0000047035-01-500012.txt : 20011029
0000047035-01-500012.hdr.sgml : 20011029
ACCESSION NUMBER: 0000047035-01-500012
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20010729
FILED AS OF DATE: 20011023
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-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-05411
FILM NUMBER: 1764087
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 INDUSTRIES INC
DATE OF NAME CHANGE: 19831103
FORMER COMPANY:
FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC
DATE OF NAME CHANGE: 19900510
10-K405
1
filing10k072901.txt
ANNUAL REPORT FORM 10K--JULY 29, 2001
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 July 29, 2001
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.)
3061 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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
Based on the closing sale price of $17.08 as of October 11, 2001 the aggregate
market value of the voting stock held by non-affiliates of the registrant was
$162,884,752.
The number of shares outstanding of registrant's common stock, $ .10 par value
as of October 11, 2001 was 10,626,576.
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 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk 17
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 10 Directors and Executive Officers of the Registrant 18
Item 11 Executive Compensation 18
Item 12 Security Ownership of Certain Beneficial
Owners and Management 18
Item 13 Certain Relationships and Related Transactions 18
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8K 19
SIGNATURES 20
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. ("Herley" or "Company") a Delaware corporation was
incorporated in 1965. The Company's headquarters and executive offices are
located at 3061 Industry Drive, Lancaster, PA 17603. The Company's common stock
is listed on The Nasdaq National Market under the symbol "HRLY".
With approximately 650 employees, including over 100 microwave engineers and
engineering aides, Herley is one of the largest suppliers of microwave products
and systems to defense and aerospace industries worldwide. With seven domestic
manufacturing sites and one facility in Israel, the Company is a significant
supplier to almost all of the larger domestic and international military
suppliers. Herley also has teaming and partnering agreements with several of the
major domestic and international aerospace companies, whereby each of the
companies agrees to sell the other's products.
Herley has grown four fold through internal growth and strategic acquisitions
over the past nine years and has evolved from a component manufacturer to a
systems and service provider. The Company has been successful in integrating
these acquisitions by adhering to its basic strategic plan, which is to acquire
microwave technology companies and fuse their strengths into the existing
Company. All of the previous acquisitions have added value by permitting the
Company to offer additional products to additional markets. Herley expects to
continue to implement this business plan through continued internal growth along
with selective acquisitions of additional specialized microwave companies or
product lines, both domestically and internationally.
Since its inception in 1965, the Company has designed and manufactured microwave
devices for use in various 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. 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 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
1
market. In January 1999, the Company acquired all of the issued and outstanding
common stock of General Microwave Corporation ("GMC") expanding its offering of
microwave components and electronic systems, and its customer base in the
industrial sector as well as in the defense industry.
In January 2000, the Company acquired substantially all of the assets of
Robinson Laboratories, Inc., a New Hampshire Corporation. Robinson designs,
develops and manufactures microwave components and assemblies primarily for
defense applications.
In September 2000, the Company acquired certain assets and the business of
American Microwave Technology, Inc. ("AMT"), which enabled the Company to enter
the area of high power, solid state amplifiers for the scientific and medical
markets.
In September 2000, the Company acquired Terrasat, Inc., Morgan Hill, California.
Terrasat designs and manufactures transceivers and receiver/transmitter modules
for digital microwave radio companies and a complete range of C and Ku Band VSAT
"block transceivers" for the commercial and military satellite markets.
Herley has over 35 years of experience in the design and manufacture of
sophisticated RF, microwave and millimeter wave electronic components in the
defense industry. Herley's technology range covers the entire RF spectrum from
900 MHz through 18.0 GHz, and millimeter wave frequencies from 20 Ghz through 40
Ghz.
Company Products
Command and Control Systems
The Company's command and control systems have been used to fly remotely a large
variety of unmanned airborne vehicles ("UAVs"), 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. The mission may be for reconnaissance,
where the vehicle is equipped with high definition TV sensors and the necessary
data links to send information back to its command and control systems ground
station. The UAV may also be used as a decoy, since the operator can direct the
flight operations that will make the small drone appear to be a larger combat
aircraft.
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
2
Herley continues to provide this system to customers to support their
requirement.
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 Herley 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 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 BAE Systems (formerly Tracor Corporation) and Northrop
Grumman Corporation have resulted in 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 1997 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 and 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.
3
In range safety applications, transponders enable accurate tracking of space
launch and unmanned airborne 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.
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, UAV,
target or space launch vehicle as a safety device. The FTR has a built-in
decoder that enables it to receive a complex series of audio tones which, when
appropriate, will set off an explosive charge that will destroy the vehicle. A
Range Safety Officer ("RSO") using the range safety transponder will track the
vehicle in flight to determine if it is performing as required. If the RSO
detects a malfunction in the test or launch vehicle that causes it to veer from
a planned trajectory in a manner that may endanger personnel or facilities, the
RSO will transmit a coded signal to the onboard FTR to explode the vehicle.
HF Communications and IFF Interrogators
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. The Company
has been a significant supplier to the Republic of Korea ("ROK") for over twenty
years and has a large, established installed base of equipment. The Company has
been, and continues to be, a supplier to the ROK KDX destroyer program.
High Power Amplifiers
The Company has design and production capabilities to produce high power
amplifier systems with frequencies ranging from 1.5 MHz to 12GHz with power
levels from multi-kilowatts up to 15W, depending on the frequency.
Herley's high power amplifier applications include but are not limited to
defense communication, electronic warfare, SATCOM communications, radar and
avionics.
Microwave Products
Herley manufactures microwave devices at its New England facilities in Woburn,
Massachusetts and Nashua New Hampshire; in Farmingdale, New York; and in
Jerusalem, Israel for existing long-term military programs, for new production
units, as well as 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.
4
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. Herley also manufactures magnetrons, which are the power
source utilized in the production of the Company's transponders.
The Company's four microwave product facilities all share certain common
engineering and manufacturing capabilities as well as maintaining areas of
specialization unique to each location. Herley seeks the more limited
production, higher unit cost microwave subsystem applications, where the
Company's engineering experience is of primary advantage to its customers.
In Woburn, Herley specializes in high power microwave devices, generally narrow
band, that are used in radar system transmitters and in long range missiles.
While there are many suppliers of low power microwave components, there are
relatively few companies with the expertise, or facilities to design and test
high power devices. High power devices frequently use small amounts of nuclear
material to enhance breakdown of high energy pulses and Herley is one of very
few companies with an active nuclear license that permits the handling of these
trace amounts of nuclear materials.
The Company has become the preeminent supplier of solid state receiver protector
devices, that are able to withstand high energy pulses without the use of
nuclear materials. These high power devices protect a radar receiver from
transient bursts of microwave energy and are employed in almost every military
and commercial radar system. For its engineering efforts in designing solid
state receiver protectors for the F-16, the United States Air Force awarded the
Company cash awards as part of the government's value engineering program.
In Farmingdale, Herley produces lower power, broad band microwave integrated
assemblies for the electronic defense business area. These complex assemblies
combine microwave functions such as amplification, attenuation, switching of
multiple signals, and phase and amplitude control. Their applications include
Rear Warning Receivers (RWR's), Electronics Countermeasure (ECM) systems, and
highly sensitive receiver systems.
The Company's Israel division supplies microwave sources, which generate signals
that are used in microwave oscillators. Herley's Israel operation sells to
various foreign governments and to the U.S. defense industry. The Company
specializes in digitally tuned oscillators (DTO's), a critical component of many
ECM systems. The Company also produces microwave components in Israel that are
sold through its catalog, which for almost forty years has been the industry
leader and microwave engineer's handbook for attenuating devices and IQ
modulation and phase shifters.
Commercial Technologies
Herley Commercial Technologies is comprised of communication and medical
products. Engineering, manufacturing, and marketing functions for communication
products, including microwave and millimeter wave systems for the wireless
industry which are used in the digital microwave radio and VSAT (Very Small
Aperture Satellite Terminals) markets, are located in Morgan Hill, California.
Engineering, manufacturing, and marketing functions for medical products,
including custom radio frequency (RF) power amplifiers for the medical and
scientific industries are located in Anaheim, California and Lancaster,
Pennsylvania.
Medical Products
Herley's medical products vary in complexity from single modules, to rack
mounted amplifiers, to complete systems. The rack-mounted amplifiers and systems
typically include detection/protection circuitry, built-in power supplies, front
panel metering and digital and/or analog interface controls. Both forced air
and/or water cooling are used, depending on the customer's requirements.
All products feature highly reliable technical solutions designed for
producibility and reliability. Producibility is enhanced through the use of
surface mount components and circuit designs and eliminate the need for
5
excessive alignment during the production cycle. High reliability is
accomplished through the implementation of conservative thermal and RF circuit
design and sophisticated self-protection schemes. Reliability is further
enhanced during the design phase by employing detailed environmental testing.
Herley's medical products are used extensively in Magnetic Resonance Imaging
(MRI) systems. These amplifiers cover the frequency ranges of 10 MHz to 200 MHz
with power levels as high as 12.0KW peak power at 10% duty cycle.
All amplifiers have dual mode capability and can be operated in either a pulsed
or CW mode. Custom products or private labeling is available. Medical customers
include both OEM systems manufacturers, universities and research centers.
Scientific Products
Herley's scientific products are used extensively in Nuclear Magnetic Resonance
(NMR) systems. These amplifiers cover the frequency ranges of 6 MHz to 950 MHz,
with power levels as high as 2.0KW peak power at 10% duty cycle.
All amplifiers have dual mode capability and can be operated in either a pulsed
or CW mode. Custom products or private labeling is available. Scientific
customers include both OEM system manufacturers and research centers.
Communication Products
Herley's core technology is in the design of microwave assemblies from 3GHz
through 18 GHz. Products include single function amplifier modules, transceivers
for microwave radios and complete satcom outdoor transceivers with built-in 40W
power amplifiers, monitor and control and redundancy all controlled via RS485
and FSK.
Satcom
Herley manufactures a complete range of C and Ku Band VSAT "Block Transceivers".
Transceivers are Outdoor Units mounted at the antenna of the satellite terminal
and are used to convert high frequency signals to/from the satellite to
intermediate frequencies required by the Indoor Units (Modems). Traditional VSAT
Transceivers use 70 MHz or 140 MHz to link to the Indoor section of Satellite
Terminals. "Block Transceivers" utilize L Band (950-1525 MHz) instead of 70MHz
or 140 MHz. "Block Transceivers" result in cost savings and also allow for
Single Channel Per Carrier (SCPC), Multi-Channel Per Carrier (MCPC) and
simultaneous multi- transponder transmissions. Herley supports products to
domestic and international equipment companies for VSAT networks.
Digital Microwave Radios
Herley supplies subsystems (transceivers and receiver/transmitter modules) to
digital microwave radio companies. Herley's products are used as "front-ends"
for high data communications including the following applications:
Point-to-point (7GHz through 38 GHz), point-to-multipoint (3.5, 10.5, 26GHz,
28GHz and 42GHz), Internet access (2.5GHz-MmDS) and non-licensed band (2.4GHz,
5.2GHz, 5.8GHz). Herley's products are best suited for higher-level modulation
and higher data rate digital microwave radios (QPSK, 16QAM, 64QAM, 34MG and
155MB).
Strategy
The Company's strategy is to attempt to continue to leverage its proprietary
technology, microwave development and manufacturing capabilities to further
expand its penetration in defense and medical markets. Key components of the
Company's strategy include the following:
6
Increase Levels of Component Integration and Value Added Content
Due to acquisitions, product development and growth of engineering expertise,
the Company has increased its capability to provide more component integration.
Component integration adds value and will enable Herley to increase content and
revenue levels on wireless and defense systems.
Maintain Leadership in Microwave Technology
The Company intends to pursue further technological advances through continued
investment in product development. The Company will seek to advance its
leadership in microwave technology by continuing its participation in selected
defense programs that involve highly sophisticated state-of-the-art microwave
technology.
Strengthen and Expand Customer Relationships
The Company has developed mutually beneficial relationships with defense and
commercial companies. The Company expects to continue to build and strengthen
relationships with industry leaders by recognizing their needs and providing
them with timely and cost effective solutions.
Enhance Manufacturing Capabilities
The Company intends to continue to implement process manufacturing automation
and believes that its ability to develop a high level of automated production
and test capability will help to further improve its cost effectiveness and time
to market.
Pursue Strategic Acquisitions
The Company intends to continue to augment its existing technology base by
acquiring specialized technology companies that complement its product offerings
and market strategies. The Company believes that expansion of its core
competencies through the acquisition of such specialized technology companies,
when combined with its technological and manufacturing skills, will provide
improved levels of integration, leading to subsystems and complete systems
products.
Customers
During the fiscal year ended July 29, 2001, approximately 18% of the Company's
sales were attributable to contracts with offices and agencies of the U. S.
