-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nm8UB5oyDuqsd+bosAMKTziR4cySVal1HoFbcvEBwG78bod9nU2gbj31yXG6NtRF KPnWffjuld/Uzl7rvaNqLQ== 0000950123-02-003098.txt : 20020415 0000950123-02-003098.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-003098 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20020328 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: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-85104 FILM NUMBER: 02590749 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 S-3 1 y58816s-3.txt HERLEY INDUSTRIES, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2002 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 HERLEY INDUSTRIES, INC. (Exact name of registrant as specified in its charter)
DELAWARE 23-2413500 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) LEE N. BLATT, CHAIRMAN OF THE BOARD 3061 INDUSTRY DRIVE 3061 INDUSTRY DRIVE LANCASTER, PENNSYLVANIA 17603-4025 LANCASTER, PENNSYLVANIA 17603-4025 (717) 397-2777 (717) 397-2777 (Address, including zip code, and telephone number, (Name, address, including zip code, and telephone including area code, of registrant's principal number, executive offices) including area code, of agent for service)
------------------------ COPIES TO: DAVID H. LIEBERMAN, ESQ. DAVID J. GOLDSCHMIDT, ESQ. BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 100 JERICHO QUADRANGLE 4 TIMES SQUARE JERICHO, NEW YORK 11753 NEW YORK, NEW YORK 10036 (516) 822-4820 (212) 735-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time after the effective date of this registration statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]________ CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SHARES AMOUNT TO BE AGGREGATE AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------- Common stock $.10 par value(2)......... 3,450,000 $20.645 $71,225,250 $6,553 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Includes 450,000 shares which may be issued pursuant to the underwriters' over-allotment option. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, based upon the average of the high and low sales prices as reported on the NASDAQ National Market on March 25, 2002. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 28, 2002 PROSPECTUS 3,000,000 SHARES HERLEY INDUSTRIES, INC. COMMON STOCK ------------------------------ We are offering 3,000,000 shares of our common stock. Our common stock is traded on the Nasdaq National Market under the symbol "HRLY." The last reported sale price of our common stock on the Nasdaq National Market on March 26, 2002 was $21.48 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT THE RISKS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------------
PER SHARE TOTAL --------- ---------- Public offering price.......................... $ $ Underwriting discounts and commissions......... $ $ Proceeds, before expenses, to us............... $ $
------------------------------ We and the selling stockholders have granted the underwriters a 30-day option to purchase from us and the selling stockholders up to an additional 450,000 shares of our common stock to cover over-allotments. ------------------------------ BEAR, STEARNS & CO. INC. SG COWEN The date of this Prospectus is , 2002 INSIDE FRONT COVER: (Clock-wise from top left) Picture of F-16 Falcon firing AIM-120 AMRAAM missile with caption below: F-16 Falcon: transmitter and low power radio frequency assemblies on aircraft radars and integrated microwave assemblies and digitally tuned oscillators for aircraft electronic warfare systems AIM-120 AMRAAM: Warhead Replaceable Tactical Telemetry Module Picture of EA-6B Prowler with caption below: EA-6B Prowler: dual down converters, complex microwave assemblies and coaxial integrated networks used in the Improved Capabilities III electronic warfare systems Picture of F/A-18 Hornet with caption below: F/A-18 Hornet: subsystems of the Automatic Carrier Landing System, Low Probability Intercept Altimeter and the Fire Control Radar Picture of AEGIS Destroyer with caption below: U.S. Navy AEGIS Destroyer: target injection assembly in the SPY phased array radar INSIDE BACK COVER: (Clock-wise from top left) Picture of various microwave switch assemblies with caption below: Microwave switch assemblies used in missile applications and electronic warfare systems Picture of a single microwave switch limiter filter with caption below: Microwave switch limiter filter used in electronic warfare systems Picture of the MAGIC2 Command and Control System with caption below: Ground control station for the MAGIC2 Command and Control System Picture of a "Hybrid" microwave chip with caption below: Integrated microcircuit used in the Sensor Fuzed Weapon PROSPECTUS SUMMARY This summary highlights information more fully described elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before buying shares of our common stock in this offering. You should read this entire prospectus carefully, including "Risk Factors" and our consolidated financial statements and the related notes included in this prospectus, before deciding to invest in shares of our common stock. References in this prospectus to "Herley," "we," "our" and "us" are to Herley Industries, Inc. and its subsidiaries. All share amounts and prices per share in this prospectus have been adjusted to reflect our three-for-two stock split on September 10, 2001. HERLEY INDUSTRIES, INC. Herley is a leading supplier of microwave products and systems to defense and aerospace entities worldwide. Our primary customers include large defense prime contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing), the U.S. government (including the Department of Defense, NASA and other U.S. government agencies) and international customers (including the Egyptian, German, Japanese and South Korean militaries and suppliers to international militaries). We are a leading provider of microwave technologies for use in command and control systems, flight instrumentation, weapons sensors and electronic warfare systems. We have served the defense industry since 1965 by designing and manufacturing microwave devices for use in high technology defense electronics applications. Our products and systems are currently deployed on a wide range of high profile military platforms, including the F-16 Falcon, the F/A-18E/F Super Hornet, the RC-135 Rivet Joint, the E-2C Hawkeye, the AEGIS class surface combatants, EA-6B Prowler and unmanned aerial vehicles, or UAVs, as well as high priority national security programs such as National Missile Defense and the Trident II D-5. We have grown more than five fold through internal growth and strategic acquisitions over the past 10 years and have evolved from being strictly a component manufacturer to becoming a systems and service provider. We have successfully integrated our acquisitions over the past 10 years by targeting microwave technology companies and fusing their strengths into our existing operations. Over the past four years, we have increased our annual revenues at a compounded annual growth rate of approximately 24%. For the year ended July 29, 2001, we had revenues of $76.5 million and operating income of $11.0 million from continuing operations. We design and manufacture microwave components and subassemblies which are embedded in a variety of radars, flight instrumentation, electronic warfare systems and guidance systems, in addition to having commercial and medical applications. Our microwave devices are used on our subassemblies and integrated systems, and are also sold on a component basis. We operate in two markets: defense electronics and commercial technologies. DEFENSE ELECTRONICS. We are a leader in the development, production and support of command and control systems, telemetry systems, transponders, flight termination receivers and identification friend or foe, or IFF, interrogators. By incorporating cutting-edge microwave technology into our products, we provide communication systems that enable remote guidance, destruction and two-way data transfer for airborne vehicles. Our products include guidance systems that remotely fly UAVs, telemetry systems that provide complete airborne data link and transponders that enable accurate identification and tracking of space launch vehicles, missiles and target drones. We are a leading provider of microwave components used in our microwave systems, as well as in a variety of radars, flight instrumentation, weapons sensors, electronic warfare systems and guidance systems. These microwave devices are manufactured for existing long-term military programs, new production units, as well as spare parts and repair services. We design and manufacture complex microwave integrated circuits, high power and low power integrated assemblies and oscillators. These are essential components of radar transmitters and electronic warfare systems. Sales to defense electronics customers provided approximately $62.0 million, or 81%, of our total revenues for our fiscal year ended July 29, 2001 and $36.8 million, or 83% of our total revenues for the six months ended January 27, 2002. 1 COMMERCIAL TECHNOLOGIES. Commercial technologies is comprised of scientific products and medical microwave applications. Our commercial products include custom radio frequency power amplifiers for the medical and scientific industries. These amplifiers are used extensively in Nuclear Magnetic Resonance systems and Magnetic Resonance Imaging systems. Customers include original equipment manufacturers, systems manufacturers, universities and research centers. Sales to commercial technologies customers provided approximately $14.5 million, or 19%, of our net sales for fiscal year ended July 29, 2001 and $7.3 million, or 17% of our net sales for the six months ended January 27, 2002. INDUSTRY BACKGROUND We operate primarily in the defense industry. The defense industry is in a period of transition, attempting to keep pace with a U.S. military strategy that has been evolving to respond to the decentralized, asymmetric threats that have emerged since the mid-1980s. Current U.S. defense strategy and force structure is moving towards lighter, smarter and more flexible weapons systems with an emphasis on intelligence, surveillance and reconnaissance. The end of the Cold War and the subsequent reduction in defense spending has led to consolidation in the defense industry. As a result of such consolidation, the industry is currently dominated by a small number of large domestic prime contractors and a few large European defense companies with an increasing presence in U.S. markets. The large defense prime contractors have shifted their business strategies to focus on platforms and systems integration and consequently have subcontracted the development of many systems and subsystems. After a decade of reduced spending, the defense procurement budget is increasing. Driven by the need to modernize U.S. forces, increased procurement spending is necessary. We believe that the current business, political and global security environments will create new opportunities for mid-tier defense companies to develop strategic relationships with prime contractors and provide additional system development and production for the next generation platforms and weapons systems. BUSINESS STRATEGY Our goal is to continue to leverage our proprietary technology, microwave expertise and manufacturing capabilities to further expand our penetration in our targeted markets. Our strategies implemented to achieve these objectives include: - INCREASE LEVELS OF COMPONENT INTEGRATION AND VALUE ADDED CONTENT. Due to growth of engineering expertise, new product development and acquisitions, we have increased our capability to provide more component integration. Component integration adds value and will enable us to increase the level of content we provide in defense platforms and systems, thereby increasing our revenue and profitability. - MAINTAIN LEADERSHIP IN MICROWAVE TECHNOLOGY. We intend to pursue further technological advances through continued investment in internally-funded and customer-funded new product development. - STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. We have developed mutually beneficial relationships with the U.S. government and defense and commercial companies. We expect to continue to build and strengthen these relationships with industry leaders by anticipating and recognizing their needs and providing them with on-time and cost-effective solutions. - CAPITALIZE ON OUTSOURCING DYNAMICS IN THE AEROSPACE AND DEFENSE INDUSTRY. Microwave technology has traditionally been an in-house resource at the prime contractors. However, prime contractors are beginning to outsource the design and manufacture of this specialized engineering work to system subcontractors. We are well positioned to generate more business as prime contractors continue to focus primarily on integration of defense electronics. 2 - PURSUE STRATEGIC ACQUISITIONS. We intend to continue to augment our existing technological base by acquiring specialized companies that complement or expand our product offerings and market strategies. We believe that expansion of our core competencies through the acquisition of such specialized technology companies, when combined with our current technological and manufacturing skills, will provide us with improved levels of horizontal and vertical integration, enabling us to manufacture subsystems and complete system products. - ENHANCE MANUFACTURING CAPABILITIES. We intend to continue to implement test and process manufacturing automation and believe that our ability to develop a high level of automated production and test capability will help to further improve our cost effectiveness and time to market. - PURSUE SELECTIVE COMMERCIAL OPPORTUNITIES. We seek to identify and pursue selected commercial applications for our products and technologies where we can add value based on our microwave expertise. COMPETITIVE STRENGTHS Our competitive strengths include: - TECHNICAL EXPERTISE. We have developed a leading position in the field of microwave technology through our 35 year focus on research and development and our state-of-the-art design and production capabilities. We have developed and rewarded our engineers in order to maintain our expertise in-house. - HIGH PROPORTION OF LONG-TERM SOLE-PROVIDER PRODUCTION PROGRAMS. We generate a significant proportion of our revenue from continuing, long-term programs, both in the production and upgrade phases, and continue to target high growth, high priority defense programs. Typically, on such long-term defense programs we are the sole provider of microwave equipment. - DIVERSE PRODUCT AND CUSTOMER BASE. We have a diverse product and customer base, with only the U.S. government, at approximately 19%, representing more than 10% of our fiscal 2001 revenues. We are a first-tier supplier to all of the prime defense contractors, as well as a direct supplier to all of the service branches of the U.S. military, including products found on over 120 individual platforms. Foreign customers accounted for approximately 27% of our revenues in fiscal 2001. - LONG-STANDING INDUSTRY RELATIONSHIPS. We have established long-standing relationships with the U.S. government and other key organizations in the aerospace and defense industry after 35 years in the defense electronics industry. - SUCCESSFUL ACQUISITION TRACK RECORD. We have demonstrated that we can successfully integrate acquired companies. - EMPHASIS ON RESEARCH AND DEVELOPMENT. In fiscal 2001, we spent over $4.6 million on research and development, of which our customers funded approximately $2.0 million. This spending enables us to maintain our technological leadership in current products, develop new capabilities and solidify and strengthen our position on different programs. - EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over 21 years of experience in the defense electronics industry. We are incorporated in Delaware and the address of our principal executive office is 3061 Industry Drive, Lancaster, Pennsylvania 17603. Our telephone number is (717) 397-2777. Our Internet address is (http://www.herley.com), which is an interactive textual reference only, meaning that the information contained on the website is not part of this prospectus and is not incorporated in this prospectus by reference. 3 THE OFFERING Common stock offered by Herley Industries.................. 3,000,000 shares Common stock to be outstanding after this offering........... 14,431,865 shares Use of proceeds............... For general corporate purposes, including potential acquisitions. See "Use of Proceeds." NASDAQ symbol................. HRLY Risk Factors.................. You should carefully read and consider the information provided in the section entitled "Risk Factors" and all other information in this prospectus before investing in our common stock. ------------------------------ The table above is based on shares of our common stock outstanding as of January 27, 2002. This table excludes shares that may be issued by us as follows: - 3,025,341 shares of our common stock issuable by us pursuant to stock options granted under our stock option plans at a weighted average exercise price of $10.10 per share. - 100,000 shares of our common stock issuable by us upon exercise of outstanding warrants at a weighted average exercise price of $3.09 per share. - 703,758 shares of our common stock reserved for issuance pursuant to stock options that may be granted by us in the future under existing stock option plans; and - up to shares of our common stock issuable by us if the underwriters exercise their over-allotment option. ------------------------------ 4 SUMMARY CONSOLIDATED FINANCIAL DATA We derived the summary of earnings and per share data presented below for the 52 weeks ended August 1, 1999, July 30, 2000, and July 29, 2001 and the summary of financial position data as of July 30, 2000 and July 29, 2001 presented below from our audited consolidated financial statements included in this prospectus. The summary of earnings, per share data, and summary of financial position data as of and for the 26 weeks ended January 28, 2001 and January 27, 2002 have been derived from our unaudited consolidated financial statements which appear elsewhere in this prospectus. You should read the summary consolidated financial data with the "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is included elsewhere in this prospectus. As adjusted results give effect to the net proceeds to be received by us from this offering, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.
52 WEEKS ENDED 26 WEEK ENDED ------------------------------- ------------------------- AUGUST 1, JULY 30, JULY 29, JANUARY 28, JANUARY 27, 1999 2000 2001 2001 2002 --------- -------- -------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF EARNINGS DATA: Net sales............................... $61,036 $70,537 $76,494 $34,823 $44,053 Gross profit............................ 24,287 26,155 25,803 12,495 14,675 Selling and administrative expenses..... 11,877 13,497 14,810 7,060 7,033 Operating income........................ 12,410 12,658 10,993 5,435 7,236 Income from continuing operations before income taxes and extraordinary item................................. 11,960 11,752 11,440 5,602 7,322 Income from continuing operations before extraordinary item................... 7,862 7,639 7,573 3,669 4,832 Loss from discontinued operations....... -- -- (168) (35) (921) Cumulative effect of adopting SFAS 142.................................. -- -- -- -- (4,637) Net income (loss)....................... $ 7,735 $ 7,639 $ 7,405 $ 3,634 $ (726) PER SHARE DATA -- FROM CONTINUING OPERATIONS(1), (2): Basic................................... $ 1.00 $ 1.05 $ 0.75 $ 0.38 $ 0.44 Diluted................................. $ 0.92 $ 0.96 $ 0.69 $ 0.35 $ 0.41 FINANCIAL RATIOS AND SUPPLEMENTAL INFORMATION: EBIT(3)................................. $12,708 $12,890 $11,672 $ 5,716 $ 7,495 EBITDA(4)............................... 15,997 16,888 16,444 7,887 9,408 Cash flow from operating activities..... 12,723 9,854 3,858 77 2,580 Capital expenditures.................... 1,662 2,618 3,679 1,177 2,435 Depreciation and amortization........... 3,289 3,998 4,772 2,171 1,913 Internal product development net of amount paid by customers............. 1,685 2,264 2,588 1,463 1,991 Interest expense........................ $ 748 $ 1,138 $ 232 $ 114 $ 173 Interest coverage ratio(5).............. 21.4x 14.8x 70.9x 69.2x 54.4x Long-term debt to EBITDA................ 1.0x 0.2x 0.2x 0.4x 0.6x Long-term debt to total capitalization....................... 26.3% 4.3% 3.0% 3.2% 5.7% Average Employees....................... 409 547 612 588 615 Net sales per employee.................. $ 149 $ 129 $ 125 $ 59 $ 72
5
AS OF -------------------- AS OF JANUARY 27, 2002 JULY 30, JULY 29, ----------------------- 2000 2001 ACTUAL AS ADJUSTED -------- -------- -------- ----------- SUMMARY OF FINANCIAL POSITION DATA: Working capital.............................. $ 35,476 $ 46,804 $ 56,253 $116,774 Net property, plant and equipment............ 18,992 21,312 21,905 21,905 Total assets................................. 86,656 114,597 117,691 178,212 Long-term debt, excluding current installments.............................. 2,931 2,740 5,596 5,596 Total shareholders' equity................... 65,371 88,673 92,513 153,034
- --------------- (1) Earnings per share and financial ratios from continuing operations are presented and calculated before extraordinary item in fiscal 1999, before discontinued operations in 2001 and 2002, and before cumulative effect of accounting change in 2002. (2) No cash dividends have been distributed in any of the years presented. (3) Earnings from continuing operations before extraordinary item, discontinued operations, cumulative effect of accounting change, interest expense, and income taxes. (4) EBITDA represents earnings from continuing operations before extraordinary item, discontinued operations, cumulative effect of accounting change, interest expense, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under generally accepted accounting principles, is not intended to represent cash flow from operations and should not be considered as an alternative to net earnings as an indicator of our operating performance or to cash flows as a measure of liquidity. We believe that EBITDA is widely used by analysts, investors and others in the defense industry. EBITDA is not necessarily comparable with similarly titled measures used by other companies. (5) Ratio of EBITDA to interest expense. 6 RISK FACTORS Investing in our common stock involves risk. You should carefully consider the following information about these risks together with the other information contained in this prospectus before buying shares of our common stock. If any of the following risks actually occur, our business could be harmed. This could cause the price of our stock to decline, and you may lose part or all of your investment. RISKS RELATED TO OUR BUSINESS A SIGNIFICANT PERCENTAGE OF OUR SALES ARE UNDER GOVERNMENT CONTRACTS WHICH ARE ONLY PARTIALLY FUNDED INITIALLY AND MAY LOSE FUNDING OR BE TERMINATED IN FUTURE YEARS. Approximately 61% of our net sales for fiscal 2001 and 77% of our net sales for fiscal 2000, were made to United States government agencies and their contractors and subcontractors for defense programs. Over its lifetime, a government program may be implemented by the award of many different individual contracts and subcontracts. The funding of government programs is subject to congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes further appropriations. The termination of funding for a government program would result in a loss of anticipated future revenues attributable to that program which could have a negative impact on our operations. Generally, government contracts contain provisions permitting the government agency to terminate the contract at its convenience, in whole or in part, without prior notice, and to provide for payment of compensation only for work done and commitments made at the time of termination. We cannot guarantee that one or more of our government contracts will not be terminated under these circumstances. Also, we cannot guarantee that we would be able to procure new government contracts to offset the revenues lost as a result of termination of any contracts. Because a substantial part of our revenues are dependent on our procurement, performance and payment under our contracts, our failure to replace sales attributable to a significant defense program or contract at its termination, whether due to cancellation, spending cuts, budgetary constraints or otherwise, could have a material adverse effect upon our business, financial condition and results of operations. FIXED-PRICE CONTRACTS ARE COMMON IN ALL OF OUR MARKETS AND MAY INCREASE RISKS OF COST OVERRUNS AND PRODUCT NON-PERFORMANCE. Our customers set demanding specifications for product performance, reliability and cost. Substantially all of our customer contracts are firm, fixed price contracts, providing for a predetermined fixed price for the products that we make, regardless of the costs we incur. Thus, we must make pricing commitments to our customers based on our expectation that we will achieve more cost effective product designs and automate more of our manufacturing operations. The manufacture of our products requires a complex integration of demanding processes involving unique technical skill sets. We face risks of cost overruns or order cancellations if we fail to achieve forecasted product design and manufacturing efficiencies or if products cost more to produce than expected. The expense of producing products can rise due to increased cost of materials, components, labor, capital equipment or other factors. We may have cost overruns or problems with the performance or reliability of our products in the future. OUR INTERNATIONAL SALES ARE SUBJECT TO RISKS RELATED TO DOING BUSINESS IN FOREIGN COUNTRIES. In fiscal 2001 and 2000, international sales comprised approximately 27% and 23%, respectively, of our net sales, and we expect our international business to continue to account for a significant part of our revenues. International sales are subject to numerous risks, including political and economic instability in foreign markets, currency and economic difficulties in the Pacific Rim, restrictive trade policies of foreign governments, inconsistent product regulation by foreign agencies or governments, imposition of product tariffs and burdens and costs of complying with a wide variety of international and U.S. export laws and 7 regulatory requirements. The governments of Japan, South Korea, Taiwan and the United Kingdom are all significant customers. Our international sales also are subject to us obtaining export licenses for certain products and systems. We cannot assure you that we will be able to continue to compete successfully in international markets or that our international sales will be profitable. All of our revenues in fiscal 2001 were denominated in U.S. dollars, and we intend to continue to enter only into U.S. dollar-denominated contracts. Nevertheless, fluctuations in currency could adversely affect our customers, which may lead to delays in the timing and execution of orders. WE RELY ON A SMALL NUMBER OF SIGNIFICANT CUSTOMERS. Our sales have historically come mainly from contracts with agencies of, and prime contractors to, the U.S. government. Net sales directly to the U.S. government accounted for 19.0% of fiscal year 2001 net sales. Additionally, approximately 30% of our net sales were attributable to our next five largest customers for fiscal year 2001. Variations in the demand for our products by any of these direct and indirect customers could have a serious, adverse impact on our performance. If we were to lose any of these or any other major customers, or if orders by any major customer were otherwise to be delayed or reduced, including reductions due to market or competitive conditions in commercial markets or further decreases in government defense spending, then our business, financial condition and results of operations would be harmed. WE HAVE LIMITED INTELLECTUAL PROPERTY RIGHTS. Our success is dependent upon our proprietary technology. We do not currently have any material patents. We rely principally on trade secret and copyright laws, certain employee and third-party non-disclosure agreements, as well as limited access to and distribution of proprietary information, in order to protect our technology. Trade secret laws afford us limited protection because they cannot be used to prevent third parties from reverse engineering and reproducing our products. Similarly, copyright laws afford us limited protection because copyright protection extends only to how an idea is expressed and does not protect the idea itself. Moreover, third parties could independently develop technologies that compete with our technologies. We cannot assure you that the obligations on the part of our employees and business partners to maintain the confidentiality of our proprietary technology will prevent disclosure of such information by our employees or third parties. Litigation may be necessary for us to defend against claims of infringement or protect our proprietary technology, which could result in substantial cost to us and diversion of our efforts. We cannot assure you that we would prevail in any such litigation. Our inability to protect our proprietary technology could have a material adverse effect on our business, financial condition and results of operations. Although we believe that our products and proprietary rights do not infringe on the patents and proprietary rights of third parties, we cannot assure you that infringement claims, regardless of merit, will not be asserted against us. In addition, effective copyright and trade secret protection of our proprietary technology may be unavailable or limited in certain foreign countries. In 2004, our exclusive license to manufacture, market, and sell the Multiple Aircraft GPS Integrated Command and Control system, which we refer to as the MAGIC(2) system, including enhancements to such system, expires. Thereafter, we and the licensor each will have the non-exclusive right to manufacture, market, license and sell the MAGIC(2) system without any payment to the other and the licensor will have the right to grant additional non-exclusive licenses to others. A FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL COULD REDUCE OUR REVENUES AND OUR OPERATIONAL EFFECTIVENESS. There is a continuing demand for qualified technical personnel. We believe that our future growth and success will depend upon our ability to attract, train and retain such personnel. Competition for personnel in the defense industry is intense and there is a limited number of persons, especially engineers, with knowledge of and experience in microwave technology. Our design and development efforts depend on hiring and retaining qualified technical personnel. Although we currently experience relatively low rates of turnover for our technical personnel, the rate of turnover may increase in the future. An inability to attract or maintain a sufficient number of technical personnel could have a material adverse effect on our contract performance or on our ability to capitalize on market opportunities. 8 THE MARKETS IN WHICH WE OPERATE ARE COMPETITIVE. Our historical defense markets and our more recent commercial markets are characterized by rapid technological change as new products are generally developed quickly and industry standards are constantly evolving. Thus, our products can become obsolete over a short period of time unless we succeed in remaining technologically innovative and in anticipating new market demands. The defense industry in particular has experienced substantial consolidation due to declining defense budgets and increasing pressures for cost reductions. Both factors have substantially increased competitive pressures and introduced delays in contract funding and awards into our historical markets in the defense industry. Many of our competitors are larger than us and have substantially greater financial and other resources than we have. As a supplier, we also experience significant competition from the in-house capabilities of our customers. Our ability to compete for defense contracts largely depends on the following factors: - our ability to offer better performance than our competitors; - the readiness of our facilities, equipment and personnel to undertake the programs for which we compete; and - the effectiveness and innovations of our research and development programs. WE MAY ENCOUNTER DIFFICULTIES IN EFFECTIVELY INTEGRATING ACQUIRED BUSINESSES. As part of our business strategy, we intend to augment our technology base by acquiring companies with compatible or related products and we may use all or a portion of the proceeds of this offering to fund such acquisitions. Historically, we have acquired a number of such companies and products and have integrated those companies into our business. These and any future acquisitions we make will be accompanied by the risks commonly encountered in acquisitions of companies, which include, among other things: - potential exposure to unknown liabilities of acquired companies; - higher than anticipated acquisition costs and expenses; - difficulty and expense of assimilating the operations and personnel of the companies, especially if the acquired operations are geographically distant; - potential disruption of our ongoing business and diversion of management time and attention; - failure to maximize our financial and strategic position by the successful incorporation of acquired technology; - difficulties in adopting and maintaining uniform standards, controls, procedures and policies; - incurrence of additional indebtedness to fund acquisitions; - loss of key employees and customers as a result of changes in management; and - possible dilution to our shareholders. We may not be successful in overcoming these risks or any other problems encountered in connection with any of our acquisitions. We may make a strategic acquisition knowing that the transaction may adversely affect our short-term profitability, perhaps because the acquisition candidate may be experiencing operating losses. We may believe that acquiring such a company outweighs the operating losses the candidate is experiencing and the losses that we expect to experience before being able to make the acquisition candidate profitable. The completion of such an acquisition in the future would negatively affect our profitability and may cause a decline in our stock price. WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE POSSIBLE FUTURE GROWTH. The growth in size and complexity of our business and the expansion of our product lines and customer base have placed significant demands on our management and operations, and we expect that these demands will continue in the future. We have recently expanded our plant in Lancaster, Pennsylvania to increase our manufacturing capabilities. The pace of our expansion, in combination with the complexity of the technology involved in the manufacture of our products, demands an unusually high 9 level of managerial effectiveness in anticipating, planning, coordinating and meeting our operational needs and the needs of our customers. Our systems, procedures or controls may not be adequate to support our operations. Our management may not be able to achieve the rapid expansion necessary to exploit potential market opportunities for our products. Our ability to compete effectively and to manage future growth will depend on our ability to continue to implement and improve manufacturing, operational and financial systems on a timely basis. We do not know whether we will be able to manage our future growth. OUR BACKLOG IS SUBJECT TO REDUCTION AND CANCELLATION. Backlog represents products or services that our customers have committed by contract to purchase from us. Our backlog as of January 27, 2002, was approximately $80.2 million, which consisted of $49.3 million of domestic orders and $30.9 million of foreign orders. Typically, the majority of our backlog is filled within 12 months. Our backlog is subject to fluctuations and is not necessarily indicative of future backlog or sales. Moreover, cancellations of purchase orders or reductions of product quantities in existing contracts could substantially and materially reduce our backlog and, consequently, future revenues. Our failure to replace canceled or reduced backlog could result in lower revenues. WE ARE SUBJECT TO ENVIRONMENTAL LAWS AND REGULATIONS AND OUR ONGOING OPERATIONS MAY EXPOSE US TO ENVIRONMENTAL LIABILITIES. Our operations are subject to federal, state, foreign and local environmental laws and regulations. As a result, we may be involved from time to time in administrative or legal proceedings relating to environmental matters. We cannot assure you that the aggregate amount of future clean-up costs and other environmental liabilities will not be material. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Enactment of more stringent laws or regulations or more strict interpretations of existing laws and regulations may require us to make additional expenditures, some of which could be material. THERE MAY BE RISKS RELATED TO OUR USE OF ARTHUR ANDERSEN LLP AS OUR INDEPENDENT PUBLIC ACCOUNTANTS. On March 14, 2002, our independent public accountants, Arthur Andersen LLP, was indicted on federal obstruction of justice charges arising from the government's investigation of Enron. Arthur Andersen has indicated that it intends to contest vigorously the indictment. As a public company, we are required to file with the Securities and Exchange Commission, or SEC, periodic financial statements audited or reviewed by an independent, certified public accountant. The SEC has said that it will continue accepting financial statements audited by Arthur Andersen, and interim financial statements reviewed by it, so long as Arthur Andersen is able to make certain representations to its clients. Our access to the capital markets and our ability to make timely SEC filings could be impaired if the SEC ceases accepting financial statements audited by Arthur Andersen, if Arthur Andersen becomes unable to make required representations to us or if for any other reason Arthur Andersen is unable to perform required audit-related services for us in a timely manner which, in turn, may result in an event of default under our credit facility with Allfirst. In such a case, we would promptly seek to engage other independent public accountants or take such other actions as may be necessary to enable us to maintain access to the capital markets and timely file financial reports and such actions could be disruptive to our operations and may affect the price and liquidity of our securities. Certain investors, including significant mutual funds and institutional investors, may choose not to hold or invest in securities of issuers that do not have then current financial reports available. Furthermore, relief which may be available to shareholders under the federal securities laws against auditing firms may not be available as a practical matter against Arthur Andersen should it cease to operate or be financially impaired. 10 RISKS RELATED TO THIS OFFERING FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD LOWER THE STOCK PRICE. We may, in the future, sell additional shares of common stock in subsequent public offerings. We may also issue additional shares of common stock to finance future acquisitions. Additionally, a substantial number of shares of our common stock will be available for future sale upon exercise of outstanding options and warrants. Future sales and issuances of shares of our common stock (including shares issued upon the exercise of stock options and warrants or as acquisition financing), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. OUR STOCK PRICE HAS FLUCTUATED SIGNIFICANTLY AND MAY CONTINUE TO DO SO. A number of factors could cause the market price of our common stock to fluctuate significantly after this offering, including: - our quarterly operating results or those of other defense companies; - the public's reaction to our press releases, announcements and our filings with the Securities and Exchange Commission; - changes in earnings estimates or recommendations by research analysts; - changes in general conditions in the U.S. economy, financial markets or defense industry; - natural disasters, terrorist attacks or acts of war; and - other developments affecting us or our competitors. In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to the operating performance of these companies. DELAWARE LAW AND OUR CHARTER DOCUMENTS MAY IMPEDE OR DISCOURAGE A TAKEOVER, WHICH COULD CAUSE THE MARKET PRICE OF OUR SHARES TO DECLINE. We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing shareholders. Our certificate of incorporation and by-laws provide, among other things, for a classified board of directors serving staggered three-year terms. Our incorporation under Delaware law, the acceleration of the vesting of outstanding stock options that we have granted upon a change in control, and certain provisions of our certificate of incorporation and by-laws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock. WE HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING. We will retain significant flexibility to expend the net proceeds of this offering and will have the ability to change the application of the proceeds of this offering without stockholder approval. As described in "Use of Proceeds," the proceeds of this offering will be used for general corporate purposes, including potential acquisitions. Although we regularly evaluate potential acquisitions, we have not entered into any agreements with respect to any material transactions at this time. Our failure to use the funds effectively could have a material adverse effect on our business, financial condition and results of operations. THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. Our common stock is currently listed on the Nasdaq National Market. The market for our common stock has historically been characterized by limited trading volume and a limited number of holders. There can be no assurance that a more active trading market for our common stock will develop or be sustained after this offering. 11 FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this prospectus, including without limitation statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," regarding our financial position, business strategy and our plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements involve various important assumptions, risks, uncertainties and other factors which could cause our actual results to differ materially from those expressed in such forward-looking statements. Forward-looking statements in this prospectus can be identified by words such as "anticipate," "believe," "estimate," "expect," "plan" "intend" or the negative of these terms or similar expressions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievement. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors. The factors listed in the "Risk Factors" section of this prospectus, as well as any cautionary language in this prospectus, provide examples of these risks and uncertainties. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this prospectus or the date of the document incorporated by reference, in this prospectus. We are under no obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. USE OF PROCEEDS We estimate the net proceeds to us from the sale of the 3,000,000 shares of our common stock being offered by this prospectus will be approximately $60,521,000, or $ if the underwriters exercise the over-allotment option in full, assuming a public offering price of $21.48 per share, and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. We plan to use the proceeds of the offering for general corporate purposes, including future acquisitions, strategic alliances and joint ventures in businesses, products, services or technologies complementary to our current business. We have not entered into any agreements with respect to any material acquisitions at this time. We currently have no other specific plans for any significant portion of the proceeds. Accordingly, our management will have broad discretion in the application of the net proceeds. Pending their use, we intend to invest our net proceeds from this offering in short-term, interest-bearing investment grade securities. We will not receive any of the proceeds from the shares sold by the selling stockholders as part of the over-allotment option. We have agreed to pay the expenses, other than the underwriting discounts, relating to the sale of these shares. 12 DIVIDEND POLICY We have never paid any cash dividends. We intend to retain future earnings for use in our business and do not expect to declare any dividends on our common stock in the foreseeable future. Any future declaration of dividends will be subject to the discretion of our board of directors. PRICE RANGE OF COMMON STOCK Our common stock is traded on the Nasdaq National Market under the symbol "HRLY." The following table sets forth the high and low sales prices for our common stock, as reported by the Nasdaq National Market for the periods indicated, as adjusted to reflect our three-for-two stock split 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............................................. 18.50 11.17 Second Quarter............................................ 17.13 13.10 Third Quarter (through March 26).......................... 22.00 15.79
On March 26, 2002, the last reported sale price of our common stock on the Nasdaq National Market was $21.48. On March 26, 2002, there were approximately 260 holders of record of our common stock. 13 CAPITALIZATION The following table sets forth our consolidated capitalization and cash position as of January 27, 2002 on an actual basis and on an as adjusted basis to give effect to the sale of the 3,000,000 shares of common stock offered by us in this offering at the assumed public offering price of $21.48 per share. The following table should be read in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other financial information and accompanying notes appearing elsewhere in this prospectus.
