for $2,080,630 realizing a gain of $80,630. In 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 2, 1998 and August 3, 1997 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. In July 1998 the Company received a partial distribution of $592,824 from the Partnership. As of August 2, 1998 the Company's limited partnership interest had an estimated fair value of $849,324. NOTE G - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are comprised of the following:
August 2, August 3, Estimated 1998 1997 Useful Life ---------- ---------- ----------- Land $ 880,270 $ 880,270 Building and building improvements 5,486,900 5,438,663 10-40 years Machinery and equipment 20,104,794 17,515,954 5- 8 years Furniture and fixtures 624,576 494,056 5-10 years Tools 34,495 24,869 5 years Leasehold improvements 292,894 288,757 5-10 years ---------- ---------- 27,423,929 24,642,569 Less accumulated depreciation 14,874,586 12,937,814 ---------- ---------- $ 12,549,343 $ 11,704,755 ========== ==========
NOTE H - COMMITMENTS AND CONTINGENCIES Leases The Company leases office, production and warehouse space as well as computer equipment and automobiles under noncancellable operating leases. Rent expense for the 52 weeks ended August 2, 1998, 53 weeks ended August 3, 1997 and 52 weeks ended July 28, 1996 was approximately $546,000, $229,900, and $284,600, respectively. F-11 Minimum annual rentals under noncancellable leases are as follows:
Year ending fiscal Amount ------------------ ------ 1999 $394,000 2000 318,000 2001 188,000 2002 165,000
Employment Agreements The Company has employment agreements with various executives and employees of the Company, which, as amended, expire at various dates through October 31, 2002, subject to extension each January 1 for three years from that date. These agreements provide for aggregate annual salaries for fiscal 1999 of $800,000. Certain agreements provide for an annual cost of living adjustment based on the consumer price index, and also provide for incentive compensation based on pretax income of the Company in excess of 10% of the Company's stockholders' equity for specific periods, as adjusted for stock issuances and repurchases. Incentive compensation in the amount of $727,659, $665,352, and $446,750 was expensed in fiscal years 1998, 1997, and 1996, respectively. Certain agreements also provide that, in the event there is a change in control of the Company, as defined, the executives have the option to terminate the agreements and receive a lump-sum payment of approximately three times their annual salary. As of August 2, 1998, the amount payable in the event of such termination would be approximately $2,400,000. One of the employment contracts provides for a consulting agreement commencing at the end of the employment period which will be effective October 1, 1998, and terminating December 31, 2010 at the annual rate of $100,000. Another one of the employment contracts, as amended October 1, 1998, provides for a consulting period commencing at the end of the period of active employment and continuing for a period of five years at the annual rate of $100,000. Two officers of the Company have severance agreements providing for a lump-sum payment of $430,000 through fiscal 1999, adjusted to $320,000 in fiscal 2000, $215,000 through fiscal 2002, and $105,000 in fiscal 2003. Litigation In November 1996, the Company settled all claims in connection with two class action complaints, related to the Company's acquisition of Carlton Industries, Inc. and its subsidiary, Vega Precision Laboratories, Inc. for $450,000. In August 1997, the Company settled all claims in connection with a class action complaint filed in 1995 for $170,000. The claim related to the Company's settlement of the Litton Action in the Essex Superior Court of Massachusetts which alleged, inter alia, that there was insufficient disclosure by the Company of its true potential exposure in that claim. In July 1996, the Company was notified by the American Arbitration Association of the decision of the arbitrators in an action commenced in March 1994 by the principal selling shareholders of Carlton Industries, Inc. and its subsidiary, Vega Precision Laboratories, Inc. According to the award, the Company was to pay to the claimants the sum of $1,052,900, inclusive of interest. Correspondingly, the claimants were to pay the Company the sum of $277,719, inclusive of interest. The Company paid $775,181 to claimants, representing the difference between the award to the claimants and the award to the Company, in August, 1996. The award to the claimants was offset by $593,162 otherwise payable to one of the selling shareholders. The Company is also involved in other legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. F-12 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, 2000. At August 2, 1998 stand-by letters of credit aggregating $1,505,285 were outstanding under this facility. NOTE I - INCOME TAXES Income tax provision consisted of the following:
52 Weeks ended 53 Weeks ended 52 Weeks ended August 2, August 3, July 28, 1998 1997 1996 -------------- -------------- -------------- Current Federal $ 1,468,665 $ (52,000) $ 90,000 State 85,000 89,000 12,400 --------- ------- ------- 1,553,665 37,000 102,400 --------- ------- ------- Deferred Federal 1,307,970 (142,000) - State 72,365 585,000 - --------- ------- ------- 1,380,335 443,000 - --------- ------- ------- $ 2,934,000 $ 480,000 $ 102,400 ========= ======= =======
The Company paid income taxes of approximately $1,486,000 in 1998, $178,000 in 1997, and $19,000 in 1996. 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 2, August 3, July 28, 1998 1997 1996 ---- ---- ---- U.S. Federal statutory rate 34.0 % 34.0 % 34.0 % State taxes, net of federal tax benefit 1.5 12.2 0.2 Alternative minimum tax - - 2.4 Benefit of foreign sales corporation (1.8) - - Benefit of net operating loss carryforward - (30.8) (35.2) Non-deductible expenses .8 .3 1.3 Decrease in valuation allowance - (9.4) - Other, net .3 2.8 - ---- ---- ---- Effective tax rate 34.8 % 9.1 % 2.7 % ==== ==== ====
The 1997 and 1996 tax provisions reflect the utilization of prior year net operating loss carryforwards. In 1995 a valuation allowance had been provided to reduce deferred tax assets to their net realizable value primarily based on management's uncertainty that past performance would be indicative of future earnings. In 1997 the valuation allowance was reversed through the deferred tax provision. A determining factor in assessing the change was the cumulative income in recent years. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. F-13 Components of deferred tax assets and liabilities are as follows:
August 2, 1998 August 3, 1997 ------------------------------ --------------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities ---------- ------------ -------- ----------- Intangibles $ - $ 1,775,858 $ - $ 1,681,375 Alternative minimum tax 952,426 - 265,906 - Accrued vacation pay 133,962 - 123,644 - Accrued bonus 438,976 - 343,398 - Warranty costs 88,000 - 220,000 - Inventory 971,825 - 985,703 - Depreciation - 2,334,917 - 2,006,038 Net operating loss carryforwards - - 725,113 - Contract losses 503,856 - 275,635 - Other 60,689 202,364 71,917 78,967 --------- --------- --------- --------- $ 3,149,734 $ 4,313,139 $ 3,011,316 $ 3,766,380 ========= ========= ========= =========