Government. No other customers accounted for shipments in excess of 10% of
consolidated net sales.
During fiscal year 2001, sales to foreign customers accounted for approximately
26% of the Company's consolidated net sales. All of the Company's contracts with
foreign customers are payable in U. S. dollars. Sales to foreign customers were
$20,683,000, $16,506,000 and $17,680,000 in fiscal 2001, 2000 and 1999,
respectively.
The Company provides defense electronics equipment to major defense prime
contractors for integration into larger systems. Some of its customers for
defense electronics equipment include:
Boeing/McDonnell Douglas
British Aerospace
Harris
Lockheed Martin
Litton/Amecon
Northrop Grumman
Raytheon
7
Business Acquisition
The Company entered into an agreement effective as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common stock of
Terrasat, Inc. ("Terrasat"), a California corporation. The transaction provides
for the payment of $6,000,000 in cash, $3,000,000 which was paid in December
2000 and $3,000,000 to be paid in December 2001, and the assumption of
approximately $1,025,000 in liabilities. In addition, the agreement provides for
additional cash payments in the future up to $2,000,000, based on gross revenues
through December 31, 2001. The transaction has been accounted for under the
purchase method. Accordingly, the consolidated balance sheet includes the assets
and liabilities of Terrasat at July 29, 2001, and the consolidated statement of
income includes the results of Terrasat operations from October 1, 2000. Excess
cost over the fair value of net assets acquired of approximately $4,845,000 is
being amortized over 20 years.
The Company entered into an agreement as of September 1, 2000 to acquire certain
assets and the business, subject to the assumption of certain liabilities, of
American Microwave Technology, Inc., ("AMT"), a California corporation, which
operates as a division of Herley Industries, Inc. The transaction provided for
the payment of $5,400,000 in cash, and the assumption of approximately
$1,153,000 in liabilities. In addition, the Company entered into an exclusive
license agreement for certain products providing for a royalty of 10% on the net
shipments of such products through October 2004. The transaction has been
accounted for under the purchase method. Accordingly, the consolidated balance
sheet includes the assets and liabilities of AMT at July 29, 2001, and the
consolidated statement of income includes the results of AMT's operations from
September 1, 2000. Excess cost over the fair value of net assets acquired of
approximately $4,112,000 is being amortized over 20 years.
Sales and Marketing
The Company markets its products worldwide to OEMs, service providers, research
institutions and universities in commercial markets and prime contractors and
various countries in defense markets. Sales are primarily through a sales force
generally organized by geographic territory and markets. In addition, the
Company has contracts with manufacturers' representatives in the United States
and international representatives who are located in Western Europe, the Middle
East and Asia. As part of its marketing efforts, the Company advertises in major
trade publications and attends major industrial shows in the commercial,
medical, satcom and defense markets.
After the Company has identified key potential customers, the Company makes
sales calls with its own sales, management and engineering personnel and its
manufacturers' representative.
In order to promote widespread acceptance of its products and provide customers
with support, the Company's sales and engineering teams work closely with its
customers to develop tailored solutions to their requirements. The Company
believes that its customer engineering support provides it with a key
competitive advantage.
Manufacturing
The Company manufactures its products from standard components, as well as from
items that are manufactured by vendors to the company's specifications. A
majority of the Company's commercial and defense electronics assemblies and
subsystems products contain proprietary technology which is designed and tested
by the Company's engineers and technicians and is manufactured at the Company's
own facilities.
The Company continues to invest in the advancement of its proprietary
manufacturing processes and in automation of the manufacturing processes.
Automation is critical in meeting its customers' demands for price
competitiveness, world class quality and on-time delivery. The Company is also
investing to enhance its responsiveness to production demands from its
customers.
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.
8
The Company maintains minimal levels of finished products inventory to meet the
needs of it's medical products customers. 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.
Quality assurance checks are performed on manufacturing processes, purchased
items, work-in-process and finished products. Due to the complexity of the
Company's products, final tests are performed on some products by highly skilled
engineers and technicians.
Herley's primary manufacturing facilities have earned the ISO 9001 Registration.
The ISO 9000 series standards are internationally recognized quality management
system requirements. ISO 9001, the most comprehensive Standard in the ISO 9000
Series covers design, manufacturing, installation, and servicing systems.
Assembly, test, package and shipment of products are done at the Company's
manufacturing facilities located in the following cities:
Lancaster, Pennsylvania
Farmingdale, New York
Woburn, Massachusetts
Nashua, New Hampshire
Anaheim, CA
Morgan Hill, CA
Jerusalem, Israel
Backlog
The Company's total backlog of orders was approximately $87,743,000 on July 29,
2001 as compared to $53,127,000 on July 30, 2000. Of the Company's total backlog
of $87,743,000 at July 29, 2001, $52,944,000 is attributable to domestic orders
and $34,799,000 is attributable to foreign orders. Management anticipates that
approximately $68,440,000 of its backlog will be shipped during the fiscal year
ending July 28, 2002.
All of the orders included in backlog are covered by signed contracts or
purchase orders. Backlog is not directly indicative of future sales.
Accordingly, the Company does not believe that its backlog as of any particular
date is representative of actual sales for any succeeding period.
Substantially all of the Company's 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.
Product Development
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 has been funded by
the Company's customers.
9
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 $2,070,000, $1,727,000 and $1,685,000 in
fiscal 2001, 2000 and 1999, respectively.
Competition
The microwave component and subsystems industry is highly competitive and the
Company competes against many companies, both foreign and domestic. Many of
these are larger, have greater financial resources and are better known. As a
supplier, the Company also experiences significant competition from the in-house
capabilities of its actual prospective customers.
Competition is generally based upon technology, design, price and past
performance. The Company's ability to compete 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.
Government Regulation
The Company's wireless communications products are incorporated into wireless
telecommunications systems that are subject to regulation domestically by the
FCC and internationally by other government agencies. In addition, because of
its participation in the defense industry, the Company is subject to audit from
time to time for its compliance with government regulations by various
government agencies. The Company is also subject to a variety of local, state
and federal government regulations relating to, among other things, the storage,
discharge, handling, omission, generation, manufacture and disposal of toxic or
other hazardous substances used to manufacture the Company's products. The
Company believes that it operates its business in material compliance with
applicable laws and regulations. However, any failure to comply with existing or
future laws or regulations could have a material adverse impact on the Company's
business, financial condition and result of operations.
Intellectual Property
While the Company holds several patents, the Company relies primarily on a
combination of trade secret, employee and third-party nondisclosure agreements
to protect its intellectual property, as well as limiting access to the
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. Furthermore, there
can be no assurance that, in the future, third parties will assert infringement
claims against the Company or with respect to its products for which the Company
has indemnified certain of its customers. Asserting the Company's rights or
defending against third party claims could involve substantial costs and
diversion of resources, thus materially and adversely affecting the Company's
business, financial condition and results of operations. In the event a third
party were successful in a claim that one of the Company's products infringed
its proprietary rights, the Company may have to pay substantial royalties or
damages, remove that product from the marketplace or expand substantial amounts
in order to modify the product so that it no longer infringes such proprietary
rights, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Employees
As of September 30, 2001, the Company employed 640 persons full time. Of these
employees, 93 comprise the engineering staff, 470 constitute manufacturing
personnel, 25 occupy sales and marketing positions, and 52 are in executive,
management, and support 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
10
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.
Item 2. Properties
The Company's properties are as follows:
Owned
or
Location Purpose of Property Area Leased
-------- ------------------- ---- ------
Lancaster, PA (1) Production, engineering, administrative 71,200 sq. ft. Owned
and executive offices
Woburn, MA Production, engineering and administration 60,000 sq. ft. Owned
Farmingdale, NY (2) Production, engineering and administration 46,000 sq. ft. Leased
Jerusalem, Israel Production, engineering and administration 12,000 sq. ft.. Owned
Nashua, NH (3) Production, and engineering 20,000 sq. ft. Leased
Chicago, IL Engineering and administration 3,000 sq. ft. Leased
Morgan Hill, CA (4) Production, and engineering 11,000 sq. ft. Leased
Anaheim, CA (5) Engineering 4,000 sq. ft. Leased
Lancaster, PA Land held for expansion 20.4 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.
(2) On September 23, 1999 the Company closed on the sale of its prior owned
facility in Amityville, NY and relocated the plant to this leased facility in
Farmingdale, NY. The Company entered into a 10 year lease agreement with a
partnership owned by the children of certain officers of the Company. The lease
provides for initial minimum annual rent of $312,390, subject to escalation of
approximately 4% annually throughout the 10 year term.
(3) As of January 3, 2000 the Company acquired substantially all of the
assets of Robinson Laboratories, Inc. which operates as a division at this
location.
(4) As of September 30, 2000 the Company acquired all of the outstanding
common stock of Terrasat, Inc. which operates as a wholly owned subsidiary at
this location.
(5) As of September 1, 2000 the Company acquired substantially all of the
assets of American Microwave Technology, Inc. which operates as a division at
this location.
In addition to the above operating facilities, the Company has an idle facility
in Billerica, MA which is under lease. The Company is looking to sublease this
facility.
The Company believes that its facilities are adequate for its current and
presently anticipated future needs.
Item 3. Legal Proceedings
On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson
("Robinson") filed an amended complaint against the Company in the United States
District Court for the Eastern District of New York. The core allegations are
11
(i) that the Company has not issued 146,761 (as adjusted) shares of common stock
in connection with certain earn out requirements contained in an asset purchase
agreement dated February 1, 2000; (ii) that the Company breached an employment
agreement with Robinson by terminating his employment on August 5, 2001; and
(iii) that the Company breached a stock option agreement dated January 31, 2000
with Robinson. On September 17, 2001, the Company filed an answer and
affirmative defenses and counterclaims in this matter denying the material
allegations of the amended complaint. The Company also filed counterclaims
against both RLI and Robinson. In these counterclaims, the Company's core
allegations concern Robinson's misconduct (i) in connection with the manner he
attempted to satisfy RLI's earn out requirements; (ii) misrepresentations made
in connection with the asset purchase agreement; (iii) wrongdoing as a Company
employee leading to his termination; and (iv) post-Company employment wrongdoing
in connection with a new company. In addition to seeking a declaratory judgment,
the Company also asserted claims for, among other things, fraud, breach of
contract, breach of fiduciary duty, unfair competition and tortious interference
with actual and prospective contractual relationships. The parties are now
engaged in discovery and expect a trial date in 2002. The Company believes that
it has meritorious defenses to this action.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
(a) The Company's Common Stock is traded in the NASDAQ National Market
under the symbol HRLY. The following table sets forth the high and
low sales price as reported by the NASDAQ National Market for the
Company's Common Stock for the periods indicated and gives effect to
the three-for- two stock split of the Common Stock on September 10,
2001.
Common Stock
------------
High Low
---- ---
Fiscal Year 2000
First Quarter...........................$ 10.00 $ 8.13
Second Quarter.......................... 10.33 7.42
Third Quarter........................... 12.92 9.25
Fourth Quarter.......................... 12.71 10.46
Fiscal Year 2001
First Quarter........................... 15.17 11.63
Second Quarter.......................... 15.46 8.79
Third Quarter........................... 10.89 8.38
Fourth Quarter.......................... 13.15 9.97
Fiscal Year 2002
First Quarter (through October 11, 2001) 18.50 11.17
The closing price on October 11, 2001 was $17.08.
(b) As of October 11, 2001, 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.
12
Item 6. Selected Financial Data (in thousands except per share data)
52 Weeks ended
-----------------------------------------------------------
July 29, July 30, August 1, August 2, August 3,
2001 (2) 2000 (3) 1999 (4) 1998 1997
-------- -------- -------- ----- ----
Net sales $ 80,597 70,537 61,036 40,798 32,195
====== ====== ====== ====== ======
Net income $ 7,405 7,639 7,735 5,497 4,804
====== ====== ====== ======= =======
Earnings per common share (1)
Basic $ .73 1.05 .99 .74 .79
==== ==== ==== === ====
Assuming Dilution $ .68 .96 .91 .68 .67
==== ===== ==== ==== ====
Total Assets $ 114,597 86,656 74,056 57,553 39,257
Total Current Liabilities $ 18,732 12,783 10,513 9,843 9,813
Long-Term Debt net of current portion $ 2,740 2,931 15,437 4,111 2,890
(1) As adjusted to give effect to a 3-for-2 stock split effective September
10, 2001.
(2) As of September 1, 2000 and September 30, 2000 the Company acquired
American Microwave Technology, Inc. and Terrasat, Inc., respectively.
See Note B of the financial statements.
(3) On January 3, 2000, the Company acquired Robinson Laboratories, Inc.
See Note B of the financial statements.
(4) On January 4, 1999, the Company acquired General Microwave Corporation.
See Note B of the financial statements.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of income
expressed as a percentage of net sales. There can be no assurance that trends in
sales growth or operating results will continue in the future.