AS OF JANUARY 27, 2002 ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Cash and cash equivalents................................... $13,381 $ 73,902 ------- -------- Current portion of long-term debt........................... 258 258 Long-term debt: Mortgage note............................................. 2,657 2,657 IDA revenue bond.......................................... 2,905 2,905 Other long-term debt...................................... 34 34 ------- -------- Total long-term debt...................................... 5,596 5,596 ------- -------- Shareholders' equity: Common stock, $0.10 par value, 20,000,000 shares authorized, 11,431,865 shares issued and outstanding, actual; 14,431,865 shares issued and outstanding, as adjusted............................................... 1,143 1,443 Additional paid-in capital................................ 49,727 109,948 Retained earnings......................................... 41,643 41,643 ------- -------- Total shareholders' equity................................ 92,513 153,034 ------- -------- Total capitalization...................................... $98,367 $158,888 ------- --------
The table set forth above is based on shares of our common stock outstanding as of January 27, 2002. This table excludes: - 3,025,341 shares of our common stock issuable under our various fixed stock option plans upon exercise of outstanding options at a weighted average exercise price of $10.10 per share as of January 27, 2002; - 703,758 shares of our common stock reserved for issuance under our various stock option plans; - 100,000 of shares of our common stock issuable upon exercise of warrants outstanding at an exercise price of $3.09 per share as of January 27, 2002; - up to shares of our common stock issuable by us if the underwriters exercise their over-allotment option. 14 SELECTED CONSOLIDATED FINANCIAL DATA We derived the summary of earnings and per share data presented below for the 52 weeks ended August 1, 1999, July 30, 2000 and July 29, 2001 and the summary of financial position data as of July 30, 2000 and July 29, 2001 from our audited consolidated financial statements included in this prospectus, which have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon appears elsewhere in this prospectus. We derived such data presented below as of August 3, 1997, August 2, 1998 and August 1, 1999, and for the 53 weeks ended August 3, 1997 and 52 weeks ended August 2, 1998 from our audited consolidated financial statements not included in this prospectus. We derived such data as of and for the 26 weeks ended January 28, 2001 and January 27, 2002 from our unaudited consolidated financial statements included elsewhere in this prospectus. You should read the selected consolidated financial data with "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is included elsewhere in this prospectus.
53 WEEKS 52 WEEKS ENDED 26 WEEKS ENDED ENDED ------------------------------------------ ------------------------- AUGUST 3, AUGUST 2, AUGUST 1, JULY 30, JULY 29 JANUARY 28, JANUARY 27, 1997 1998 1999 2000 2001 2001 2002 --------- --------- --------- -------- ------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF EARNINGS DATA: Net sales............................ $32,195 $40,798 $61,036 $70,537 $76,494 $34,823 $44,053 Gross profit......................... 11,441 16,629 24,287 26,155 25,803 12,495 14,675 Selling and administrative expenses........................... 6,293 8,339 11,877 13,497 14,810 7,060 7,033 Operating income..................... 5,148 8,290 12,410 12,658 10,993 5,435 7,236 Income from continuing operations before income taxes and extraordinary item................................. 5,284 8,431 11,960 11,752 11,440 5,602 7,322 Income from continuing operations before extraordinary item.......... 4,804 5,497 7,862 7,639 7,573 3,669 4,832 Loss from discontinued operations.... -- -- -- -- (168) (35) (921) Cumulative effect of adopting SFAS 142................................ -- -- -- -- -- -- (4,637) Net income (loss).................... $ 4,804 $ 5,497 $ 7,735 $ 7,639 $ 7,405 $ 3,634 $ (726) PER SHARE DATA -- From continuing operations(1),(2): Basic earnings per share............. $ 0.79 $ 0.74 $ 1.00 $ 1.05 $ 0.75 $ 0.38 $ 0.44 Diluted earnings per share........... $ 0.68 $ 0.68 $ 0.92 $ 0.96 $ 0.69 $ 0.35 $ 0.41 SUMMARY OF FINANCIAL POSITION DATA: Working capital...................... $10,662 $26,593 $25,703 $35,476 $46,804 $44,710 $56,253 Net property, plant and equipment.... 11,705 12,549 21,889 18,992 21,312 19,553 21,905 Total assets......................... 39,257 57,553 74,056 86,656 114,597 108,620 117,691 Long-term debt, excluding current installments....................... 2,890 4,111 15,437 2,931 2,740 2,811 5,596 Total shareholders' equity........... 23,371 40,440 42,900 65,371 88,673 84,779 92,513 FINANCIAL RATIOS AND SUPPLEMENTAL INFORMATION: EBIT(3).............................. $ 5,815 $ 8,877 $12,708 $12,890 $11,672 $ 5,716 $ 7,495 EBITDA(4)............................ 7,353 10,746 15,997 16,888 16,444 7,887 9,408 Cash flows from operating activities......................... 3,647 4,571 12,723 9,854 3,858 77 2,580 Capital expenditures................. 862 1,645 1,662 2,618 3,679 1,177 2,435 Depreciation and amortization........ 1,538 1,869 3,289 3,998 4,772 2,171 1,913 Internal product development net of amount paid by customers........... 1,828 1,562 1,685 2,264 2,588 1,463 1,991 Interest coverage ratio(5)........... 13.8x 24.1x 21.4x 14.8x 70.9x 69.2x 54.4x Long-term debt to EBITDA............. 0.4x 0.4x 1.0x 0.2x 0.2x 0.4x 0.6x Long-term debt to total capitalization..................... 10.9% 9.1% 26.3% 4.3% 3.0% 3.2% 5.7%
15 - --------------- (1) Earnings per share and financial ratios from continuing operations are presented and calculated before extraordinary item in fiscal 1999, before discontinued operations in 2001 and 2002, and before cumulative effect of accounting change in 2002. (2) No cash dividends have been distributed in any of the years presented. (3) Earnings from continuing operations before extraordinary item, discontinued operations, cumulative effect of accounting change, interest expense, and income taxes. (4) EBITDA represents earnings from continuing operations before extraordinary item, discontinued operations, cumulative effect of accounting change, interest expense, income taxes, depreciation and amortization. EBITDA is not the measurement of financial performance under generally accepted accounting principles, is not intended to represent cash flow from operations and should not be considered as an alternative to net earnings as an indicator of our operating performance or to cash flow as a measure of liquidity. We believe that EBITDA is widely used by analysts, investors and others in the defense industry. EBITDA is not necessarily comparable with similarly titled measures used by other companies. (5) Ratio of EBITDA to interest expense. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Herley is a leading supplier of microwave products and systems to defense and aerospace entities worldwide. Our primary customers include large defense prime contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing), the U.S. government (including the Department of Defense, NASA and other U.S. government agencies) and international customers (including the Egyptian, German, Japanese and South Korean militaries and suppliers to international militaries). We are a leading provider of microwave technologies for use in command and control systems, flight instrumentation, weapons sensors and electronic warfare systems. We have served the defense industry since 1965 by designing and manufacturing microwave devices for use in high technology defense electronics applications. Our products and systems are currently deployed on a wide range of high profile military platforms, including the EA-6B Prowler, the F/A-18E/F Super Hornet, the F-16 Falcon, the RC-135 Rivet Joint, the E-2C Hawkeye, the AEGIS class surface combatants and unmanned aerial vehicles, or UAVs, as well as high priority national security programs such as National Missile Defense and the Trident II D-5. 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. We adopted the provisions of each statement on July 30, 2001. The adoption of SFAS No. 142 results in our discontinuation of amortization of our goodwill as of July 30, 2001. In connection with the adoption of SFAS 142, we were required to assess goodwill for impairment within six months of adoption, and we completed our assessment in the second quarter of fiscal 2002. We operate as a single integrated business and as such have one operating segment which is also the reportable segment as defined in SFAS 131. Within the operating segment, we have identified two components as reporting units as defined under SFAS 142, defense electronics and commercial technologies. We have determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of July 30, 2001. We have determined that an impairment of goodwill in the commercial technologies unit has occurred. Accordingly, a transition adjustment in the amount of $4,637,000 has been recorded as of July 30, 2001 as a cumulative effect of a change in accounting principle. There is no tax benefit associated with the adjustment since the impaired goodwill is not deductible for income tax purposes. There was no impairment in the remaining goodwill at January 27, 2002 of approximately $21,665,000 related to the defense electronics reporting unit based on our current market capitalization. An annual impairment test will be performed in the fourth quarter of each fiscal year and any future impairment of goodwill will be charged to operations. Amortization of goodwill charged to continuing operations for the quarter and twenty-six weeks ended January 28, 2001 and for the fiscal year ended July 29, 2001 was approximately $310,000, $602,000 and $1,296,000, respectively. Amortization of goodwill charged to discontinued operations for the quarter and twenty-six weeks ended January 28, 2001 and for the fiscal year ended July 29, 2001 was approximately $62,000, $83,000 and $208,000, respectively. In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment of long-lived 17 assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for segments of a business to be disposed of, but retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. The provisions of this statement were adopted by us effective on July 30, 2001. DISPOSITION OF TERRASAT We acquired Terrasat in September 2000 in exchange for the payment of $6,000,000 in cash, and the assumption of approximately $1,025,000 in liabilities. The transaction was accounted for under the purchase method. During the quarter ended January 27, 2002, we determined that Terrasat would no longer be able to generate sufficient returns to justify continued investment due to the overcapacity in the telecom industry and deteriorating economic conditions in Terrasat's primary markets and to discontinue the operations of and seek a purchaser for Terrasat. Consequently, the accompanying consolidated financial statements reflect Terrasat as discontinued operations in accordance with SFAS No. 144. Accordingly, the consolidated balance sheet includes the assets and liabilities of Terrasat at July 29, 2001 and January 27, 2002 as "Assets held for sale", and "Liabilities held for sale", and the consolidated statement of income includes the results of Terrasat operations from October 1, 2000 to July 29, 2001 and July 30, 2001 to January 27, 2002 as "Loss from discontinued operations". Results of operations and cash flows of Terrasat have been classified as discontinued, for all periods presented. Net sales of Terrasat were approximately $4,103,000 for the fiscal year ended July 29, 2001 and $1,593,000 and $2,147,000 for the twenty-six weeks ended January 28, 2001 and January 27, 2002, respectively. The net loss from discontinued operations was $35,000 in 2001 and $921,000 in 2002. The results for 2002 include an impairment of assets adjustment of $1,166,000. A tax provision of $26,000 was recorded in 2001 and a tax benefit of $474,000 was recognized in 2002. The sale of the assets and liabilities, and the business of Terrasat was consummated on March 1, 2002 to certain current employees of Terrasat for cash and a note which approximates the value of the net assets held for sale as of January 27, 2002. RECENT ACQUISITIONS The following summarizes acquisitions since 1999 that affect the comparability of period to period results, except for Terrasat which is discussed above. Fiscal 2001 We 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., a California corporation. The transaction provided for the payment of $5,400,000 in cash, and the assumption of approximately $1,153,000 in liabilities. In addition, we entered into an exclusive license agreement for certain products requiring us to pay 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 American Microwave at July 29, 2001, and the consolidated statement of income includes the results of American Microwave operations from September 1, 2000. Excess cost over the fair value of net assets acquired of approximately $4,112,000 was being amortized over 20 years. Amortization ceased on July 30, 2001. The acquisition of American Microwave contributed approximately $6,812,000 in net sales in the fiscal year ended July 29, 2001. 18 Fiscal 2000 We entered into an agreement, as of January 3, 2000, to acquire substantially all of the assets of Robinson Laboratories, Inc., a New Hampshire corporation. The transaction provided for the payment of $6,000,000 in cash, the issuance of 50,762 shares of our common stock, and the assumption of approximately $3,140,000 in liabilities. 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) was being amortized over 20 years. Amortization ceased on July 30, 2001. 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. Fiscal 1999 As of January 4, 1999, we completed the acquisition of all of the issued and outstanding common stock of General Microwave Corporation, 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 our common stock, at an aggregate purchase price of approximately $24,556,000. This transaction was accounted for under the purchase method. The purchase price includes shares of common stock of General Microwave 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 our common stock, subject to a call provision after October 11, 2000 at $.67 per warrant if the average last reported sales price of our common stock 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 prior to redemption, 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 General Microwave operations from January 4, 1999. RESULTS OF CONTINUING OPERATIONS Twenty-six weeks ended January 27, 2002 and January 28, 2001 Net sales from continuing operations for the twenty-six weeks ended January 27, 2002 were approximately $44,053,000 compared to $34,823,000 in the first six months of fiscal 2001. The sales increase of $9,230,000 (26.5%) is attributable to increased revenue in defense electronics of $8,097,000; and increased revenue of $1,133,000 in commercial technologies. The gross profit margin of 33.3% in the twenty-six weeks ended January 27, 2002 was lower than the margin of 35.9% in fiscal 2001 primarily due to the continued investment in new product development in our defense electronics business and a change in product mix. Selling and administrative expenses for the twenty-six weeks ended January 27, 2002 decreased approximately $27,000 in the aggregate as compared to fiscal 2001. In connection with the adoption of SFAS 142 as of July 30, 2001, we ceased amortization of goodwill which amounted to $685,000 in the twenty-six weeks ended January 28, 2001, of which $83,000 is included in discontinued operations. Other changes include an increase in legal fees of $440,000, a net increase in payroll-related expenses of $56,000 and various other changes of $79,000. 19 Plant closing costs in connection with the facilities in Nashua, NH and Anaheim, CA were accrued in October 2001 in the amount of $406,000 of which $328,000 was paid as of January 27, 2002. Investment income decreased approximately $22,000 from the prior year primarily due to lower interest earned on temporary investments of excess cash. Interest expense increased approximately $59,000 as compared to fiscal 2001 due to the $3,000,000 financing of the expansion of the Lancaster facility through industrial revenue bonds and temporary borrowings of $2,400,000 under the bank line of credit. Fiscal 2001 Compared to Fiscal 2000 Net sales from continuing operations for the 52 weeks ended July 29, 2001 were approximately $76,494,000 compared to $70,537,000 for fiscal 2000. The net sales increase of $5,957,000 (8.4%) is attributable to the acquisition of American Microwave in the first quarter of fiscal 2001 which contributed $6,812,000 in net sales, as well as an increase in net sales of approximately $4,573,000 in commercial products. Defense electronics experienced a drop in revenue of approximately $5,428,000 due to delayed orders from various customers. Gross profit of 33.7% for the 52 weeks ended July 29, 2001 is less than the prior year of 37.1%. The decline in margin of 3.4% is due primarily to lower margins on commercial products and certain defense electronics products. Margins also have 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 $14,810,000 compared to $13,497,000 for fiscal 2000, an increase of $1,313,000. The primary increase is due to businesses acquired which added $1,563,000 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 33.8% 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 net sales increase of $9,501,000 (15.6%) is partially attributable to the acquisition of Robinson as of January 3, 2000 which contributed $4,690,000 in net sales, and the acquisition of General Microwave as of January 4, 1999 which contributed $5,101,000 additional net sales over the volume generated in fiscal 1999, offset by a decrease in net sales of approximately $290,000 in certain defense electronics products. 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 certain defense electronics products, which includes the revenues from Robinson and General Microwave. 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 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 General Microwave 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 our foreign sales corporation in fiscal 2000. 20 LIQUIDITY AND CAPITAL RESOURCES As of January 27, 2002 and July 29, 2001, working capital was $56,253,000 and $46,804,000, respectively, and the ratio of current assets to current liabilities was 4.72 to 1 and 3.50 to 1, respectively. As is customary in the defense industry, inventory is partially financed by progress payments. The unliquidated balance of these advanced payments was approximately $1,498,000 at January 27, 2002, and $261,000 at July 29, 2001. Net cash provided by continuing operations during the 26 weeks ended January 27, 2002 was approximately $2,580,000 as compared to $77,000 in the prior fiscal year. Significant items contributing to the sources of funds include income from operations of $6,745,000 (adjusted for depreciation and amortization), higher collections of accounts receivable of $3,204,000, increases in advanced payments on contracts of $1,237,000, and an increase of $1,828,000 in income taxes. Offsetting these increases are additional costs incurred on uncompleted contracts of $5,323,000, an increase in inventory of $1,236,000, and a decrease in accounts payable and accrued expenses of $3,891,000. Net cash used in investing activities consists of the investment of unexpended proceeds of approximately $1,156,000 from the industrial revenue bond funding, $2,435,000 for capital expenditures, and $500,000 for a license of certain technology; offset by a partial distribution from the limited partnership of $445,000. We maintain a revolving credit facility with Allfirst Bank for an aggregate of $30,000,000, which expires January 31, 2004. The revolving credit facility requires the payment of interest only on a monthly basis and payment of the outstanding principal balance on January 31, 2004. Interest is set at 1.65% over the FOMC Federal Funds Target Rate (3.55% at January 27, 2002). 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 were no borrowings outstanding as of January 27, 2002 and July 29, 2001. During the 26 weeks ended January 27, 2002 we borrowed and repaid $2,400,000 under the credit facility for working capital needs. Stand-by letters of credit were outstanding in the amount of $5,238,000 under the credit facility at January 27, 2002. During the 26 weeks ended January 27, 2002, we received proceeds of $3,000,000 from the issuance of industrial revenue bonds in connection with the financing of the plant expansion in Lancaster PA, and received approximately $2,541,000 from the exercise of common stock options by employees. We received 201,273 shares of common stock during the 26 weeks ended January 27, 2002 valued at $3,717,000 in exchange for payroll taxes due from employees upon the exercise of stock options. We believe that presently anticipated future cash requirements will be provided by internally generated funds and existing credit facilities. At January 27, 2002, we had cash and cash equivalents of approximately $13,381,000. A significant portion of our revenue for fiscal 2002 will be generated from our existing backlog of sales orders. The adjusted backlog of orders (to reflect the discontinued business of Terrasat, Inc.) at January 27, 2002 was approximately $80,200,000. All orders included in backlog are covered by signed contracts or purchase orders. Nevertheless, contracts involving government programs may be terminated at the discretion of the government. In the event of the cancellation of a significant amount of government contracts included in our backlog, we will be required to rely more heavily on our existing credit facility to fund our operations. We are not aware of any events which are reasonably likely to result in any cancellation of our government contracts. We have $24,762,000 available under our bank credit facility, net of outstanding stand-by letters of credit of $5,238,000. 21 Future payments required on long-term debt are as follows (in thousands):
INDUSTRIAL CAPITAL TWELVE MONTHS MORTGAGE REVENUE LEASE ENDED JANUARY TOTAL NOTE BONDS OBLIGATIONS - ------------- ------ -------- ---------- ----------- 2003.......................................... $ 258 $ 78 $ 95 $ 85 2004.......................................... 207 83 100 24 2005.......................................... 204 89 105 10 2006.......................................... 207 97 110 -- 2007.......................................... 219 104 115 -- Future........................................ 4,759 2,284 2,475 -- ------ ------ ------ ---- $5,854 $2,735 $3,000 $119 ====== ====== ====== ====
Stand-by letters of credit expire as follows (in thousands):
DURING FISCAL YEAR AMOUNT - ------------------ ------ 2002........................................................ $ 333 2003........................................................ 1,450 2004........................................................ 3,065 2005........................................................ 115 2006........................................................ 275
Minimum annual rentals under non-cancellable operating leases are as follows (in thousands):
DURING FISCAL YEAR AMOUNT - ------------------ ------ 2002........................................................ $ 655 2003........................................................ 951 2004........................................................ 807 2005........................................................ 781 2006........................................................ 803 Future...................................................... 2,572
CRITICAL ACCOUNTING POLICIES Revenue under certain long-term, fixed price contracts is recognized using the percentage of completion method of accounting. Revenue recognized on these contracts is based on estimated completion to date (the total contract amount multiplied by percent of performance, based on total costs incurred in relation to total estimated cost at completion). 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. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs. Risks and uncertainties inherent in the estimation process could affect the amounts reported in our financial statements. The key assumptions used in the estimate of costs to complete relate to labor costs and indirect costs required to complete the contract. The estimate of rates and hours as well as the application of overhead costs is reviewed on a regular basis. If our business conditions were different, or if we used different assumptions in the application of this and other accounting policies, it is likely that materially different amounts would be reported on our financial statements. 22 BUSINESS BACKGROUND Herley is a leading supplier of microwave products and systems to defense and aerospace entities worldwide. Our primary customers include large defense prime contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing), the U.S. government (including the Department of Defense, NASA and other U.S. government agencies) and international customers (including the Egyptian, German, Japanese and South Korean militaries and suppliers to international militaries). We are a leading provider of microwave technologies for use in command and control systems, flight instrumentation, weapons sensors and electronic warfare systems. We have served the defense industry since 1965 by designing and manufacturing microwave devices for use in high technology defense electronics applications. Our products and systems are currently deployed on a wide range of high profile military platforms, including the F-16 Falcon, the F/A-18E/F Super Hornet, the RC-135 Rivet Joint, the E-2C Hawkeye, the AEGIS class surface combatants, EA-6B Prowler and unmanned aerial vehicles, or UAVs, as well as high priority national security programs such as National Missile Defense and the Trident II D-5. ACQUISITIONS We have grown more than five fold through internal growth and strategic acquisitions over the past ten years and have evolved from a component manufacturer to a systems and service provider. We have successfully integrated these acquisitions by targeting microwave technology companies and focusing their strengths into our existing operations. - In September 1992, we acquired Micro-Dynamics, Inc. of Woburn, Massachusetts, a microwave subsystem designer and manufacturer. - In June 1993, we acquired Vega Precision Laboratories, Inc. of Vienna, Virginia, a manufacturer of flight instrumentation products. - In July 1995, we acquired Stewart Warner Electronics Corp. of Chicago, Illinois, a manufacturer of high frequency radio and IFF interrogator systems. - In August 1997, we acquired Metraplex Corporation of Frederick, Maryland, a manufacturer of airborne PCM and FM telemetry and data acquisition systems. - In January 1999, we acquired General Microwave Corporation of Farmingdale, New York, a manufacturer of microwave components and electronic systems. - In January 2000, we acquired Robinson Laboratories, Inc. of Nashua, New Hampshire, a designer, developer and manufacturer of microwave components and assemblies primarily for defense applications. - In September 2000, we acquired American Microwave Technology, Inc. of Anaheim, California, a manufacturer of high power, solid state amplifiers for the scientific and medical markets, which enabled us to enter these markets. BUSINESS STRATEGY Our goal is to continue to leverage our proprietary technology, microwave expertise and manufacturing capabilities to further expand our penetration in our market. Our strategies to achieve our objectives include: - INCREASE LEVELS OF COMPONENT INTEGRATION AND VALUE ADDED CONTENT. Due to growth of engineering expertise, new product development, and acquisitions, we have increased our capability to provide more component integration. Component integration adds value and will enable us to increase content in defense platforms and systems, thereby increasing our revenue and profitability. 