The Company has available a $952,426 alternative minimum tax credit to carry forward for an indefinite period of time. NOTE J- LONG-TERM DEBT Long-term debt is summarized as follows:
August 2, August 3, Rate 1998 1997 ---- --------- ---------- Note payable bank (a) 7.15% $ 1,500,000 $ - Mortgage note (b) 10.4 % 2,890,000 3,225,000 Capital lease obligations (c) - 125,869 - --------- --------- 4,515,869 3,225,000 Less current portion 404,984 335,000 --------- --------- $ 4,110,885 $ 2,890,000 ========= =========
(a) In July 1998, the Company renewed the revolving credit agreement with a bank that provides for the extension of credit in the aggregate principal amount of $21,000,000 and may be used for general corporate purposes, including business acquisitions. The facility requires the payment of interest only on a monthly basis and payment of the outstanding principal balance on January 31, 2000. Interest is set biweekly at 1.65% over the FOMC Target Rate. The agreement contains various financial covenants, including, among other matters, the maintenance of working capital, tangible net worth, and restrictions on other borrowings. (b) The mortgage note provides for annual principal payments at varying amounts through 2004 plus semiannual interest payments. Land and buildings in Lancaster, Pa. having a net book value of $1,904,000 are pledged as collateral. The mortgage note agreement contains various financial covenants, including, among other matters, the maintenance of specific amounts of working capital and tangible net worth. In connection with this loan, the Company paid approximately $220,000 in financing costs. Such costs are included in Other Assets in the accompanying consolidated balance sheets at August 2, 1998 and August 3, 1997 and are being amortized over the term of the loan (15 years). (c) Certain noncancellable leases are classified as capital leases and the leased assets are included as part of "Property, Plant, and Equipment" at $143,006, net of depreciation of $23,834. F-14 The Company paid interest of approximately $441,000 in 1998, $567,000 in 1997, and $854,000 in 1996. Future payments required on long-term debt are as follows:
Fiscal year ending during: Amount ------------------------- ---------- 1999 $ 404,984 2000 1,950,220 2001 497,583 2002 503,082 2003 550,000 2004 610,000 --------- $ 4,515,869 =========
NOTE K - RELATED PARTY TRANSACTIONS On March 6, 1996, the Board of Directors approved the purchase of an industrial parcel of land from the Chairman of the Company for $940,000. A deposit of $94,000 was paid on execution of the contract, and the balance of $846,000 was paid at settlement in April, 1998. The Company intends to use this land, which is included in other assets in the consolidated balance sheet, for possible future expansion. NOTE L - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses include the following:
August 2, August 3, 1998 1997 Accounts payable $ 3,064,596 $ 1,841,468 Accrued payroll and bonuses 1,865,426 1,483,915 Accrued commissions 615,022 205,692 Accrued interest 56,491 55,900 Accrued litigation expenses 37,487 297,538 Accrued expenses 829,161 1,102,227 --------- --------- $ 6,468,183 $ 4,986,740 ========= =========
NOTE M - EMPLOYEE BENEFIT PLANS In August 1985, the Board of Directors approved an Employee Savings Plan which qualified as a thrift plan under Section 401(k) of the Internal Revenue Code. This Plan, as amended and restated, allows employees to contribute between 2% and 15% of their salaries to the Plan. The Company, at its discretion can contribute 100% of the first 2% of the employees' contribution and 25% of the next 4%. Additional Company contributions can be made depending on profits. The aggregate benefit payable to an employee is dependent upon his rate of contribution, the earnings of the fund, and the length of time such employee continues as a participant. The Company has accrued approximately $197,000 for the 52 weeks ended August 2, 1998, and contributed approximately $181,000, and $159,000 to this plan for the 53 weeks ended August 3, 1997 and the 52 weeks ended July 28, 1996, respectively. F-15 NOTE N - COMPUTATION OF PER SHARE EARNINGS The following table shows the calculation of basic earnings per share and earnings per share assuming dilution:
52 Weeks ended 53 Weeks ended 52 Weeks ended August 2, 1998 August 3, 1997 July 28,1996 -------------- -------------- -------------- Numerator: Net Income $ 5,496,608 $ 4,803,659 $ 3,668,956 ========= ========= ========= Denominator: Basic weighted-average shares 4,969,248 4,063,505 3,786,176 Effect of dilutive securities: Employee stock options and warrants 438,035 670,177 467,609 --------- --------- --------- Diluted weighted-average shares 5,407,283 4,733,682 4,253,785 ========= ========= ========= Earnings per common share - Basic $1.11 $1.18 $ .97 ==== ==== ==== Earnings per common share - Diluted $1.02 $1.01 $ .86 ==== ==== ====
NOTE O - SHAREHOLDERS' EQUITY At the annual meeting of stockholders held on February 18, 1998, the stockholders of the Company approved a proposal to amend the Certificate of Incorporation to increase the authorized shares of Common Stock from 10,000,000 to 20,000,000 shares. In December 1997, the Company completed the sale of 1,100,000 shares of common stock to the public, of which 700,000 shares were sold by the Company and 400,000 shares were sold by certain selling stockholders. In addition , the Company also sold 1,265,000 Common Stock Purchase Warrants. The Company received net proceeds of $7,451,579 after underwriting discounts and commissions and other expenses of the offering. Each Warrant entitles the holder to purchase one share of common stock at $14.40 per share (subject to adjustment under certain conditions) through January 1999 and thereafter at $15.60 per share until they expire in January 2000. The Company has also issued to the underwriters, for their own accounts, warrants to purchase 110,000 shares of common stock of the Company (subject to adjustment under certain circumstances), exercisable for a period of twenty-five months at a price of $14.40 per share through January 1999, and at a price of $15.60 per share through their expiration in January 2000. On September 4, 1997 the Board of Directors declared a 4-for-3 stock split effected as a stock dividend payable September 30, 1997 to holders of record on September 15, 1997. The amount of $105,234 was transferred from additional paid-in capital to the common stock account to record this distribution. All share and per share data, including stock options and warrants, included in the financial statements have been restated to reflect the stock split. The Company has two fixed option plans which reserve shares of common stock for issuance to executives, key employees and directors. The Company applies APB Opinion No, 25 and related Interpretations in accounting for these plans. Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and , if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has been recognized for the stock option plans. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 4.9%; volatility factor of the expected market F-16 price of the Company's common stock of .59; and a weighted-average expected life of the option, after the vesting period, of .4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management' s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation cost for stock options granted in fiscal 1998 and 1997 been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below using the statutory income tax rate of 34%:
1998 1997 ---- ---- Net earnings - as reported $5,496,608 $4,803,659 Net earnings - pro forma $4,925,488 $3,911,486 Earnings per share - as reported Basic $1.11 $1.18 Diluted 1.02 1.01 Earnings per share - pro forma Basic $.99 $.96 Diluted .91 .83
No options were granted in fiscal 1996. The effects of applying the pro forma disclosures of SFAS 123 are not likely to be representative of the effects on reported net earnings for future years due to the various vesting schedules. In May 1997, the Board of Directors approved the 1997 Stock Option Plan which covers 1,666,666 shares of the Company's common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986 or non-qualified stock options. Under the terms of the Plan, the exercise price for options granted under the plan will be the fair market value at the date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. The nature and terms of the options to be granted is determined at the time of grant by the Board of Directors. The options expire ten years from the date of grant, subject to certain restrictions. Options for 88,333 and 801,660 shares were granted during the fiscal years ended August 2, 1998, and August 3, 1997, respectively. In October 1995, the Board of Directors approved the 1996 Stock Option Plan which covers 666,666 shares of the Company's common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986 or non-qualified stock options. Under the terms of the Plan, the exercise price for options granted under the plan will be the fair market value at the date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at least 110% of market value at date of grant. The nature and terms of the options to be granted is determined at the time of grant by the Board of Directors. If not specified, 100% of the shares can be exercised one year after the date of grant. The options expire ten years from the date of grant. Options for 663,989 shares were granted during the fiscal year ended August 3, 1997. In December 1992, the Board of Directors approved the 1992 Non-Qualified Stock Option Plan which covers 1,333,333 shares, as amended, of the Company's common stock. Under the terms of the Plan, the purchase price of the shares, subject to each option granted, is 100% of the fair market value at the date of grant. The date of exercise is determined at the time of grant by the Board of Directors; however, F-17 if not specified, 50% of the shares can be exercised each year beginning one year after the date of grant. The options expire ten years from the date of grant. Options for 339,986 shares were granted during the fiscal year ended July 30, 1995. These options may be exercised cumulatively at the rate of 25% per year beginning one year after the date of grant. This plan was terminated in December 1995, except for outstanding options thereunder. In October 1987, the Board of Directors approved the 1988 Non-Qualified Stock Option Plan which covers 666,666 shares of the Company's common stock. Under the terms of the Plan, the purchase price of the shares, subject to each option granted, will not be less than 85% of the fair market value at the date of grant. The date of exercise may be determined at the time of grant by the Board of Directors; however, if not specified, 20% of the shares can be exercised each year beginning one year after the date of grant and generally expire five years from the date of grant. This plan was terminated in December 1995, except for outstanding options thereunder. A summary of stock option activity under all plans for the 52 weeks ended August 2, 1998, the 53 weeks ended August 3, 1997, and the 52 weeks ended July 28, 1996 follows:
Non-Qualified Stock Options ---------------------------------------- Weighted Warrant Agreements Average ------------------ Number Price Range Exercise Number Price Range of shares per share Price of shares per share --------- ------------- ----- --------- ----------- Outstanding July 30, 1995............ 1,256,624 $ 2.54 - 9.01 $ 4.33 573,333 $ $5.35 Granted .......................... - 293,333 4.64 Exercised......................... (541,900) 2.54 - 5.72 4.87 Canceled.......................... (31,330) 2.54 - 5.25 4.83 (533,333) 5.35 --------- ------------- ----- ------- ----------- Outstanding July 28, 1996............ 683,394 $ 2.54 - 9.01 $ 3.89 333,333 $4.64 - 5.35 Granted .......................... 1,465,649 6.10 -10.41 6.48 Exercised......................... (1,225,384) 2.54 - 6.94 5.46 (13,333) 4.64 Canceled.......................... (7,332) 5.25 - 9.01 8.67 - --------- ------------- ----- ------- ----------- Outstanding August 3, 1997........... 916,327 $ 2.54 -10.41 $ 5.87 320,000 $4.64 - 5.35 Granted .......................... 88,333 10.31 -13.88 12.04 Exercised......................... (135,594) 2.54 - 6.94 5.08 (40,000) 5.35 Canceled.......................... (8,222) 2.54 - 6.47 5.31 - --------- ------------- ----- ------- ----------- Outstanding August 2, 1998........... 860,844 $ 2.54 -13.88 $ 6.65 280,000 $ 4.64 ========= =======
Options to purchase 582,389 shares of common stock were exercisable under all plans at August 2, 1998 at a weighted average exercise price of $5.87 with a weighted average remaining contractual life of 8.2 years as follows: Options Outstanding and Exercisable by Price Range as of August 2, 1998
Options Outstanding Options Exercisable --------------------------------------------- ------------------------- Weighted Average Weighted Weighted Range of Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------ ----------- ---------------- -------------- ----------- -------------- $ 2.5350 -$ 6.0938 301,117 7.43 $ 5.0302 301,117 $ 5.0302 6.4688 - 6.4688 300,062 8.75 6.4688 113,140 6.4688 6.9375 - 12.8750 224,665 8.44 7.9716 168,132 6.9540 13.0000 - 13.8750 35,000 9.36 13.5673 - - ------- ---- ------- ------- ------ $2.5350 -$13.8750 860,844 8.23 $ 6.6464 582,389 $ 5.8651 ======= =======
F-18 In April 1993, common stock warrants were issued to certain officers and directors for the right to acquire 573,333 shares of common stock of the Company at the fair market value of $5.35 per share at date of issue. In December 1995 warrants for 533,333 shares were canceled, and the remaining 40,000 warrants were exercised in fiscal 1998. In December 1995, common stock warrants were issued to certain officers for the right to acquire 293,333 shares of common stock of the Company at the fair market value of $4.64 per share at date of issue. The warrants vest immediately and expire December 13, 2005. Warrants for 13,333 shares were exercised in fiscal 1997. NOTE P - MAJOR CUSTOMERS Net sales to the U.S. Government in 1998, 1997, and 1996 accounted for approximately 26%, 34%, and 33% of net sales, respectively. Foreign sales amounted to approximately $11,943,000, $9,398,000, and $6,556,000 in fiscal 1998, 1997, and 1996, respectively. Included in accounts receivable as of August 2, 1998 and August 3, 1997 are amounts due from the U.S. Government of approximately $933,000 and $1,454,000, respectively. NOTE Q - FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximated its fair value. Notes receivable-officers: The carrying amount reported in the balance sheet for notes receivable from officers approximated its fair value. Available-for-sale securities: The fair value of available-for-sale securities was based on quoted market prices. Long-term debt: The fair value of the mortgage note was estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. Off balance sheet financial instruments: Stand-by letters of credit: These letters of credit primarily collateralize the Company's obligations to customers for advanced payments received under contracts. The contract amounts of the letters of credit approximate their fair value. The carrying amounts and fair values of the Company's financial instruments are presented below:
August 2, 1998 ------------------------------ Carrying Amount Fair Value --------------- ---------- Cash and cash equivalents $ 10,689,193 $ 10,689,193 Long-term debt 4,110,885 4,499,000 Stand-by letters of credit - 1,505,285
NOTE R - SUBSEQUENT EVENTS As of August 21, 1998, the Company entered into an agreement to acquire all of the issued and outstanding common stock of General Microwave Corp., a New York corporation , for $18.00 per share and a three-year warrant to purchase one share of the Company's common stock at an aggregate purchase F-19 price of approximately $23,000,000. The warrant is exercisable at $14.40 per share through January 11, 1999, and thereafter at $15.60 per share, until expiration. General Microwave designs, manufactures and markets microwave components and subsystems, and related electronic test and measurement equipment. The company is headquartered in Amityville, New York, and operates two other facilities, one in Billerica, Massachusetts, and one in Israel. The transaction is subject to the approval of the stockholders of General Microwave Corp. at a meeting to be held in December 1998. The transaction will be accounted for under the purchase method. As of October 20, 1998, the Company has acquired 362,400 shares (27%) of General Microwave in the open market for approximately $6,217,000. F-20 EX-10.3 2 EMPLOYMENT AGREEMENT -------------------- AGREEMENT made as of this 1st day of October 1998, by and between HERLEY INDUSTRIES, INC., a Delaware corporation (hereinafter called the "Company"), and LEE N. BLATT, residing at 471 North Arrowhead Trail, Vero Beach, Fl 32963, (hereinafter called the "Employee"). WITNESSETH WHEREAS, the Employee was initially employed by the Company under an Employment Agreement, dated June 11, 1984, as amended, which agreement was superseded by a second Employment Agreement between Employee and the Company, dated January 1, 1997, which agreement was superseded by a third Employment Agreement between Employee and the Company dated as of November 1, 1997, and the Company desires to enter into a new employment agreement with Employee which agreement shall supersede all prior employment agreements; and, WHEREAS, Employee desires to enter into the new employment agreement with the Company; NOW THEREFORE, it is agreed as follows: 1. PRIOR AGREEMENTS SUPERSEDED. This Agreement supersedes any employment agreements, oral or written, entered into between Employee and the Company prior to the date of this Agreement including, but not limited to, the Employment Agreements between the Employee and the Company, dated June 11, 1984, as amended, January 1, 1997 and November 1, 1997, respectively. 2. RETENTION OF SERVICES. The Company hereby retains the services of Employee, and Employee agrees to furnish such services, upon the terms and conditions hereinafter set forth. 3. TERM. Subject to earlier termination on the terms and conditions hereinafter provided, the term of this Agreement shall be comprised of a four (4) year and three (3) month period of employment commencing October 1, 1998 and ending December 31, 2002. On each January 1, commencing January 1, 2000, unless either party provides prior written notice to the other party that it does not want the term of the Agreement to be extended, the term of the Agreement shall extend to three (3) years from each January 1. 4. DUTIES AND EXTENT OF SERVICES DURING PERIOD OF EMPLOYMENT. During the period of employment, Employee shall be employed as a Senior Executive of the Company. In such capacity, Employee agrees that he shall serve the Company under the direction of the Board of Directors of the Company to the best of his ability, shall perform all duties incident to his offices on behalf of the Company, and shall perform such other duties as may from time to time be assigned to him by the Board of Directors of the Company. Employee shall also serve in similar capacities of such of the subsidiary corporations of the Company as may be selected by the Board of Directors and shall be entitled to such additional compensation therefore as may be determined by the Board of Directors of the Company. Notwithstanding the foregoing, it is understood and agreed that the duties of Employee during the period of employment shall not be inconsistent with (i) his position and title as Senior Executive of the Company; or (ii) with those duties ordinarily performed by a comparable executive officer. 5. REMUNERATION. During the period of employment, Employee shall be entitled to receive the following compensation for his services: (i) The Company shall pay to Employee an annual salary at the rate of FOUR HUNDRED SEVENTY-FIVE ($475,000) DOLLARS commencing October 1, 1998, payable in weekly installments, or in such other manner as shall be agreeable to the Company and Employee. (ii) In addition to his salary set forth in Paragraph 5(i) above, Employee shall receive an increment in an amount equal to the cumulative cost of living on his base salary as reported in the "Consumer Price Index, New York Northeastern New Jersey, all items", published by the United States Department of Labor, Bureau of Labor Statistics, using January 1, 1998 as the base year for computation. Such cost of living increment with respect to the aforesaid salary of Employee shall be made semi-annually as follows: (A) With respect to the first six months of each calendar year during the period of employment, such increment shall be calculated and payable cumulatively on or before the first day of August of such year; and (B) With respect to the last six months of each calendar year during the period of employment, such increment shall be calculated and payable cumulatively on or before the first day of February of the following calendar year. If Employee's employment shall terminate during any six-month period referred to in this Paragraph 5 (ii), then the cost of living increment provided for herein shall be prorated accordingly. (iii)Not later than one hundred twenty (120) days after the end of the fiscal year of the Company and each subsequent fiscal year of the Company ending during the period of employment, the Company shall pay to Employee, as incentive compensation an amount equal to five (5%) percent of the Consolidated Pretax Earnings of the Company in excess of the Company's Minimum Consolidated Pretax Earnings, as defined below in this clause (iii) and in no event more than Employee's annual salary set forth in clause (i) immediately above. For purposes hereof, the term "Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the consolidated income, if any, of the Company for such fiscal year as set forth in the audited, consolidated financial statements (the "Financial Statements") of the Company and its subsidiaries included in its Annual Report to stockholders for such fiscal year, before deduction of taxes based on income or of the incentive compensation to be paid to Employee for such fiscal year under this Agreement. For the purposes hereof the term "Minimum Consolidated Pretax Earnings" of the Company shall mean with respect to any fiscal year, the amount of consolidated Pretax Earnings of the Company equal to ten percent (10%) of (x) the company's Stockholders' Equity as set forth in the Financial Statements for the beginning of such fiscal year, plus (y) the proceeds from the sale of the Company's equity securities, less (z) the purchase price from the acquisition of the Company's equity securities on a time-proportioned basis, during such fiscal year. 6. EMPLOYEE BENEFITS - EXPENSES a) During the term of this agreement, the Company shall provide, at its expense $56,000 annually to purchase life insurance, with Employee having the right to designate the insurer, owner and beneficiary of such life insurance. b) In the event of the death of Employee, within 30 days thereafter the Company shall promptly make a lump sum payment to Employee's widow, or to such other person or persons as may be designated by Employee in his Will, or to his estate in the event of Employee's intestacy, of the salary and compensation to which Employee is entitled hereunder for the three year period from date of death and one-half of such salary for the balance of the period covered by this Agreement, and in the year of death an additional payment equal to the pro rata amount for said year of the compensation set forth in paragraph 5 (iii), the Company's contribution to the 401(k), and the pro-rata cost of living increment, which additional payment shall be made in accordance with paragraph 5 (ii). c) Employee shall be eligible to participate in the Company's stock option and stock purchase plans and to acquire warrants to purchase the Company's stock, to the extent determined in the sole discretion of the Compensation Committee of the Company's Board of Directors. d) During the period of employment, Employee shall be furnished with office space and facilities commensurate with his position and adequate for the performance of his duties; he shall be provided with the perquisites customarily associated with the position of a Senior Executive of the Company; and he shall be entitled to six weeks regular vacation during each year. e) It is contemplated that, during the period of employment, Employee may be required to incur out-of-pocket expenses in connection with the performance of his services hereunder, including expenses incurred for travel and business entertainment. Accordingly, the Company shall pay, or reimburse Employee, for all out-of-pocket expenses reasonably incurred by Employee in the performance of his duties hereunder in accordance with the usual procedures of the Company. Notwithstanding the foregoing, the recognition that Employee will be required during the term of this Agreement to do a considerable amount of driving in connection with his services hereunder, the Company shall provide Employee with the use of a suitable automobile and all expenses incidental throughout the term of this Agreement, including fuel, repairs, maintenance and insurance. f) All benefits to Employee specially provided for herein shall be in addition to, and shall not diminish, (i) such other benefits and/or compensation as may hereafter be granted to or afforded to Employee by the Board of Directors of the Company; and (ii) any rights which Employee may have or may acquire under any hospitalization, life insurance, pension, profit-sharing, incentive compensation or other present or future employee benefit plan or plans of the Company. g) Employee currently works from offices in Lancaster, Pennsylvania and from his homes where he has created work space and his responsibilities do not require regular attendance at any Company office. These responsibilities include, among other things, conducting executive recruiting tasks and visiting customers, investment banks and potential acquisition candidates in the best interests of the Company. In recognition of these special employment conditions, disability for Employee shall occur if he becomes unable, for twelve consecutive months or more, due to ill health or other incapacity to perform the services described above. In that event, the Company may thereafter, upon at least 90 days written notice to employee, place him on disability status and terminate this agreement. If employee is so determined by the Company as disabled, he shall be entitled to his annual compensation as set forth in paragraph 5 (i) and 5 (ii) hereof payable in weekly installments for the first two years after notice of disability and thereafter one-half of such compensation payable in weekly installments for the balance of the period covered by this agreement. 7. NON-COMPETITION. Employee agrees that, during term of this Agreement, he will not, without the prior written approval of the Board of Directors of the Company, directly or indirectly through any other individual or entity,(a) become an officer or employee of, or render any services to, any competitor of the Company, (b) solicit, raid, entice or induce any customer of the Company to cease purchasing goods or services from the Company or to become a customer of any competitor of the Company, and Employee will not approach any customer for any such purpose or authorize the taking of any such actions by any other individual or entity, or (c) solicit, raid, entice or induce any employee of the Company to become employed by any competitor of the Company, and Employee will not approach any such employee for any such purpose or authorize the taking of any such action by any other individual or entity. However, nothing contained in this paragraph 7 shall be construed as preventing Employee from investing his assets in such form or manner as will not require him to become an officer or employee of, or render any services (including consulting services) to, any competitor of the Company. 8. TERMINATION FOR CAUSE. a) The Company has been intimately familiar with the ability, competence and judgment of Employee, which are acknowledged to be of the highest caliber. Accordingly, the Company and Employee agree that Employee's services hereunder may be terminated by the Company only (i) for an act of moral turpitude materially adversely affecting the financial condition of the Company, or (ii) breach of the terms of this Agreement which shall materially adversely affect the financial condition of the Company. b) If the Company terminates Employee's employment hereunder for any reason other than as set forth in paragraph 8 (a) hereof, Employee's compensation shall continue to be paid to him as provided in paragraph 5 hereunder for the remainder of the term of this Agreement. Employee shall have no duty to mitigate the Company's damages hereunder. Therefore, no deduction shall be made by the Company for any compensation earned by Employee from other employment or for monies or property otherwise received by Employee subsequent to such termination of his employment hereunder. Employee and the Company acknowledge that the foregoing provisions of this paragraph 8(b) are reasonable and are based upon the facts and circumstances of the parties at the time of entering into this Agreement, and with due regard to future expectations. 