52 weeks ended
------------------------------
July 29, July 30, August 1,
2001 2000 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 67.2% 62.9% 60.2 %
----- ----- ------
Gross profit 32.8% 37.1 % 39.8 %
Selling and administrative expenses 19.3% 19.2 % 19.5%
----- ------ ----
Operating income 13.5% 17.9 % 20.3%
----- ------ -----
Other income (expense), net:
Investment income 0.8% 0.3 % 0.5 %
Interest expense (0.3)% (1.6)% (1.2)%
------ ------ ------
0.5% (1.3)% (0.7)%
----- ------- -------
Income before income taxes and extraordinary item 14.0% 16.6 % 19.6 %
Provision for income taxes 4.8% 5.8 % 6.7 %
----- ------- -------
Income before extraordinary item 9.2% 10.8 % 12.9 %
Extraordinary item 0.0% 0.0% (0.2)%
---- ---- ------
Net income 9.2 % 10.8 % 12.7 %
===== ====== ======
14
Fiscal 2001 Compared to Fiscal 2000
Net sales for the 52 weeks ended July 29, 2001 were approximately $80,597,000
compared to $70,537,000 for fiscal 2000. The sales increase of $10,060,000
(14.3%) is attributable to the acquisitions of Terrasat and AMT in the first
quarter of fiscal 2001 which contributed $10,915,000 in revenues, as well as an
increase in net sales of approximately $3,997,000 in microwave products and
$4,573,000 in commercial products. Microwave systems products experienced a drop
in revenue of approximately $9,425,000.
Gross profit of 32.8% for the 52 weeks ended July 29, 2001 is less than the
prior year of 37.1%. The decline in margin of 4.3% is due primarily to lower
margins on microwave and commercial products as compared to microwave systems.
Margins have also been impacted by certain inefficiencies at the Nashua
facility. This operation is now being consolidated into the New England and
Farmingdale facilities.
Selling and administrative expenses for the 52 weeks ended July 29, 2001 were
$15,592,000 compared to $13,497,000 for fiscal 2000, an increase of $2,095,000.
The primary increase is due to businesses acquired which added $2,345,000 in
fiscal 2001 and $486,000 in additional personnel expenses associated with power
amplifier marketing costs. Incentive compensation decreased $707,000.
Investment income increased approximately $447,000 from the prior year primarily
from the investment of proceeds from the exercise of warrants in May and
November 2000. Interest expense decreased $906,000 as compared to fiscal 2000
due to the repayment of bank borrowings out of the proceeds of the exercise of
the warrants.
The effective income tax rate decreased to 34.4% in fiscal 2001 from 35.0% in
2000 due to various favorable tax benefits including a lower effective tax rate
on foreign-source income.
Fiscal 2000 Compared to Fiscal 1999
Net sales for the 52 weeks ended July 30, 2000 were approximately $70,537,000
compared to $61,036,000 for fiscal 1999. The sales increase of $9,501,000
(15.6%) is partially attributable to the acquisition of Robinson Labs as of
January 3, 2000 which contributed $4,690,000 in revenues, and the acquisition of
GMC as of January 4, 1999 which contributed $5,101,000 additional revenue over
the volume generated in fiscal 1999, as well as an increase in net sales of
approximately $2,478,000 in microwave products. Space and communications
products experienced a drop in revenue of approximately $2,768,000.
Gross profit of 37.1% for the 52 weeks ended July 30, 2000 is less than the
prior year of 39.8%. The decline in margin of 2.7% is due primarily to lower
margins on microwave products, which includes the revenues from Robinson Labs
and GMC.
Selling and administrative expenses for the 52 weeks ended July 30, 2000 were
$13,497,000 compared to $11,877,000 for fiscal 1999, an increase of $1,620,000.
The primary increase is due to the acquisition of Robinson Labs which added
$1,069,000 in selling and administrative expenses in fiscal 2000. As a
percentage of revenues, expenses declined from 19.5% in 1999 to 19.2% in 2000.
Interest expense increased approximately $390,000 due to additional bank
borrowings to fund the acquisitions of GMC and Robinson.
The effective income tax rate increased to 35.0% in fiscal 2000 from 34.3% in
1999 due primarily to a decreased benefit received from the Company's foreign
sales corporation in fiscal 2000.
15
Liquidity and Capital Resources
As of July 29, 2001 and July 30, 2000, working capital was approximately
$46,804,000 and $35,476,000, respectively, and the ratio of current assets to
current liabilities was 3.50 to 1 and 3.78 to 1, respectively. At July 29, 2001,
the Company had cash and cash equivalents of approximately $13,041,000.
The Company entered into an agreement effective as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common stock of
Terrasat, Inc. ("Terrasat"), a California corporation. The transaction provides
for the payment of $6,000,000 in cash, $3,000,000 which was paid in December
2000 and $3,000,000 to be paid in December 2001, and the assumption of
approximately $1,025,000 in liabilities. In addition, the agreement provides for
additional cash payments in the future up to $2,000,000, based on gross revenues
through December 31, 2001.
The Company entered into an agreement as of September 1, 2000 to acquire certain
assets and the business, subject to the assumption of certain liabilities, of
American Microwave Technology, Inc., ("AMT"), a California corporation, which
operates as a division of Herley Industries, Inc. The transaction provided for
the payment of $5,400,000 in cash, and the assumption of approximately
$1,153,000 in liabilities. In addition, the Company entered into an exclusive
license agreement for certain products providing for a royalty of 10% on the net
shipments of such products through October 2004.
As of January 3, 2000, the Company acquired substantially all of the assets of
Robinson Laboratories, Inc. ("Robinson" or "Robinson Labs"), a New Hampshire
corporation, which is being operated as a division of Herley Industries, Inc.
The transaction provided for the payment of $6,000,000 in cash, the issuance of
50,762 (as adjusted) shares of Common Stock of the Company valued at $10.125 per
share, and the assumption of approximately $3,140,000 in liabilities. In
addition, the agreement provides for the issuance of additional shares of Common
Stock at a future date, up to a maximum of 146,761(as adjusted) shares, based on
new orders booked through January 2001. The Company believed previously, based
upon preliminary data, that it was obligated to issue additional shares to
Robinson Labs. The Company has since determined, based upon a comprehensive
inquiry, that Robinson Labs is not entitled to any stock under the earn out
provisions of the Asset Purchase Agreement. See "Item 3. Legal Proceedings".
In connection with the acquisition of all of the issued and outstanding common
stock of GMC in January 1999, the Company issued 1,450,013 (as adjusted)
three-year warrants to purchase one share of the Company's common stock at an
exercise price of $10.40 per share. The warrants were to expire in January 2002,
subject to a call provision after October 11, 2000 at $.67 per warrant if the
average last reported sales price of the common stock of the Company has been
not less than $11.73 per share for fifteen consecutive trading days immediately
preceding the call date. The warrants were called for redemption as of November
13, 2000, and approximately 1,419,525 of the warrants were exercised at $10.40
per share of common stock resulting in proceeds of approximately $14,759,000.
As is customary in the defense industry, inventory is partially financed by
advance payments. The unliquidated balance of these advance payments was
approximately $261,000 in 2001, and $1,006,000 in 2000.
Net cash provided by operations was approximately $2,210,000, and $9,854,000, in
2001 and 2000 respectively. Significant variances from the prior fiscal year
include additional increases in inventory of $6,626,000 and a decrease in
customer deposits of $940,000.
Net cash used in investing activities in 2001 of approximately $11,740,000
relates primarily to the acquisitions of Terrasat and certain assets and the
business of AMT, net of cash acquired, which was funded by available cash
balances and borrowings under the bank line of credit. Capital expenditures
amounted to $3,679,000. Included in capital expenditures is the purchase of land
for $747,000 for expansion of the Lancaster, PA facility.
Net cash used in investing activities in 2000 of approximately $4,571,000
relates to the acquisition of Robinson Labs, in part for cash of approximately
$6,000,000 which was funded by borrowings under the bank line of credit, and
16
capital expenditures of $2,618,000, including building and leasehold
improvements of $1,676,000 to accommodate the move of GMC from Amityville, NY to
a leased facility in Farmingdale, NY, and consolidation of the GMC leased
facilities in Billerica, MA with the Company's Woburn, MA facility. Offsetting
the cash outflows were the net proceeds from the sale of the facility in
Amityville of $4,125,000.
Net cash flows from financing activities in fiscal 2001 included: (1) the
exercise of approximately 1,419,500 warrants aggregating $14,759,000 which were
issued in connection with the acquisition of GMC in 1999; (2) the exercise of
103,950 underwriter warrants aggregating $998,000 which were issued in
connection with the public offering of common stock in fiscal 1998; (3) proceeds
from the exercise of 37,251 stock options aggregating $250,000; and (4) the
acquisition of treasury stock in the aggregate amount of $194,000.
Net cash flows from financing activities in fiscal 2000 included: (1) net
payments under the bank line of credit of $12,500,000; (2) proceeds from the
exercise of stock options and warrants of $21,574,000, including the exercise of
approximately 1,314,000 of the warrants issued in connection with the sale of
common stock to the public in 1997 resulting in proceeds of approximately
$20,492,000; and (3) the acquisition of treasury stock in the aggregate amount
of $7,565,000.
The Company maintains a revolving credit facility with a bank for an aggregate
of $30,000,000, as amended in February 2001, which expires January 31, 2003. No
borrowings were outstanding as of July 29, 2001 and July 30, 2000.
During the fiscal years ended July 29, 2001 and July 30, 2000 the Company
acquired 10,800 (pre-split) and 512,000 (pre-split) shares of its outstanding
common stock for approximately $194,000 and $7,565,000, respectively through
open market purchases, pursuant to a stock repurchase plan to acquire up to
1,250,000 (pre- split) shares of Common Stock.
The Company also acquired 8,982 and 410,593 shares of common stock in fiscal
2000 and 1999, respectively, valued at $80,000, and $5,989,000, 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.
Subsequent Events
On August 7, 2001 the Board of Directors declared a 3-for-2 stock split effected
as a stock dividend payable September 10, 2001 to holders of record on August
28, 2001. The effect of the split is presented within shareholders' equity at
July 29, 2001. As of the date of the split, the distribution increased the
number of shares outstanding from 7,027,553 to 10,541,329. The amount of
$351,373 was transferred from the additional paid-in capital to the common stock
account to record this distribution. Unless otherwise indicated, all share and
per share data (other than common stock issued and outstanding on the 2000
Consolidated Balance Sheet and 1999 and 2000 Consolidated Statements of
Shareholders' Equity), including stock options and warrants, included in this
annual report have been restated to reflect the stock split on a retroactive
basis.
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 credit facility with a bank having an interest
rate that is set at 1.65% over the FOMC Federal Funds Target Rate based on
tangible net worth in excess of $25,000,000, or at an increment of 1.80% if
tangible net worth is less than $25,000,001, and a mortgage on its facility in
Lancaster, Pa. at a fixed rate of 7.43%. The FOMC Federal Funds Target Rate at
17
at July 29, 2001 was 5.55%. The credit line is reviewed on an annual basis.
Since the acquisition of GMC, the Company is subject to movements in foreign
currency rate changes related to GMC's Israel operations. The Company does not
anticipate any other material changes in its primary market risk exposures in
fiscal 2001.
As of July 29, 2001, 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 payment cash flows by maturity date required
under the mortgage and line of credit, and corresponding fair values are as
follows:
Fiscal year ending during: Mortgage
------------------------- --------
2002 $ 75
2003 80
2004 86
2005 93
2006 101
2007 and later 2,330
-----
$2,765
=====
Fair value $2,765
=====
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 2002, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended July 29, 2001.
18
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 August 7, 2001.
10.1 1996 Stock Option Plan (Exhibit 10.1 of Annual Report on Form 10-K for the
fiscal year ended July 28, 1996).
10.2 1997 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 10,
1997).
10.3 1998 Stock Option Plan (Exhibit 10.3 of Annual Report on Form 10-K for the
fiscal year ended August 1, 1999).
10.4 2000 Stock Option Plan (Exhibit 4.1 of Report on Form S-8 dated October
12, 2001).
10.5 Amendments dated January 26,1999 and July 30, 1999 to Employment Agreement
between Herley Industries, Inc. and Lee N. Blatt dated as of October 1,
1998 (Exhibit 10.4 of Annual Report on Form 10-K for the fiscal year ended
August 1, 1999).
10.6 Amendments dated January 26,1999 and July 30, 1999 to Employment Agreement
between Herley Industries, Inc. and Myron Levy dated as of October 1, 1998
(Exhibit 10.5 of Annual Report on Form 10-K for the fiscal year ended
August 1, 1999).
10.7 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).
10.8 Agreement and Plan of Merger dated as of August 21, 1998 among General
Microwave Corp., Eleven General Microwave Corp., Shareholders, GMC
Acquisition Corporation and Registrant (Exhibit 1 of Schedule 13D dated
August 28, 1998).