23 - MAINTAIN LEADERSHIP IN MICROWAVE TECHNOLOGY. We intend to pursue further technological advances through continued investment in internally-funded and customer-funded research and product development. - STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. We have developed mutually beneficial relationships with various agencies of the U.S. government and defense and commercial companies. We expect to continue to build and strengthen these relationships with industry leaders by anticipating and recognizing their needs and providing them with on-time and cost-effective solutions. - CAPITALIZE ON OUTSOURCING DYNAMICS IN THE AEROSPACE AND DEFENSE INDUSTRY. Microwave technology has traditionally been an in-house resource of the prime contractors. However, the prime contractors are beginning to outsource the design and manufacture of this specialized engineering work to system sub-contractors. We are well positioned to generate more business as prime contractors continue to focus primarily on integration of defense electronics. - PURSUE STRATEGIC ACQUISITIONS. We intend to continue to augment our existing technological base by acquiring specialized companies that complement or expand our product offerings and market strategies. We believe that expansion of our core competencies through the acquisition of such specialized technology companies, when combined with our current technological and manufacturing skills, will provide us with improved levels of horizontal and vertical integration, leading to the creation of subsystems and complete system products. - ENHANCE MANUFACTURING CAPABILITIES. We intend to continue to implement process manufacturing automation and believe that our ability to develop a high level of automated production and test capability will help to further improve our cost effectiveness and time to market. - PURSUE SELECTIVE COMMERCIAL OPPORTUNITIES. We seek to identify and pursue selected commercial applications for our products and technologies where we can add value based on our microwave expertise. COMPETITIVE STRENGTHS Our competitive strengths include: - TECHNICAL EXPERTISE. We have developed a leading position in the field of microwave technology through our 35 year focus on research and development and our state-of-the-art design and production capabilities. We have recently completed construction of state-of-the-art manufacturing facilities in Lancaster, Pennsylvania, where we have a full range of capabilities including long and short run production, hardware assembly and full-service engineering. In addition, we have highly capable manufacturing facilities located in Woburn, Massachusetts; Farmingdale, New York; and Jerusalem, Israel. We have developed and rewarded our engineers in order to maintain our expertise in-house. - HIGH PROPORTION OF LONG-TERM SOLE-PROVIDER PRODUCTION PROGRAMS. We generate a significant proportion of our revenue from continuing, long-term programs, both in the production and upgrade phases, and continue to target high growth, high priority defense programs. Typically, on such long-term defense programs we are the sole provider of microwave equipment. - DIVERSE PRODUCT AND CUSTOMER BASE. We have a diverse product and customer base, with only the U.S. government, at approximately 19%, representing more than 10% of our fiscal 2001 revenues. We are a first-tier supplier to all of the prime defense contractors, as well as a direct supplier to all of the service branches of the U.S. military, including products found on over 120 individual platforms. Foreign customers accounted for approximately 27% of our revenues in fiscal 2001. - LONG-STANDING INDUSTRY RELATIONSHIPS. We have established long-standing relationships with the U.S. government and other key organizations in the aerospace and defense industry after 35 years 24 in the defense electronic industry. Over this period, we have become recognized for our ability to develop new technologies and meet stringent program requirements. - SUCCESSFUL ACQUISITION TRACK RECORD. We have demonstrated that we can successfully integrate acquired companies. We are experienced at evaluating prospective operations in order to increase efficiencies and capitalize on market and technological synergies. - EMPHASIS ON RESEARCH AND DEVELOPMENT. In fiscal year 2001, we spent over $4.6 million on new product development, of which our customers funded approximately $2.0 million. Our emphasis on new product development enables us to maintain our technological leadership in current products and to develop new capabilities. This spending helps solidify and strengthen our position on different programs and may serve as a barrier to entry for competitors. - EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over 21 years of experience in the defense electronics industry. PRODUCTS AND SERVICES We operate in two markets: defense electronics and commercial technologies. DEFENSE ELECTRONICS We are a leading supplier of microwave products and systems to defense and aerospace entities worldwide. We design and manufacture microwave components and subassemblies which are embedded in a variety of radars, flight instrumentation, weapons sensors, electronic warfare systems and guidance systems. Our microwave devices are used on our subassemblies and integrated systems (e.g. command and control systems, telemetry systems, transponders, flight termination receivers and identification friend or foe, or IFF, interrogators), in addition to being sold on a component basis. The following are descriptions of our major systems and products: Telemetry Systems. Telemetry systems provide wireless data transmission between two or more sites for recording and analysis. Missile, UAV, or target testing on domestic and international test ranges requires flight safety and performance data transmission to maximize flight safety during the test operation. Surveillance and intelligence gathering UAVs also require a data transmission downlink and a command and control systems uplink to accomplish their mission. We have developed a telemetry system capability that can be configured to meet individual customers' needs. Various components of the system include data encoders, transmitters and flight termination receivers. Each has a distinctive role and each is key to the success of the mission. We are a leading manufacturer of Pulse Code Modulation, or PCM, and Frequency Modulation, or FM, telemetry and data acquisition systems for severe environment applications, and our products are used worldwide for testing space launch vehicle instrumentation, aircraft flight testing, and amphibian, industrial and automotive vehicle testing. The product portfolio ranges in size and complexity from miniature encoders to completely programmable data acquisition systems. We offer a complete airborne data link system. With our digital capability in data encoding and acquisition elements combined with our radio frequency capability in providing telemetry transmitters and flight termination receivers, we offer a full line of narrow and wide-band airborne telemetry systems to meet a wide variety of industrial needs, both domestically and internationally. Command and Control Systems. Our command and control systems have been used to fly remotely a large variety of unmanned aerial vehicles, or UAVs, typically aircraft used as target drones or Remotely Piloted Vehicles, or RPVs. Our command and control systems also control surface targets. Operations have been conducted by users on the open ocean, remote land masses, and instrumented test and training ranges. Our command and control systems are currently in service throughout the world. Command and control systems permit a ground operator to fly a target or a UAV through a pre-planned mission. The mission may be for reconnaissance, where the vehicle is 25 equipped with high definition TV sensors and the necessary data links to send information back to its command and control systems ground station. The UAV may also be used as a decoy, since the operator can direct the flight operations that will make the small drone appear to be a larger combat aircraft. Our MAGIC2 system affords over-the-horizon command and control using GPS guidance and control of multiple targets from a single ground station. The ability to control multiple targets at increased distances represents a significant product improvement. The MAGIC2 is a highly flexible, multiple processor design with high resolution graphics, which can be field-configured within minutes to fly or control any selected vehicle for which it is equipped. The MAGIC2 is used in support of missile, aircraft and other weapons systems development and testing. The system meets a growing requirement to test against multiple threats with the automated defense capabilities of ships like the AEGIS cruiser and the E-2C aircraft. Transponders. We manufacture a variety of expendable transponders, including range safety, IFF, command and control, and range scoring systems. Transponders are small, expendable, electronic systems consisting of a transmitter, sensitive receiver and internal signal processing equipment comprised of active and passive components, including microwave subassemblies such as amplifiers, oscillators and circulators. The transponder receives signals from radars, changes and amplifies the frequency of the signals, and transmits back a reply on a different frequency and signal level. This reply is a strong, noise-free signal upon which the tracking radar can "lock," and one which is far superior to skin reflection tracking, particularly under adverse weather conditions after the launch. In range safety applications, transponders enable accurate tracking of space launch and unmanned aerial vehicles, missiles, and target drones so that position and direction are known throughout its flight. In the case of several defense and commercial space launch vehicles (i.e., Delta, Atlas, Titan and Pegasus), our transponder is tracked by the ground launch team all the way to space orbit, and in certain instances through several orbits, as a reference location point in space to assure that the launch payload has been properly placed in orbit. IFF transponders, which are used in conjunction with the Federal Aviation Authority Air Traffic Control System, enable ground controllers to identify the unmanned targets, drones and cruise missiles on which these units fly and to vector other manned aircraft safely away from the flight path of the unmanned aerial vehicle. Command and control transponders provide the link through the telemetry system for relaying ground signals to direct the vehicle's flight. The uplink from the ground control station, a series of coded pulse groups, carries the signals that command the flight control guidance system of the vehicle. The downlink to the ground provides both tracking signals for range safety, as well as acknowledgment and status of the uplink commands and their implementation in the vehicle. The transponder is therefore the means to fly the vehicle. Scoring systems are mounted on both airborne and sea targets. Scoring systems enable test and evaluation engineers to determine the "miss-distance" between a projectile and the target at which it has been launched. Flight Termination Receiver. A flight termination receiver, or FTR, is installed in a test missile, UAV, target or space launch vehicle as a safety device. The FTR has a built-in decoder that enables it to receive a complex series of audio tones which, when appropriate, will set off an explosive charge that will destroy the vehicle. A Range Safety Officer, or RSO, using the range safety transponder will track the vehicle in flight to determine if it is performing as required. If the RSO detects a malfunction in the test or launch vehicle that causes it to veer from a planned trajectory in a manner that may endanger personnel or facilities, the RSO will transmit a coded signal to the onboard FTR to explode the vehicle. HF Communications and IFF Interrogators. We design and manufacture high frequency radio and IFF interrogators. This high frequency communications equipment is used by the U.S. Navy and foreign navies that conduct joint military exercises with the U.S. Navy. The IFF interrogators are 26 used as part of shipboard equipment and are also placed on coastlines, where they are employed as silent sentries. We have been a significant supplier to the Republic of Korea for over twenty years and have a large, established installed base of equipment. We have been, and continue to be, a supplier to the Republic of Korea KDX destroyer program. High Power Amplifier. We design and manufacture high power amplifier systems with frequencies ranging from 1.5 MHz to 12GHz with power levels from multi-kilowatts up to 15W, depending on the frequency. Our high power amplifier applications include but are not limited to defense communication, electronic warfare, radar and avionics. We have an exclusive sales and marketing agreement with EADS ewation, Grintek Ewation, Sysdel Close Corporation and Teleplan AS regarding high power amplifiers for monitoring reconnaissance and countermeasures. Microwave Integrated Circuits. We design and manufacture complex microwave integrated circuits, or MICs, which consist of sophisticated assemblies that perform many functions, primarily involving switching of microwave signals. Our MICs are employed in many defense electronics systems and missile programs. We also manufacture magnetrons, which are the power source utilized in the production of our transponders. High/Low Power Integrated Assembly. Our high power microwave devices are used in radar system transmitters and in long-range missiles. High power devices frequently use small amounts of nuclear material to enhance breakdown of high energy pulses, and we are one of very few companies with an active nuclear license that permits the handling of these trace amounts of nuclear materials. There are relatively few companies with the expertise or facilities to design, manufacture and test high power devices. We also produce lower power, broad band microwave integrated assemblies for the defense electronics industry. These complex assemblies combine microwave functions such as amplification, attenuation, switching of multiple signals, and phase and amplitude control. Their applications include Rear Warning Receivers, or RWRs, Electronics Countermeasure, or ECM, systems and highly sensitive receiver systems. Solid State Receiver Protector. We have become a preeminent supplier of solid-state receiver protector devices that are able to withstand high energy pulses without the use of nuclear materials. These high power devices protect a radar receiver from transient bursts of microwave energy and are employed in almost every military and commercial radar system. For our engineering efforts in designing solid-state receiver protectors for the F-16, we received cash awards from the United States Air Force as part of the government's value engineering program. Digitally Tuned Oscillators (DTO's). We produce microwave sources, which generate signals that are used in microwave oscillators. Our microwave sources are sold to the U.S. defense industry and to various foreign governments. We specialize in digitally tuned oscillators, or DTOs, a critical component in many ECM systems. 27 Our defense electronics products, on what programs, platforms and systems our subassemblies, components and subsystems can be found and our customers for these products are summarized in the table below:
- ------------------------------------------------------------------------------------------------------------------- PROGRAM/PLATFORM HOST SYSTEM PRODUCT DESCRIPTION CUSTOMER(S) - ------------------------------------------------------------------------------------------------------------------- F-16 A/B, C/D Falcon - AN/APG 66, 68 Airborne Transmitter and low power RF Northrop Grumman, Radar assemblies; Integrated Microwave BAE Systems, U.S. Air - (V)XM Fire Control Radar Assemblies (IMA) and digitally Force, - ALR-56 Electronic Warfare tuned oscillators for electronic South Korea, System warfare systems Taiwan, Israel, - RAPPORT Electronic Warfare Greece, Egypt, System Norway, Turkey, - SPEWS II Electronic Belgium, Denmark, Warfare System Netherlands - ------------------------------------------------------------------------------------------------------------------- F/A-18 C/D Hornet - Automatic Carrier Landing AN/ARA-63 receiver-decoder group, U.S. Navy, F/A-18 E/F Super System (ACLS) APN 202 Transponder and 1623 BAE Systems, Hornet - Low Probability Intercept Receiver of the Automatic Carrier Raytheon Altimeter (LPIA) Landing System which provides - APG 65, 70 and 73 Fire instrument approach guidance from Control Radar the ship to aircraft; Low Probability of Intercept Altimeter; receiver protector, phase shifters and attenuator for the APG 65, 70 and 73 fire control radar - ------------------------------------------------------------------------------------------------------------------- F-15 Eagle - APG 63 and 70 Fire Control Receiver protector, phase shifter U.S. Air Force, Radar and waveguide switch Raytheon - ------------------------------------------------------------------------------------------------------------------- Gripen - Electronic Warfare Systems Limiter amplifier module SAAB - ------------------------------------------------------------------------------------------------------------------- EA-6B Prowler - Improved Capabilities Dual down converter, complex Northrop Grumman, (ICAP III) Electronic microwave assemblies and coaxial BAE Systems Warfare Systems integrated networks used in the transmit and receive systems to suppress enemy air defenses - ------------------------------------------------------------------------------------------------------------------- RC-135 - Intelligence Gathering Amplifier assemblies and switch L-3 Communications Rivet Joint - Communication Intercept products for on-board systems that enable military specialists to monitor electromagnetic emissions of adversaries - ------------------------------------------------------------------------------------------------------------------- U-2 Butterfly - Intelligence Gathering Digitally tuned oscillator and BAE Systems - Communication Intercept microwave switch matrix products for surveillance systems - ------------------------------------------------------------------------------------------------------------------- E-3 AWACS - APX-103 High power switch network for U.S. Air Force transmitter - -------------------------------------------------------------------------------------------------------------------
28
- ------------------------------------------------------------------------------------------------------------------- PROGRAM/PLATFORM HOST SYSTEM PRODUCT DESCRIPTION CUSTOMER(S) - ------------------------------------------------------------------------------------------------------------------- E-2C Hawkeye - ALQ-210/217 Electronic Amplifier and switching systems Lockheed Martin Warfare System used in Electronic Support - APS-145 (Radar) Measures (ESM) and RF power measurement system for radar - ------------------------------------------------------------------------------------------------------------------- AIM-120 - Warhead Replaceable Tracking transponder and flight Harris Corporation Advanced Medium-Range Tactical Telemetry Module termination command and control in Air-to-Air Missile (WRTTM) the WRTTM used in the U.S. Air (AMRAAM) Force AIM-120 AMRAAM. - ------------------------------------------------------------------------------------------------------------------- Conventional Air - Data Acquisition Encoder Transmitter, command decoder, Boeing Launch Cruise Missile Systems Flight Termination Receiver (FTR), (CALCM) Pulse Code Modulator (PCM) and PCM encryption for accumulation and transmission of flight data - ------------------------------------------------------------------------------------------------------------------- BLU-108 - Sensor Fuzed Weapon Hybrids used to process target Textron Systems identification for sensor fused air-to-ground strike munitions - ------------------------------------------------------------------------------------------------------------------- Trident D5 Missile - Low Cost Test Missile Kit Flight Termination Receiver (FTR), Lockheed Martin GPS translator, GPS antenna, preamplifiers, data acquisition, telemetry/tracking transmitter, feed network, integrated valve, assembly current monitor - ------------------------------------------------------------------------------------------------------------------- BQM-74E, Predator, - LN-200 Inertial fiber- Fiber-optic receiver which Northrop Grumman Global Hawk, optic gyros provides guidance and control as AMRAAM, part of the inertial fiber optic RAH-66 Helicopter gyros - ------------------------------------------------------------------------------------------------------------------- BQM-74E Target Drones, - Multiple Aircraft MAGIC2 for use as a target control U.S. Navy, MQM 107E Target Drones Integrated Command and system for the BQM-74 and MQM-107 BAE Systems, Control System (MAGIC2) target drone systems Northrop Grumman, Raytheon, Singapore, Australia, Egypt - ------------------------------------------------------------------------------------------------------------------- KDX-II Program - AN/URT-23F Radio URT-23F, a 1KW HF radio used for South Korea (ROK) Korean Navy - UPX-28 (IFF) ship to shore communication; Destroyer UPX-28 used for identification friend or foe - -------------------------------------------------------------------------------------------------------------------
29
- ------------------------------------------------------------------------------------------------------------------- PROGRAM/PLATFORM HOST SYSTEM PRODUCT DESCRIPTION CUSTOMER(S) - ------------------------------------------------------------------------------------------------------------------- Advanced Integrated - AN/SLY-2 Integrated multi-frequency Northrop Grumman Electronic Warfare subsystems which are designed to System (AIEWS) provide improved situational awareness, engagement support, counter targeting and anti-ship missile defense capabilities for the U.S. Navy's next generation shipboard electronic warfare system - ------------------------------------------------------------------------------------------------------------------- Missile Defense - Phased array radar Switching and time delay Raytheon Systems: assemblies to assist in long range Theater High and high altitude missile tracking Altitude Air Defense (THAAD), SPY-3 Radar, High Power Distriminator (HPD), X-Band Radar (XBR) - ------------------------------------------------------------------------------------------------------------------- Hummell - Electronic Warfare Systems High power amplifier systems for EADS mobile jamming system - ------------------------------------------------------------------------------------------------------------------- Delta, Atlas and Titan - Airborne Tracking System Radar transponders used to track Lockheed Martin Launch Vehicles, virtually every manned and Boeing SPOT Satellite, unmanned aerial vehicle and NASA Space Shuttle missile Matra Orbital Science - ------------------------------------------------------------------------------------------------------------------- B-52H Buffalo - Situational Awareness Amplifier and switching systems Lockheed Martin Defensive Improvement used in Electronic Support (SADI) Measures (ESM) - ------------------------------------------------------------------------------------------------------------------- H-60 Helicopters - LAMPS Amplifier and switching system Lockheed Martin Electronic Warfare System used in Electronic Support Measures (ESM) - ------------------------------------------------------------------------------------------------------------------- European Fighter - Electronic Warfare System Traveling Wave Tube (TWT) FIAT Aircraft (EFA) Microwave Driver Assembly - -------------------------------------------------------------------------------------------------------------------
COMMERCIAL TECHNOLOGIES Our commercial technologies are comprised of scientific products and medical products. Scientific Products. Our scientific products are used extensively in Nuclear Magnetic Resonance (NMR) systems. These amplifiers cover the frequency ranges of 6 MHz to 950 MHz, with power levels as high as 2.0KW peak power at 10% duty cycle. 30 All amplifiers have dual mode capability and can be operated in either a pulsed or continuous wave. Custom products or private labeling is available. Scientific customers include OEM, system manufacturers and research centers. Medical Products. Our medical products vary in complexity from single modules, to rack mounted amplifiers, to complete systems. The rack-mounted amplifiers and complete systems typically include detection/protection circuitry, built-in power supplies, front panel metering and digital and/or analog interface controls. Both forced air and/or water cooling are used, depending on the customer's requirements. All products feature highly reliable technical solutions designed for improved production and reliability. Producibility is enhanced through the use of surface mount components and circuit designs which eliminate the need for excessive alignment during the production cycle. High reliability is achieved through the implementation of conservative thermal and RF circuit design and sophisticated self-protection schemes. Reliability is further enhanced during the design phase by employing detailed environmental testing. Our medical products are used in Magnetic Resonance Imaging, or 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 continuous wave mode. Custom products or private labeling are available. Medical customers include both original equipment manufacturers, systems manufacturers, universities and research centers. CUSTOMERS During the fiscal year ended July 29, 2001, approximately 19% of our sales were attributable to contracts with offices and agencies of the U.S. government. No other customers accounted for shipments in excess of 10% of net sales. We provide defense electronics equipment to major defense prime contractors for integration into larger platforms and systems. Some of our customers for defense electronics equipment include: Boeing BAE Systems Harris Lockheed Martin Northrop Grumman Raytheon During fiscal 2001, sales to foreign customers accounted for approximately 27% of our consolidated net sales. The governments of Egypt, Japan, South Korea, Taiwan and the United Kingdom are all significant customers of ours. All of our contracts with foreign customers are payable in U.S. dollars. International sales are subject to numerous risks, including political and economic instability in foreign markets, including currency and economic difficulties in the Pacific Rim, restrictive trade policies of foreign governments, inconsistent product regulation by foreign agencies or governments, imposition of product tariffs and burdens and costs of complying with a wide variety of international and U.S. export laws and regulatory requirements. Our international sales also are subject to us obtaining export licenses for certain products and systems. SALES AND MARKETING We market our products worldwide to the United States government, prime contractors and various countries in defense markets, and to OEMs, research institutions and universities in commercial markets. Sales are primarily through a sales force generally organized by geographic territory and markets. In addition, we have contracts with manufacturers' representatives in the United States and international 31 representatives who are located in Western Europe, the Middle East and Asia. As part of our marketing efforts, we advertise in major trade publications and attend major industrial shows in the commercial, medical, satellite communications and defense markets. After we have identified key potential customers, we make sales calls with our own sales, management and engineering personnel. In order to promote widespread acceptance of our products and provide customers with support, our sales and engineering teams work closely with our customers to develop tailored solutions to their requirements. We believe that our customer engineering support provides us with a key competitive advantage. We also produce microwave components that are sold through our catalog, which for almost forty years has been an industry leader, and sell attenuating devices and IQ modulation and phase shifters through the microwave engineer's handbook. MANUFACTURING We manufacture our products from standard components, as well as from items that are manufactured by vendors to our specifications. A majority of our defense electronics and commercial assemblies and subsystems contain proprietary technology which is designed and tested by our engineers and technicians and is manufactured at our own facilities. We continue to invest in improving our proprietary manufacturing processes and the automation of the manufacturing processes. Automation is critical in meeting our customers' demands for price competitiveness, world class quality and on-time delivery. We are also investing to enhance our responsiveness to the production demands of our customers. We purchase electronic components and other raw materials used in our products from a large number of suppliers and all such materials are readily available from alternate sources. We maintain minimal levels of finished products inventory to meet the needs of our medical products customers. We generally purchase raw materials for specific contracts, and we purchase common components for stock based on our firm fixed backlog. There are no significant environmental control procedures required concerning the discharge of materials into the environment that require us to invest in any significant capital equipment or that would have a material effect on our earnings or our competitive position. Quality assurance checks are performed on manufacturing processes, purchased items, work-in-process and finished products. Due to the complexity of our products, final tests are performed on some products by highly skilled engineers and technicians. Our primary manufacturing facilities have earned the ISO 9001 Registration. The ISO 9000 series standards are internationally recognized quality management system requirements. ISO 9001, the most comprehensive Standard in the ISO 9000 Series, covers design, manufacturing, installation, and servicing systems. Assembly, test, package and shipment of products are done at our manufacturing facilities located in the following cities: Lancaster, Pennsylvania Farmingdale, New York Woburn, Massachusetts Jerusalem, Israel 32 BACKLOG Our total backlog of orders was approximately $80.2 million on January 27, 2002 as compared to $68.6 million on January 28, 2001. Of our total backlog of $80.2 million at January 27, 2002, $49.3 million is attributable to domestic orders and $30.9 million is attributable to foreign orders. Of the amount attributable to foreign orders, $11.8 million is covered by letters of credit. All of the orders included in backlog are covered by signed contracts or purchase orders. Backlog is not directly indicative of future sales. Accordingly, we do not believe that our backlog as of any particular date is representative of actual sales for any succeeding period. Substantially all of our contracts are fixed price contracts, some of which require delivery over time periods in excess of one year. With this type of contract, we agree to deliver products at a fixed price except for costs incurred because of change orders issued by the customer. In accordance with Department of Defense procedures, all contracts involving government programs may be terminated by the government, in whole or in part, at the government's discretion. 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 us under the contract to the date of termination plus a fee based on the work completed. PRODUCT DEVELOPMENT We believe that our growth depends, in part, on our ability to renew and expand our technology, products, and design and manufacturing processes with an emphasis on cost effectiveness. Our primary efforts are focused on engineering design and product development activities rather than pure research. Our policy is to assign the required engineering and support people, on an ad hoc basis, to new product development as needs require and budgets permit. The cost of these development activities, including employees' time and prototype development, was approximately $3.2 million in fiscal 1999, $3.5 million in fiscal 2000 and $4.6 million in fiscal 2001, of which we paid approximately $1.7 million in fiscal 1999, $2.3 million in fiscal 2000 and $2.6 million in 2001. The remainder of these costs were paid by some of our customers. COMPETITION The microwave component and subsystems industry is highly competitive and we compete against many companies, both foreign and domestic. Many of these companies are larger, have greater financial resources and are better known. As a supplier, we also experience significant competition from the in-house capabilities of our customers. Competition is generally based upon technology, design, past performance and price. Our ability to compete depends, in part, on our ability to offer better design and performance than our competitors and our readiness in facilities, equipment and personnel to complete the programs. Many of the programs in which we participate are long standing programs in which we are the sole provider of our product. GOVERNMENT REGULATION Because of our participation in the defense industry, we are subject to audits by various government agencies for our compliance with government regulations. We are also subject to a variety of local, state and federal government regulations relating to, among other things, the storage, discharge, handling, omission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. We believe that we operate our business in material compliance with applicable laws and regulations. However, any failure to comply with existing or future laws or regulations could have a material adverse impact on our business, financial condition and results of operations. 33 INTELLECTUAL PROPERTY We rely primarily on a combination of trade secrets and employee and third-party nondisclosure agreements to protect our intellectual property, as well as limiting access to the distribution of proprietary information. We cannot assure you that the steps taken to protect our intellectual property rights will be adequate to prevent misappropriation of our technology or to preclude competitors from independently developing such technology. Furthermore, we cannot assure you that, in the future, third parties will not assert infringement claims against us or with respect to our products for which we have indemnified certain of our customers. Asserting our rights or defending against third party claims could involve substantial costs and diversion of resources, thus materially and adversely affecting our business, financial condition and results of operations. In the event a third party were successful in a claim that one of our products infringed its proprietary rights, we may have to pay substantial royalties or damages, remove that product from the marketplace or expend substantial amounts in order to modify the product so that it no longer infringes on such proprietary rights, any of which could have a material adverse effect on our business, financial condition and results of operations. EMPLOYEES As of January 27, 2002, we employed 563 persons full time. Of these employees, 80 comprise the engineering staff, 419 constitute manufacturing personnel, 22 occupy sales and marketing positions, and 42 are in executive, management, and support functions. None of our employees are covered by collective bargaining agreements and we consider our employee relations to be satisfactory. We believe that our future success will depend, in part, on our continued ability to recruit and retain highly skilled technical, managerial and marketing personnel, including microwave engineers. To assist in recruiting and retaining such personnel, we have established competitive benefits programs, including a 401(k) employee savings plan and stock option plans. LEGAL PROCEEDINGS In August 2001, Robinson Laboratories, Inc. and Ben Robinson filed an amended complaint against us in the United States District Court for the Eastern District of New York. We acquired Robinson Laboratories in January 2000. The core allegations are (1) that we have not issued certain shares of common stock in connection with certain earn out requirements contained in an asset purchase agreement dated February 1, 2000; (2) that we breached an employment agreement with Robinson by terminating his employment; and (3) that we breached a stock option agreement with Robinson. In September 2001, we filed an answer and affirmative defenses and counterclaims in this matter denying the material allegations of the amended complaint. We also filed counterclaims against both Robinson Laboratories and Robinson. In these counterclaims, our core allegations concern Robinson's misconduct (1) in connection with the manner he attempted to satisfy Robinson Laboratories' earn out requirements; (2) misrepresentations made in connection with the asset purchase agreement; (3) wrongdoing as our employee leading to his termination; and (4) post-employment wrongdoing in connection with a new company. In addition to seeking a declaratory judgment, we have 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 this year. We believe that we have meritorious defenses to this action. 34 PROPERTIES Our facilities are as follows:
OWNED OR LOCATION PURPOSE OF PROPERTY AREA LEASED - -------- ------------------- ---- ------ Lancaster, PA(1) Production, engineering, 86,200 sq. ft. Owned administrative and executive offices Woburn, MA Production, engineering and 60,000 sq. ft. Owned administration Farmingdale, NY(2) Production, engineering and 46,000 sq. ft. Leased administration 14,000 sq. ft. Leased Jerusalem, Israel Production, engineering and 12,000 sq. ft. Owned administration Chicago, IL Engineering and administration 3,000 sq. ft. Leased Lancaster, PA Land held for expansion 20.4 Acres Owned
- --------------- (1) Our 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 we closed on the sale of our prior owned facility in Amityville, NY and relocated to two facilities in Farmingdale, NY. We entered into two 10-year lease agreements with a partnership owned by the children of Messrs. Blatt and Levy. The leases provide for initial minimum annual rent of approximately $312,000 and $92,000, respectively, in each case subject to escalation of approximately 4% annually throughout the term. We believe that our facilities are adequate for our current and presently anticipated future needs. 35 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following lists our current executive officers and directors:
NAME AGE POSITION(S) - ---- --- ----------- Lee N. Blatt............................... 74 Chairman of the Board Myron Levy................................. 61 Chief Executive Officer and Director Howard M. Eckstein......................... 50 Senior Vice President John M. Kelley............................. 48 Senior Vice President Rozalie Schachter.......................... 55 Senior Vice President Mitchell Tuckman........................... 51 Senior Vice President William Wilson............................. 53 Senior Vice President Anello C. Garefino......................... 54 Vice President-Finance, Treasurer and Chief Financial Officer David H. Lieberman......................... 57 Secretary, Director, Member of Nominating Committee Adm.Thomas J. Allshouse(Ret.).............. 76 Director, Member of Compensation and Audit Committees Alvin M. Silver............................ 70 Director, Member of Compensation and Audit Committees John A. Thonet............................. 50 Director, Member of Nominating Committee Adm. Edward K. Walker, Jr.(Ret.)........... 68 Director, Member of Compensation, Audit and Nominating Committees
MR. LEE N. BLATT is our co-founder and has been our Chairman of the Board since its organization in 1965. Mr. Blatt holds a Bachelors Degree in Electrical Engineering from Syracuse University and a Masters Degree in Business Administration from City College of New York. MR. MYRON LEVY has been our Chief Executive Officer since August 2001 and served as President since June 1993, and as Executive Vice President and Treasurer since May 1991, and prior thereto as Vice President for Business Operations and Treasurer since October 1988. For more than ten years prior to joining the Company, Mr. Levy, a certified public accountant, was employed in various executive capacities, including Vice-President, by Griffon Corporation (formerly Instrument Systems Corporation). MR. HOWARD M. ECKSTEIN was appointed Senior Vice President in July 2000, and served as Vice President and General Manager, Herley Vega since December 1998, and was Vice President, New Product Development upon joining us in April 1998. Mr. Eckstein has 25 years experience in the design and development of aerospace telemetry equipment and systems. Mr. Eckstein served from 1992 to 1998 as Vice President -- Advanced Products for L3 Communications, and as Vice President -- Engineering from 1986 to 1992. Mr. Eckstein earned his Bachelors Degree in Electrical Engineering from the Pennsylvania State University and holds a Masters Degree in Engineering from the University of Pennsylvania. MR. JOHN KELLEY was appointed Senior Vice President in July 2000, and served as Vice President/ Director of Corporate Communications since March 2000. Mr. Kelley joined us in December 1998 as Director of Investor Relations. Prior to joining Herley, Mr. Kelley had fifteen years of banking experience, most recently serving as Vice President at First Capital Bank. Mr. Kelley earned his BS in Finance from the University of Arizona, Tucson, Arizona, with Graduate Degree Studies at UCLA. DR. ROZALIE SCHACHTER was appointed Senior Vice President in August 2001, and served as Vice President since May 2000. Dr. Schachter joined General Microwave in 1990 and was Vice President, Business Development when we acquired General Microwave in January 1999. Prior to joining General Microwave, Dr. Schachter held positions as Technical Director at American Cyanamid Co. and Group 36 Leader at Stauffer Chemical Co. Dr. Schachter received her BS from Brooklyn College in 1968, MS from Yeshiva University in 1970 and PhD in Physics from New York University in 1979. MR. MITCHELL TUCKMAN was appointed Senior Vice President in July 2000, and served as our Vice President since the acquisition of General Microwave Corporation in January 1999. At the time of the acquisition, Mr. Tuckman was President -- Chief Executive Officer of General Microwave since March 1995. He was Executive Vice President and Chief Operating Officer of General Microwave from August 1994 until March 1995. From June 1993 until August 1994, Mr. Tuckman was Vice President Microwave Engineering of General Microwave. Prior to that, he was Chief Microwave Engineer of General Microwave. MR. WILLIAM WILSON has been employed as Senior Vice President since January 2002. From 1991 until his employment with us, Mr. Wilson held several executive positions with the Litton Laser Systems, a division of Northrop Grumman including, Vice President of Technical Operations and Special Projects from 1998 until January 2002. Mr. Wilson holds a Bachelors Degree in Engineering from the University of Arkansas. MR. ANELLO C. GAREFINO has been employed by us in various executive capacities for more than the past five years. Mr. Garefino, a certified public accountant, was appointed Vice President-Finance, Treasurer and Chief Financial Officer in June 1993. From 1987 to January 1990, Mr. Garefino was Corporate Controller of Exide Corporation. MR. DAVID H. LIEBERMAN has been a director since 1985 and our Secretary since 1994. Mr. Lieberman has been a practicing attorney in the State of New York for more than the past ten years and is a member of the firm of Blau, Kramer, Wactlar & Lieberman, P.C., our general counsel. ADMIRAL THOMAS J. ALLSHOUSE (RET.) has been a director since September 1983. Prior to 1981, when he retired from the United States Navy, Admiral Allshouse served for 34 years in various naval officer positions, including acting as commanding officer of the United States Naval Ships Parts Control Center. Admiral Allshouse holds a Bachelors Degree in Engineering from the United States Naval Academy and a Masters Degree in Business Administration from Harvard University. DR. ALVIN M. SILVER became a director in October 1997. Since 1977, Dr. Silver has been Executive Vice President of the Ademco Division of Pittway Corporation. Dr. Silver holds a Bachelors Degree in Industrial Engineering from Columbia University, a Masters Degree in Industrial Engineering from Stevens Institute of Technology and a Doctor of Engineering Science Degree in Industrial Engineering/ Operations Research from Columbia University. Dr. Silver is a Professor at the Frank G. Zarb School of Business of Hofstra University. MR. JOHN A. THONET became a director in 1991 and has been President of Thonet Associates, an environmental consulting firm specializing in land planning and zoning matters, for the past ten years. Mr. Thonet is the son-in-law of Mr. Blatt. ADMIRAL EDWARD K. WALKER, JR. (RET.) became a director in October 1997. Since his retirement from the United States Navy in 1988, Admiral Walker has been the Director of Corporate Strategy for Resource Consultants, Inc., a privately held corporation supporting the Department of Defense, and other government agencies. Prior to his retirement from the United States Navy, Admiral Walker served for 34 years in various naval officer positions, including Commander of the Naval Supply Systems Command, and Chief of Supply Corps. Admiral Walker holds a Bachelors Degree from the United States Naval Academy and Masters Degree in Business Administration from The George Washington University. COMMITTEES OF THE BOARD OF DIRECTORS The board of directors has a compensation committee, audit committee and nominating committee. The compensation committee administers compensation plans, including stock option plans, options to officers and employees and establishes the compensation structure for our executives. The audit committee recommends appointment of our independent auditors and maintains a direct exchange of information with 37 the auditors including review of the results of and scope of audits and other accounting-related services provided by our auditors. The audit committee operates under a written charter adopted by the board of directors. The nominating committee nominates directors for election by stockholders. EXECUTIVE COMPENSATION The following table sets forth the annual and long-term compensation with respect to our Chairman, Chief Executive Officer, and our three most highly compensated executive officers other than the Chief Executive Officer (the "named executive officers") for services rendered for the fiscal years ended July 29, 2001, July 30, 2000 and August 1, 1999. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION(1) ------------------------------ ------------------------------- SECURITIES FISCAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OPTIONS/SARS(4) COMPENSATION - --------------------------- ------ --------- -------- --------------- ------------ Lee N. Blatt...................... 2001 $630,959 $ -- 150,000(5) $ 4,800(8) Chairman of the Board 2000 637,879 539,619 225,000(6) 4,800 1999 475,908 538,126 750,000(7) 4,800 Myron Levy........................ 2001 $465,593 $ -- 150,000(5) $ 6,348(8) Chief Executive Officer 2000 471,590 431,695 225,000(6) 6,924 1999 329,166 430,501 750,000(7) 9,525 Allan L. Coon(9).................. 2001 $197,681 $ -- 15,000(5) $ 7,572(8) Senior Vice President 2000 158,758 50,000 22,500(6) 8,094 1999 137,157 35,000 30,000(7) 6,502 Howard Eckstein................... 2001 $145,972 $ 25,000 15,000(5) $ 5,250(8) Senior Vice President 2000 120,016 20,000 15,000(6) 4,402 1999 114,240 3,000 22,500(7) 4,083 Mitchell Tuckman.................. 2001 $173,269 $ 6,875 11,250(5) $ 5,140(8) Senior Vice President 2000 160,000 -- 15,000(6) 5,059 1999 92,308 44,985 30,000(7) 2,664
- --------------- (1) Does not include Other Annual Compensation because amounts of certain perquisites and other non-cash benefits provided by us do not exceed the lesser of $50,000 or 10% of the total annual base salary and bonus disclosed in this table for the respective officer. (2) Amounts set forth herein include cost of living adjustments for Messrs. Blatt and Levy under employment contracts. (3) Represents for Messrs. Blatt and Levy incentive compensation under employment agreements. The incentive under the contracts was waived by these individuals for fiscal year 2001. (4) Adjusted to give effect to a three-for-two stock split on September 10, 2001. (5) Consisting of the following options issued in March 2001 for the right to purchase our common stock at a price of $8.3753: Lee N. Blatt -- 150,000, Myron Levy -- 150,000, Allan L. Coon -- 15,000, Howard Eckstein -- 15,000, and Mitchell Tuckman -- 11,250. (6) Consisting of the following options issued in May 2000 for the right to purchase our common stock at a price of $10.4587: Lee N. Blatt -- 225,000, Myron Levy -- 225,000, Allan L. Coon -- 22,500, Howard Eckstein -- 15,000, and Mitchell Tuckman -- 15,000. (7) Consisting of the following options issued in August 1998 for the right to purchase common stock at a price of $6.1667 Lee N. Blatt -- 375,000, and Myron Levy -- 375,000; options granted in December 1998 at a price of $7.6253: Allan L. Coon -- 15,000, and Howard Eckstein -- 11,250; and at a price of $8.7691 (at 115% of the market price on date of issue): Allan L. Coon -- 15,000, and Howard Eckstein -- 11,250; and options granted in June 1999 at a price of $8.0833: Lee N. Blatt -- 38 187,500, and Myron Levy -- 187,500, and at a price of $9.2958 (at 115% of the market price on date of issue): Lee N. Blatt -- 187,500, and Myron Levy -- 187,500; and options granted in January 1999 at a price of 10.9733 (at 115% of the market price on date of issue): Mitchell Tuckman -- 15,000, and at a price of $9.542: Mitchell Tuckman -- 15,000. (8) All Other Compensation includes: (a) group term life insurance as follows: $1,548 for Mr. Levy, $2,772 for Mr. Coon, $450 for Mr. Eckstein, and $340 for Mr. Tuckman, and (b) contributions to our 401(k) Plan as a pre-tax salary deferral as follows: $4,800 for each of Messrs. Blatt, Levy, Coon, Eckstein and Tuckman. (9) Mr. Coon retired in February 2002. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table sets forth certain information concerning the stock options granted to the named executive officers during fiscal 2001.
INDIVIDUAL GRANTS(1) --------------------------------------- POTENTIAL REALIZED VALUE AT NUMBER OF ASSUMED ANNUAL RATES OF SECURITIES % OF TOTAL STOCK PRICE APPRECIATION UNDERLYING OPTIONS ISSUED EXERCISE OPTION TERM(4) OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ----------------------------- NAME GRANTED(2) FISCAL YEAR(3) ($/SH) DATE 0% 5% 10% - ---- ---------- --------------- -------- ---------- ----- -------- ---------- Lee N. Blatt.............. 150,000 18 $8.38 3/12/11 $0.00 $790,077 $2,002,211 Myron Levy................ 150,000 18 $8.38 3/12/11 $0.00 $790,077 $2,002,211 Allan L. Coon............. 15,000 2 $8.38 4/12/06 $0.00 $ 35,375 $ 78,343 Howard Eckstein........... 15,000 2 $8.38 4/12/06 $0.00 $ 35,375 $ 78,343 Mitchell Tuckman.......... 11,250 1 $8.38 4/12/06 $0.00 $ 26,531 $ 58,757
- --------------- (1) Adjusted to give effect to a three-for-two stock split on September 10, 2001. (2) Options were issued in fiscal 2001 at 100% of the closing price of our common stock on dates of issue and vest as follows: Lee N. Blatt and Myron Levy -- at date of grant, Allan L. Coon Howard Eckstein and Mitchell Tuckman -- one-fifth of the options on each of the first through fifth anniversaries of the date of grant. (3) Total options issued to employees and directors in fiscal 2001 were for 829,500 shares of common stock. (4) The amounts under the columns labeled "5%" and "10%" are included by us pursuant to certain rules promulgated by the Commission and are not intended to forecast future appreciation, if any, in the price of the common stock. Such amounts are based on the assumption that the named persons hold the options for the full term of the options. The actual value of the options will vary in accordance with the market price of the common stock. The column headed "0%" is included to demonstrate that the options were issued with an exercise price greater than or equal to the trading price of the Common Stock so that the holders of the options will not recognize any gain without an increase in the stock price, which increase benefits all stockholders commensurately. 39 AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES The following table sets forth stock options exercised during fiscal 2001 and all unexercised stock options and warrants held by the named executive officers as of July 29, 2001.
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN THE-MONEY OPTIONS AND WARRANTS OPTIONS AND WARRANTS SHARES AT FISCAL YEAR-END(2) AT FISCAL YEAR-END(2)(3) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- -------------- ----------- ------------- ----------- ------------- Lee N. Blatt............ -- $ -- 1,199,999 -- $12,055,490 $ -- Myron Levy.............. -- -- 1,100,000 -- 10,607,874 -- Allan L. Coon........... -- -- 97,998 27,000 1,078,495 250,394 Howard Eckstein......... -- -- 23,250 40,500 207,964 347,676 Mitchell Tuckman........ 1,500 6,875 19,500 35,250 140,914 276,524
- --------------- (1) Values are calculated by subtracting the exercise price from the trading price of the common stock as of the exercise date (2) Adjusted to give effect to a three-for-two stock split on September 10, 2001. (3) Based upon the closing price of the common stock of $17.57 on July 29, 2001. EMPLOYMENT AGREEMENTS Lee N. Blatt entered into an employment agreement with us, dated as of October 1, 1998 (as modified January 26, 1999 and July 30, 1999), which provides for an initial four year and three month term commencing October 1, 1998, and terminating on December 31, 2003 (as extended). The term of the agreement automatically extends for three years from each January 1, unless either party provides written notice not to extend the term. Pursuant to the agreement, Mr. Blatt receives compensation consisting of a base salary of $626,217, as adjusted June 30, 2001, with an annual cost of living increase plus an incentive bonus. Mr. Blatt's incentive bonus is 5% of our pretax income in excess of $2,000,000. Mr. Blatt waived the incentive bonus for fiscal 2001. Myron Levy entered into an employment agreement with us, dated as of October 1, 1998, (as modified January 26, 1999 and July 30, 1999), which provides for an initial four year and three month term commencing October 1, 1998, and terminating on December 31, 2003 (as extended), and a five year consulting period commencing at the end of the active employment period. The term of the agreement automatically extends for three years from each January 1, unless either party provides written notice not to extend the term. Pursuant to the agreement, Mr. Levy receives compensation consisting of a base salary of $462,097, as adjusted June 30, 2001, with an annual cost of living increase plus an incentive bonus. Mr. Levy's incentive bonus is 4% of our pretax income in excess of $2,000,000. Mr. Levy's compensation during the consulting period is at the annual rate of $100,000. Mr. Levy waived the incentive bonus for fiscal 2001. The employment agreements with Messrs. Blatt and Levy provide for certain payments following death or disability. The employment agreements also provide, in the event of a change in our control, as defined therein, the right, at their election, to terminate the agreement and receive a lump sum payment of approximately three times their annual salary. Messrs. Eckstein and Tuckman have each entered into a severance agreement with us dated July 26, 2000, which provides that in the event of a change in control prior to July 27, 2002, each is entitled to two years' base salary. The base salary of each executive as of November 1, 2001 is as follows: Mr. Eckstein $150,000, and Mr. Tuckman $175,000. 40 INDEMNIFICATION AGREEMENTS We have entered into separate indemnification agreements with our officers and directors. We have agreed to provide indemnification with regard to certain legal proceedings so long as the indemnified officer or director has acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests and with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. We only provided indemnification for expenses, judgments, fines and amounts paid in settlement actually incurred by the relevant officer or director, or on his or her behalf, arising out of proceedings brought against such officer or director by reason of his or her corporate status. CERTAIN 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. We used this land for a 15,000 square foot addition. On September 23, 1999, we closed on the sale of General Microwave's property in Amityville, New York and relocated the plant to a leased facility in Farmingdale, New York. We entered into a 10-year lease agreement with a partnership owned by the children of Messrs. Blatt and Levy. The lease provides for initial minimum annual rent of approximately $312,000 subject to escalation of approximately 4% annually throughout the term. Additionally, in March 2000, we entered into another 10-year lease agreement with the same partnership for additional space. The initial minimum annual rent of $92,000 is subject to escalation of approximately 4% annually throughout the 10-year term. We believe that these transactions were entered into at fair market values on the respective dates. STOCK PLANS Certain of our officers and directors hold options or warrants to purchase common stock under our 1996 Stock Option Plan, 1997 Stock Option Plan, 1998 Stock Option Plan, 2000 Stock Option Plan, and under certain warrant agreements. The following information about our stock plans and warrant agreements reflect our three-for-two stock split as of September 10, 2001. 1996 Stock Option Plan. The 1996 Stock Option Plan covers 1,000,000 shares of common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified stock options. Under the terms of the plan, the exercise price of 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 our stock are at least 110% of market value at the date of grant. The nature and terms of the options to be granted are determined at the time of grant by the compensation committee or the board of directors. If not specified, 100% of the shares can be exercised one year after the date of grant. The options expire not later than ten years from the date of grant. At July 29, 2001, non-qualified options to purchase 78,996 shares of common stock were outstanding under this plan. 1997 Stock Option Plan. The 1997 Stock Option Plan covers 2,500,000 shares of common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified stock options. Under the terms of the plan, the exercise price of 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 our stock are at least 110% of market value at the date of grant. The nature and terms of the options to be granted are determined at the time of grant by the compensation committee or the board of directors. If not specified, 100% of the shares can be exercised one year after the date of grant. The options expire not later than ten years from the date of grant, subject to certain restrictions. Options for 14,250 shares of common stock were granted during the fiscal year ended July 29, 2001. At July 29, 2001, options to purchase 1,181,740 shares of common stock were outstanding under this plan. 41 1998 Stock Option Plan. The 1998 Stock Option Plan covers 2,250,000 shares of common stock. Options granted under the plan may be incentive stock options qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified stock options. Under the terms of the plan, the exercise price of 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 our stock are at least 110% of market value at the date of grant. The nature and terms of the options to be granted are determined at the time of grant by the compensation committee or the board of directors. If not specified, 100% of the shares can be exercised one year after the date of grant. The options expire not later than ten years from the date of grant, subject to certain restrictions. Options for 440,250 shares of common stock were granted during the fiscal year ended July 29, 2001. At July 29, 2001, options to purchase 2,122,050 shares of common stock were outstanding under this plan. 2000 Stock Option Plan. The 2000 Stock Option Plan covers 1,500,000 shares of common stock. Options granted under the plan are non-qualified stock options. Under the terms of the plan, the exercise price of options granted under the plan will be the fair market value at the date of grant. The nature and terms of the options to be granted are determined at the time of grant by the compensation committee or the board of directors. If not specified, 100% of the shares can be exercised one year after the date of grant. The options expire not later than ten years from the date of grant, subject to certain restrictions. Options for 375,000 shares of common stock were granted during the fiscal year ended July 29, 2001. At July 29, 2001, options to purchase 375,000 shares of common stock were outstanding under this plan. On March 12, 2001, we issued ten year options to purchase 150,000 shares of common stock at a price of $8.3753 per share, the fair market value at the date of grant, under these plans to each of Lee N. Blatt and Myron Levy, which options vest at grant date, and five year options for 15,000 shares of common stock at a price of $8.3753 per share to each of Allan L. Coon and Howard Eckstein, and options for 11,250 shares to Mitchell Tuckman. One-fifth of the five-year options will vest on each anniversary of the date of grant. Warrant Agreements. In December 1995, warrants were issued to certain officers for the right to acquire 440,000 shares of common stock at an exercise price of $3.09 per share at date of issue. These warrants expire December 13, 2005. At July 29, 2001, warrants to purchase 320,000 shares of common stock at $3.09 per share were outstanding. EMPLOYEE SAVINGS PLAN We maintain an Employee Savings Plan that qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows employees to contribute between 2% and 15% of their salaries to the plan. At our discretion, we can contribute 100% of the first 2% of the employees' salary so contributed and 25% of the next 4% of salary. Additional contributions can be made by us, depending on profits. The aggregate benefit payable to an employee depends upon the employee's rate of contribution, the earnings of the fund, and the length of time such employee continues as a participant. We recognized expenses of approximately $164,000, $415,000 and $266,000 for the 52 weeks ended July 29, 2001, July 30, 2000 and August 1, 1999, respectively. For the year ended July 29, 2001, $4,800 was contributed by us to this plan for each of Messrs. Blatt, Levy, Coon, Eckstein and Tuckman, and $31,414 was contributed for all officers and directors as a group. 42 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth the indicated information as of January 27, 2002 with respect to the beneficial ownership of our securities by: (1) all persons known to us to be beneficial owners of more than 5% of the outstanding shares of common stock, based solely on filings with the SEC, (2) each director and named executive officer, and (3) by all executive officers and directors as a group.