9. CONSOLIDATION OR MERGER. In the event of any consolidation or merger of the Company into or with any other corporation during the term of this Agreement, or the sale of all or substantially all of the assets of the Company to another corporation during the term of this Agreement, such successor corporation shall assume this Agreement and become obligated to perform all of the terms and provisions hereof applicable to the Company, and Employee's obligations hereunder shall continue in favor of such successor corporation. 10. INDEMNIFICATION. The Company agrees to indemnify the Employee to the fullest extent permitted by applicable law consistent with the Company's Certification of Incorporation and By-Laws as in effect on the effective date of this Agreement with respect to any action or failure to act on his part while he was an officer, director and/or employee (a) of the Company or any subsidiary thereof or (b) of any other entity if his service with such entity was at the request of the Company. This provision shall survive the termination of this Agreement. 11. NOTICES. Notice is to be given hereunder to the parties by telegram or by certified or registered mail, addressed to the respective parties at the addresses herein below set forth or to such addresses as may be hereinafter furnished, in writing: TO: Lee N. Blatt 471 North Arrowhead Trail Vero Beach, FL 32963 TO: HERLEY INDUSTRIES, INC. 10 Industry Drive Lancaster, PA 17603 Attention: Myron Levy, President 12. CHANGE OF CONTROL. In the event there shall be a change in the present control of the Company as hereinafter defined, or in any person directly or indirectly presently controlling the Company, as hereinafter defined, Employee shall have the right, exercisable within six months of his becoming aware of such event, to terminate his employment. Upon such termination, Employee shall immediately receive as a lump sum payment an amount equal to (i) three (3) times his "base amount", within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (hereinafter "the Code"), reduced by (ii) $100.00, but in no event shall he receive an amount greater than is deductible under Section 280G of the Internal Revenue Code of 1986, as amended, such amount to be determined by the Company's independent auditors. For purposes of this Agreement, a change in control of the Company, or in any person directly or indirectly controlling the Company, shall mean: a) a change in control as such term is presently defined in Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act"); or b) if any "person" (as such term is used in Section 13(d) and 14 (d) of the Exchange Act) other than the Company or any "person" who on the date of this Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five (25%) of the voting power of the Company's then outstanding securities; or c) if during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director who is not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period. 13. SUCCESSORS AND ASSIGNS. This agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Unless clearly inapplicable, reference herein to the Company shall be deemed to include such other successor. In addition, this Agreement shall be binding upon and inure to the benefits of the Employee and his heirs, executors, legal representatives and assigns, provided, however, that the obligations of Employee hereunder may not be delegated without the prior written approval of Directors of the company. 14. AMENDMENTS. This agreement may not be altered, modified, amended or terminated except by a written instrument signed by each of the parties hereto. 15. GOVERNING LAW. This agreement shall be governed by and construed and interpreted in accordance with the laws of Delaware, without reference to principles of conflict of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. HERLEY INDUSTRIES, INC. HERLEY INDUSTRIES, INC. By: /s/ David Lieberman By: /s/ Myron Levy -------------------- ------------------------------- David Lieberman Myron Levy, President Secretary /s/ Lee N. Blatt -------------------------------- Lee N. Blatt, Employee EX-10.4 3 EMPLOYMENT AGREEMENT -------------------- AGREEMENT made as of this 1st day of October 1998, by and between HERLEY INDUSTRIES, INC., a Delaware corporation (hereinafter called the "Company"), and MYRON LEVY residing at 147 Deer Ford Drive, Lancaster PENNSYLVANIA 17603 (hereinafter called the "Employee"). WITNESSETH ---------- WHEREAS, the Employee has been employed by the Company under an Employment Agreement, dated October 3, 1988, as amended, which agreement was superseded by a second Employment Agreement between Employee and the Company, dated January 1, 1997; by a third Employment Agreement between Employee and the Company dated as of November 1, 1997, and the Company desires to enter into a new employment agreement with Employee which agreement shall supersede all prior employment agreements; and, WHEREAS, Employee desires to enter into the new employment agreement with the Company; NOW THEREFORE, it is agreed as follows: 1. PRIOR AGREEMENTS SUPERSEDED. This Agreement supersedes any employment agreements, oral or written, entered into between Employee and the Company prior to the date of this Agreement, including, but not limited to, the Employment Agreements between the Employee and the Company, dated October 3, 1988, as amended and January 1, 1997, and November 1, 1997, respectively. 2. RETENTION OF SERVICES. The Company hereby retains the services of Employee, and Employee agrees to furnish such services, upon the terms and conditions hereinafter set forth. 3. TERM. Subject to earlier termination on the terms and conditions hereinafter provided, the term of this Agreement shall be comprised of a four (4) year and three (3) month period of employment commencing October 1, 1998 and ending December 31, 2002 and a five year "consulting period" commencing at the end of active employment. On each January 1, commencing January 1, 2000, unless either party provides prior written notice to the other party that it does not want the term of the Agreement to be extended, the term of the Agreement shall extend to three (3) years from each January 1. 