10.9 Lease Agreement dated September 1, 1999 between Registrant and RSK Realty
LTD. (Exhibit 10.8 of Annual Report on Form 10-K for the fiscal year ended
August 1, 1999).
10.10 Loan Agreement dated February 16, 1999 between Registrant and The First
National Bank of Maryland, a division of FMB Bank. (Exhibit 10.9 of Annual
Report on Form 10-K for the fiscal year ended August 1, 1999).
10.11 Asset Purchase Agreement dated as of February 1, 2000 between Registrant
and Robinson Laboratories, Inc. (Exhibit 10.2 of Form 10-Q dated March 13,
2000).
10.12 Amendment to Loan Agreement dated January 11, 2000 between Registrant and
Allfirst Bank, successor to The First National Bank of Maryland (Exhibit
10.1 of Form 10-Q dated March 13, 2000).
10.13 Amendment to Loan Agreement dated February 15, 2001 between Registrant and
Allfirst Bank, successor to The First National Bank of Maryland (Exhibit
10.1 of Form 10-Q dated March 13, 2001).
10.14 Asset Purchase Agreement dated as of October 12, 2000 between Registrant
and American Microwave Technology Inc. (Exhibit 10.1 of Form 10-Q dated
December 12, 2000).
10.15 Common Stock Purchase Agreement dated as of December 4, 2000 between
Registrant and Terrasat, Inc. (Exhibit 10.2 of Form 10-Q dated December 12
2000).
10.16 Lease Agreement dated March 1, 2000 between Registrant and RSK Realty LTD
(Exhibit 10.13 of Annual Report on Form 10-K for the fiscal year ended
July 30, 2000).
23.1 Consent of Arthur Andersen LLP.
(b) Financial Statements
See Index to Consolidated Financial Statements at Page F-1.
(c) Reports on Form 8-K
None
19
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 23rd day of October, 2001.
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 23, 2001 by the following persons in the
capacities indicated:
By: /S/ Lee N. Blatt Chairman of the Board
-------------------------------------------
Lee N. Blatt
By: /S/ Myron Levy Chief Executive Officer and
------------------------------------------- Director
Myron Levy (Principal Executive Officer)
By: /S/ Anello C. Garefino Vice President Finance,
------------------------------------------- CFO/Treasurer
Anello C. Garefino (Principal Financial Officer)
By: /S/ David H. Lieberman Secretary and Director
-------------------------------------------
David H. Lieberman
By: /S/ 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.
20
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, July 29, 2001 and July 30, 2000 F-3
Consolidated Statements of Income for the 52 weeks ended
July 29, 2001, July 30, 2000, and August 1, 1999 F-4
Consolidated Statements of Shareholders' Equity for the 52 weeks
ended July 29, 2001, July 30, 2000, and August 1, 1999 F-5
Consolidated Statements of Cash Flows for the 52 Weeks Ended
July 29, 2001, July 30, 2000, and August 1, 1999 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 July 29, 2001 and July 30, 2000, and
the related consolidated statements of income, shareholders' equity and
cash flows for the 52 weeks ended July 29, 2001, July 30, 2000 and August
1, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Herley Industries, Inc. and Subsidiaries as of July 29, 2001
and July 30, 2000, and the consolidated results of their operations and
their cash flows for the 52 weeks ended July 29, 2001, July 30, 2000 and
August 1, 1999 in conformity with accounting principles generally accepted
in the United States.
/S/ ARTHUR ANDERSEN LLP
Lancaster, PA
October 3, 2001
F-2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
July 29, July 30,
2001 2000
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 13,041 $ 7,665
Accounts receivable 17,047 14,315
Costs incurred and income recognized in excess
of billings on uncompleted contracts 541 146
Other receivables 166 293
Inventories 32,768 23,045
Deferred taxes and other 1,973 2,795
------- -------
Total Current Assets 65,536 48,259
Property, Plant and Equipment, net 21,312 18,004
Intangibles, net of amortization of $4,639 in 2001
and $3,095 in 2000 26,766 18,096
Available-For-Sale Securities 146 146
Other Investments 773 1,020
Other Assets 64 1,131
------- -------
$114,597 $ 86,656
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 213 $ 282
Accounts payable and accrued expenses 16,194 9,602
Billings in excess of costs incurred and
income recognized on uncompleted contracts 531 --
Income taxes payable 1,061 1,426
Reserve for contract losses 472 467
Advance payments on contracts 261 1,006
------- -------
Total Current Liabilities 18,732 12,783
Long-term Debt 2,740 2,931
Deferred Income Taxes 4,452 5,571
------- -------
25,924 21,285
------- -------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
10,537,289 in 2001 and 5,993,870 in 2000 1,054 599
Additional paid-in capital 45,250 29,808
Retained earnings 42,369 34,964
------- -------
Total Shareholders' Equity 88,673 65,371
------- -------
$114,597 $ 86,656
======= =======
The accompanying notes are an integral part of these financial statements.
F-3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
52 weeks ended
-------------------------
July 29, July 30, August 1,
2001 2000 1999
-------- -------- ---------
Net sales $ 80,597 $ 70,537 $ 61,036
------- ------- -------
Cost and expenses:
Cost of products sold 54,159 44,382 36,749
Selling and administrative expenses 15,592 13,497 11,877
------- ------- -------
69,751 57,879 48,626
------- ------- -------
Operating income 10,846 12,658 12,410
------- ------- -------
Other income (expense), net:
Investment income 679 232 298
Interest expense (232) (1,138) (748)
------- ------- -------
447 (906) (450)
------- ------- -------
Income before income taxes and
extraordinary item 11,293 11,752 11,960
Provision for income taxes 3,888 4,113 4,098
------- ------- -------
Income before extraordinary item 7,405 7,639 7,862
Extraordinary item - loss on extinguishment
of debt (net of income tax benefit
of $ 68) -- -- 127
------- ------- -------
Net income $ 7,405 $ 7,639 $ 7,735
======= ======= =======
Earnings per common share - Basic
Earnings before extraordinary item $ .73 $ 1.05 $1.00
Extraordinary loss on extinguishment
of debt -- -- .01
---- ---- ----
Net earnings per common share - Basic $ .73 $ 1.05 $ .99
==== ==== ====
Basic weighted average shares 10,082 7,308 7,849
====== ===== =====
Earnings per common share - Diluted
Earnings before extraordinary item $ .68 $ .96 $ .92
Extraordinary loss on extinguishment
of debt -- -- .01
---- ---- ----
Net earnings per common share - Diluted $ .68 $ .96 $ .91
==== ==== ====
Diluted weighted average shares 10,956 7,928 8,490
====== ===== =====
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 July 29, 2001, July 30, 2000 and August 1, 1999
(In thousands except share data)
Common Stock Additional
------------ Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
--------- ------ ------- -------- ----- -----
Balance at August 2, 1998 5,266,159 $ 527 20,324 19,590 -- $ 40,441
Net income 7,735 7,735
Issuance of warrants in
connection with business acquired 1,450 1,450
Exercise of stock options
and warrants 735,767 73 4,752 (5,989) (1,164)
Tax benefit upon exercise of stock
options 2,127 2,127
Purchase of 561,050 shares
of treasury stock (7,689) (7,689)
Retirement of treasury shares (971,643) (97) (13,581) 13,678 --
--------- ----- ------ ------ ------ ------
Balance at August 1, 1999 5,030,283 $ 503 15,072 27,325 -- $ 42,900
Net income 7,639 7,639
Issuance of common stock in
connection with business acquired 33,841 3 511 514
Exercise of warrants issued in
connection with public offering
in 1998 1,313,613 131 20,361 20,492
Exercise of stock options
and warrants 137,115 14 1,213 (140) 1,087
Tax benefit upon exercise of stock
options 304 304
Purchase of 512,000 shares
of treasury stock (7,565) (7,565)
Retirement of treasury shares (520,982) (52) (7,653) 7,705 --
--------- ----- ------ ------ ----- ------
Balance at July 30, 2000 5,993,870 $ 599 29,808 34,964 -- $ 65,371
Net income 7,405 7,405
Exercise of warrants issued in
connection with business acquired
in 1999 946,349 95 14,664 14,759
Exercise of stock options
and warrants 94,134 10 1,239 1,249
Tax benefit upon exercise of stock
options 83 83
Purchase of 10,800 shares
of treasury stock (194) (194)
Retirement of treasury shares (10,800) (1) (193) 194 --
Three-for-two stock split 3,513,736 351 (351) --
---------- ------ ------ ------ ----- ------
Balance at July 29, 2001 10,537,289 $ 1,054 45,250 42,369 -- $ 88,673
========== ====== ====== ====== ===== ======
The accompanying notes are an integral part of these financial statements.
F-5
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
52 weeks ended
-------------------------
July 29, July 30, August 1,
2001 2000 1999
-------- -------- ---------
Cash flows from operating activities:
Net Income $ 7,405 $ 7,639 $ 7,735
------- ------- -------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 4,772 3,998 3,289
Loss (gain) on sale of fixed assets 4 (21) --
Extraordinary loss on extinguishment
of debt, net of income taxes -- -- 127
Equity in income of limited partnership (49) (71) (99)
Decrease (increase) in deferred tax assets 962 (148) 483
(Decrease) increase in deferred tax liabilities (1,119) 342 (141)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,525) (1,568) (361)
(Increase) decrease in costs incurred
and income recognized in excess of
billings on uncompleted contracts (395) (146) 1,665
Decrease (increase) in other receivables 127 (20) 36
Decrease in prepaid income taxes -- -- 377
(Increase) decrease in inventories (8,251) (1,625) 729
Decrease in prepaid expenses and other 10 4 199
Increase (decrease) in accounts payable and
accrued expenses 1,978 685 (2,119)
Increase in billings in excess of costs incurred and
income recognized on uncompleted contracts 531 -- --
(Decrease) increase in income taxes payable (281) 1,458 2,019
(Decrease) increase in reserve for contract losses (1,201) (1,038) 360
(Decrease) increase in advance payments
on contracts (745) 195 (1,620)
Other, net (13) 170 44
------- ------- -------
Total adjustments (5,195) 2,215 4,988
------- ------- -------
Net cash provided by operations 2,210 9,854 12,723
------- ------- -------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (8,373) (6,095) (20,101)
Proceeds from sale of fixed assets 16 4,142 6
Partial distribution from limited partnership 296 -- --
Capital expenditures (3,679) (2,618) (1,662)
------- ------- -------
Net cash used in investing activities (11,740) (4,571) (21,757)
------- ------- -------
Cash flows from financing activities:
Borrowings under bank line of credit 7,100 13,900 29,500
Proceeds from refinance of mortgage note -- -- 2,915
Proceeds from exercise of stock options and warrants, net 16,008 21,574 (1,164)
Payments under bank line of credit (7,100) (26,400) (18,500)
Payments of long-term debt (908) (1,868) (970)
Extinguishment of debt -- -- (3,006)
Purchase of treasury stock (194) (7,565) (7,689)
------- ------- -------
Net cash provided by (used in) financing activities 14,906 (359) 1,086
------- ------- -------
Net increase (decrease) in cash and cash equivalents 5,376 4,924 (7,948)
Cash and cash equivalents at beginning of period 7,665 2,741 10,689
------- ------- -------
Cash and cash equivalents at end of period $ 13,041 $ 7,665 $ 2,741
======= ======= =======
Supplemental cash flow information:
Cashless exercise of stock options $ -- $ 80 $ 5,989
======= ======= =======
Stock issued for business acquired $ -- $ 514 $ --
======= ======= =======
Warrants issued for business acquired $ -- $ -- $ 1,450
======= ======= =======
Tax benefit related to stock options $ 83 $ 304 $ 2,127
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Operations
The Company, a Delaware corporation, is engaged in research, engineering,
product development, and manufacturing of complex microwave radio
frequency (RF) and millimeter wave components and subsystems for
commercial wireless, defense and space customers worldwide.
2. Fiscal Year
The Company's fiscal year ends on the Sunday closest to July 31. Normally
each fiscal year consists of 52 weeks, but every five or six years the
fiscal year will consist of 53 weeks. All fiscal years presented
consisted of 52 weeks.
3. Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Herley
Industries, Inc. and its subsidiaries, all of which are wholly-owned. All
significant inter-company accounts and transactions have been eliminated
in consolidation. The presentation of financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements as well
as revenues and expenses during the period. Actual results could differ
from those estimates.
4. Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of
three months or less at the date of acquisition to be cash equivalents.
Short-term investments are recorded at the amortized cost plus accrued
interest which approximates market value. The Company limits its credit
risk to an acceptable level by evaluating the financial strength of
institutions at which significant investments are made and based upon
credit ratings.
5. Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit
risk consist primarily of trade accounts receivable. Accounts receivable
are principally from the U.S. Government, major U.S. Government
contractors, several foreign governments, and domestic customers in the
aerospace, communications, 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 bases,
drawings, patents, licenses, certain government qualifications and
technology and goodwill in connection with the acquisitions of Terrasat,
Inc. and certain assets of American Microwave Technology, Inc. in 2001,
certain assets of Robinson Laboratories, Inc. in 2000, General Microwave
Corporation in 1999, Metraplex Corporation in 1997, and Vega Precision
Laboratories, Inc. in 1993. Intangibles are being amortized over twenty
years. Amortization charges totaled $1,544,000, $1,109,000 and $754,000
in fiscal 2001, 2000 and 1999, respectively.
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 July 29, 2001, 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. 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. This investment is
accounted for under 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 is recognized using the
percentage of completion method of accounting. Revenue recognized on
these contracts is based on
F-8
estimated completion to date (the total contract amount multiplied by
percent of performance, based on total costs incurred in relation to
total estimated cost at completion). Prospective losses on long-term
contracts are based upon the anticipated excess of inventoriable
manufacturing costs over the selling price of the remaining units to be
delivered and are recorded when first reasonably determinable. Actual
losses could differ from those estimated due to changes in the ultimate
manufacturing costs and contract terms.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred.
12. 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. 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
$2,070,000, $1,727,000, and $1,685,000 in fiscal 2001, 2000, and 1999,
respectively.
15. New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting, and broadens the criteria for recording intangible assets
separate from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill
and certain intangibles is more than its fair value. The provisions of
each statement will be adopted by the Company on July 30, 2001. The
adoption of SFAS No.142 will result in the Company's discontinuation of
amortization of its goodwill and intangible assets which amounted to
$1,504,000 in fiscal 2001.
F-9
However, the Company will be required to test its goodwill for impairment
under the new standard beginning in the second quarter of 2002, which
could have an adverse effect on the Company's future results of
operations if an impairment occurs.
NOTE B - ACQUISITIONS
The Company entered into an agreement effective as of the close of
business September 30, 2000, to acquire all of the issued and outstanding
common stock of Terrasat, Inc. ("Terrasat"), a California corporation.
The transaction provides for the payment of $6,000,000 in cash,
$3,000,000 which was paid in December 2000 and $3,000,000 to be paid in
December 2001, and the assumption of approximately $1,025,000 in
liabilities. In addition, the agreement provides for additional cash
payments in the future up to $2,000,000, based on gross revenues through
December 31, 2001. The transaction has been accounted for under the
purchase method. Accordingly, the consolidated balance sheet includes the
assets and liabilities of Terrasat at July 29, 2001, and the consolidated
statement of income includes the results of Terrasat operations from
October 1, 2000. Excess cost over the fair value of net assets acquired
of approximately $4,845,000 is being amortized over 20 years.
The Company entered into an agreement as of September 1, 2000 to acquire
certain assets and the business, subject to the assumption of certain
liabilities, of American Microwave Technology, Inc., ("AMT"), a
California corporation, which operates as a division of Herley
Industries, Inc. The transaction provided for the payment of $5,400,000
in cash, and the assumption of approximately $1,153,000 in liabilities.
In addition, the Company entered into an exclusive license agreement for
certain products providing for a royalty of 10% on the net shipments of
such products through October 2004. The transaction has been accounted
for under the purchase method. Accordingly, the consolidated balance
sheet includes the assets and liabilities of AMT at July 29, 2001, and
the consolidated statement of income includes the results of AMT's
operations from September 1, 2000. Excess cost over the fair value of net
assets acquired of approximately $4,112,000 is being amortized over 20
years.
The acquisitions of Terrasat and AMT contributed approximately
$10,915,000 in revenues in the fiscal year ended July 29, 2001.
The allocation of the aggregate estimated purchase price in connection
with these acquisitions may be revised as additional information
concerning asset and liability valuations is obtained. Adjustments, which
could be significant, will be made during the allocation period based on
detailed reviews of the fair values of assets acquired and liabilities
assumed and could result in a substantial change in the excess of cost
over the fair value of net assets acquired.
The Company entered into an agreement, as of January 3, 2000, to acquire
substantially all of the assets of Robinson Laboratories, Inc.
("Robinson" or "Robinson Labs"), a New Hampshire corporation, which
operates as a division of Herley Industries, Inc. The transaction
provided for the payment of $6,000,000 in cash, the issuance of 50,762
(as adjusted) shares of Common Stock of the Company valued at $10.125 per
share, and the assumption of approximately $3,140,000 in liabilities. In
addition, the agreement provides for the issuance of additional shares of
Common Stock at a future date, up to a maximum of 146,761 (as adjusted)
shares, based on new orders booked through January 2001. The Company
believed previously, based upon preliminary data, that it was obligated
to issue additional shares to Robinson Labs. The Company has since
determined, based upon a comprehensive inquiry, that Robinson Labs is not
entitled to any stock under the earn out provisions of the Asset Purchase
Agreement. The transaction has been accounted for under the purchase
method. The consolidated statement of income includes the results of
Robinson's operations from January 3, 2000. Excess cost over the fair
value of net assets acquired of approximately $6,722,000 (as adjusted
based on final asset and liability valuations) is being amortized over 20
years.
F-10
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 1999,
unaudited consolidated net sales, net income, basic earnings per share,
and diluted earnings per share for the fifty-two weeks ended August 1,
1999 would have been approximately $69,283,000, $7,272,000, $.93, and
$.85, and approximately $73,246,000, $7,275,000, $.99, and $.92,
respectively, for the fifty-two weeks ended July 30, 2000. The pro forma
information includes adjustments for additional depreciation based on the
estimated fair value of the property, plant, and equipment acquired, the
amortization of intangibles, and additional interest on bank borrowings
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 affected at the beginning of fiscal 1999.
As of January 4, 1999, the Company completed the acquisition of all of
the issued and outstanding common stock of General Microwave Corporation
("GMC"), a New York corporation, including outstanding stock options, for
$18.00 per share and 1,450,013 three-year warrants to purchase one share
of the Company's common stock, at an aggregate purchase price of
approximately $24,556,000. GMC designs, manufactures and markets
microwave components and subsystems, and related electronic test and
measurement equipment. This transaction was accounted for under the
purchase method. The purchase price includes shares of common stock of
GMC purchased in the open market, acquisition of the remaining shares of
common stock outstanding, an estimate of the fair market value of the
warrants based on the trading price of similar warrants currently on the
market, and transaction expenses. The warrants were exercisable at $10.40
per share of common stock of the Company, subject to a call provision
after October 11, 2000 at $.67 per warrant if the average last reported
sales price of the common stock of the Company has been not less than
$11.73 per share for fifteen consecutive trading days immediately
preceding the call date. The warrants were called for redemption as of
November 13, 2000, and approximately 1,419,500 of the warrants were
exercised at $10.40 per share of common stock resulting in proceeds of
approximately $14,759,000.
The consolidated statements of income include the results of GMC
operations from January 4, 1999.
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 1999,
unaudited consolidated net sales, net income, basic earnings per share,
and diluted earnings per share for the fifty-two weeks ended August 1,
1999 would have been approximately $70,349,000, $7,481,000, $.95, and
$.88, respectively. The pro forma information includes adjustments for
additional depreciation based on the estimated fair market value of the
property, plant, 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 1999.
NOTE C - INVENTORIES
The major components of inventories are as follows (in thousands):
July 29, July 30,
2001 2000
---- ----
Purchased parts and raw materials $ 17,128 $ 12,804
Work in process 13,645 9,358
Finished products 1,995 883
-------- -------
$ 32,768 $ 23,045
====== ======
NOTE D - OTHER INVESTMENTS
In July 1994, the Company invested $1,000,000 for a limited partnership
interest in M.D. Sass Municipal
F-11
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 July 29, 2001 and July 30, 2000 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 2001
the Company received a partial distribution of approximately $296,000
from the Partnership. As of July 29, 2001 the Company's limited
partnership interest had a carrying value of $773,000.
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following (in
thousands):
July 29, July 30, Estimated
2001 2000 Useful Life
---- ---- -----------
Land $ 2,908 $ 1,161
Building and building
improvements 8,643 8,418 10-40 years
Machinery and equipment 30,403 26,293 5-8 years
Furniture and fixtures 1,049 915 5-10 years
Automobiles 91 108 3 years
Tools 34 34 5 years
Leasehold improvements 1,586 1,351 5-10 years
------ ------
44,714 38,280
Less accumulated depreciation 23,402 20,276
------ ------
$ 21,312 $ 18,004
====== ======
Depreciation charges totaled $3,127,000, $2,889,000, and $2,535,000 in
fiscal 2001, 2000, and 1999, respectively.
NOTE F - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, production and warehouse space as well as
computer equipment and automobiles under noncancellable operating leases.
Rent expense for the 52 weeks ended July 29, 2001, July 30, 2000, and
August 1, 1999, was approximately $1,506,000, $1,053,000, and $519,000,
respectively.
Minimum annual rentals under noncancellable operating leases are as
follows (in thousands):
Amount
------
Year ending fiscal 2002 $ 1,446
2003 1,223
2004 957
2005 856
2006 803
Future 2,572
F-12
Employment Agreements
The Company has employment agreements with certain executives of the
Company, which, as amended, expire at various dates through December 31,
2004, subject to extension each January 1 for three years, commencing
January 1, 2000. These agreements provide for aggregate annual salaries
as of July 29, 2001 of $1,088,000, as adjusted. These 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 $2,000,000. Incentive compensation in the
amount of $971,000, and $969,000, was expensed in fiscal years 2000, and
1999, respectively. The executives waived their incentive for fiscal
2001.
The agreements also provide that, in the event there is a change in
control of the Company, as defined, the executives have the option to
terminate the agreements and receive a lump-sum payment of approximately
three times their annual salary. As of July 29, 2001, the amount payable
in the event of such termination would be approximately $3,265,000.
One of the employment contracts provides for a consulting agreement
commencing at the end of the employment period which became 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. Seven officers of the Company have severance
agreements providing for a lump-sum payment of $2,120,000 through fiscal
2002 in the event of a change of control of the Company as defined in the
agreements.
Litigation
On August 14, 2001, Robinson Laboratories, Inc. and Ben Robinson filed a
complaint against the Company alleging, among other allegations, that the
Company has not issued 146,761 (as adjusted) shares of common stock in
connection with certain provisions of the asset purchase agreement. On
September 17, 2001, the Company filed an answer and affirmative defenses
and counterclaims in this matter denying the material allegations of the
complaint. The parties are now engaged in discovery and expect a trial
date in 2002. The Company believes that it has meritorious defenses to
this action.
The Company is involved in various other legal proceedings and claims
which arise in the ordinary course of its business. While any litigation
contains an element of uncertainty, management believes that the outcome
of such litigation, including the action described above, will not have a
material adverse effect on the Company's financial position or results of
operations.
Stand-by Letters of Credit
The Company maintains a letter of credit facility with a bank that
provides for the issuance of stand-by letters of credit and requires the
payment of a fee of 1.0% per annum of the amounts outstanding under the
facility. The facility expires January 31, 2003. At July 29, 2001
stand-by letters of credit aggregating approximately $4,479,000 were
outstanding under this facility.
F-13
NOTE G - INCOME TAXES
Income tax provision consisted of the following (in thousands):
52 Weeks ended
-------------------------------------------
July 29, July 30, August 1,
2001 2000 1999
---- ---- ----
Current
Federal $ 3,071 $ 3,573 $ 3,328 (1)
State 275 192 399
Foreign 202 154 29
----- ----- -----
3,548 3,919 3,756
----- ----- -----
Deferred
Federal 248 215 540
State 92 (21) (198)
----- ----- -----
340 194 342
----- ----- -----
$ 3,888 $ 4,113 $ 4,098
===== ===== =====
(1) Excludes benefit of $68 from extraordinary loss incurred as a
result of early extinguishment of long term debt (See Note H).
The Company paid income taxes of approximately $4,427,000, $2,241,000,
and $1,324,000 in fiscal 2001, 2000, and 1999, respectively. The
following is a reconciliation of the U. S. statutory income tax rate and
the effective tax rate on pretax income:
52 Weeks ended
-------------------------------------
July 29, July 30, August 1,
2001 2000 1999
---- ---- ----
U.S. Federal statutory rate 34.0 % 34.0 % 34.0 %
State taxes, net of
federal tax benefit 2.4 0.9 1.4
Benefit of foreign sales
corporation (2.6) (2.1) (3.2)
Non-deductible expenses 2.5 1.8 1.4
Benefit of foreign and
foreign-source income (2.3) (1.8) (1.2)
Other, net 0.4 2.2 1.9
---- ----- ----
Effective tax rate 34.4 % 35.0 % 34.3 %
==== ==== ====
Income taxes have not been provided on undistributed earnings of foreign
subsidiaries. If remitted as dividends, these earnings could become
subject to additional tax. The Company's intention is to reinvest
unremitted earnings of subsidiaries outside the United States
permanently.