SHARES OF COMMON STOCK BENEFICIALLY OWNED(1)(2) -------------------- NAME SHARES PERCENT - ---- --------- ------- Lee N. Blatt(3)(5).......................................... 987,420 8.2% Myron Levy(5)(6)............................................ 837,680 7.1% Howard M. Eckstein(5)....................................... 30,750 * Mitchell Tuckman(5)......................................... 9,750 * Adm. Thomas J. Allshouse(5)................................. 73,250 * David H. Lieberman(5)....................................... 12,650 * John A. Thonet(4)(5)........................................ 81,788 * Alvin M. Silver(5).......................................... 56,250 * Adm. Edward K. Walker, Jr. (Ret.)(5)........................ 42,750 * Royce & Associates(7)....................................... 633,450 5.5% Directors and executive officers as a group (9 persons)..... 2,132,288 16.8%
- --------------- * less than 1%. (1) No executive officer or director owns more than one percent of the outstanding shares of common stock unless otherwise indicated. Ownership represents sole voting and investment power. (2) In the event the over-allotment option is exercised in full, after the offering will own shares, or %, and will own shares, or %. (3) Does not include an aggregate of 458,902 shares owned by family members, including Hannah Thonet, Rebecca Thonet, Kathi Thonet, Randi Rossignol, Max Rossignol, Henry Rossignol, Patrick Rossignol and Allyson Gerber, of which Mr. Blatt disclaims beneficial ownership. Includes 100,000 shares owned by Mr. Blatt's wife, Sydelle Blatt. (4) Does not include 155,998 shares, owned by Mr. Thonet's children, Hannah and Rebecca Thonet, and 32,417 shares owned by his wife, Kathi Thonet. Mr. Thonet disclaims beneficial ownership of these shares. (5) Includes shares subject to options exercisable within the 60 days after January 27, 2002 at prices ranging from $4.0625 to $10.9733 per share pursuant to our Stock Plans: Lee N. Blatt -- 601,000, Myron Levy -- 375,000, Howard Eckstein -- 30,750, Mitchell Tuckman -- 8,250, Adm. Thomas J. Allshouse -- 56,250, David H. Lieberman -- 11,750, John A. Thonet -- 61,250, Alvin M. Silver -- 56,250, Edward K. Walker -- 41,250. (6) Includes shares subject to outstanding warrants exercisable within 60 days after January 27, 2002 at a price of $3.0937: 20,000 shares held by Mr. Levy's wife, Merle Levy. Does not include an aggregate of 80,000 warrants held by family members, including Ronni Roth, Samantha Roth, Zachary Roth, Stephanie Steren, Ian Steren and Jack Steren, of which Mr. Levy disclaims beneficial ownership. (7) Address is 1414 Avenue of the Americas, Ninth Floor, New York, NY 10019. 43 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 20,000,000 shares of common stock, $.10 par value per share. COMMON STOCK General. We have 20,000,000 authorized shares of common stock, 14,431,865 of which will be issued and outstanding following the consummation of this offering, assuming no exercise of the over-allotment option. All of our shares of common stock outstanding will be validly issued, fully paid and non- assessable. Voting Rights. Each share of common stock entitles its holder to one vote, either in person or by proxy, at meetings of stockholders. Our board of directors will consist of three classes each of which serves for a term of three years. At each annual meeting of the stockholders, the directors in only one class will be elected. The holders are not permitted to vote their shares cumulatively. Accordingly, the holders of more than fifty percent (50%) of the issued and outstanding shares of common stock can elect all of our directors. Dividend Policy. All shares of common stock are entitled to participate ratably in dividends when and as declared by our board of directors out of the funds legally available for payment of dividends. Any dividends may be paid in cash, property or additional shares of common stock. We presently expect that any earnings will be used to develop our business and that no cash dividends on the shares of common stock will be declared in the foreseeable future. Payment of future cash dividends will be subject to the discretion of our board of directors and will depend upon, among other things - future earnings; - our operating and financial condition; - our capital requirements; and - general business conditions. Therefore, cash dividends on our common stock may not be paid in the future. For additional information regarding our intention to pay dividends, see "Dividend Policy." Miscellaneous Rights and Provisions. Holders of common stock do not have: - preemptive or other subscription rights; - conversion rights; - redemption; or - sinking fund provisions. In the event of our liquidation or dissolution, whether voluntary or involuntary, each share of common stock is entitled to share ratably in any assets available for distribution to our holders of the equity after satisfaction of all liabilities. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, New York, New York. 44 UNDERWRITING Subject to the terms and conditions of an underwriting agreement, dated , 2002, the underwriters named below, acting through their representative, Bear, Stearns & Co. Inc. and SG Cowen Securities Corporation, have severally agreed with us and the selling stockholders, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth below opposite their respective names.
UNDERWRITER NUMBER OF SHARES - ----------- ---------------- Bear, Stearns & Co. Inc..................................... SG Cowen Securities Corporation............................. -------- Total....................................................... --------
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of common stock offered by this prospectus are subject to approval by their counsel of legal matters and to other conditions set forth in the underwriting agreement. The underwriters are obligated to purchase and accept delivery of all the shares of common stock offered hereby, other than those shares covered by the over-allotment option described below, if any are purchased. The representatives have advised us that the underwriters propose to offer the shares of common stock directly to the public at the public offering price indicated on the cover page of this prospectus and to certain dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as indicated on the cover page of this prospectus. The common stock is offered by the underwriters as stated in this prospectus, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have informed us that they do not intend to confirm sales of common stock to any accounts over which they exercise discretionary authority. We and the selling stockholders have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase from time to time up to an aggregate of 450,000 shares of our common stock to cover over-allotments, if any, at the public offering price less underwriting discounts and commissions. If the underwriters exercise their over-allotment option to purchase any of the additional 450,000 shares of common stock, each underwriter, subject to certain conditions, will become obligated to purchase its pro-rata portion of these additional shares based on the underwriter's percentage purchase commitment in the offering as indicated in the table above. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered by this prospectus are being sold. We and the selling stockholders will be obligated, pursuant to the over-allotment option, on a pro-rata basis, to sell shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the over-allotment option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. The following table summarizes the underwriting compensation to be paid to the underwriters by us and the selling stockholders from the proceeds of the offering, before expenses, to us. Such amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares.
TOTAL ------------------------------- WITHOUT WITH PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT ---------- -------------- -------------- Underwriting discounts and commissions payable by us.................................................. $ $ $ Underwriting discounts and commissions payable by the selling stockholders................................ $ $ -- $
The underwriting discount and commission per share is equal to the public offering price per share of our common stock less the amount paid by the underwriters to us per share of common stock. 45 We estimate total expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $375,000. We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect of those liabilities. Each of our executive officers and directors including, without limitation, the selling stockholders have agreed, subject to specified exceptions, not to enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common stock (regardless of whether any of these transactions are to be settled by the delivery of common stock, or such other securities, in cash or otherwise) for a period of 90 days after the date of this prospectus without the prior written consent of Bear, Stearns & Co. Inc. This restriction terminates after the close of trading of the common stock on and including the 90th day after the registration statement relating to the offering has been declared effective by the staff of the Securities and Exchange Commission. However, Bear, Stearns & Co. Inc. may, in its sole discretion and at any time or from time to time before the termination of the 90-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives and any of our stockholders who have executed a lock-up agreement, other than the selling stockholders, providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that, subject to certain exceptions, during the lock-up period we will not, without the prior written consent of Bear, Stearns & Co. Inc., consent to the disposition of any shares held by stockholders subject to lock-up agreements prior to the expiration of the lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, the issuance of our common stock upon the exercise of outstanding options or warrants, and the issuance of options or shares of common stock under existing stock option and incentive plans. Other than in the United States, no action has been taken by us, the selling stockholders, or the underwriters that would permit a public offering of the shares of common stock offered by this prospectus in any jurisdiction where action for that purpose is required. The shares of common stock offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of common stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of common stock offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful. A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters of this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representatives on the same basis as other allocations. Other than the prospectus in electronic format, the information on any underwriter's web site and any information contained in any other web site maintained by an underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors. The representatives have advised us that, pursuant to Regulation M under the Securities Exchange Act, some participants in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or 46 maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the representative to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representative in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon for us by the law firm of Blau, Kramer, Wactlar & Lieberman, P.C., Jericho, New York. David H. Lieberman, our Secretary and one of our directors, is a member of Blau, Kramer, Wactlar & Lieberman, P.C. Mr. Lieberman owns shares and has options to purchase shares of our common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. EXPERTS The audited financial statements included in this prospectus and incorporated by reference, to the extent and for the periods indicated in their report, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts. WHERE YOU CAN FIND MORE INFORMATION We are a reporting company and file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy such materials at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain copies of such material from the SEC at prescribed rates for the cost of copying by writing to the Public Reference Section of the SEC at the same address. You may call the SEC at 1-800-SEC-0330 for more information on the public reference rooms. You can also find our SEC filings at the SEC's website at www.sec.gov. 47 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" information that we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the termination of this offering. - Annual Report on Form 10-K for the year ended July 29, 2001. - Quarterly Reports on Form 10-Q for the quarters ended October 28, 2001 and January 27, 2002. - Proxy Statement dated November 26, 2001 for our Annual Meeting of Stockholders. You may request a copy of these filings at no cost, by writing or telephoning us at the following address: Herley Industries, Inc. 3061 Industry Drive Lancaster, Pennsylvania 17603 (717) 397-2777 e-mail: herley@herley.com This prospectus is part of a registration statement that we filed with the SEC. This prospectus does not contain all of the information included in the registration statement. We have omitted certain parts of the registration statement in accordance with the rules and regulations of the SEC. For further information, we refer you to the registration statement, including its exhibits and schedules. 48 HERLEY INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- FINANCIAL STATEMENTS: July 29, 2001: Report of Independent Public Accountants............... F-2 Consolidated Balance Sheets, July 30, 2000 and July 29, 2001.................................................. F-3 Consolidated Statements of Income for the 52 weeks ended August 1, 1999, July 30, 2000, and July 29, 2001.................................................. F-4 Consolidated Statements of Cash Flows for the 52 Weeks Ended August 1, 1999, July 30, 2000, and July 29, 2001.................................................. F-5 Consolidated Statements of Shareholders' Equity for the 52 weeks ended August 1, 1999, July 30, 2000, and July 29, 2001.............................................. F-6 Notes to Consolidated Financial Statements............. F-7 Schedules have been omitted as not applicable. January 27, 2002: Consolidated Balance Sheets -- July 29, 2001 and January 27, 2002 (Unaudited).......................... F-25 Consolidated Statements of Income (Loss) (Unaudited) -- For the thirteen and twenty-six weeks ended January 28, 2001 and January 27, 2002........... F-26 Consolidated Statements of Cash Flows (Unaudited) --For the thirteen and twenty-six weeks ended January 28, 2001 and January 27, 2002............................. F-27 Notes to Consolidated Financial Statements (Unaudited)........................................... F-29
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 30, 2000 and July 29, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for the 52 weeks ended August 1, 1999, July 30, 2000 and July 29, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Herley Industries, Inc. and Subsidiaries as of July 30, 2000 and July 29, 2001, and the consolidated results of their operations and their cash flows for the 52 weeks ended August 1, 1999, July 30, 2000 and July 29, 2001 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Lancaster, PA October 3, 2001 (except with respect to the matters discussed in Note P, as to which the date is March 1, 2002.) F-2 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JULY 30, JULY 29, 2000 2001 --------- --------- (IN THOUSANDS EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 7,665 $ 13,041 Accounts receivable....................................... 14,315 16,069 Costs incurred and income recognized in excess of billings on uncompleted contracts............................... 146 541 Other receivables......................................... 293 160 Inventories............................................... 23,045 31,397 Assets held for sale...................................... -- 2,370 Deferred taxes and other.................................. 2,795 1,958 ------- -------- Total Current Assets.............................. 48,259 65,536 Property, Plant and Equipment, net.......................... 18,992 21,312 Intangibles, net of amortization of $3,095 in 2000 and $4,639 in 2001............................................ 18,096 26,766 Available-For-Sale Securities............................... 146 146 Other Investments........................................... 1,020 773 Other Assets................................................ 143 64 ------- -------- $86,656 $114,597 ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt......................... $ 282 $ 213 Accounts payable and accrued expenses..................... 9,602 15,304 Billings in excess of costs incurred and income recognized on uncompleted contracts............................... -- 531 Income taxes payable...................................... 1,426 1,061 Reserve for contract losses............................... 467 472 Advance payments on contracts............................. 1,006 261 Liabilities held for sale................................. -- 890 ------- -------- Total Current Liabilities......................... 12,783 18,732 Long-term Debt.............................................. 2,931 2,740 Deferred Income Taxes....................................... 5,571 4,452 ------- -------- 21,285 25,924 ------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 5,993,870 in 2000 and 10,537,289 in 2001..................................... 599 1,054 Additional paid-in capital................................ 29,808 45,250 Retained earnings......................................... 34,964 42,369 ------- -------- Total Shareholders' Equity........................ 65,371 88,673 ------- -------- $86,656 $114,597 ======= ========
The accompanying notes are an integral part of these financial statements. F-3 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
52 WEEKS ENDED ------------------------------------ AUGUST 1, JULY 30, JULY 29, 1999 2000 2001 ---------- --------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) Net sales................................................... $61,036 $70,537 $76,494 ------- ------- ------- Cost and expenses: Cost of products sold..................................... 36,749 44,382 50,691 Selling and administrative expenses....................... 11,877 13,497 14,810 ------- ------- ------- 48,626 57,879 65,501 ------- ------- ------- Operating income.......................................... 12,410 12,658 10,993 ------- ------- ------- Other income (expense), net: Investment income......................................... 298 232 679 Interest expense.......................................... (748) (1,138) (232) ------- ------- ------- (450) (906) 447 ------- ------- ------- Income from continuing operations before income taxes and extraordinary item..................................... 11,960 11,752 11,440 Provision for income taxes.................................. 4,098 4,113 3,867 ------- ------- ------- Income from continuing operations before extraordinary item................................................... 7,862 7,639 7,573 Extraordinary item -- loss on extinguishment of debt (net of income tax benefit of $68)................................ (127) -- -- ------- ------- ------- Income from continuing operations......................... 7,735 7,639 7,573 Loss from discontinued operations net of income taxes....... -- -- (168) ------- ------- ------- Net income................................................ $ 7,735 $ 7,639 $ 7,405 ======= ======= ======= Earnings (loss) per common share -- Basic Income from continuing operations before extraordinary item................................................... $ 1.00 $ 1.05 $ .75 Extraordinary item -- loss on extinguishment of debt...... (.01) -- -- Loss from discontinued operations......................... -- -- (.02) ------- ------- ------- Net earnings.............................................. $ .99 $ 1.05 $ .73 ======= ======= ======= Basic weighted average shares............................. 7,849 7,308 10,082 ======= ======= ======= Earnings (loss) per common share -- Diluted Income from continuing operations before extraordinary item........... $ .92 $ .96 $ .69 Extraordinary item -- loss on extinguishment of debt...... (.01) -- -- Loss from discontinued operations......................... -- -- (.02) ------- ------- ------- Net earnings.............................................. $ .91 $ .96 $ .68 ======= ======= ======= Diluted weighted average shares........................... 8,490 7,928 10,956 ======= ======= =======
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
COMMON STOCK ADDITIONAL ------------------- PAID-IN RETAINED TREASURY SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL ---------- ------ ---------- -------- -------- ------- (IN THOUSANDS EXCEPT SHARE DATA) 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
52 WEEKS ENDED ------------------------------- AUGUST 1, JULY 30, JULY 29, 1999 2000 2001 --------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Income from continuing operations......................... $ 7,735 $ 7,639 $ 7,573 -------- -------- -------- Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization........................... 3,289 3,998 4,772 (Gain) loss on sale of fixed assets..................... -- (21) 4 Extraordinary loss on extinguishment of debt, net of income taxes.......................................... 127 -- -- Equity in income of limited partnership................. (99) (71) (49) Decrease (increase) in deferred tax assets.............. 483 (148) 962 (Decrease) increase in deferred tax liabilities......... (141) 342 (1,119) Changes in operating assets and liabilities: (Increase) in accounts receivable..................... (361) (1,568) (547) Decrease (increase) in costs incurred and income recognized in excess of billings on uncompleted contracts.......................................... 1,665 (146) (395) Decrease (increase) in other receivables.............. 36 (20) 133 Decrease in prepaid income taxes...................... 377 -- -- Decrease (increase) in inventories.................... 729 (1,625) (6,880) Decrease in prepaid expenses and other................ 199 4 25 (Decrease) increase in accounts payable and accrued expenses........................................... (2,119) 685 1,088 Increase in billings in excess of costs incurred and income recognized on uncompleted contracts......... -- -- 531 Increase (decrease) in income taxes payable........... 2,019 1,458 (281) Increase (decrease) in reserve for contract losses.... 360 (1,038) (1,201) (Decrease) increase in advance payments on contracts.......................................... (1,620) 195 (745) Other, net............................................ 44 170 (13) -------- -------- -------- Total adjustments.................................. 4,988 2,215 (3,715) -------- -------- -------- Net cash provided by operations......................... 12,723 9,854 3,858 -------- -------- -------- Cash flows from investing activities: Acquisition of businesses, net of cash acquired........... (20,101) (6,095) (8,373) Proceeds from sale of fixed assets........................ 6 4,142 16 Partial distribution from limited partnership............. -- -- 296 Capital expenditures...................................... (1,662) (2,618) (3,679) -------- -------- -------- Net cash used in investing activities................... (21,757) (4,571) (11,740) -------- -------- -------- Cash flows from financing activities: Borrowings under bank line of credit...................... 29,500 13,900 7,100 Proceeds from refinance of mortgage note.................. 2,915 -- -- Proceeds from exercise of stock options and warrants, net..................................................... (1,164) 21,574 16,008 Payments under lines of credit............................ (18,500) (26,400) (7,100) Payments of long-term debt................................ (970) (1,868) (908) Extinguishment of debt.................................... (3,006) -- -- Purchase of treasury stock................................ (7,689) (7,565) (194) -------- -------- -------- Net cash provided by (used in) financing activities..... 1,086 (359) 14,906 -------- -------- -------- Net cash used in discontinued operations.................... -- -- (1,648) -------- -------- -------- Net (decrease) increase in cash and cash equivalents.... (7,948) 4,924 5,376 Cash and cash equivalents at beginning of period............ 10,689 2,741 7,665 -------- -------- -------- Cash and cash equivalents at end of period.................. $ 2,741 $ 7,665 $ 13,041 ======== ======== ======== Supplemental cash flow information: Cashless exercise of stock options........................ $ 5,989 $ 80 $ -- ======== ======== ======== Stock issued for business acquired........................ $ -- $ 514 $ -- ======== ======== ======== Warrants issued for business acquired..................... $ 1,450 $ -- $ -- ======== ======== ======== Tax benefit related to stock options...................... $ 2,127 $ 304 $ 83 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-6 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Nature of Operations The Company, a Delaware corporation, is engaged in research, engineering, product development, and manufacturing of complex microwave radio frequency (RF) and millimeter wave components and subsystems for defense and commercial customers worldwide. 2. Fiscal Year The Company's fiscal year ends on the Sunday closest to July 31. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year will consist of 53 weeks. 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. Certain amounts in the financial statements and notes thereto have been reclassified to conform to the 2001 presentation. 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 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $754,000, $1,109,000 and $1,544,000 in fiscal 1999, 2000 and 2001, 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 estimated completion to date (the total contract amount multiplied by percent of performance, based on F-8 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $1,685,000, $2,264,000, and $2,588,000 in fiscal 1999, 2000, and 2001, respectively, and are included in cost of products sold.. 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 were adopted by the Company on July 30, 2001. The adoption of SFAS No. 142 resulted in the Company's discontinuation of amortization of its goodwill and intangible assets which amounted to $1,504,000 in fiscal 2001. The Company was required to assess its goodwill for impairment under the new standard within six months of adoption and completed its assessment in the second quarter of 2002. A transition adjustment in the amount of $4,637,000 was F-9 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recorded as of July 30, 2001 in the second quarter of 2002 as a cumulative effect of a change in accounting principle. 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 targeted gross revenues under the agreement were not achieved, therefore no additional cash payments are required. 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 was being amortized over 20 years through July 29, 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. 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 was being amortized over 20 years through July 29, 2001. The acquisitions of Terrasat and AMT contributed approximately $10,915,000 in revenues in the fiscal year ended July 29, 2001. 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 was being amortized over 20 years through July 29, 2001. On the basis of a pro forma consolidation of the results of operations as if the acquisition of Robinson 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 F-10 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Excess cost over the fair value of net assets acquired of approximately $7,551,000 was being amortized over 20 years through July 29, 2001. On the basis of a pro forma consolidation of the results of operations as if the acquisition of GMC 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 30, JULY 29, 2000 2001 -------- -------- Purchased parts and raw materials........................ $12,804 $16,548 Work in process.......................................... 9,358 12,854 Finished products........................................ 883 1,995 ------- ------- $23,045 $31,397 ======= =======
NOTE D -- OTHER INVESTMENTS In July 1994, the Company invested $1,000,000 for a limited partnership interest in M.D. Sass Municipal Finance Partners-I, a Delaware limited partnership. The objectives of the partnership are the preservation and protection of its capital and the earning of income through the purchase of certificates or other documentation that evidence liens for unpaid local taxes on parcels of real property. At July 30, 2000 F-11 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and July 29, 2001 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 30, JULY 29, ESTIMATED 2000 2001 USEFUL LIFE -------- -------- ----------- Land............................................... $ 2,149 $ 2,908 Building and building improvements................. 8,418 8,643 10-40 years Machinery and equipment............................ 26,293 30,403 5-8 years Furniture and fixtures............................. 915 1,049 5-10 years Automobiles........................................ 108 91 3 years Tools.............................................. 34 34 5 years Leasehold improvements............................. 1,351 1,586 5-10 years ------- ------- 39,268 44,714 Less accumulated depreciation...................... 20,276 23,402 ------- ------- $18,992 $21,312 ======= =======
Depreciation charges totaled $2,535,000, $2,889,000, and $3,127,000 in fiscal 1999, 2000, and 2001, respectively. NOTE F -- COMMITMENTS AND CONTINGENCIES Leases The Company leases office, production and warehouse space as well as computer equipment and automobiles under noncancellable operating leases. Rent expense for the 52 weeks ended August 1, 1999, July 30, 2000, and July 29, 2001, was approximately $519,000, $1,053,000, and $1,506,000, 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
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 $969,000, and $971,000, F-12 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was expensed in fiscal years 1999, and 2000, 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, 2004. At July 29, 2001 stand-by letters of credit aggregating approximately $4,479,000 were outstanding under this facility. F-13 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE G -- INCOME TAXES Income tax provision consisted of the following (in thousands):
52 WEEKS ENDED --------------------------------- AUGUST 1, JULY 30, JULY 29, 1999 2000 2001 --------- -------- -------- Current Federal............................................... $3,328(1) $3,573 $3,050 State................................................. 399 192 275 Foreign............................................... 29 154 202 ------ ------ ------ 3,756 3,919 3,527 ------ ------ ------ Deferred Federal............................................... 540 215 248 State................................................. (198) (21) 92 ------ ------ ------ 342 194 340 ------ ------ ------ $4,098 $4,113 $3,867 ====== ====== ======
- --------------- (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 $1,324,000, $2,241,000, and $4,427,000 in fiscal 1999, 2000, and 2001, 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 --------------------------------- AUGUST 1, JULY 30, JULY 29, 1999 2000 2001 --------- -------- -------- U.S. Federal statutory rate............................. 34.0% 34.0% 34.0% State taxes, net of federal tax benefit................. 1.4 0.9 2.4 Benefit of foreign sales corporation.................... (3.2) (2.1) (2.6) Non-deductible expenses................................. 1.4 1.8 1.9 Benefit of foreign and foreign-source income............ (1.2) (1.8) (2.3) Other, net.............................................. 1.9 2.2 0.4 ---- ---- ---- Effective tax rate.................................... 34.3% 35.0% 33.8% ==== ==== ====
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 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Components of deferred tax assets and liabilities are as follows (in thousands):
JULY 30, 2000 JULY 29, 2001 ----------------------- ----------------------- DEFERRED DEFERRED DEFERRED DEFERRED TAX TAX TAX TAX ASSETS LIABILITIES ASSETS LIABILITIES -------- ----------- -------- ----------- Intangibles................................. $ -- $1,766 $ -- $1,943 Accrued vacation pay........................ 323 -- 446 -- Accrued bonus............................... 578 -- 39 -- Warranty costs.............................. 95 -- 100 -- Inventory................................... 1,011 -- 838 -- Depreciation................................ -- 3,770 -- 2,873 Contract losses............................. 345 -- 146 -- Net operating loss carryforwards............ 96 -- 230 -- Other....................................... 201 195 342 99 ------ ------ ------ ------ $2,649 $5,731 $2,141 $4,915 ====== ====== ====== ======
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 30, JULY 29, RATE 2000 2001 --------------- -------- -------- Revolving loan facility(a)...................... 8.15% and 7.20% $ -- $ -- Mortgage note(b)................................ 7.43% 2,840 2,765 Other........................................... -- 373 188 ------ ------ 3,213 2,953 Less current portion............................ 282 213 ------ ------ $2,931 $2,740 ====== ======
- --------------- (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, 2004. 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 30, 2000 and July 29, 2001. 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. F-15 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (b) The mortgage loan is for a term of ten years commencing February 16, 1999 with fixed monthly principal and interest installments of $23,359, including interest at a fixed rate of 7.43%, and is based upon a twenty year amortization. The loan is secured by a mortgage on the Company's land and building in Lancaster, Pennsylvania having a net book value of approximately $1,899,000. 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 30, 2000 and July 29, 2001, 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 $730,000 in 1999, $1,200,000 in 2000, and $289,000 in 2001. 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 30, JULY 29, 2000 2001 -------- -------- Accounts payable........................................ $3,812 $ 6,760 Accrued payroll and bonuses............................. 3,430 3,002 Due for business acquired............................... -- 3,000 Accrued commissions..................................... 710 591 Accrued interest........................................ 19 -- Accrued legal expenses.................................. 129 174 Accrued warranty costs.................................. 220 255 Accrued severance....................................... 594 780 Accrued rent expense.................................... -- 132 Lease termination cost.................................. 134 54 Other accrued expenses.................................. 554 556 ------ ------- $9,602 $15,304 ====== =======
F-16 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE J -- EMPLOYEE BENEFIT PLANS In August 1985, the Board of Directors approved an Employee Savings Plan ("Plan") which qualified as a thrift plan under Section 401(k) of the Internal Revenue Code. This Plan, as amended and restated, allows employees to contribute between 2% and 15% of their salaries to the Plan. The Company, at its discretion can contribute 100% of the first 2% of the employees' contribution and 25% of the next 4%. Additional Company contributions can be made depending on profits. The aggregate benefit payable to an employee is dependent upon his rate of contribution, the earnings of the fund, and the length of time such employee continues as a participant. The Company has recognized expenses of approximately $266,000, $415,000, and $164,000 under the Plan for the 52 weeks ended August 1, 1999, July 30, 2000, and July 29, 2001, 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) =====
F-17 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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%
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. F-18 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ------------------------------------------------ AUGUST 1, 1999 JULY 30, 2000 JULY 29, 2001 -------------- ------------- ------------- Numerator: Income from continuing operations before extraordinary item...................... $7,862 $7,639 $ 7,573 Extraordinary loss......................... 127 -- -- Loss from discontinued operations.......... -- -- 168 ------ ------ ------- Net Income................................. $7,735 $7,639 $ 7,405 ====== ====== ======= Denominator: Basic weighted-average shares.............. 7,849 7,308 10,082 Effect of dilutive securities: Employee stock options and warrants..... 641 620 874 ------ ------ ------- Diluted weighted-average shares............ 8,490 7,928 10,956 ====== ====== ======= Stock options and warrants not included in computation................................ 4,570 2,472 544 ====== ====== =======