4. DUTIES AND EXTENT OF SERVICES DURING PERIOD OF EMPLOYMENT (a) During the period of active employment, Employee shall be employed as an executive of the Company. In such capacity, Employee agrees that he shall serve the Company under the direction of the Chief Executive Officer of the Company to the best of his ability, shall devote full time during normal business hours to such employment, shall perform all duties incident to his offices on behalf of the Company, and shall perform such other duties as may from time to time be assigned to him by the Chief Executive Officer of the Company. (b) In the event that this agreement is not renewed, Employee shall cease to be an employee of the Company. However, in recognition of the continued value to the Company of Employee's extensive knowledge and expertise, Employee shall serve as a consultant to the Company during the consulting period. In such capacity, Employee shall consult with the Company and its respective senior executive officers with respect to its respective businesses and operations. Such consulting services shall not require more than fifty (50) days in any one year, it being understood and agreed that during the consulting period Employee shall have the right to undertake full time or part time employment with any business enterprise which is not a competitor of the Company. Employee's services as a consultant to the Company shall be required at such times and such places as shall result in the least inconvenience to Employee, having in mind his other business commitments which may obligate him to perform services prior to the performance of his services hereunder. To the end that there shall be a minimum of interference with Employees other commitments, his consulting services shall be rendered by personal consultation at his residence or office wherever maintained, or by correspondence through mail, telegram or telephone, or other similar modes of communications at times, including weekends and evenings, most convenient to him. During the consulting period, Employee shall not be obligated to serve as a member of the Board of Directors of the Company or to occupy any office on behalf of the Employer or any of its subsidiaries or affiliates. 5. REMUNERATION (a) During the period of active employment, Employee shall be entitled to receive the following compensation for his services: (i) The Company shall pay to Employee an annual salary at the rate of THREE HUNDRED TWENTY-FIVE THOUSAND ($325,000) DOLLARS commencing October 1, 1998, payable in weekly installments, or in such other manner as shall be agreeable to the Company and Employee. (ii) In addition to his salary set forth in Paragraph 5(i) above, Employee shall receive an increment in an amount equal to the cumulative cost of living on his base salary as reported in the "Consumer Price Index, New York Northeastern New Jersey, all items", published by the United States Department of Labor, Bureau of Labor Statistics, using January 1,1998 as the base year for computation. Such cost of living increment with respect to the aforesaid salary of Employee shall be made semi-annually as follows: (A) With respect to the first six months of each calendar year during the period of employment, such increment shall be calculated and payable cumulatively on or before the first day of August of such year; and (B) With respect to the last six months of each calendar year during the period of employment, such increment shall be calculated and payable cumulatively on or before the first day of February of the following calendar year. If Employee's employment shall terminate during any six-month period referred to in this Paragraph 5 (ii), then the cost of living increment provided for herein shall be prorated accordingly. (iii)Not later than one hundred twenty (120) days after the end of the fiscal year of the Company and each subsequent fiscal year of the Company ending during the four year and three month period of employment, the Company shall pay to Employee, as incentive compensation an amount equal to four (4%) percent of the Consolidated Pretax Earnings of the Company in excess of the Company's Minimum Consolidated Pretax Earnings, as defined below. For purposes hereof, the term "Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the consolidated income, if any, of the Company for such fiscal year as set forth in the audited, consolidated financial statements (the "Financial Statements") of the Company and its subsidiaries included in its Annual Report to stockholders for such fiscal year, before deduction of taxes based on income or of the incentive compensation to be paid to Employee for such fiscal year under this Agreement as defined below in this clause (iii) and in no event more than Employee's annual salary set forth in clause (i) immediately above. For purposes hereof the term "Minimum Consolidated Pretax Earnings" of the Company shall mean, with respect to any fiscal year, the amount of Consolidated Pretax Earnings of the Company equal to ten percent (10%) of (x) the Company's Stockholders' Equity, as set forth in the Financial Statements for the beginning of such fiscal year, plus (y) the proceeds from the sale of the Company's equity securities, less (z) the purchase price from the acquisition of the Company's equity securities, on a time-proportioned basis, during such fiscal year. (b) During the consulting period, Employee shall be entitled to a consulting fee at the rate of ONE HUNDRED THOUSAND ($100,000) dollars per annum, paid on a monthly basis. 6. EMPLOYEE BENEFITS - EXPENSES a) During the period of active employment, Employee shall receive all fringe benefits in the nature of health, medical, life and/or other insurance, a Company car and related expenses as received by other officers of the Company. b) The Company shall reimburse Employee for all proper expenses incurred by him, including disbursements made in the performance of his duties to the Company; provided, however that no extraordinary expenses and/or disbursements shall be incurred by Employee without the prior approval of the Chief Executive Officer or the Board of Directors of the Company. c) Employee shall be eligible to participate in the Company's stock option and stock purchase plans and to acquire warrants to purchase the Company's stock to the extent determined in the sole discretion of the Compensation Committee of the Company's Board of Directors. d) During the period of active employment, Employee shall be furnished with office space and facilities commensurate with his position and adequate for the performance of his duties; he shall be provided with the perquisites customarily associated with the position of a Senior Executive of the Company; and he shall be entitled to six weeks regular vacation during each year. e) In the event of the death of Employee, within 30 days thereafter the Company shall promptly make a lump sum payment to Employee's widow, or to such other person or persons as may be designated by Employee in his Will, or to his estate in the event of Employee's intestacy, of the salary and compensation to which Employee is entitled hereunder for the two year period from date of death and one-half of such salary for the balance of the period covered by this Agreement, and in the year of death an additional payment equal to the pro rata amount for said year of the compensation set forth in paragraph 5 (iii), the Company's contribution to the 401(k), and the pro-rata cost of living increment, which additional payment shall be made in accordance with paragraph 5 (ii). and thereafter one-half of such compensation Board of Directors of the Company or a committee thereof. f) Disability for Employee shall occur if he becomes unable, for twelve consecutive months or more, due to ill health or other incapacity to perform the services described above. In that event, the Company may thereafter, upon at least 90 days written notice to employee, place him on disability status and terminate this agreement. If employee is so determined by the Company as disabled, he shall be entitled to his annual compensation as set forth in paragraph 5 (i) and 5 (ii) hereof payable in weekly installments for the first two years after notice of disability, payable in weekly installments for the balance of the period covered by this agreement. 