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-14
Components of deferred tax assets and liabilities are as follows (in
thousands):
July 29, 2001 July 30, 2000
---------------------------- ---------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Intangibles $ - $ 1,943 $ - $ 1,766
Accrued vacation pay 446 - 323 -
Accrued bonus 39 - 578 -
Warranty costs 100 - 95 -
Inventory 838 - 1,011 -
Depreciation - 2,873 - 3,770
Contract losses 146 - 345 -
Net operating loss
carryforwards 230 - 96 -
Other 342 99 201 195
----- ----- ----- -----
$ 2,141 $ 4,915 $ 2,649 $ 5,731
===== ===== ===== =====
As of July 29, 2001 the Company has available net operating loss
carryforwards for federal and state income tax purposes of
approximately $489,000 and $956,000, respectively which expire from
fiscal 2002 through 2020. The Federal net operation loss arose through
the acquisition of Terrasat and its utilization is subject to certain
limitations.
NOTE H- LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
July 29, July 30,
Rate 2001 2000
----------------- ---- ----
Revolving loan facility (a) 7.20% and 8.15% $ - $ -
Mortgage note (b) 7.43% 2,765 2,840
Other - 188 373
----- -----
2,953 3,213
Less current portion 213 282
----- -----
$ 2,740 $ 2,931
===== =====
(a) In February 2001, the Company entered into an amendment to its
revolving loan agreement with a bank that provides for a revolving
unsecured loan in the aggregate principal amount of $30,000,000 which
may be used for general corporate purposes, including business
acquisitions. The revolving credit facility requires the payment of
interest only on a monthly basis and payment of the outstanding
principal balance on January 31, 2003. Interest is set at 1.65% over
the FOMC Federal Funds Target Rate based on tangible net worth in
excess of $25,000,000, or at an increment of 1.80% if tangible net
worth is less than $25,000,001. The FOMC Federal Funds Target Rate
was 5.55% at July 29, 2001. There is a fee of 15 basis points per
annum on the unused portion of the credit line in excess of
$20,000,000 payable quarterly. There are no borrowings under the line
at July 29, 2001 and July 30, 2000.
The agreement contains various financial covenants, including, among
other matters, minimum tangible net worth, debt to tangible net
worth, debt service coverage, and restrictions on other borrowings.
The Company is in compliance with all covenants at July 29, 2001.
(b) The mortgage loan is for a term of ten years commencing February 16,
1999 with fixed monthly principal and interest installments of
F-15
$23,359, including interest at a fixed rate of 7.43%, and is based
upon a twenty year amortization. The loan is secured by a mortgage on
the Company's land and building in Lancaster, Pennsylvania having a
net book value of approximately $1,899,000. The proceeds of the
mortgage loan were used to prepay the existing mortgage note having
an outstanding balance of $2,890,000 plus a prepayment premium of
$115,600.
The mortgage note agreement contains various financial covenants,
including, among other matters, the maintenance of specific amounts
of tangible net worth, debt to tangible net worth, debt service
coverage, and restrictions on other borrowings. In connection with
this loan, the Company paid approximately $45,000 in financing costs.
Such costs are included in Other Assets in the accompanying
consolidated balance sheets at July 29, 2001 and July 30, 2000, and
are being amortized over the term of the loan (10 years). Unamortized
debt expenses of $79,226 related to the prior mortgage and the
$115,600 prepayment premium were charged to expense in 1999 as an
extraordinary loss in connection with the prepayment of this mortgage
note.
The Company paid interest of approximately $289,000 in 2001, $1,200,000
in 2000, and $730,000 in 1999.
Future payments required on long-term debt are as follows (in thousands):
Fiscal year ending during: Amount
------------------------- ------
2002 $ 213
2003 108
2004 108
2005 93
2006 101
Future 2,330
-----
$ 2,953
=====
NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following (in
thousands):
July 29, July 30,
2001 2000
---- ----
Accounts payable $ 7,386 $ 3,812
Accrued payroll and bonuses 3,159 3,430
Due for business acquired 3,000 -
Accrued commissions 591 710
Accrued interest - 19
Accrued legal expenses 174 129
Accrued warranty costs 255 220
Accrued severance 780 594
Accrued rent expense 132 -
Lease termination cost 54 134
Other accrued expenses 663 554
--------- -------
$ 16,194 $ 9,602
======= ======
NOTE J - EMPLOYEE BENEFIT PLANS
In August 1985, the Board of Directors approved an Employee Savings Plan
("Plan") which qualified as a thrift plan under Section 401(k) of the
Internal Revenue Code. This Plan, as amended and restated,
F-16
allows employees to contribute between 2% and 15% of their salaries to
the Plan. The Company, at its discretion can contribute 100% of the first
2% of the employees' contribution and 25% of the next 4%. Additional
Company contributions can be made depending on profits. The aggregate
benefit payable to an employee is dependent upon his rate of
contribution, the earnings of the fund, and the length of time such
employee continues as a participant. The Company has recognized expenses
of approximately $164,000, $415,000, and $266,000 under the Plan for the
52 weeks ended July 29, 2001, July 30, 2000, and August 1, 1999,
respectively
Employees of GMC became eligible to participate in the Plan as of May 1,
1999. The existing savings and investing plan of GMC did not provide for
company matching contributions and has been frozen.
At the time of the acquisition, GMC also had a noncontributory defined
benefit pension plan covering all eligible employees of the company. As
part of the acquisition plan, the Company froze all benefits under the
plan effective April 30, 1999 and elected to terminate the plan as of
November 1, 1999. All plan assets were liquidated and distributed to plan
participants or used to purchase annuities on their behalf. Excess plan
assets in the amount of approximately $470,000 were transferred in
January 2001 directly into the Plan discussed above and inured to the
benefit of Plan employees.
Net pension (income) expense recorded by the Company in fiscal 2000
includes the following components (in thousands):
July 30,
2000
----
Service cost - benefits earned
during the period $ -
Interest cost 237
Return on assets (736)
----
Net pension income $ (499)
====
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheet at July 30, 2000 (in
thousands):
July 30,
2000
----
Projected benefit obligation at beginning of period $ 4,841
Service costs -
Interest cost 237
Actuarial gain (348)
Benefit payments (214)
Projected benefit obligation, end of year $ 4,516
-----
Change in fair value of plan assets:
Fair value at beginning of period $ 4,342
Return on assets 823
Benefit payments (214)
-----
Fair value at end of year 4,951
-----
Funded status (435)
Unrecognized net gain 435
-----
Accrued pension costs $ -
=====
Assumptions used were:
Discount rate 5.00%
Expected return on plan assets 10.00%
F-17
NOTE K - RELATED PARTY TRANSACTIONS
On January 16, 2001, the Board of directors approved the purchase of an
industrial parcel of land adjacent to the existing facility in Lancaster,
PA for $747,000 from a partnership of which the Chairman is general
partner. Settlement on the property was on July 27, 2001. The Company is
using this land for a 15,000 square foot addition.
In connection with the move of the Amityville facilities of GMC in fiscal
1999, the Company entered into a 10 year lease agreement with a
partnership owned by the children of certain officers of the Company. The
lease provides for initial minimum annual rent of $312,000 subject to
escalation of approximately 4% annually throughout the 10 year term.
Additionally, in March 2000, The Company entered into another 10 year
lease with the same partnership for additional space. The initial minimum
annual rent of $92,000 is subject to escalation of approximately 4%
annually.
NOTE L - COMPUTATION OF PER SHARE EARNINGS
The following table shows the calculation of basic earnings per share and
earnings per share assuming dilution (in thousands except per share
data):
52 Weeks ended
------------------------------------------------
July 29, 2001 July 30, 2000 August 1, 1999
------------- ------------- --------------
Numerator:
Income before extraordinary item $ 7,405 $ 7,639 $ 7,862
Extraordinary loss - - 127
----- ----- -----
Net Income $ 7,405 $ 7,639 $ 7,735
===== ===== =====
Denominator:
Basic weighted-average shares 10,082 7,308 7,849
Effect of dilutive securities:
Employee stock options and warrants 874 620 641
------ ----- -----
Diluted weighted-average shares 10,956 7,928 8,490
====== ===== =====
Stock options and warrants not included in computation 544 2,472 4,570
=== ===== =====
The number of stock options and warrants not included in the computation
of diluted EPS relates to stock options and warrants having exercise
prices that are greater than the average market price of the common
shares during the period, and therefore, are antidilutive. The options
and warrants with exercise prices ranging from $11.87 to $13.67, which
expire at various dates through April 28, 2010 were outstanding as of
July 29, 2001.
NOTE M - 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.
On August 7, 2001 the Board of Directors declared a 3-for-2 stock split
effected as a stock dividend payable September 10, 2001 to holders of
record on August 28, 2001. The effect of the split is presented within
shareholders' equity at July 29, 2001. The distribution increased the
number of shares outstanding from 7,027,553 to 10,541,329. The amount of
$351,373 was transferred from the additional paid-in capital to the
common stock account to record this distribution. All share and per share
data (other than common stock issued and outstanding on the 2000
Consolidated Balance Sheet and 1999 and 2000 Consolidated Statements of
Shareholders' Equity), including stock options and warrants, included in
this annual report have been restated to reflect the stock split on a
retroactive basis.
F-18
In December 1997, the Company completed the sale of 1,650,000 shares of
common stock to the public, of which 1,050,000 shares were sold by the
Company and 600,000 shares were sold by certain selling stockholders. In
addition, the Company also sold 1,897,500 Common Stock Purchase Warrants
("Warrant(s)"). 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 $10.40 per share (subject to adjustment under certain
conditions) through May 2000, as extended. The Company also issued to the
underwriters, for their own accounts, Managing Underwriters' Warrants
which entitle the holder to purchase 165,000 shares of common stock of
the Company (subject to adjustment under certain circumstances), at a
price of $9.60 per share through December 2002, and the right to purchase
165,000 Warrants (as described above) at a price of $.08 per Warrant
through May 2000, as extended.
Approximately 1,971,000 of the warrants which were due to expire May 18,
2000 were exercised during fiscal 2000 at $10.40 per share of common
stock resulting in proceeds of approximately $20,492,000. The proceeds
were used to pay off bank debt under the revolving credit facility.
The Company has various 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 options granted is estimated at the date of grant
using a Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price
volatility. 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.
For purposes of computing pro-forma (unaudited) consolidated net
earnings, the following assumptions were used to calculate the fair value
of each option granted:
52 Weeks ended
----------------------------------------------
July 29, 2001 July 30, 2000 August 1, 1999
------------- ------------- --------------
Expected life of options .73 years .71 years .65 years
Volatility .70 .72 .58
Risk-free interest rate 3.4% 6.1% 5.1%
Dividend yield zero zero zero
Had compensation cost for stock options granted in fiscal years 2001,
2000, and 1999 been determined based on the fair value at the grant date
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below using the statutory income tax rate of 34% (in thousands
except per share data):
F-19
2001 2000 1999
---- ---- ----
Net income - as reported $ 7,405 $ 7,639 $ 7,735
Net income - pro forma 5,795 5,952 5,940
Earnings per share - as reported
Basic $.73 $1.05 $.99
Diluted .68 .96 .91
Earnings per share - pro forma
Basic $.57 $.81 $.76
Diluted .53 .75 .70
The effects of applying the pro forma disclosures of SFAS 123 are not
likely to be representative of the effects on reported net income for
future years due to the various vesting schedules.
In September 2000, the Board of Directors approved the 2000 Stock Option
Plan which covers 1,500,000 shares of the Company's common stock. Options
granted under the plan are non-qualified stock options. Under the terms
of the plan, the exercise price for options granted under the plan will
be the fair market value at the date of grant. The nature and terms of
the options to be granted is determined at the time of grant by the Board
of Directors. The options expire not later than ten years from the date
of grant, subject to certain restrictions. Options for 375,000 shares
were granted during the fiscal year ended July 29, 2001.
In April 1998, the Board of Directors approved the 1998 Stock Option Plan
which covers 2,250,000 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted is
determined at the time of grant by the Board of Directors. The options
expire not later than ten years from the date of grant, subject to
certain restrictions. Options for 440,250, 969,750 and 562,500 shares
were granted during the fiscal years ended July 29, 2001, July 30, 2000
and August 1, 1999, respectively.
In May 1997, the Board of Directors approved the 1997 Stock Option Plan
which covers 2,500,000 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted is
determined at the time of grant by the Board of Directors. The options
expire not later than ten years from the date of grant, subject to
certain restrictions. Options for 14,250, 129,000, and 1,313,250 shares
were granted during the fiscal years ended July 29, 2001, July 30, 2000
and August 1, 1999, respectively.