The number of stock options and warrants not included in the computation of diluted EPS relates to stock options and warrants having exercise prices 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. 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 F-19 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ------------------------------------------------ AUGUST 1, 1999 JULY 30, 2000 JULY 29, 2001 -------------- ------------- ------------- Expected life of options..................... .65 years .71 years .73 years Volatility................................... .58 .72 .70 Risk-free interest rate...................... 5.1% 6.1% 3.4% Dividend yield............................... zero zero zero
Had compensation cost for stock options granted in fiscal years 1999, 2000, and 2001 been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below using the statutory income tax rate of 34% (in thousands except per share data):
1999 2000 2001 ------ ------ ------ Net income -- as reported................................ $7,735 $7,639 $7,405 Net income -- pro forma.................................. 5,940 5,952 5,795 Earnings per share -- as reported Basic.................................................. $ .99 $ 1.05 $ .73 Diluted................................................ .91 .96 .68 Earnings per share -- pro forma Basic.................................................. $ .76 $ .81 $ .57 Diluted................................................ .70 .75 .53
F-20 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 562,500, 969,750 and 440,250 shares were granted during the fiscal years ended August 1, 1999, July 30, 2000 and July 29, 2001, 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 1,313,250, 129,000, and 14,250 shares were granted during the fiscal years ended August 1, 1999, July 30, 2000 and July 29, 2001, 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-21 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of stock option activity under all plans for the 52 weeks ended August 1, 1999, July 30, 2000 and July 29, 2001 follows:
NON-QUALIFIED STOCK OPTIONS WARRANT AGREEMENTS ----------------------------------------------- ------------------------ NUMBER PRICE RANGE WEIGHTED AVERAGE NUMBER PRICE RANGE OF SHARES PER SHARE EXERCISE 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 RANGE OF EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED 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 operates as a single integrated business and as such has one operating segment as a provider of complex microwave radio F-22 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) frequency (RF) and millimeter wave components and subsystems for defense and commercial customers worldwide. All of the Company's revenues result from sales of its products. Revenues for fiscal years 1999, 2000 and 2001 were as follows: defense electronics, $58,700,000, $67,405,000 and $61,977,000, respectively; and commercial technologies, $2,336,000, $3,132,000, and $14,517,000, respectively. Net sales to the U.S. Government in 1999, 2000 and 2001 accounted for approximately 17%, 26% and 19% of net sales, respectively. No other customer accounted for shipments in excess of 10% of consolidated net sales in fiscal 2000 or 2001. One customer accounted for 12% of net sales in 1999. Foreign sales amounted to approximately $17,680,000, $16,506,000 and $20,683,000 in fiscal 1999, 2000 and 2001, respectively. Included in accounts receivable as of July 30, 2000 and July 29, 2001 are amounts due from the U.S. Government of approximately $2,269,000 and $2,003,000 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
NOTE P -- SUBSEQUENT EVENT -- DISCONTINUED OPERATIONS In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for segments of a business to be disposed of, but retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. The provisions of this statement were adopted by the Company effective on July 30, 2001. F-23 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In January 2002 the Board of Directors of the Company decided to discontinue the operations of Terrasat and to seek a buyer for the business. The Company no longer anticipates that Terrasat will be able to generate sufficient returns to justify continued investment due to the overcapacity in the telecom industry and deteriorating economic conditions in Terrasat's primary markets. Consequently, the accompanying consolidated financial statements reflect Terrasat as discontinued operations in accordance with SFAS No. 144. The assets and liabilities of Terrasat have been classified in the accompanying balance sheet as "Assets held for sale", and "Liabilities held for sale." Results of operations and cash flows of Terrasat have been classified as discontinued, for all periods presented. The following table shows the components of assets and liabilities of Terrasat held for sale as of July 29, 2001: Assets held for sale: Accounts receivable....................................... $ 978 Prepaid expenses.......................................... 21 Inventory................................................. 1,371 ------ $2,370 ====== Liabilities held for sale: Accounts payable.......................................... $ 626 Accrued expenses.......................................... 264 ------ $ 890 ======
Summarized below are the results of discontinued operations:
52 WEEKS ENDED JULY 29, 2001 -------------- Net sales................................................... $4,103 ------ Loss from discontinued operations........................... (147) Income tax provision........................................ 21 ------ Net loss from discontinued operations....................... $ (168) ======
The sale of the assets and liabilities, and the business of Terrasat was consummated on March 1, 2002 to certain current employees of Terrasat for cash and a note which approximates the value of the net assets held for sale as of January 27, 2002. F-24 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JULY 29, JANUARY 27, 2001 2002 --------- ----------- (AUDITED) (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 13,041 $ 13,381 Accounts receivable....................................... 16,069 12,865 Costs incurred and income recognized in excess of billings on uncompleted contracts............................... 541 5,864 Other receivables......................................... 160 143 Inventories............................................... 31,397 32,633 Prepaid income taxes...................................... -- 2,853 Assets held for sale...................................... 2,370 1,374 Deferred taxes and other.................................. 1,958 2,270 -------- -------- Total Current Assets.............................. 65,536 71,383 Property, Plant and Equipment, net.......................... 21,312 21,905 Unexpended industrial revenue bond proceeds................. -- 1,156 Goodwill.................................................... 26,302 21,665 Intangibles, net of amortization of $104 in 2001 and $125 in 2002...................................................... 464 443 Available-For-Sale Securities............................... 146 146 Other Investments........................................... 773 368 Other Assets................................................ 64 625 -------- -------- $114,597 $117,691 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt......................... $ 213 $ 258 Accounts payable and accrued expenses..................... 15,304 11,413 Billings in excess of costs incurred and income recognized on uncompleted contracts............................... 531 983 Income taxes payable...................................... 1,061 -- Reserve for contract losses............................... 472 482 Advance payments on contracts............................. 261 1,498 Liabilities held for sale................................. 890 496 -------- -------- Total Current Liabilities......................... 18,732 15,130 Long-term Debt.............................................. 2,740 5,596 Deferred Income Taxes....................................... 4,452 4,452 -------- -------- 25,924 25,178 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 10,537,289 at July 29, 2001 and 11,431,865 at January 27, 2002................ 1,054 1,143 Additional paid-in capital................................ 45,250 49,727 Retained earnings......................................... 42,369 41,643 -------- -------- Total Shareholders' Equity........................ 88,673 92,513 -------- -------- $114,597 $117,691 ======== ========
The accompanying notes are an integral part of these financial statements. F-25 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED -------------------------- -------------------------- JANUARY 28, JANUARY 27, JANUARY 28, JANUARY 27, 2001 2002 2001 2002 ----------- ----------- ----------- ----------- (IN THOUSANDS EXCEPT PER SHARE DATA) Net sales..................................... $17,065 $21,840 $34,823 $44,053 ------- ------- ------- ------- Cost and expenses: Cost of products sold....................... 11,347 14,804 22,328 29,378 Selling and administrative expenses......... 3,340 3,470 7,060 7,033 Plant closing costs......................... -- -- -- 406 ------- ------- ------- ------- 14,687 18,274 29,388 36,817 ------- ------- ------- ------- Income from operations...................... 2,378 3,566 5,435 7,236 Other income, net............................. 93 7 167 86 ------- ------- ------- ------- Income from continuing operations before income taxes............................. 2,471 3,573 5,602 7,322 Provision for income taxes.................... 844 1,180 1,933 2,490 ------- ------- ------- ------- Income from continuing operations........... 1,627 2,393 3,669 4,832 Loss from discontinued operations (including loss on net assets held for sale of $1,166 in 2002) net of income taxes................ (23) (777) (35) (921) ------- ------- ------- ------- Income before cumulative effect of change in accounting principle..................... 1,604 1,616 3,634 3,911 Cumulative effect of adopting SFAS 142........ -- -- -- (4,637) ------- ------- ------- ------- Net income (loss)........................ $ 1,604 $ 1,616 $ 3,634 $ (726) ======= ======= ======= ======= Earnings (loss) per common share -- Basic Income from continuing operations........... $ .16 $ .21 $ .38 $ .44 Loss from discontinued operations........... -- (.07) -- (.08) Cumulative effect of adopting SFAS 142...... -- -- -- (.42) ------- ------- ------- ------- Net earnings (loss)...................... $ .16 $ .14 $ .38 $ (.07) ======= ======= ======= ======= Basic weighted average shares............... 10,263 11,238 9,624 10,964 ======= ======= ======= ======= Earnings (loss) per common share -- Diluted Income from continuing operations........... $ .15 $ .20 $ .35 $ .41 Loss from discontinued operations........... -- (.06) -- (.08) Cumulative effect of adopting SFAS 142...... -- -- -- (.39) ------- ------- ------- ------- Net earnings (loss)...................... $ .14 $ .13 $ .34 $ (.06) ======= ======= ======= ======= Diluted weighted average shares............. 11,100 11,986 10,632 11,828 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-26 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-SIX WEEKS ENDED -------------------------- JANUARY 28, JANUARY 27, 2001 2002 ----------- ----------- (IN THOUSANDS) Cash flows from operating activities: Income from continuing operations......................... $ 3,669 $ 4,832 ------- ------- Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization.......................... 2,171 1,913 Equity in income of limited partnership................ (34) (40) Decrease (increase) in deferred tax assets............. 38 (297) (Decrease) in deferred tax liabilities................. (120) -- Changes in operating assets and liabilities: Decrease in accounts receivable...................... 633 3,204 (Increase) in costs incurred and income recognized in excess of billings on uncompleted contracts......... (818) (5,323) Decrease in other receivables........................ 192 17 (Increase) in inventories............................ (2,895) (1,236) (Increase) in prepaid expenses and other............. (59) (15) (Decrease) in accounts payable and accrued expenses............................................ (1,870) (3,891) Increase in billings in excess of costs incurred and income recognized on uncompleted contracts.......... -- 452 (Decrease) increase in income taxes payable.......... (648) 1,828 (Decrease) increase in reserve for contract losses... (171) 10 Increase in advance payments on contracts............ 3 1,237 Other, net........................................... (14) (111) ------- ------- Total adjustments................................. (3,592) (2,252) ------- ------- Net cash provided by operating activities.............. 77 2,580 ------- ------- Cash flows from investing activities: Investment of unexpended industrial revenue bond proceeds............................................... -- (1,156) Investment in technology license.......................... -- (500) Acquisition of businesses, net of cash acquired........... (8,373) -- Partial distribution from limited partnership............. -- 445 Capital expenditures...................................... (1,177) (2,435) ------- ------- Net cash used in investing activities.................. (9,550) (3,646) ------- -------
F-27
TWENTY-SIX WEEKS ENDED -------------------------- JANUARY 28, JANUARY 27, 2001 2002 ----------- ----------- (IN THOUSANDS) Cash flows from financing activities: Borrowings under bank line of credit...................... 1,000 2,400 Proceeds from industrial revenue bond financing........... -- 3,000 Proceeds from exercise of stock options and warrants...... 15,968 2,541 Payments under lines of credit............................ (1,000) (2,400) Payments of long-term debt................................ (765) (99) Purchase of treasury stock................................ (194) (3,717) ------- ------- Net cash provided by financing activities.............. 15,009 1,725 ------- ------- Net cash used in discontinued operations.................... (1,220) (319) ------- ------- Net increase in cash and cash equivalents.............. 4,316 340 Cash and cash equivalents at beginning of period............ 7,665 13,041 ------- ------- Cash and cash equivalents at end of period.................. $11,981 $13,381 ======= =======
The accompanying notes are an integral part of these financial statements. F-28 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED) 1. BASIS OF 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. On August 7, 2001 the Board of Directors declared a 3-for-2 stock split effected as a stock dividend payable September 10, 2001. All share and per share data included in this quarterly report have been restated to reflect the stock split. Due to rounding differences, earnings per share for the quarter and cumulatively for the year to date may differ in total by one cent. In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position and results of operations and cash flows for the periods presented. These financial statements (except for the balance sheet presented at July 29, 2001) are unaudited and have not been reported on by independent public accountants. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year due to external factors which are beyond the control of the Company. 2. DISCONTINUED OPERATIONS The Company entered into an agreement effective as of the close of business September 30, 2000, to acquire all of the issued and outstanding common stock of Terrasat, Inc. ("Terrasat"), a California corporation. 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 which was paid in December 2001. 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 targeted gross revenues under the agreement were not achieved, therefore no addition cash payments are required. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for segments of a business to be disposed of, but retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. The provisions of this statement were adopted by the Company effective on July 30, 2001. In January 2002 the Board of Directors of the Company decided to discontinue the operations of Terrasat and to seek a buyer for the business. The Company no longer anticipates that Terrasat will be able to generate sufficient returns to justify continued investment due to the overcapacity in the telecom industry and deteriorating economic conditions in Terrasat's primary markets. Consequently, the accompanying consolidated financial statements reflect Terrasat as discontinued operations in accordance with SFAS No. 144. The assets and liabilities of Terrasat have been classified in the accompanying balance sheet as "Assets held for sale", and "Liabilities held for sale." Results of operations and cash flows of Terrasat have been classified as discontinued, for all periods presented. F-29 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED) The following table shows the components of assets and liabilities of Terrasat held for sale:
JULY 29, JANUARY 27, 2001 2002 -------- ----------- Assets held for sale: Accounts receivable/other............................... $ 999 $ 974 Inventory............................................... 1,371 400 ------ ------ $2,370 $1,374 ====== ====== Liabilities held for sale: Accounts payable........................................ $ 626 $ 396 Accrued expenses........................................ 264 100 ------ ------ $ 890 $ 496 ====== ======
The sale of the assets and liabilities, and the business of Terrasat was consummated on March 1, 2002 to certain current employees of Terrasat for cash and a note which approximates the value of the net assets held for sale as of January 27, 2002. Summarized below are the results of discontinued operations:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED -------------------------- -------------------------- JANUARY 28, JANUARY 27, JANUARY 28, JANUARY 27, 2001 2002 2001 2002 ----------- ----------- ----------- ----------- Net sales............................. $ 1,257 $1,323 $ 1,593 $2,147 ------- ------ ------- ------ Loss from discontinued operations..... (2) (11) (9) (229) Loss on net assets held for sale...... -- (1,166) -- (1,166) Income tax provision (benefit)........ 21 (400) 26 (474) ------- ------ ------- ------ Net loss from discontinued operations.......................... $ (23) $ (777) $ (35) $ (921) ======= ====== ======= ======
3. INDUSTRIAL REVENUE BOND FINANCING On October 19, 2001, the Company received $3,000,000 in proceeds from the East Hempfield Township Industrial Development Authority Variable Rate Demand/Fixed Rate Revenue Bonds Series of 2001 (the "Bonds"). The Bonds are due in varying annual installments through October 1, 2021. The initial installment of $95,000 is due October 1, 2002 and increases each year until the final payment of $225,000 in 2021. The interest rate on the Bonds is reset weekly at the prevailing market rate of the BMA Municipal index. The initial rate of interest was 2.1%, which, after giving effect to a ten year interest rate swap agreement (See Note 4) becomes a fixed rate of 4.07%. The interest rate at January 27, 2002 was 1.41%. The bond agreement requires a sinking fund payment on a monthly basis to fund the annual Bonds redemption installment. Proceeds from the Bonds are being used for the construction of a 15,000 square foot expansion of the Company's facilities in Lancaster PA, and for manufacturing equipment. The presently unexpended proceeds from the Bonds are presented as a noncurrent asset on the consolidated balance sheet at January 27, 2002. As required by the Trust Indenture, these funds have been invested in a US Government money market portfolio, and are carried at cost which approximates market. The Bonds are secured by a letter of credit expiring October 18, 2006 and a mortgage on the related properties pledged as collateral. 4. FINANCIAL INSTRUMENTS The Company recognizes all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge") or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to F-30 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED) a recognized asset or liability ("cash flow hedge"). Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively. In October 2001, the Company entered into an interest rate swap with a bank pursuant to which it exchanged floating rate interest in connection with the Bonds discussed in Note 3 on a notional amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending October 1, 2011. The notional amount reduces each year in tandem with the annual installments due on the Bonds. The fixing of the interest rate for this period offsets the Company's exposure to the uncertainty of floating interest rates on the Bonds, and as such has been designated as a cash flow hedge. The hedge is deemed to be highly effective and any ineffectiveness will be recognized in interest expense in the reporting period. The market value of the interest rate swap was immaterial to the consolidated financial statements as of January 27, 2002. There was no material hedge ineffectiveness related to cash flow hedges during the period to be recognized in earnings. There was no gain or loss reclassified from accumulated other comprehensive income into earnings during the quarter ended January 27, 2002 as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. 5. PLANT CLOSING COSTS In connection with the plant closings in Anaheim, CA and Nashua, NH in October 2001, the Company accrued and charged to expense approximately $406,000 for employee severance and benefits, and lease termination costs. As of January 27, 2002 the Company paid approximately $328,000 of these costs. 6. SFAS 142 ADOPTION In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142 "Goodwill and Other Intangible Assets" which requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill will not be amortized into results of operations, but instead will be reviewed for impairments which will be charged to results of operations in the periods in which the recorded value of goodwill is more than its fair value. The provisions of this statement were adopted by the Company on July 30, 2001. The adoption of SFAS No. 142 resulted in the Company's discontinuation of amortization of its goodwill as of July 30, 2001. In connection with the adoption of SFAS 142, the Company was required to assess goodwill for impairment within six months of adoption, and completed its assessment in the second quarter of fiscal 2002. The Company operates as a single integrated business and as such has one operating segment which is also the reportable segment as defined in SFAS 131. Within the operating segment, the Company has identified two components as reporting units as defined under SFAS 142, defense electronics and commercial technologies. The Company has determined the carrying value of each reporting unit by F-31 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED) assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of July 30, 2001. The Company has determined that an impairment of goodwill in the commercial technologies unit has occurred. Accordingly, a transition adjustment in the amount of $4,637,000 has been recorded as of July 30, 2001 as a cumulative effect of a change in accounting principle. There is no tax benefit associated with the adjustment since the impaired goodwill is not deductible for income tax purposes. There was no impairment in the remaining goodwill at January 27, 2002 of approximately $21,665,000 related to the defense electronics reporting unit based on current market capitalization of the Company. An annual impairment test will be performed in the fourth quarter of each fiscal year and any future impairment of goodwill will be charged to operations. Amortization of goodwill charged to continuing operations for the quarter and twenty-six weeks ended January 28, 2001 and for the fiscal year ended July 29, 2001 was approximately $310,000, $602,000 and $1,296,000 respectively. Amortization of goodwill charged to discontinued operations for the quarter and twenty-six weeks ended January 28, 2001 and for the fiscal year ended July 29, 2001 was approximately $62,000, $83,000 and $208,000 respectively. Pro-forma net income (loss) and earnings (loss) per share in connection with the adoption of SFAS 142 is as follows (in thousands except per share data): Income from continuing operations:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED -------------------------- -------------------------- JANUARY 28, JANUARY 27, JANUARY 28, JANUARY 27, 2001 2002 2001 2002 ----------- ----------- ----------- ----------- Income from continuing operations as reported............................ $1,627 $2,393 $3,669 $4,832 Add goodwill amortization, net of income tax benefit.................. 201 -- 391 -- ------ ------ ------ ------ Adjusted income from continuing operations....................... $1,828 $2,393 $4,060 $4,832 ====== ====== ====== ====== Earnings per common share -- basic: From continuing operations as reported......................... $ .16 $ .21 $ .38 $ .44 Goodwill amortization............... .02 -- .04 -- ------ ------ ------ ------ Adjusted......................... $ .18 $ .21 $ .42 $ .44 ====== ====== ====== ====== Earnings per common share -- diluted: From continuing operations as reported......................... $ .15 $ .20 $ .34 $ .41 Goodwill amortization............... .02 -- .04 -- ------ ------ ------ ------ Adjusted......................... $ .16 $ .20 $ .38 $ .41 ====== ====== ====== ======
F-32 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED) Net income (loss):
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED -------------------------- -------------------------- JANUARY 28, JANUARY 27, JANUARY 28, JANUARY 27, 2001 2002 2001 2002 ----------- ----------- ----------- ----------- Net income as reported................ $1,604 $1,616 $3,634 $ (726) Add goodwill amortization, net of income tax benefit.................. 248 -- 452 -- ------ ------ ------ ------ Adjusted net income................. $1,852 $1,616 $4,086 $ (726) ====== ====== ====== ====== Earnings per common share-basic: As reported......................... $ .16 $ .14 $ .38 $ (.07) Goodwill amortization............... .02 -- .04 -- ------ ------ ------ ------ Adjusted......................... $ .18 $ .14 $ .42 $ (.07) ====== ====== ====== ====== Earnings per common share-diluted: As reported......................... $ .14 $ .13 $ .34 $ (.06) Goodwill amortization............... .02 -- .04 -- ------ ------ ------ ------ Adjusted......................... $ .16 $ .13 $ .38 $ (.06) ====== ====== ====== ======
Intangibles, consisting of patents having an estimated useful life of fourteen years, are carried at an aggregate gross amount of $568,000 with accumulated amortization at January 27, 2002 of $125,000. Amortization expense for the twenty-six weeks ended January 27, 2002 was approximately $21,000. Estimated annual amortization expense for each of the next five fiscal years is approximately $41,000. 7. WEIGHTED AVERAGE SHARES The following table shows the calculation of basic and diluted weighted-average shares outstanding (in thousands except per share data):
THIRTEEN WEEKS ENDED -------------------------- JANUARY 28, JANUARY 27, 2001 2002 ----------- ----------- Basic weighted-average shares......................... 10,263 11,238 Effect of dilutive securities: Employee stock options and warrants.............. 837 748 ------ ------ Diluted weighted-average shares....................... 11,100 11,986 ====== ======
Options to purchase 2,500 shares of common stock, with an exercise price of $15.90, were outstanding during the second quarter of fiscal 2002, but were not included in the computation of diluted EPS because the exercise price is greater than the average market price of the common shares. The options, which expire November 24, 2006, were still outstanding as of January 27, 2002. Options to purchase 93,000 shares of common stock, with exercise prices ranging from $12.59 to $14.25, were outstanding during the second quarter of fiscal 2001 but were not included in the computation of diluted EPS because the exercise prices are greater than the average market price of the common shares. F-33 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED)
TWENTY-SIX WEEKS ENDED -------------------------- JANUARY 28, JANUARY 27, 2001 2002 ----------- ----------- Basic weighted-average shares......................... 9,624 10,964 Effect of dilutive securities: Employee stock options and warrants.............. 1,008 864 ------ ------ Diluted weighted-average shares....................... 10,632 11,828 ====== ======
Options to purchase 2,500 shares of common stock, with an exercise price of $15.90, were outstanding during the first six months of fiscal 2002, but were not included in the computation of diluted EPS because the exercise price is greater than the average market price of the common shares. The options, which expire November 24, 2006, were still outstanding as of January 27, 2002. Options to purchase 68,125 shares of common stock, with exercise prices ranging from $13.67 to $14.25, were outstanding during the first six months of fiscal 2001 but were not included in the computation of diluted EPS because the exercise prices are greater than the average market price of the common shares. As of March 1, 2002, 11,521,765 shares of common stock were outstanding. 8. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information is as follows (in thousands):
TWENTY-SIX WEEKS ENDED -------------------------- JANUARY 28, JANUARY 27, 2001 2002 ----------- ----------- Cash paid during the period for: Interest............................................ $ 161 $ 143 Income Taxes........................................ 2,733 309 Cashless exercise of stock options.................... 47 7,867 Tax benefit related to stock options................ 161 5,742
F-34 - ------------------------------------------------------ - ------------------------------------------------------ YOU MAY RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. NEITHER HERLEY INDUSTRIES, INC. NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. --------------------------- TABLE OF CONTENTS ---------------------------
PAGE ---- Prospectus Summary..................... 1 Summary Consolidated Financial Data.... 5 Risk Factors........................... 7 Forward-Looking Statements............. 12 Use of Proceeds........................ 12 Dividend Policy........................ 13 Price Range of Common Stock............ 13 Capitalization......................... 14 Selected Consolidated Financial Data... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 17 Business............................... 23 Management............................. 36 Principal and Selling Stockholders..... 43 Description of Capital Stock........... 44 Underwriting........................... 45 Legal Matters.......................... 47 Experts................................ 47 Where You Can Find More Information.... 47 Incorporation of Certain Documents by Reference............................ 48 Index to Consolidated Financial Statements........................... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ HERLEY INDUSTRIES, INC. 3,000,000 SHARES COMMON STOCK ---------------- PROSPECTUS ---------------- BEAR, STEARNS & CO. INC. SG COWEN , 2002 - ------------------------------------------------------ - ------------------------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses of the distribution, all of which shall be borne by registrant, are as follows: SEC Registration Fee........................................ $ 6,553 NASD Filing Fee............................................. 7,623 NASDAQ Application.......................................... 10,000 Blue Sky Fees and Expenses (including legal fees)........... 7,500 Transfer Agent Fees......................................... 10,000 Accounting Fees and Expenses................................ 50,000 Legal Fees and Expenses..................................... 150,000 Printing and Engraving...................................... 85,000 Miscellaneous............................................... 48,324 -------- Total............................................. $375,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under provisions of our By-Laws, each person who is or was our director or officer may be indemnified by us to the full extent permitted or authorized by the General Corporation Law of Delaware. Section 145 of the Delaware General Corporation Law provides, among other things, that to the extent that such person is successful on the merits of defense of a suit or proceeding brought against him by reason of the fact that he is a director or officer of us, he shall be indemnified against expenses (including attorneys' fees) reasonably incurred in connection with such action. If unsuccessful in defense of a third-party civil suit or if a criminal suit is settled, such a person may be indemnified under such law against both (1) expenses (including attorneys' fees) and (2) judgments, fines and amounts paid in settlement if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, our best interests, and with respect to any criminal action, had no reasonable cause to believe his conduct was unlawful. If unsuccessful in defense of a suit brought by us or in our right, or if such suit is settled, such a person may be indemnified under such law only against expenses (including attorneys' fees) incurred in the defense or settlement of such suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, our best interests except that if such a person is adjudged to be liable in such suit for negligence or misconduct in the performance of his duty to us, he cannot be made whole even for expenses unless the court determines that he is fairly and reasonably entitled to indemnity for such expenses. Our officers and directors are covered by officers and directors liability insurance. The policy coverage is $5,000,000, which includes reimbursement for costs and fees. There is a maximum deductible under the policy of $250,000 for each claim. We have entered into indemnification agreements with certain of our officers and directors. The Agreements provide for indemnification with regard to certain legal proceedings so long as the indemnified officer or director has acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests and with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. We only provided indemnification for expenses, judgments, fines and amounts paid in settlement actually incurred by the relevant officer or director, or on his or her behalf, arising out of proceedings brought against such officer or director by reason of his or her corporate status. II-1 ITEM 16. EXHIBITS 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation, as amended (Exhibit 3(a) of Form S-1 Registration Statement No. 2-87160). 3.2 By-Laws, as amended August 7, 2001 (Exhibit 3.2 of Annual Report on Form 10-K for the fiscal year ended July 29, 2001). 5 Opinion of Blau, Kramer, Wactlar & Lieberman, P.C.* 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 Employment Agreement between Herley Industries, Inc. and Lee N. Blatt dated as of October 1, 1998, as amended on January 26, 1999 and July 30, 1999 (Exhibit 10.4 of Annual Report on Form 10-K for the fiscal year ended August 1, 1999). 10.6 Employment Agreement between Herley Industries, Inc. and Myron Levy dated as of October 1, 1998, as amended on January 26, 1999 and July 30, 1999 (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 us, 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 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). 21 List of Subsidiaries of Herley Industries, Inc. 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit 5 hereof)* 24 Powers of Attorney (included in the signature pages hereof) 99 Letter regarding representations of Arthur Andersen LLP.
- --------------- * To be filed by amendment. II-2 ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected on the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a registrant of expenses incurred or paid by a director, officer or controlling person of such registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Lancaster, Pennsylvania on the 26th day of March, 2002. Herley Industries, Inc. By: /s/ MYRON LEVY ------------------------------------ Myron Levy Chief Executive Officer POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on March 26, 2002, by the following persons in the capacities indicated. Each person whose signature appears below also constitutes and appoints Lee N. Blatt and Myron Levy, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to execute and file any registration statement and amendments thereto, for the same offering filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, with all exhibits thereto and all other documents in connection therewith, with the Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE - --------- ----- /s/ LEE N. BLATT Chairman of the Board - --------------------------------------------- Lee N. Blatt /s/ MYRON LEVY Chief Executive Officer and Director - --------------------------------------------- Myron Levy /s/ ANELLO C. GAREFINO Vice President -- Finance, Treasurer (Chief - --------------------------------------------- Financial Officer and Principal Accounting Anello C. Garefino Officer) /s/ THOMAS J. ALLSHOUSE Director - --------------------------------------------- Thomas J. Allshouse /s/ DAVID H. LIEBERMAN Secretary and Director - --------------------------------------------- David H. Lieberman /s/ JOHN THONET Director - --------------------------------------------- John Thonet /s/ ALVIN M. SILVER Director - --------------------------------------------- Alvin M. Silver /s/ EDWARD K. WALKER, JR. Director - --------------------------------------------- Edward K. Walker, Jr.