7. NON-COMPETITION. Employee agrees that, during term of this Agreement, he will not, without the prior written approval of the Board of Directors of the Company, directly or indirectly through any other individual or entity, (a) become an officer or employee of, or render any services to, any competitor of the Company, (b) solicit, raid, entice or induce any customer of the Company to cease purchasing goods or services from the Company or to become a customer of any competitor of the Company, and Employee will not approach any customer for any such purpose or authorize the taking of any such actions by any other individual or entity, or (c) solicit, raid, entice or induce any employee of the Company to become employed by any competitor of the Company, and Employee will not approach any such employee for any such purpose or authorize the taking of any such action by any other individual or entity. However, nothing contained in this paragraph 7 shall be construed as preventing Employee from investing his assets in such form or manner as will not require him to become an officer or employee of, or render any services (including consulting services) to, any competitor of the Company. 8. TERMINATION FOR CAUSE a) The Company has been intimately familiar with the ability, competence and judgment of Employee, which are acknowledged to be of the highest caliber. Accordingly, the Company and Employee agree that Employee's services hereunder may be terminated by the Company only (i) for an act of moral turpitude materially adversely affecting the financial condition of the Company, or (ii) breach of the terms of this Agreement which shall materially adversely affect the financial condition of the Company. b) If the Company terminates Employee's employment hereunder for any reason other than as set forth in paragraph 8 (a) hereof, Employee's compensation shall continue to be paid to him as provided in paragraph 5 hereunder for the remainder of the term of this Agreement. Employee shall have no duty to mitigate the Company's damages hereunder. Therefore, no deduction shall be made by the Company for any compensation earned by Employee from other employment or for monies or property otherwise received by Employee subsequent to such termination of his employment hereunder. Employee and the Company acknowledge that the foregoing provisions of this paragraph 8(b) are reasonable and are based upon the facts and circumstances of the parties at the time of entering into this Agreement, and with due regard to future expectations. 9. CONSOLIDATION OR MERGER. In the event of any consolidation or merger of the Company into or with any other corporation during the term of this Agreement, or the sale of all or substantially all of the assets of the Company to another corporation during the term of this Agreement, such successor corporation shall assume this Agreement and become obligated to perform all of the terms and provisions hereof applicable to the Company, and Employee's obligations hereunder shall continue in favor of such successor corporation. 10. INDEMNIFICATION. The Company agrees to indemnify the Employee to the fullest extent permitted by applicable law consistent with the Company's Certification of Incorporation and By-Laws as in effect on the effective date of this Agreement with respect to any action or failure to act on his part while he was an officer, director and/or employee (a) of the Company or any subsidiary thereof or (b) of any other entity if his service with such entity was at the request of the Company. This provision shall survive the termination of this Agreement. 11. NOTICES. Notice is to be given hereunder to the parties by telegram or by certified or registered mail, addressed to the respective parties at the addresses herein below set forth or to such addresses as may be hereinafter furnished, in writing: TO: Myron Levy 147 Deer Ford Drive Lancaster, PA 17601 TO: HERLEY INDUSTRIES, INC. 10 Industry Drive Lancaster, PA 17603 Attention: Lee N. Blatt, Chairman 12. CHANGE OF CONTROL. In the event there shall be a change in the present control of the Company as hereinafter defined, or in any person directly or indirectly presently controlling the Company, as hereinafter defined, Employee shall have the right, exercisable within six months of his becoming aware of such event, to terminate his employment. Upon such termination, Employee shall immediately receive as a lump sum payment an amount equal to (i) three (3) times his "base amount", within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (hereinafter "the Code"), reduced by (ii) $100.00, but in no event shall he receive an amount greater than is deductible under Section 280G of the Internal Revenue Code of 1986, as amended, such amount to be determined by the Company's independent auditors. For purposes of this Agreement, a change in control of the Company, or in any person directly or indirectly controlling the Company, shall mean: a) a change in control as such term is presently defined in Regulation 240.12b-2 under the Securities Exchange Act of 1934 ("Exchange Act"); or b) if any "person" (as such term is used in Section 13(d) and 14 (d) of the Exchange Act) other than the Company or any "person" who on the date of this Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five (25%) of the voting power of the Company's then outstanding securities; or c) if during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director who is not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period. 13. SUCCESSORS AND ASSIGNS. This agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Unless clearly inapplicable, reference herein to the Company shall be deemed to include such other successor. In addition, this Agreement shall be binding upon and inure to the benefits of the Employee and his heirs, executors, legal representatives and assigns, provided, however, that the obligations of Employee hereunder may not be delegated without the prior written approval of Directors of the company. 14. AMENDMENTS. This agreement may not be altered, modified, amended or terminated except by a written instrument signed by each of the parties hereto. 15. GOVERNING LAW. This agreement shall be governed by and construed and interpreted in accordance with the laws of Delaware, without reference to principles of conflict of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. HERLEY INDUSTRIES, INC. HERLEY INDUSTRIES, INC. BY: /s/ David Lieberman BY: /s/ Lee Blatt ------------------- ------------------------------- David Lieberman Lee Blatt, Chairman and CEO Secretary BY: /s/ Myron Levy ------------------------------- Myron Levy, Employee EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated September 17, 1998 included in this Form 10-K, into Herley Industries, Inc's. previously filed Registration Statement File Nos. 333-17369, 333-19739, and 333-35485. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Lancaster, PA October 27, 1998 EX-27 5 FDS--AUG-2-1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 52 WEEKS ENDED AUGUST 2, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR AUG-2-1998 Aug-4-1997 AUG-2-1998 10,689,193 0 6,193,947 0 15,068,618 36,436,516 27,423,929 14,874,586 57,552,529 9,843,041 0 0 0 526,616 39,913,634 57,552,529 40,797,991 40,797,991 24,169,034 32,507,823 0 0 446,109 8,430,608 2,934,000 5,496,608 0 0 0 5,496,608 1.11 1.02
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