In October 1995, the Board of Directors approved the 1996 Stock Option
Plan which covers 1,000,000 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted 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.
F-20
A summary of stock option activity under all plans for the 52 weeks ended
July 29, 2001, July 30, 2000 and August 1, 1999 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 August 2, 1998 1,291,271 $ 1.69 - 9.25 $ 4.43 420,000 $ 3.09
Granted 1,875,750 6.16 - 10.97 7.62
Exercised (1,003,650) 1.69 - 6.62 4.37 (100,000) 3.09
Canceled (71,446) 4.31 - 10.97 7.43
--------- ---------------------- ------- ----
Outstanding August 1, 1999 2,091,925 $ 1.69 - 10.97 $ 7.15 320,000 $ 3.09
Granted 1,098,750 9.25 - 11.91 10.33
Exercised (155,985) 1.69 - 9.83 4.68
Canceled (20,550) 7.41 - 10.46 8.47
--------- ----------------------- ------- ----
Outstanding July 30, 2000 3,014,140 $ 4.06 - 11.91 $ 8.43 320,000 $ 3.09
Granted 829,500 8.38 - 14.25 8.99
Exercised (37,254) 4.06 - 10.46 6.72
Canceled (48,600) 4.31 - 14.25 10.76
--------- ---------------------- ------- ----
Outstanding July 29, 2001 3,757,786 $ 4.06 - 13.67 $ 8.55 320,000 $ 3.09
========= =======
Options Outstanding and Exercisable by Price Range as of July 29, 2001:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------- ----------- ---------------- -------------- ----------- --------------
$ 4.06 - $ 6.17 759,286 6.6 $ 5.54 730,688 $ 5.59
6.94 - 8.38 1,252,500 7.5 8.18 845,550 8.16
8.42 - 10.20 718,950 7.8 9.22 504,150 9.22
10.46 - 10.46 844,050 7.1 10.46 606,450 10.46
10.50 - 13.67 183,000 5.9 12.03 27,900 11.17
$ 4.06 - $13.67 3,757,786 7.2 $ 8.55 2,714,738 $ 8.21
========= =========
In December 1995, common stock warrants were issued to certain officers
for the right to acquire 440,000 shares of common stock of the Company at
the fair market value of $3.09 per share at date of issue. The warrants
vest immediately and expire December 13, 2005. Warrants for 320,000
shares are outstanding at July 29, 2001.
NOTE N - SIGNIFICANT SEGMENTS, MAJOR CUSTOMERS, AND EXPORT SALES
The Company's chief operating decision makers are considered to be the
Chairman and the Chief Executive Officer (CEO). The Company's Chairman
and CEO evaluate both consolidated and disaggregated financial
information consisting of revenue information in deciding how to allocate
resources and assess performance. The Chairman and CEO also use certain
disaggregated financial information for the Company's product groups. The
Company does not determine a measure of operating income or loss by
product group. The Company's product groups have similar long-term
economic characteristics, such as application, and are similar in regards
to (a) nature of products and production processes, (b) type of
customers, and (c) method used to distribute products. Accordingly, the
Company is in a single reportable segment as a provider of complex
microwave radio frequency (RF) and millimeter wave components and
subsystems for defense, commercial wireless and space customers
F-21
worldwide. All of the Company's revenues result from sales of its
products. Revenues by product group (as defined by the Company) for
fiscal years 2001, 2000 and 1999 were as follows: microwave systems,
$15,033,000, $24,458,000 and $31,062,000, respectively; microwave
products, $46,944,000, $42,947,000 and $27,638,000, respectively; and
commercial products, $18,620,000, $3,132,000, and $2,336,000,
respectively.
Net sales to the U.S. Government in 2001, 2000 and 1999 accounted for
approximately 18%, 26% and 17% of net sales, respectively. No other
customer accounted for shipments in excess of 10% of consolidated net
sales in fiscal 2001 or 2000. One customer accounted for 12% of net sales
in 1999. Foreign sales amounted to approximately $20,683,000, $16,506,000
and $17,680,000 in fiscal 2001, 2000 and 1999, respectively.
Included in accounts receivable as of July 29, 2001 and July 30, 2000 are
amounts due from the U.S. Government of approximately $2,003,000 and
$2,269,000 respectively.
NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximated its fair value.
Available-for-sale securities: The fair value of available-for-sale
securities was based on quoted market prices.
Long-term debt: The fair value of the mortgage note was estimated using
discounted cash flow analysis, based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial
instruments are presented below (in thousands):
July 29, 2001
---------------------------
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $ 13,041 $ 13,041
Long-term debt 2,740 2,740
F-22
EX-3
4
bylawsex32.txt
AMENDED BY-LAWS AUGUST 7, 2001
Exhibit 3.2
-----------
Amended August 7, 2001
AMENDED BY-LAWS
of
HERLEY INDUSTRIES, INC.
(A Delaware Corporation)
ARTICLE I
STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders shall be held at
such place, either within or without the State of Delaware, as shall be
designated from time to time by the Board of Directors.
Section 2. Annual Meetings. Annual meetings of stockholders shall be held
on such date not earlier than September 1 nor later than March 1 of the
subsequent year on such day and at such time as shall be designated from time to
time by the Board of Directors. At each annual meeting the stockholders shall
elect a Board of Directors by plurality vote and transact such other business as
may be properly brought before the meeting.
Section 3. Special Meetings. Except as otherwise required by law, special
meetings of the stockholders may be called only by the Board of Directors.
Section 4. Notice of Meetings. Written notice of each meeting of the
stockholders stating place, date and hour of the meeting shall be given by or at
the direction of the Board of Directors to each stockholder entitled to vote at
the meeting at least ten, but not more than sixty, days prior to the meeting.
Notice of any special meeting shall state in general terms the purpose or
purposes for which the meeting is called and no other business shall be
transacted thereat except as stated in such notice.
Section 5. Quorum; Adjournments of Meetings. The holders of the issued and
outstanding shares of the capital stock of the corporation entitled to cast a
majority of the votes entitled to be cast by the holders of all classes of
capital stock of the corporation entitled to vote generally in elections of
directors, considered for this purpose as one class, present in person or
represented by proxy, shall constitute a quorum for the transaction of business
at such meeting; but, if there be less than a quorum, the holders of a majority
of the votes entitled to be cast by the holders of all classes of the
corporation's capital stock so present or represented may adjourn the meeting to
another time or place, from time to time, until a quorum shall be present,
whereupon the meeting may be held, as adjourned, without further notice, except
as required by law, and any business may be transacted thereat which might have
been transacted at the meeting as originally called.
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Section 6. Voting. At any meeting of the stockholders every registered
owner of shares entitled to vote may vote in person or by proxy and, except as
otherwise provided by statute, in the Certificate of Incorporation or these
By-Laws, shall have one vote for each such share standing in his name on the
books of the corporation. Except as otherwise required by statute, the
Certificate of Incorporation or these By-Laws, all matters, other than the
election of directors, brought before any meeting of the stockholders shall be
decided by a vote of a majority in interest of the stockholders of the
corporation present in person or by proxy at such meeting and voting thereon, a
quorum being present.
Section 7. Inspectors of Election. The Board of Directors, or, if the Board
shall not have made the appointment, the chairman presiding at any meeting of
stockholders, shall have power to appoint one or more persons to act as
inspectors of election at the meeting or any adjournment thereof, but no
candidate for the office of director shall be appointed as an inspector at any
meeting for the election of directors.
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers. Except as provided in the Certificate of
Incorporation or these By-Laws, the affairs, business and property of the
Corporation shall be managed and controlled by the Board of Directors. The Board
may exercise all such authority and powers of the Corporation and do all such
lawful acts and things as are not by statute or the Certificate of Incorporation
directed or required to be exercised or done by the stockholders.
Section 2. Number of Directors. The number of directors of the corporation
shall not be less than three nor more than twelve, and may be changed from time
to time by action of not less than a majority of the members of the Board then
in office. Whenever the words "whole Board", "entire Board" or "total number of
directors" are used in these By-Laws, such words shall mean the number of
directors fixed by the Board and then in effect in accordance with the
provisions of the Certificate of Incorporation or these By-Laws.
Section 3. First Meeting. The first meeting of each newly elected Board of
Directors, of which no notice shall be necessary, shall be held immediately
following the annual meeting of stockholders or any adjournment thereof at the
place the annual meeting of stockholders was held at which such directors were
elected, or at such other place as a majority of the members of the newly
elected Board who are then present shall determine, for the election or
appointment of officers for the ensuing year and the transaction of such other
business as may be brought before such meeting.
Section 4. Regular Meeting. Regular meetings of the Board of Directors,
other than the first meeting, may be held without notice at such times and
places as the Board of Directors may from time to time determine.
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Section 5. Special Meetings. Special meetings of the Board of Directors may
be called by order of the Chairman of the Board, the Vice Chairman of the Board,
the President or any two directors. Notice of the time and place of each special
meeting shall be given by or at the direction of the person or persons calling
the meeting by mailing the same at least two days before the meeting or by
telephoning, telegraphing or delivering personally the same at least twenty-four
hours before the meeting to each director. Except as otherwise specified in the
notice thereof, or as required by statute, the Certificate of Incorporation or
these By-Laws, any and all business may be transacted at any special meeting.
Section 6. Attendance by Communication Equipment. Unless otherwise
restricted by the Certificate of Incorporation, members of the Board of
Directors or of any committee designated by the Board may participate in a
meeting of the Board or any such committee by means of conference telephone or
similar communications equipment whereby all persons participating in the
meeting can hear each other. Participation in any meeting by such means shall
constitute presence in person at such meeting. Any meeting at which one or more
members of the Board of Directors or of any committee designated by the Board
shall participate by means of conference telephone or similar communications
equipment shall be deemed to have been held at the place designated for such
meeting, provided that at least one member is at such place while participating
in the meeting.
Section 7. Quorum; Vote. A majority of the directors then in office shall
constitute a quorum, for the transaction of business, but less than a quorum may
adjourn any meeting to another time or place from time to time until a quorum
shall be present, whereupon the meeting may be held, as adjourned, without
further notice. Except as otherwise required by statute, the Certificate of
Incorporation or these By-Laws, all matters coming before any meeting of the
Board of Directors shall be decided by the vote of a majority of the directors
present at the meeting, a quorum being present.
Section 8. Compensation. A director or member of a committee may serve the
Corporation in any other capacity and receive compensation therefor. Each
director or member of a committee, other than directors who are officers or
employees of the Corporation, may receive for his services as director or member
of a committee, compensation (whether in the form of attendance fees, fixed
remuneration, or otherwise) in such amount as may be fixed from time to time by
the Board of Directors, in addition to reimbursement of traveling or like
expenses.
ARTICLE III
COMMITTEES
Section 1. Executive Committee. The Board of Directors may, by resolution
passed by a majority of the whole board, designate from among its members an
Executive Committee to consist of three or more members and may designate one of
such members as chairman. The Board may also designate one or more of its
members as alternates to serve as a member or members of the Executive Committee
in the absence of a regular member or members. Except as provided in Section 4
of this Article III, the Executive Committee shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation,
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and the Executive Committee may authorize the seal of the corporation to be
affixed to all papers which may require it.
Section 2. Other Committees. The Board of Directors, acting by a majority
of the whole Board, may also appoint from among its own members or otherwise
such other committees as the Board may determine, to have such powers and duties
as shall from time to time be prescribed by the Board and which, in the
discretion of the Board, may be designated as committees of the Board; provided,
however, that if an audit committee or compensation committee is formed, each
such committee shall contain only Independent Directors (as such term is defined
in Article V, Section 1).
Section 3. Quorum and Discharge. A majority of the entire committee shall
constitute a quorum for the transaction of business of any committee and may fix
its rules of procedure. The Board of Directors may discharge any committee
either with or without cause at any time.
Section 4. Powers of Committees. No committee designated or appointed by
the Board of Directors shall have the power or authority of the Board in
reference to (a) amending the Certificate of Incorporation, (b) adopting an
agreement of merger or consolidation, (c) recommending to the stockholders the
sale, lease or exchange of all or substantially all of the Corporation's
property and assets, (d) recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, (e) amending the By-Laws of the
Corporation, (f) declaring dividends, (g) designating committees, (h) filling
vacancies among committee members or (i) removing officers. The Executive
Committee shall have the power and authority of the Board to authorize the
issuance of shares of capital stock of the corporation of any class or any
series of any class.
Section 5. Committee Meetings. Regular meetings of any committee designated
or appointed by the Board of Directors shall be held at such times and places
and on such notice, if any, as the committee may from time to time determine.