II-4 EX-1.1 3 y58816ex1-1.txt FORM OF UNDERWRITING AGREEMENT Exhibit 1.1 [3,000,000] Shares of Common Stock HERLEY INDUSTRIES, INC. UNDERWRITING AGREEMENT _________, 2002 BEAR, STEARNS & CO. INC. SG COWEN as Representatives of the several Underwriters named in Schedule I attached hereto c/o Bear, Stearns & Co. Inc. 245 Park Avenue New York, New York 10167 Ladies and Gentlemen: Herley Industries, Inc., a corporation organized and existing under the laws of Delaware (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters") an aggregate of [3,000,000] shares (the "Firm Shares") of its common stock, par value $0.10 per share (the "Common Stock"). The Company and the Stockholders of the Company listed on Scheduled II hereto (the "Selling Stockholders") propose to sell for the sole purpose of covering over-allotments in connection with the sale of the Firm Shares, at the option of the Underwriters, up to an additional [450,000] shares (the "Additional Shares") of Common Stock. The Firm Shares and any Additional Shares purchased by the Underwriters are referred to herein as the "Shares." The Shares are more fully described in the Registration Statement referred to below. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-_____), and amendments thereto, and related preliminary prospectuses for the registration under the Securities Act of 1933, as amended (the "Securities Act"), of the Shares which registration statement, as so amended (including post-effective amendments, if any), has been declared effective by the Commission and copies of which have heretofore been delivered to the Underwriters. The registration statement, as amended at the time it became effective, including the exhibits and information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A or 434(d) under the Securities Act, is hereinafter referred to as the "Registration Statement." If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Securities Act registering additional shares of Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. Other than a Rule 462(b) Registration Statement, which became effective upon filing, no other document with respect to the Registration Statement has heretofore been filed with the Commission. No stop order suspending the effectiveness of either the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or, threatened by the Commission. The Company, if required by the Securities Act and rules and regulations of the Commission (together, the "Rules and Regulations"), proposes to file the Prospectus with the Commission pursuant to Rule 424(b) of the Rules and Regulations. The Prospectus, in the form in which it is to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, or, if the Prospectus is not to be filed with the Commission pursuant to Rule 424(b), the Prospectus in the form included as part of the Registration Statement at the time the Registration Statement became effective, is hereinafter referred to as the "Prospectus," except that if any revised prospectus or prospectus supplement shall be provided to the Underwriters by the Company for use in connection with the offering and sale of the Shares (the "Offering") which differs from the Prospectus (whether or not such revised prospectus or prospectus supplement is required to be filed by the Company pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus or prospectus supplement, as the case may be, from and after the time it is first provided to the Underwriters for such use. Any preliminary prospectus or prospectus subject to completion included in the Registration Statement or filed with the Commission pursuant to Rule 424 under the Securities Act is hereafter called a "Preliminary Prospectus." Any reference herein to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 which were filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act") on or before the effective date of the Registration Statement, the date of such Preliminary Prospectus or the date of the Prospectus, as the case may be, and any reference herein to the terms "amend", "amendment" or "supplement" with respect to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include (i) the filing of any document under the Exchange Act after the effective date of the Registration Statement, the date of such Preliminary Prospectus or the date of the Prospectus, as the case may be, which is incorporated therein by reference and (ii) any such document so filed. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, the Preliminary Prospectus and the Prospectus, or any amendments or supplements to any of the foregoing, shall be deemed to include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, 2 Analysis and Retrieval System ("EDGAR"). (b) At the time of the effectiveness of the Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule 434 of the Rules and Regulations, when any supplement to or amendment of the Prospectus is filed with the Commission, when any document filed under the Exchange Act was or is filed and at the Closing Date and the Additional Closing Date, if any (as hereinafter respectively defined), the Registration Statement and the Prospectus and any amendments thereof and supplements thereto complied or will comply in all material respects with the applicable provisions of the Securities Act and the Rules and Regulations and did not and will not contain an untrue statement of a material fact and did not and will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein (i) in the case of the Registration Statement, not misleading and (ii) in the case of the Prospectus or any related Preliminary Prospectus in light of the circumstances under which they were made, not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Shares or any amendment thereto or pursuant to Rule 424(a) of the Rules and Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such Preliminary Prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Securities Act, the Rules and Regulations, the Exchange Act and the respective rules and regulations thereunder and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein in light of the circumstances under which they were made not misleading. No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related Preliminary Prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through you specifically for use therein ("Underwriters' Information"). The parties acknowledge and agree that the Underwriters Information consists solely of the material included in paragraphs ___, ___ and ___ under the caption "Underwriting" in the Prospectus. If Rule 434 is used, the Company will comply with the requirements of Rule 434. (c) Arthur Andersen LLP, who has certified the financial statements and supporting schedules included or incorporated in the Registration Statement, are independent public accountants as required by the Securities Act and the Rules and Regulations. (d) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as set forth in the Registration Statement and the Prospectus, the Company has not paid any dividends on 3 its capital stock and there has been no material adverse change or any development involving a prospective material adverse change on (i) the business, prospects, properties, operations, condition (financial or other), stockholders' equity (investment) or results of operations of the Company and each subsidiary of the Company (the "Subsidiaries"), taken as a whole; (ii) the long-term debt of the Company; (iii) the capital stock of the Company (other than pursuant to the exercise of stock options described in the Registration Statement and the Prospectus as outstanding or the grant of stock options under stock option plans described in the Registration Statement and the Prospectus); (iv) the Offering, or anything giving rise to any liability or obligation on the part of the Underwriters; or (v) the consummation of the transactions contemplated by this Agreement or the Company's performance of its obligations hereunder (any of the events set forth in (i), (ii), (iii), (iv) or (v), a "Material Adverse Change" or "Material Adverse Effect"), whether or not arising from transactions in the ordinary course of business, and since the date of the latest balance sheet presented in the Registration Statement and the Prospectus, neither the Company nor any of the Subsidiaries has incurred or undertaken any liabilities or obligations, direct or contingent, or entered into any transactions which are material to the Company and the Subsidiaries, taken as a whole, except for liabilities or obligations which are reflected in the Registration Statement and the Prospectus. (e) This Agreement and the transactions contemplated herein have been duly and validly authorized by the Company and this Agreement has been duly and validly executed and delivered by the Company. (f) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to any indenture, mortgage, deed of trust, loan agreement or other agreement, instrument, franchise, license or permit to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or their respective properties or assets may be bound or (ii) violate or conflict with any provision of the certificate or articles of incorporation, by-laws or other organizational documents of the Company or any of the Subsidiaries or any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their respective properties, operations or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their respective properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, by the Registration Statement and by the Prospectus, including the issuance, sale and delivery of the Shares to be issued, sold and delivered by the Company hereunder, except the 4 registration under the Securities Act of the Shares and such consents, approvals, authorizations, orders, registrations, filings, qualifications, licenses and permits as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters. (g) The Company has the authorized capitalization set forth in the Prospectus and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and were not issued in violation of or subject to any preemptive or similar rights that entitle or will entitle any person to acquire any Shares from the Company upon issuance or sale by the Company of Shares in the Offering, except for such rights as may have been fully satisfied or waived prior to the effectiveness of the Registration Statement; the Shares to be delivered on the Closing Date and the Additional Closing Date, if any, (as hereinafter respectively defined) have been duly and validly authorized and, when delivered by the Company in accordance with this Agreement, will be duly and validly issued, fully paid and non-assessable and will not have been issued in violation of or subject to any preemptive or similar rights that entitle or will entitle any person to acquire any Shares from the Company upon issuance thereof by the Company; and all of the issued shares of capital stock of each of its Subsidiaries has been duly and validly authorized and issued and are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; the Common Stock, the Firm Shares and the Additional Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus. Except as disclosed in or specifically contemplated by the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any shares of its capital stock or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. (h) The Subsidiaries are the only subsidiaries (as defined in Rule 405 of the Securities Act) of the Company. Each of the Company and the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not in the aggregate have a Material Adverse Effect. Each of the Company and the Subsidiaries has all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits (collectively, the "Consents") of and from all public, regulatory or governmental agencies and bodies, to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. No Consent contains a materially burdensome restriction not adequately disclosed in the 5 Registration Statement and the Prospectus. (i) Except as described in the Prospectus, there is no legal or governmental proceeding, including routine litigation, to which the Company or any of the Subsidiaries is a party or of which any property of the Company or any of the Subsidiaries is the subject which, singularly or in the aggregate, if determined adversely to the Company or any of the Subsidiaries, is reasonably likely to have a Material Adverse Effect, and, to the best of the Company's knowledge, no such proceeding is threatened or contemplated by governmental authorities or threatened or contemplated by others, and the defense of all such claims against the Company in the aggregate, including routine litigation, will not have a Material Adverse Effect. (j) Neither the Company nor any of its affiliates have taken and nor will any of them take, directly or indirectly, any action designed to cause or result in, or which constitutes or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (k) Except for the Subsidiaries, the Company owns no capital stock or other beneficial interest, directly or indirectly, in any corporation, partnership, joint venture or other business entity. (l) The financial statements, including the notes thereto, and supporting schedules included or incorporated by reference in the Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries and the other entities for which financial statements are included in the Registration Statement and the Prospectus as of the dates indicated and condition and results of operations for the periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. The other financial and statistical information and data included in the Registration Statement and the Prospectus present fairly the information included therein and have been prepared on a basis consistent with that of the financial statements included or incorporated by reference in the Registration Statement and the Prospectus and the books and records of the respective entities presented therein. There are no historical or pro forma financial statements that are required to be included in the Registration Statement and Prospectus in accordance with Regulation S-X that have not been included as so required. (m) Except as disclosed in the Prospectus, no holder of securities of the Company has any rights to the registration of securities of the Company because of the filing of the Registration Statement or otherwise in connection with the sale of the Shares contemplated hereby, and any such rights so disclosed have either been fully complied with by the Company or effectively waived by the holders thereof. 6 (n) The Company is not, and upon consummation of the transactions contemplated hereby, and at all times up to and including the application of net proceeds as described in the Prospectus, will not be, subject to registration as an "investment company" under the Investment Company Act of 1940. (o) The Company and the Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Registration Statement and the Prospectus or are not reasonably likely to have a Material Adverse Effect; and any real property and buildings held under lease or sublease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and the Subsidiaries. Neither the Company nor any of the Subsidiaries has received any notice of any claim adverse to their ownership of any real or personal property or of any claim against the continued possession of any real property, whether owned or held under lease or sublease by the Company or any of the Subsidiaries, except any such claims which are not reasonably likely to have a Material Adverse Effect. (p) The Company and each of the Subsidiaries have accurately prepared and timely filed all federal, state and other tax returns that are required to be filed by it and has paid or made provision for the payment of all taxes, assessments, governmental or other similar charges, including without limitation, all sales and use taxes and all taxes which the Company and each of the Subsidiaries is obligated to withhold from amounts owning to employees, creditors and third parties, with respect to the periods covered by such tax returns (whether or not such amounts are shown as due on any tax return). No deficiency assessment with respect to a proposed adjustment of the Company's or any of the Subsidiaries' Federal, state, or other taxes is pending or, to the best of the Company's knowledge, threatened. There is no tax lien, whether imposed by any federal, state, or other taxing authority, outstanding against the assets, properties or business of the Company or any of the Subsidiaries, except where the failure to pay such lien would not have a Material Adverse Effect. (q) The Common Stock is registered pursuant to Section 12(g) of the Exchange Act and the outstanding shares of Common Stock (including the Shares) are listed for quotation on the NASDAQ National Market ("NASDAQ"), and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or de-listing the Common Stock from NASDAQ, nor has the Company received any notification that the SEC or NASDAQ is contemplating terminating such registration or listing. (r) The conditions for use of Form S-3, as set forth in the General Instructions thereto, have been satisfied. 7 (s) The documents incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission under the Exchange Act, and, when read together with the other information in the Prospectus, at the time the Registration Statement and any amendments thereto become effective and at the Closing Date, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (t) There are no contracts or other documents (including, without limitation, any voting agreement), which are required to be described in the Prospectus or filed as exhibits to the Registration Statement or the Prospectus by the Securities Act or by the Rules and Regulations and which have not been so described or filed. (u) Neither the Company nor any of the Subsidiaries (i) is in violation of its charter or by-laws, (ii) is in default (and no event has occurred which, with notice or lapse of time or both, would constitute such a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (iii) is in violation in any respect of any statute or any judgment, decree, order, rule or regulation of any court or governmental or regulatory agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their properties or assets, except, with respect to (ii) and (iii), any violation or default that would not have a Material Adverse Effect. (v) The Company and each of the Subsidiaries owns or possesses adequate right to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, formulae, customer lists, and know-how and other intellectual property (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of their respective businesses as being conducted and as described in the Registration Statement and Prospectus and have no reason to believe that the conduct of their respective businesses will conflict with, and have not received any notice of any claim of conflict with, any such right of others which claim, if the subject of an unfavorable decision, ruling or judgment, could reasonably be expected to result in a Material Adverse Effect. Except as described in the Prospectus and the Registration Statement, or as could not reasonably be expected to have a Material Adverse Effect, (i) there is no infringement by third parties of any such Intellectual Property; (ii) there is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim by others challenging the Company's rights in or to any such Intellectual Property, and the Company is unaware of any facts which would form a 8 reasonable basis for any such claim; (iii) there is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim by others that the Company infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any other fact which would form a reasonable basis for any such claim. (w) No labor disturbance by the employees of the Company or any of the Subsidiaries exists or, to the best of the Company's knowledge, is imminent which might be expected to have a Material Adverse Effect. (x) No "prohibited transaction" (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), or "accumulated funding deficiency" (as defined in Section 302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than events with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has occurred with respect to any employee benefit plan which could have a Material Adverse Effect; each employee benefit plan is in compliance in all material respects with applicable law, including ERISA and the Code; the Company has not incurred and does not expect to incur liability under Title IV of ERISA with respect to the termination of, or withdrawal from, any "pension plan;" and each "pension plan" (as defined in ERISA) for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which could cause the loss of such qualification. (y) There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission, or other release of any kind of toxic or other wastes or other hazardous substances by, due to, or caused by the Company (or, to the Company's knowledge, any other entity for whose acts or omissions the Company is or may be liable) upon any other property now or previously owned or leased by the Company or any of the Subsidiaries, or upon any other property, in violation of any statute or any ordinance, rule, regulation, order, judgment, decree or permit or which would, under any statute or any ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit, give rise to any liability, except for any violation or liability which would not have, singularly or in the aggregate with all such violations and liabilities, a Material Adverse Effect; there has been no disposal discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any toxic or other wastes or other hazardous substances with respect to which the Company or any of the Subsidiaries has knowledge. The Company has not agreed to assume, undertake or provide indemnification for any liability of any other person under any Environmental Law, including any obligation for cleanup or remedial action, except as would not reasonably be expected to have a Material Adverse Effect. 9 (z) Each of the Company and the Subsidiaries has such authorizations, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such authorization or to make any such filing or notice would not, singly or in the aggregate, have a Material Adverse Effect. (aa) Neither the Company, any of the Subsidiaries nor, to the Company's knowledge, any of its employees or agents has at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States of any jurisdiction thereof. (bb) The statistical and market-related data included in the Prospectus are based on or derived from sources which the Company believes are reliable and accurate. 2. Representations and Warranties of the Selling Stockholders. Each Selling Stockholder severally represents and warrants to, and agrees with, each of the Underwriters that: (a) This Agreement has been duly and validly authorized, executed and delivered by or on behalf of the Selling Stockholders and is a valid and binding agreement of the Selling Stockholders, enforceable against each Selling Stockholder in accordance with its terms, except as enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (b) Each of the Custody Agreements and Powers of Attorney ("Custody Agreement and Power of Attorney") signed by (i) each Selling Stockholder, (ii) the Company, as custodian (in such capacity, the "Custodian"), and (iii) [ ] and [ ], as the Selling Stockholders' attorneys-in-fact (in such capacity, the "Attorneys-In-Fact"), has been duly and validly authorized, executed and delivered by each Selling Stockholder and is a valid and binding agreement of each Selling Stockholder, enforceable against him in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. Each Selling Stockholder agrees that the Additional Shares, if any, to be sold by each Selling Stockholder on deposit with the Custodian are subject to the interests of the Underwriters, that the arrangements made for such custody are to that extent irrevocable, and that the obligations of each Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Custody Agreement and Power of Attorney, by any act of a Selling Stockholder, by operation of law, by death or incapacity of such Selling Stockholder or by the occurrence 10 of any other event. If a Selling Stockholder should die or become incapacitated, or if any other event should occur, before the delivery of the Additional Shares, if any, to be sold by such Selling Stockholder hereunder, the documents evidencing the Additional Shares, if any, to be sold by such Selling Stockholder then on deposit with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Custodian shall have received notice thereof. (c) Each Selling Stockholder (i) is the lawful owner of the Additional Shares, if any, to be sold by such Selling Stockholder hereunder or (ii) holds fully exercisable stock options ("Stock Options") to purchase a number of shares of Common Stock at least equal to the number of Additional Shares, if any, to be sold by such Selling Stockholder hereunder, and will on the Additional Closing Date be the lawful owner of such Additional Shares, and in each case upon sale and delivery of, and payment for, such Additional Shares, as provided herein, each Selling Stockholder will convey to the Underwriters good and marketable title to such Additional Shares, free and clear of all liens, encumbrances, equities, claims and security interests whatsoever. (d) Each Selling Stockholder (unless holding and exercising the Stock Options referred to in paragraph (c) above) has, and on the Additional Closing Date, if any, will have, good and valid title to all of the Additional Shares which may be sold by such Selling Stockholder pursuant to this Agreement on such date and the legal right and power, and all authorizations and approvals required by law, to enter into this Agreement and the applicable Custody Agreement and Power of Attorney, to sell, transfer and deliver all of the Additional Shares which may be sold by such Selling Stockholder pursuant to this Agreement and to comply with his other obligations hereunder and thereunder. (e) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Selling Stockholders of the transactions contemplated herein, except such as may have been obtained under the Securities Act and such as may be required under the state securities laws or the blue sky laws or any jurisdiction in connection with the purchase and distribution of the Additional Shares by the Underwriters and such other approvals as have been obtained. (f) Neither the sale of the Additional Shares, if any, being sold by the Selling Stockholders nor the consummation of any of the other transactions contemplated herein by the Selling Stockholders or the fulfillment of the terms hereof by the Selling Stockholders will conflict with, result in a breach or violation of, or constitute a default under any law or the terms of any indenture or other agreement or instrument to which any Selling Stockholder is party or bound, any judgment, order or decree applicable to any Selling Stockholder or any court or regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over any Selling 11 Stockholder. (g) None of the Selling Stockholders has any registration or other similar rights to have any equity or debt securities registered for sale by the Company under the Registration Statement or included in the offering of the Shares, except for such rights as have been waived or which are described in the Prospectus. (h) The Selling Stockholders do not have, or have waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Additional Shares, if any, that are to be sold by the Company to the Underwriters pursuant to this Agreement; and the Selling Stockholders do not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, right, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. (i) All information furnished by or on behalf of the Selling Stockholders in writing for use in the Registration Statement and Prospectus, or any document incorporated by reference into the Registration Statement and Prospectus is, and on the Closing Date and the Additional Closing Date, if any, will be, true, correct, and complete in all material respects, and does not, and on the Closing Date and the Additional Closing Date, if any, will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. To the extent such information appears in the Prospectus, each Selling Stockholder confirms as accurate the number of shares of Common Stock and options set forth opposite such Selling Stockholder's name and as described in the related footnote in the Prospectus under the caption "Principal and Selling Stockholders" (both prior to and after giving effect to the sale of the Additional Shares). (j) The Selling Stockholders have not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (k) The Selling Stockholders have not distributed and will not distribute, prior to the later of the Additional Closing Date, if any, and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares by the Selling Stockholders other than a Preliminary Prospectus, the Prospectus or the Registration Statement. (l) Each Selling Stockholder has reviewed and is familiar with the Registration Statement and the Prospectus and (i) has no knowledge of any material adverse information with regard to the Company or the Subsidiaries which is not disclosed in the Registration Statement and the Prospectus, (ii) has no knowledge of any misstatement of a material fact or failure to state a material fact necessary to make the 12 statements in the Prospectus, in light of the circumstances under which they were made, not misleading, and (iii) is not prompted to sell the Additional Shares, if any, to be sold by the Selling Stockholders by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement and the Prospectus. (m) The representations and warranties of the Selling Stockholders in the respective Custody Agreements and Powers of Attorney are, and on the Closing Date and Additional Closing Date, if any, will be, true and correct. Any certificate signed by or on behalf of a Selling Stockholder and delivered to the Representative or to Underwriters' Counsel shall be deemed to be a representation and warranty by such Selling Shareholder to each Underwriter as to the matters covered thereby. 3. Purchase, Sale and Delivery of the Shares. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters and the Underwriters, severally and not jointly, agree to purchase from the Company, at a purchase price per share of $_______, the number of Firm Shares set forth opposite the respective names of the Underwriters in Schedule I hereto plus any additional number of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof. (b) Payment of the purchase price for, and delivery of certificates for, the Shares shall be made at the office of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036, ("Underwriters' Counsel") or at such other place as shall be agreed upon by Bear, Stearns & Co. Inc. and the Company, at 10:00 A.M., New York City time on the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act) (unless postponed in accordance with the provisions of Section 9 hereof) following the date of the effectiveness of the Registration Statement (or, if the Company has elected to rely upon Rule 430A of the Regulations, the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act) after the determination of the public offering price of the Shares), or such other time not later than ten business days after such date as shall be agreed upon by Bear, Stearns & Co. Inc. and the Company (such time and date of payment and delivery being herein called the "Closing Date"). (c) Payment for the Shares shall be made to or upon the order of the Company of the purchase price by wire transfer in Federal (same day) funds to the Company upon delivery of certificates for the Shares to you through the facilities of The Depository Trust Company for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Shares to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date. The Company will permit you 13 to examine and package such certificates for delivery at least one full business day prior to the Closing Date. (d) In addition, the Company and the Selling Stockholders hereby grant to the Underwriters the option to purchase up to [450,000] Additional Shares at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares as set forth in this Section 2, for the sole purpose of covering over-allotments in the sale of Firm Shares by the Underwriters. This option may be exercised at any time and from time to time, in whole or in part, on or before the thirtieth day following the date of the Prospectus, by written notice by you to the Company. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised and the date and time, as reasonably determined by you, when the Additional Shares are to be delivered (such date and time being herein sometimes referred to as the "Additional Closing Date"); provided however, that the Additional Closing Date shall not be earlier than the Closing Date or earlier than the second full business day after the date on which the option shall have been exercised nor later than the eighth full business day after the date on which the option shall have been exercised (unless such time and date are postponed in accordance with the provisions of Section 9 hereof). Certificates for the Additional Shares shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Additional Closing Date. The Company will permit you to examine and package such certificates for delivery at least one full business day prior to the Additional Closing Date. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 10 hereof) bears to the total number of Firm Shares, subject, however, to such adjustments to eliminate any fractional shares as Bear, Stearns & Co. Inc. in its sole discretion shall make. The number of Additional Shares to be sold by (i) the Company shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as [ ] bears to [450,000] and (ii) each Selling Stockholder shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as the number of Additional Shares set forth opposite the name of such Selling Stockholder in the second column of Schedule II hereto bears to [450,000], subject in each case, however, to such adjustments to eliminate any fractional shares as Bear, Stearns & Co. Inc. in its sole discretion shall make. Payment for the Additional Shares shall be made to or upon the order of the Company of the purchase price by wire transfer in Federal (same day) funds to the Company at the offices of Underwriters' Counsel, or such other location as may be mutually acceptable upon delivery of the certificates for the Additional Shares to you for the respective accounts of the Underwriters. Payment for the Additional Shares to be 14 sold by the Selling Stockholders shall be made to or upon the order of the Selling Stockholder of the purchase price by wire transfer in Federal (same day) funds to the Selling Stockholders [[or the Custodian]] at the offices of Underwriters' Counsel, or such other location as may be mutually acceptable, upon delivery of the certificates for the Additional Shares to Bear, Stearns & Co. Inc. for the respective accounts of the Underwriters. Each Selling Stockholder hereby agrees that (i) he will pay all stock transfer taxes, stamp duties and other similar taxes, if any, payable upon the sale or delivery of the Additional Shares to be sold by the Selling Stockholder to the several Underwriters, or otherwise in connection with the performance of the Selling Stockholders' obligations hereunder and (ii) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to the Selling Stockholders hereunder and to hold such amounts for the account of the Selling Stockholders with the Custodian under the Custody Agreement and Power of Attorney. 4. Offering. Upon your authorization of the release of the Firm Shares, the Underwriters propose to offer the Shares for sale to the public upon the terms and conditions set forth in the Prospectus. 5. Covenants of the Company; Covenants of the Selling Stockholders. (A) The Company covenants and agrees with each of the Underwriters that: (a) The Registration Statement and any amendments thereto have become effective, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b), or Rule 434, the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) within the prescribed time period and will provide evidence satisfactory to you of such timely filing. If the Company elects to rely on Rule 434, the Company will prepare and file a Term Sheet that complies with requirements of Rule 434 and provide the Underwriters with copies of such filings prior to their use. The Company will notify you immediately (and, if requested by you, will confirm such notice in writing) (i) when the Registration Statement and any amendments thereto become effective, (ii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iii) of the Company's intention to file or prepare any amendments to the Registration Statement (including pursuant to rule 462(b)), the Term Sheet or any supplement, revision or amendment to the Registration Statement or the Prospectus, (iv) of the mailing or the delivery to the Commission for filing of any amendment of or supplement to the Registration Statement or the Prospectus, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of the initiation, or the threatening, of any proceedings therefor, it being understood that the Company shall make every effort to 15 avoid the issuance of any such stop order, (v) of the receipt of any comments from the Commission, and (vi) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose. If the Commission shall propose or enter a stop order at any time, the Company will make every reasonable effort to prevent the issuance of any such stop order and, if issued, to obtain the lifting of such order as soon as possible. The Company will not file any amendment to the Registration Statement or any amendment of or supplement to the Prospectus (including the prospectus required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the prospectus on file at the time of the effectiveness of the Registration Statement [before or] after the effective date of the Registration Statement or, file any document under the Exchange Act if such document would be deemed to be incorporated by reference into the Prospectus to which you shall object in writing after being timely furnished in advance a copy thereof. (b) The Company shall comply with the Securities Act and the Exchange Act to permit completion of the distribution as contemplated in this Agreement, the Registration Statement and Prospectus. If at any time when a prospectus relating to the Shares is required to be delivered under the Securities Act or the Exchange Act in connection with the sales of Shares, any event shall have occurred as a result of which the Prospectus as then amended or supplemented would, in the judgment of the Underwriters or the Company, include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances existing at the time of delivery to the purchaser, not misleading, or if it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement to comply with the Securities Act or the Rules and Regulations, or to file under the Exchange Act so as to comply therewith any document incorporated by reference in the Registration Statement or the Prospectus or in any amendment thereof or supplement thereto, the Company will notify you promptly and prepare and file with the Commission, subject to the second paragraph of Section 4(a) hereof, an appropriate amendment or supplement (in form and substance satisfactory to you) which will correct such statement or omission or which will effect such compliance and will use its best efforts to have any amendment to the Registration Statement declared effective as soon as possible. (c) The Company will promptly deliver to each of the Underwriters and Underwriters' Counsel a signed copy of the Registration Statement, including all consents and exhibits filed therewith and all documents incorporated by reference therein and all amendments thereto, and the Company will promptly deliver to each of the Underwriters such number of copies of any Preliminary Prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, all documents incorporated by reference in the Registration Statement and Prospectus or any amendment thereof or supplement thereto, as you may reasonably request. Prior to 10:00 A.M., New York City time, on the business day next succeeding 16 the date of this Agreement and from time to time thereafter the Company will furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request. (d) The Company shall promptly deliver to each of the Underwriters and to Underwriters' Counsel copies of the Preliminary Prospectus, and the Company consents to the use and delivery of the Preliminary Prospectus by the Underwriters in accordance with Rule 430 and Section 5(b) of the Securities Act. The Company shall also furnish to each of the Underwriters copies of the Final Prospectus as requested by any of the Underwriters. (e) The Company will use its best efforts, in cooperation with you, at or prior to the time of effectiveness of the Registration Statement, to qualify the Shares for offering and sale under the securities laws relating to the offering or sale of the Shares of such jurisdictions as you may designate and to maintain such qualification in effect for so long as required for the distribution thereof; except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process. (f) The Company will make generally available to its security holders and to the Underwriters as soon as practicable, but in any event not later than twelve months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Securities Act), an earnings statement of the Company and the Subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158). (g) During the period of 90 days from the date of the Prospectus, the Company will not, directly or indirectly, without your prior written consent, issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale or maintain any short position, establish or maintain a "put equivalent position" (within the meaning of Rule 16-a-1(h) under the Exchange Act ), enter into any swap, derivative transaction or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock (whether any such transaction is to be settled by delivery of Common Stock, other securities, cash or other consideration) or otherwise dispose of, any Common Stock (or any securities convertible into, exercisable for or exchangeable for Common Stock) or interest therein of the Company or of any of the Subsidiaries, and the Company will obtain the undertaking of each of its officers and directors and such of its shareholders as have been heretofore designated by you and listed on Schedule III attached hereto not to engage in any of the aforementioned transactions on their own behalf, other than the Company's sale of Shares hereunder and the Company's issuance of Common Stock upon (i) the conversion or exchange of convertible or exchangeable securities outstanding on the date hereof; (ii) the exercise of currently outstanding options; (iii) the exercise of currently outstanding warrants; and (iv) the grant and exercise of options under, or the issuance and 17 sale of shares pursuant to, employee stock option plans in effect on the date hereof. (h) During the period of three years from the effective date of the Registration Statement, the Company will furnish to you copies of all reports or other communications (financial or other) furnished to security holders, and will deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and the Subsidiaries are consolidated in reports furnished to its security holders generally or to the Commission). (i) The Company will apply the net proceeds it receives from the sale of the Shares as set forth under the caption "Use of Proceeds" in the Prospectus. (j) The Company will use its best efforts to list for quotation the Shares on NASDAQ. (k) The Company, during the period when the Prospectus is required to be delivered under the Securities Act or the Exchange Act, will file all documents required to be filed with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act within the time periods required by the Exchange Act and the rules and regulations thereunder. (B) Each Selling Stockholder covenants and agrees with each Underwriter: (a) To deliver to the Representatives prior to the Closing Date, a properly completed and executed United States Treasury Department Form W-8 (if such Selling Stockholder is a non-United States Person) or Form W-9 (if such Selling Stockholder is a United States Person). (b) If, at any time prior to the date on which the distribution of the Shares as contemplated herein and in the Prospectus has been completed, as determined by the Representatives, such Selling Stockholder has knowledge of the occurrence of any event as a result of which the Prospectus or the Registration Statement, in each case as then amended or supplemented, would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, such Selling Stockholder will promptly notify the Company and the Representatives. (c) To cooperate to the extent necessary to cause the Registration Statement or any post-effective amendment thereto to become effective at the earliest possible time and to do and perform all things to be done and performed 18 under this Agreement prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement. (d) Pay or to cause to be paid all transfer taxes with respect to the Additional Shares, if any, to be sold by such Selling Stockholder. (e) To deliver to Bear, Stearns & Co. Inc. on or prior to the date of this Agreement the lock-up agreement referenced in Section 7(j) hereof. 