Special meetings of any committee designated or appointed by the Board may be
called by order of the Chairman of the Board, Vice Chairman of the Board,
President of the Corporation, Chairman of the committee or any two members of
any such committee. Notice shall be given of the time and place of each special
meeting by mailing the same at least two days before the meeting or by
telephoning, telegraphing or delivering personally the same at least twenty-four
hours before the meeting to each committee member. Except as otherwise specified
in the notice thereof or as required by law, the Certificate of Incorporation or
these By- Laws, any and all business may be transacted at any regular or special
meeting of a committee. The Secretary of the Corporation shall keep the minutes
of the meetings of all committees designated or appointed by the Board of
Directors and shall be the custodian of all corporation records.
ARTICLE IV
OFFICERS
Section 1. Number and Designation. The Board of Directors shall elect as
executive officers a Chairman of the Board, a President, one or more Vice
Presidents, a Secretary and a Treasurer, and there may be one or more Vice
Chairmen of the Board, one or more Assistant Secretaries, one or
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August 7, 2001
more Assistant Treasurers, and such other officers, as the Board of Directors
may deem necessary. The Chairman of the Board, the Vice Chairmen of the Board
and the President shall be elected from among the Directors. Any two offices may
be held by one person, but in any case where the By- Laws or resolutions of the
Board of Directors provide for the signature of the incumbents of two or more
officers of the Corporation upon the certificates of stock, notes, checks or
other instruments or documents issued by the Corporation, no one person shall
sign in more than one capacity. The executive officers shall be elected annually
by the Board of Directors at its first meeting following the annual election of
directors, but in the event of the failure of the Board so to elect any
executive officer, such executive officer may be elected at any subsequent
meeting of the Board of Directors. The Board of Directors may at any meeting
elect additional Vice Presidents. Each executive officer shall hold office until
the first meeting of the Board of Directors following the next annual election
of directors and until his successor shall have been duly elected and qualified,
except in the event of the earlier termination of his term of office through
death, resignation, removal or otherwise. Any vacancy in an executive office may
be filled for the unexpired portion of the term of such office by the Board of
Directors at any regular or special meeting.
Section 2(a). The Chairman of the Board. The Chairman of the Board shall be
an officer of the Corporation. The Chairman of the Board (i) may execute
contracts and other instruments in the name of the Corporation, and appoint and
discharge agents and employees; (ii) shall preside at all meetings of the
stockholders and of the Board of Directors; and (iii) shall have such other
powers and perform such other duties as the Board of Directors may from time to
time prescribe.
Section 2(b). Chief Executive Officer. The Chief Executive Officer shall
have, subject to the Board of Directors, general direction, supervision and
management of the business and affairs of the Corporation. The Chief Executive
Officer (i) may execute contracts and other instruments in the name of the
Corporation, and appoint and discharge agents and employees; and (ii) shall have
such other powers and perform such other duties as the Board of Directors may
from time to time prescribe.
Section 2(c). Vice Chairman of the Board. The Vice Chairman of the Board
shall assist the Chairman of the Board in the performance of the duties of chief
executive officer, and, subject to the Board of Directors, shall have such of
the powers and duties of the chief executive officer of the Corporation as shall
be delegated by the Chairman of the Board. The Vice Chairman of the Board, or if
more than one, the Vice Chairmen of the Board, (i) to the extent empowered by
the Board, shall perform the duties of the Chairman of the Board in the absence
of the Chairman of the Board, or in the event of his inability to act; (ii)
shall have such other powers and perform such other duties as the Board of
Directors may from time to time prescribe; and (iii) may also execute contracts
and other instruments in the name of the Corporation, and appoint and discharge
agents and employees.
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Section 2(d). President. The President shall be the chief operations
officer of the Corporation, and, subject to the Board of Directors, the Chairman
of the Board and the Vice Chairman of the Board, shall direct the operations of
the Corporation. The President (i) shall have such other powers and perform such
other duties as the Board of Directors may from time to time prescribe; (ii) in
the absence of and/or in the event of the inability of both the Chairman of the
Board and the Vice Chairman of the Board to act, shall perform the duties of the
Chairman of the Board; (iii) may also execute contracts and other instruments in
the name of the Corporation, and appoint and discharge agents and employees; and
(iv) except as herein otherwise provided, shall perform all other duties
incident to the office of President.
Section 3. Vice Presidents. Whenever there is more than one Vice President,
the Board of Directors shall decide upon the order of their seniority and may
designate one or more to be executive Vice Presidents. In the absence or
inability to act of the President, or if the office of Presi dent be vacant, the
Vice Presidents, in order of seniority, subject to the right of the Board of
Directors from time to time to extend or confine such powers and duties, may
exercise all the powers of the President. Each Vice President shall have such
other powers and shall perform such other duties as may be assigned to him by
the Board of Directors.
Section 4. Treasurer. The Treasurer, subject to the right of the Board of
Directors from time to time to extend or confine his powers and duties or assign
them to others, shall have general supervision over the care and custody of the
funds and securities of the corporation and shall deposit the same or cause the
same to be deposited in the name of the Corporation in such bank or banks, trust
company or trust companies, and in such safe deposit company or companies or
invested in securities of such money market fund or funds, as the Board of
Directors or the executive committee may designate, shall have supervision over
the accounts of all receipts and disbursements of the Corporation, shall,
whenever required by the Board, render or cause to be rendered financial
statements of the Corporation, shall have the powers and perform the duties
usually incident to the office of Treasurer, and shall have such other powers
and perform such other duties as may be assigned to him by the Board of
Directors.
Section 5. Secretary. The Secretary, subject to the right of the Board of
Directors from time to time to extend or confine his powers and duties or to
assign them to others, shall act as Secretary of all meetings of the
stockholders and of the Board of Directors at which he is present, shall have
supervision over the giving and serving of notices of the Corporation, shall be
the custodian of the corporate records and of the corporate seal of the
Corporation, shall be empowered to affix the corporate seal to documents,
execution of which, on behalf of the Corporation, under its seal, is duly
authorized, and when so affixed may attest the same, shall exercise the powers
and perform the duties usually incident to the office of Secretary, and shall
exercise such other powers and perform such other duties as may be assigned to
him by the Board of Directors. The Secretary shall, if the law so provides, be
sworn to the faithful discharge of his duties.
Section 6. Other Officers. The Assistant Secretaries, the Assistant
Treasures and all other officers shall hold office during the pleasure of the
Board of Directors and shall exercise such powers and perform such duties as may
be assigned to each by the Board of Directors.
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Section 7. Term of Office; Removal and Vacancy. Each officer shall hold his
office until his successor is elected and qualified or until his earlier
resignation or removal. Any officer or agent shall be subject to removal with or
without cause at any time by the Board of Directors. Vacancies in any office
whether occurring by death, resignation, removal or otherwise, may be filled by
the Board of Directors.
Section 8. Power to Vote Stock. Unless otherwise ordered by the Board of
Directors, the Chairman of the Board, the Vice Chairman and the President each
shall have full power and authority on behalf of the Corporation to attend and
to vote at any meeting of stockholders of any corporation in which the
Corporation may hold stock, and may exercise on behalf of this Corporation any
and all of the rights and powers incident to the ownership of such stock at any
such meeting and shall have power and authority to execute and deliver proxies,
waivers and consents on behalf of the Corporation in connection with the
exercise by the Corporation of the rights and powers incident to the ownership
of such stock. The Board of Directors from time to time, may confer like powers
upon any other person or persons.
ARTICLE V
POLICY REGARDING CORPORATE OPPORTUNITY AND
AFFILIATE TRANSACTIONS
Section 1. Definitions. For the purpose of this Article, the following
terms have the meanings set forth below:
"Affiliate" means, with respect to a particular Person, (i) any Person
that, directly or indirectly is in control of, is controlled by, or is
under common control with, such particular Person, (ii) any Person who is a
director, officer or general partner (A) of such particular Person, (B) of
any Subsidiary of such particular Person, (C) of any Person described in
clause (i) above, (iii) any trust or estate in which such particular
Person, or the spouse of any relative of such Person, or any relative of
such spouse, has a beneficial interest or as to which such particular
Person, or the spouse of any relative of such Person, or any relative of
such spouse, serves as trustee or in a similar fiduciary capacity, or (iv)
the spouse of any relative of such particular Person, or any relative of
such spouse. For purposes of this definition, (i) "control" of a Person
shall mean the power, direct or indirect, (A) to vote 10% or more of the
securities having ordinary voting power for the election of directors of
such Person or (B) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise; and the terms
"controlling" and "controlled by" have meanings correlative to the
foregoing and (ii) a "relative" of a Person shall mean an ancestor,
descendant or sibling of such Person.
"Independent Director" means a director of the Company who (i) is not
an employee or Affiliate of the Company or any of its Subsidiaries (other
than by reason of his status as a director of the Company or one or more of
its Subsidiaries) and (ii) has no material business or professional
relationship with the Company or any Subsidiary of the Company, or any of
their Affiliates. For purposes of this definition, a "material business or
professional relationship" means any business or professional relationship
with the Company or a Subsidiary of the Company of any of the types
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described in, and which exceeds any applicable disclosure threshold set
forth in, Item 404(b) of Regulation S-K.
"Person" means any individual, corporation, partnership, joint
venture, incorporated or unincorporated association, joint-stock company,
trust, unincorporated organization or government or other agency or
political subdivision thereof or other entity of any kind.
Section 2. Corporate Opportunity. In the event any corporate opportunity is
presented to any director or officer of the Company or any Subsidiary or any
Affiliates of such director or officer to acquire or to enter into any business
transaction involving any type of business conducted by the Company or that
would be significant to the Company, i.e., Flight Instrumentation Components and
Systems and related products or systems, such director or officer shall submit
such opportunity to the Board of Directors for their review and consideration by
appropriate notice in writing promptly after presentation of the opportunity to
such director or officer and such director or officer shall take no action with
respect to such opportunity until the first to occur of (i) a decision by the
Board of Directors not to pursue the opportunity so presented by such director
or officer and approval of the Board of Directors of such director's or
officer's participation in such opportunity or (ii) the expiration of thirty
(30) days after receipt by the Board of Directors of the notice from such
director or officer to the Board of Directors described such opportunity.
Section 3. Affiliate Transactions. The Company shall not, and shall not
permit any Subsidiary of the Company to, directly or indirectly, enter into any
transaction (including without limitation the purchase, sale, lease or exchange
of any property or the rendering of any service) with an officer or director of
the Company or of any Subsidiary or an Affiliate of any such officer or director
(an "Affiliate Transaction"), unless such transaction shall have been
unanimously approved by the Independent Directors and such resolution provides
that such Affiliate Transaction complies with the requirements of this Article
V.
Section 4. Investment Policy. The Company shall establish an investment
policy for the investing of available cash. Cash held by the Company, to the
extent not immediately necessary to fulfill the Company's needs, shall be
invested in certain high-quality short term securities, the choice of which
shall be at the reasonable discretion of the treasurer or other chief financing
officer of the Company.
Section 5. Amendment of this Article. This Article may only be amended or
repealed by approval of the holders of two-thirds of the outstanding shares of
the Company's common stock.
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ARTICLE VI
CAPITAL STOCK
Section 1. Certificates for Stock. Certificates or stock of the Corporation
shall be in such form as the Board of Directors may from time to time prescribe
and shall be signed by the Chairman of the Board or a Vice Chairman of the Board
or the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary.
Section 2. Transfer of Stock. Shares of capital stock of the Corporation
shall be transferable on the books of the Corporation only by the holder of
record thereof, in person or by duly authorized attorney, upon surrender and
cancellation of certificates for a like number of shares, with an assignment or
power of transfer endorsed thereon or delivered therewith, duly executed, and
with such proof of the authenticity of the signature and of authority to
transfer, and of payment of transfer taxes, as the Corporation or its agents may
require.
Section 3. Ownership of Stock. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock as the owner thereof in
fact and shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise expressly provided by
law.
ARTICLE VII
MISCELLANEOUS
Section 1. Corporate Seal. The seal of the Corporation shall be circular in
form and shall contain the name of the Corporation and the year and State of
Incorporation.
Section 2. Fiscal Year. The Board of Directors shall have power to fix, and
from time to time to change, the fiscal year of the Corporation.
ARTICLE VIII
AMENDMENT
The Board of Directors shall have the power to make, alter or repeal the
By-Laws of the Corporation subject to the power of the stockholders to alter or
repeal the By-Laws made or altered by the Board of Directors.
ARTICLE IX
INDEMNIFICATION
The Corporation may indemnify any director, officer, employee or agent of
the Corporation to the full extent permitted by law.
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EX-23
5
ex23-1concent2001.txt
CONSENT OF ARTHUR ANDERSEN
Exhibit 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated October 3, 2001 included in this Form 10-K, into
Herley Industries, Inc.'s previously filed Registration Statements File Nos.
333-72427, 333-17369, 333-19739, 333-46777, 333-35485, 333-95327, 333-95975 and
333-71476.
/s/ ARTHUR ANDERSEN LLP
Lancaster, PA
October 22, 2001