6. Payment of Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of the obligations of the Company hereunder, including the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Securities Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of producing any Agreement among Underwriters, this Agreement, the blue sky memoranda closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(A) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the blue sky survey; (iv) all fees and expenses in connection with listing the Shares on NASDAQ; (v) all travel expenses of the Company's officers and employees and any other expense of the Company incurred in connection with attending or hosting meetings with prospective purchasers of the Shares; (vi) any stock transfer taxes incurred in connection with this Agreement or the Offering; and (vii) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; (viii) fees of the Custodian and other fees and expenses related to the offering of the Additional Shares by the Selling Stockholders, on behalf of the Selling Stockholders in connection with the sale of Additional Shares, if any. The Company also will pay or cause to be paid: (i) the cost of preparing stock certificates; (ii) the cost and charges of any transfer agent or registrar; and (iii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 6. It is understood, however, that except as provided in this Section, and Sections 8 and 12 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. Notwithstanding anything to the contrary in this Section 6, in the event that this Agreement is terminated pursuant to Section 7 hereof, or subsequent to a Material Adverse Change, the Company will pay all out-of pocket 19 expenses of the Underwriters incurred in connection herewith. 7. Conditions of Underwriters' Obligations. The obligations of the Underwriters to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein contained, as of the date hereof and as of the Closing Date (for purposes of this Section 7 "Closing Date" shall refer to the Closing Date for the Firm Shares and any Additional Closing Date, if different, for the Additional Shares), to the absence from any certificates, opinions, written statements or letters furnished to you or to Underwriters' Counsel pursuant to this Section 7 of any misstatement or omission, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions: (a) The Registration Statement shall have become effective and all necessary approvals from NASDAQ shall have been received not later than, if pricing pursuant to Rule 430A: 5:30 P.M., New York City time, on the date of this Agreement or at such later time and date as shall have been consented to in writing by you; if the Company shall have elected to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with Section 5(A)(a) hereof and a form of the Prospectus containing information relating to the description of the Shares and the method of distribution and similar matters shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period; and, at or prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof shall have been issued and no proceedings therefor shall have been initiated or threatened by the Commission. (b) At the Closing Date, you shall have received the favorable written opinion of Blau, Kramer, Wactler & Lieberman P.C., counsel for the Company, dated the Closing Date, addressed to the Underwriters in the form attached hereto as Annex I. (c) At the Closing Date, you shall have received the favorable written opinion of Blau, Kramer, Wactlar & Lieberman, P.C., counsel for the Selling Stockholders, dated the Closing Date addressed to the Underwriters in the form attached hereto as Annex II. (d) All proceedings taken in connection with the sale of the Firm Shares and the Additional Shares as herein contemplated shall be reasonably satisfactory in form and substance to you and to Underwriters' Counsel, and the Underwriters shall have received from said Underwriters' Counsel a favorable opinion, dated as of the Closing Date, with respect to the issuance and sale of the Shares, the Registration Statement and the Prospectus and such other related matters as you may require, and the Company shall have furnished to Underwriters' Counsel such documents as they request for the purpose of enabling them to pass upon such matters. 20 (e) At the Closing Date, you shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, dated the Closing Date, to the effect that (i) the condition set forth in subsection (a) of this Section 7 has been satisfied, (ii) as of the date hereof and as of the Closing Date, the representations and warranties of the Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date, all agreements, conditions and obligations of the Company to be performed or complied with hereunder on or prior thereto have been duly performed or complied with, (iv) the Company and the Subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and (v) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus there has not been any Material Adverse Change in the capital stock or long-term debt of the Company or any of the Subsidiaries or any change, or any development involving a prospective change in the business, prospects, properties, operations, condition (financial or otherwise) or results of operations of the Company and the Subsidiaries taken as a whole, except in each case as described in or contemplated by the Prospectus. (f) At the time this Agreement is executed and at the Closing Date, you shall have received a comfort letter from Arthur Andersen LLP, independent public accountants for the Company, dated as of the date of this Agreement and as of the Closing Date, respectively, addressed to the Company and the Underwriters and in form and substance satisfactory to the Underwriters and Underwriters' Counsel. (g) Subsequent to the execution and delivery of this Agreement or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been any change in the capital stock (other than through the exercise of stock options referred to in the Registration Statement and Prospectus) or long-term debt of the Company or any of the Subsidiaries or any change, or any development involving a prospective change in or affecting the condition (financial or otherwise), results of operations, business, properties or prospects of the Company and the Subsidiaries taken as a whole, including, without limitation, the occurrence of a fire, flood, explosion or other calamity at any of the properties owned or leased by the Company or any of its Subsidiaries, the effect of which, in any such case described above, is, in the judgment of the Underwriters, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus (exclusive of any supplement). (h) You shall have received a lock-up agreement from each person who is a director or officer of the Company and each shareholder as shall have been heretofore designated by you and listed on Schedule III hereto substantially in the 21 form attached hereto as Annex II. [List of officers to be discussed.] (i) At the Closing Date, the Shares shall have been approved for listing on NASDAQ. (j) At the Closing Date, you shall have received a certificate of each Selling Stockholder, dated the Closing Date, to the effect that the representations and warranties of the Selling Stockholder set forth in Section 2 hereof are accurate and that such Selling Stockholder has complied with all agreements and satisfied all conditions on his part to be performed or satisfied hereunder at or prior to the Closing Date. (k) On or prior to the Closing Date, you shall have received a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof) from each Selling Stockholder. (l) The Company shall have complied with the provisions of Section 5(A)(c) hereof with respect to the furnishing of prospectuses. (m) The Company shall have furnished the Underwriters and Underwriters' Counsel with such other certificates, opinions or other documents as they may have reasonably requested. (n) At the Closing Date the National Association of Securities Dealers, Inc. shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. If any of the conditions specified in this Section 7 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to you or to Underwriters' Counsel pursuant to this Section 7 shall not be satisfactory in form and substance to you and to Underwriters' Counsel, all obligations of the Underwriters hereunder may be cancelled by you at, or at any time prior to, the Closing Date and the obligations of the Underwriters to purchase the Additional Shares may be cancelled by you at, or at any time prior to, the Additional Closing Date. Notice of such cancellation shall be given to the Company in writing, or by telephone. Any such telephone notice shall be confirmed promptly thereafter in writing. 8. Indemnification. (a) The Company shall indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but 22 not limited to reasonable attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement for the registration of the Shares, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided however, that the Company will not be liable in any such case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through you expressly for use therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have, including under this Agreement. (b) Each Selling Stockholder agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to reasonable attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact relating to such Selling Stockholder contained in the Registration Statement for the registration of the Shares, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact relating to such Selling Stockholder required to be stated therein or necessary to make the statements therein not misleading; provided, however, that in no such case shall any Selling Stockholder be liable or responsible for any amount in excess of the proceeds (net of the underwriting discount) applicable to the Shares sold by such Selling Stockholder pursuant to the transactions contemplated hereby. This indemnity agreement will be in addition to any liability which any Selling Stockholder may otherwise have including under this Agreement. 23 (c) Each Underwriter severally, and not jointly, shall indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, and each other person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to reasonable attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim, and any and all amounts paid in settlement of any claim or litigation), jointly or severally, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through you expressly for use therein; provided however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder. This indemnity will be in addition to any liability which any Underwriter may otherwise have, including under this Agreement. The Company acknowledges that the statements set forth in [ ] constitute the only information furnished in writing by or on behalf of any Underwriter expressly for use in the Registration Statement relating to the Shares as originally filed or in any amendment thereof, any related preliminary prospectus or the Prospectus or in any amendment thereof or supplement thereto, as the case may be. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of any claims or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the claim or the commencement thereof (but the failure so to notify an indemnifying party shall not relieve the indemnifying party from any liability which it may have under this Section 8 to the extent that it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability that such indemnifying party may have otherwise than on account of the indemnity agreement hereunder). In case any such claim or action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, an indemnifying party may participate, at its own expense in the defense of such action, and 24 to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party; provided however, that counsel to the indemnifying party shall not (except with the written consent of the indemnified party) also be counsel to the indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, (iii) the indemnifying party does not diligently defend the action after assumption of the defense or (iv) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. No indemnifying party shall, without the prior written consent of the indemnified parties, effect any settlement or compromise of, or consent to the entry of judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could have been sought under Section 8 or 9 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of the indemnified party from all liability arising out of such litigation, investigation, proceeding or claim, (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act, by or on behalf of the indemnified party and (iii) the indemnifying party reaffirms its indemnification obligations pursuant to this Agreement. 9. Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in Section 8 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company, the Selling Stockholders and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company and each Selling Stockholder, any contribution received by the Company and/or the Selling Stockholder from persons, other than the Underwriters, who may also be liable for contribution, including persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to 25 which the Company, each Selling Stockholder and one or more of the Underwriters may be subject, in such proportions as are appropriate to reflect the relative benefits received by the Company, each Selling Stockholder and the Underwriters from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 8 hereof, in such proportions as are appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company, the Selling Stockholder and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Selling Stockholders bear to (y) the underwriting discount received by the respective Underwriters, respectively, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, any Selling Stockholder and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, a Selling Stockholder or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 9. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 9 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 9, (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares are underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of Section 15 of the 26 Securities Act or Section 20 of the Exchange Act, each officer of the Company, who shall have signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company and any Selling Stockholder, as applicable, subject in each case to clauses (i) and (ii) of this Section 9. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 9 or otherwise. The obligations of the Underwriters to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. 10. Default by an Underwriter. (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares or Additional Shares hereunder, and if the Firm Shares or Additional Shares with respect to which such default relates do not (after giving effect to arrangements, if any, made by you pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares or Additional Shares, the Firm Shares or Additional Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to the respective proportions which the numbers of Firm Shares set forth opposite their respective names in Schedule I hereto bear to the aggregate number of Firm Shares [set forth opposite the names of the non-defaulting Underwriters.] (b) In the event that such default relates to more than 10% of the Firm Shares or Additional Shares, as the case may be, you may in your discretion arrange for yourself or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm Shares or Additional Shares, as the case may be, to which such default relates on the terms contained herein. In the event that within five calendar days after such a default you do not arrange for the purchase of the Firm Shares or Additional Shares, as the case may be, to which such default relates as provided in this Section 10, this Agreement or, in the case of a default with respect to the Additional Shares, the obligations of the Underwriters to purchase and of the Company and the Selling Stockholders to sell the Additional Shares shall thereupon terminate, without liability on the part of the Company or the Selling Stockholders with respect thereto (except in each case as provided in Sections 6, 8(a) and 9 hereof with respect to the Company and Sections 8(b) and 9 hereof with respect to the Selling Stockholders) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company and the Selling Stockholders for damages occasioned by its or their default hereunder. 27 (c) In the event that the Firm Shares or Additional Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or Additional Closing Date, as the case may be, for a period not exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may thereby be made necessary or advisable. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 10 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares and Additional Shares. 11. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Underwriters and the Company and the Selling Stockholders contained in this Agreement or in certificates of officers of the Company or any Subsidiary submitted hereto or thereto, including the agreements contained in Section 6, the indemnity agreements contained in Section 8 and the contribution agreements contained in Section 9, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof or by or on behalf of the Company or the Selling Stockholders, any of its officers and directors or any controlling person thereof, and shall survive delivery of and payment for the Shares to and by the Underwriters. The representations contained in Section 1 and the agreements contained in Sections 6, 8, 9, 11 and 12(d) hereof shall survive the termination of this Agreement, including termination pursuant to Section 10 or 12 hereof. 12. Effective Date of Agreement; Termination. (a) This Agreement shall become effective, upon the later of when (i) you and the Company shall have received notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. If either the public offering price or the purchase price per Share has not been agreed upon prior to 5:00 P.M., New York City time, on the fifth full business day after the Registration Statement shall have become effective, this Agreement shall thereupon terminate without liability to the Company, the Selling Stockholders or the Underwriters except as herein expressly provided. Until this Agreement becomes effective as aforesaid, it may be terminated by the Company by notifying you or by you notifying the Company. Notwithstanding the foregoing, the provisions of this Section 12 and of Sections 1, 6, 8 and 9 hereof shall at all times be in full force and effect. (b) You shall have the right to terminate this Agreement at any time prior to the Closing Date or to terminate the obligations of the Underwriters to purchase the Additional Shares at any time prior to the Additional Closing Date, as the 28 case may be, if (A) any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, the market for the Company's securities or securities in general; or (B) if trading on the New York Stock Exchange or NASDAQ shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York Stock Exchange or NASDAQ by the New York Stock Exchange or NASDAQ or by order of the Commission or any other governmental authority having jurisdiction; or (C) if a banking moratorium has been declared by any state or federal authority or if any material disruption in commercial banking or securities settlement or clearance services shall have occurred; or (D) any downgrading shall have occurred in the Company's corporate credit rating or the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization" as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act or if any such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities; or (E) (i) if there shall have occurred any outbreak or escalation of hostilities or acts of terrorism involving the United States or there is a declaration of a national emergency or war by the United States or (ii) if there shall have been any other calamity or crisis or any change in political, financial or economic conditions if the effect of any such event in (i) or (ii) in your judgment makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Shares or the Additional Shares, as the case may be, on the terms and in the manner contemplated by the Prospectus. (c) Any notice of termination pursuant to this Section 12 shall be in writing. (d) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than pursuant to (i) notification by you as provided in Section 12(a) hereof or (ii) Section 10(b)), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by you, reimburse the Underwriters for all out-of-pocket expenses (including the reasonable fees and expenses of their counsel), incurred by the Underwriters in connection herewith. If this Agreement shall be terminated pursuant to Section 12(b) hereof, then no party shall have any liability hereunder except for the Company's obligation, pursuant to Section 6 hereof, to pay all out-of-pocket expenses of the Underwriters (including the reasonable fees and expenses of their Counsel) incurred in connection with this Agreement. 13. Notices. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing, and: 29 (a) if sent to any Underwriter, shall be mailed, delivered, or faxed and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention: Equity Capital Markets, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York, 10036, Attention: David J. Goldschmidt, Esq. (b) if sent to the Company, shall be mailed, delivered, or faxed and confirmed in writing to the Company and its counsel at the addresses set forth in the Registration Statement, Attention: David Lieberman, Esq.; (c) if sent to the Selling Stockholders, shall be mailed, delivered, or faxed and confirmed in writing to the Custodian c/o the Company, at [3061 Industry Drive, Lancaster, Pennsylvania 17603-4025 ]. provided however, that any notice to an Underwriter pursuant to Section 8 shall be delivered or sent by mail or facsimile transmission to such Underwriter at its address set forth in its acceptance facsimile to you, which address will be supplied to any other party hereto by you upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 14. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters and the Company and the controlling persons, directors, officers, employees and agents referred to in Sections 8 and 9 hereof and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and their respective successors, and said controlling persons, officers and directors and their heirs and legal representatives, and it is not for the benefit of any other person, firm or corporation. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of Shares from any of the Underwriters. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, but without regard to principles of conflicts of law. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which may be delivered by facsimile and shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 17. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 30 18. Time is of the Essence. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. [signature page follows] 31 If the foregoing correctly sets forth the understanding between you and the Company and the Selling Stockholders, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, HERLEY INDUSTRIES, INC. By: ____________________________________ SELLING STOCKHOLDERS By: ____________________________________ Name: Lee N. Blatt Title: Chairman By: ______________________________ Name: [ ] Title: [ ] Accepted as of the date first above written BEAR, STEARNS & CO. INC. By: ___________________________ Name: Title: On behalf of themselves and the other Underwriters named in Schedule I hereto. SCHEDULE I
NUMBER OF FIRM SHARES NAME OF UNDERWRITER TO BE PURCHASED Bear, Stearns & Co. Inc............................ ---------------- SG Cowen........................................... ---------------- --------------- --------------- Total:................................... ===============
I-1 SCHEDULE II
- ----------------------------------------------------------------------------------------- NUMBER OF ADDITIONAL SHARES TO BE SOLD TO NAMES OF SELLING STOCKHOLDER THE UNDERWRITERS - ----------------------------------------------------------------------------------------- Lee N. Blatt [ ] - -----------------------------------------------------------------------------------------
II-1 SCHEDULE III NAMES OF STOCKHOLDERS SUBJECT TO THE LOCK-UP PROVISION III-1 ANNEX I Form of Opinion of Company Counsel (i) Each of the Company and the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation with full power and corporate and all other necessary authority to own its properties and conduct its business as described in the Prospectus. Each of the Company and the Subsidiaries is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not in the aggregate have a Material Adverse Effect. (ii) The Company has an authorized capitalization as set forth in the Registration Statement and the Prospectus. All of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are not now in violation of or subject to any preemptive or, to the best of such counsel's knowledge, similar rights that entitle or will entitle any person to acquire any Shares from the Company upon issuance thereof by the Company; and the Common Stock, the Firm Shares and the Additional Shares conform as to legal matters to the descriptions thereof contained in the Registration Statement and the Prospectus. The Shares to be delivered on the Closing Date have been duly and validly authorized and, when delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and non-assessable and will not have been issued in violation of or subject to preemptive or, to the best of such counsel's knowledge, similar rights that entitle or will entitle any person to acquire any Shares from the Company upon issuance thereof by the Company. All of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims. (iii) Except as disclosed in the Prospectus and Registration Statement, the Company has not granted any registration rights that remain outstanding with respect to any of its capital stock, and no such rights will be triggered by the consummation of the Offering or the transactions contemplated by this Agreement. (iv) The Common Stock currently outstanding is listed, and the Shares to be sold under this Agreement to the Underwriters are duly authorized for listing on NASDAQ. (v) This Agreement has been duly and validly authorized, executed and delivered by the Company. A-1 (vi) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of the Subsidiaries is a party or of which any property of the Company or any of the Subsidiaries is the subject which, if determined adversely to the Company or any of the Subsidiaries, would individually or in the aggregate have a Material Adverse Effect; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (vii) The issuance and sale of the Shares by the Company, the execution, delivery, and performance of this Agreement, compliance by the Company with all provisions of this Agreement and the consummation of the transactions contemplated hereby by the Company do not and will not (A) conflict with or result in a breach of any of the terms or provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to any indenture, mortgage, deed of trust, loan agreement or any other agreement, instrument, franchise, license or permit known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or their respective properties or assets is subject or may be bound or (B) violate or conflict with any provision of the certificate of incorporation or by-laws of the Company or any of the Subsidiaries, or, to the best knowledge of such counsel, any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their respective properties or assets. (viii) No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental, or regulatory agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their respective properties or assets is required for the issuance, sale and delivery of the Shares, the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except for (1) such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters (as to which such counsel need express no opinion), (2) such as have been made or obtained under the Securities Act and (3) such as are required by the National Association of Securities Dealers, Inc. (ix) The Registration Statement and the Prospectus and any amendments thereof or supplements thereto (other than the financial statements and schedules and other financial data included or incorporated by reference therein, as to which no opinion need be rendered) appear on their face to be responsive in all material respects with the requirements of the Securities Act and the Rules and Regulations. There are no known amendments to the Registration Statement and there are no documents required by the Rules and Regulations to be filed in connection with, incorporated by reference, or described in the Registration A-2 Statement that have not been so filed, incorporated by reference or described. The documents filed under the Exchange Act to the extent incorporated by reference in the Registration Statement and the Prospectus or any amendment thereof or supplement thereto (other than the financial statements and schedules and other financial data included or incorporated by reference therein, as to which no opinion need be rendered) when they became effective or were filed with the Commission, as the case may be, appear on their face to be responsive as to form in all material respects with the Securities Act or the Exchange Act, as applicable, and the Rules and Regulations of the Commission thereunder; and such counsel has no reason to believe that any of such documents, when such documents became effective or were so filed, as they case may be, contained, in the case of a registration statement which became effective under the Securities Act, an untrue statement of a material fact, or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or, in the case of other documents which were filed under the Exchange Act with the Commission, an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading. (x) The statements under the caption "Description of Capital Stock" in the Prospectus and Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly summarize the information called for with respect to such legal matters, documents and proceedings. (xi) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (xii) Such counsel has been orally advised by the Commission that the Registration Statement was declared effective on _____________, 2002 at _________ and that such counsel has been orally advised by the Commission that no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued and to the best of such counsel's knowledge no proceedings therefor have been initiated or threatened by the Commission and all filings required by Rule 424(b) and Rule 430A of the Rules and Regulations have been made. (xiii) The Company has full right, power and authority to execute and deliver this Agreement and the Shares and to perform its obligations hereunder, and all corporate action required to be taken for the due and proper authorization, execution and delivery of this Agreement and the Shares and the consummation of the transactions contemplated by this Agreement and as described in the Prospectus have been duly and validly taken. A-3 (xiv) To the best of such counsel's knowledge, no contract or agreement is required to be filed as an exhibit to the Registration Statement that is not so filed. (xv) Neither the Company nor any of the Subsidiaries is in violation of its respective charter or by-laws and, to the best of such counsel's knowledge after due inquiry, neither the Company nor any of the Subsidiaries is in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and the Subsidiaries, taken as a whole, to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or their respective properties may be bound. In addition, such opinion shall also contain a statement that such counsel has participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed and no facts have come to the attention of such counsel which would lead such counsel to believe that either the Registration Statement, at the time it became effective (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any amendment thereof made prior to the Closing Date, as of the date of such amendment, contained or incorporated by reference any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (including the documents incorporated by reference therein), as of its date (or any amendment thereof or supplement thereto made prior to the Closing Date as of the date of such amendment or supplement) and as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and schedules and other financial data included or incorporated by reference therein). A-4 ANNEX II Form of Opinions of Selling Stockholder's Counsel (i) Each Selling Stockholder has full legal right, power and authority, and any approval required by law (other than any approval imposed by the applicable state securities and Blue Sky laws), to sell, assign, transfer and deliver the Additional Shares to be sold by the Selling Stockholder in the manner provided in this Agreement. (ii) To the best of such counsel's knowledge, after due inquiry, each Selling Stockholder has good and clear title to the certificates for the Additional Shares to be sold by such Selling Stockholder, and upon delivery thereof pursuant hereto and payment therefor, good and clear title will pass to the Underwriters, severally, free of all restrictions and transfer, liens, encumbrances, security interests and claims whatsoever. (iii) This Agreement has been duly and validly authorized, executed and delivered by each Selling Stockholder. (iv) The Custody Agreements and Powers of Attorney appointing _________________ as the Custodian and _______________ and ________________ as the Selling Stockholders' Attorneys-In-Fact, to the extent set forth therein with regard to the transactions contemplated hereby and by the Registration Statement, have been duly authorized, executed and delivered by or on behalf of each Selling Stockholder enforceable in accordance with its terms, and pursuant to such power of attorney, each Selling Stockholder has authorized such Attorneys-In-Fact, to execute and deliver on such Selling Stockholder's behalf this Agreement and any other document necessary or desirable in connection with the transactions contemplated hereby and to deliver the Additional Shares to be sold by such Selling Stockholder pursuant to this Agreement. (v) The execution, delivery and performance of this Agreement by each Selling Stockholder, compliance by each Selling Stockholder with all the provisions hereof and the consummation of the transactions contemplated hereby will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the Securities Act, state securities laws or Blue Sky laws or except as such may have been obtained) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, any material agreement, indenture or other instrument to which such Selling Stockholder is a party or by which such Selling Stockholder or property of such Selling Stockholder is bound, or, to the knowledge of such counsel, violate or conflict with any laws, administrative regulation or ruling or court decree applicable to such Selling Stockholder or property of such Selling Stockholder. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' Counsel) of other counsel reasonably acceptable to A-2-1 Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of fact, to the extent they deem proper, on certificates of the Selling Stockholders provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel. The opinion of such counsel shall state that the opinion of any such other counsel is in form satisfactory to such counsel and, in their opinion, you and they are justified in relying thereon. A-2-2 ANNEX III _______________ __, 2002 BEAR, STEARNS & CO. INC. [as Representative of the several Underwriters] c/o Bear, Stearns & Co. Inc. 245 Park Avenue New York, New York 10167 Attention: Equity Capital Markets Herley Industries, Inc. Lock-Up Agreement Ladies and Gentlemen: We refer to the proposed Underwriting Agreement (the "Underwriting Agreement"), between Herley Industries, Inc., a Delaware corporation (the "Company") and you, as representatives of the Underwriters named therein (the "Underwriters"), relating to an underwritten public offering (the "Offering") of common stock, $0.10 par value (the "Common Stock"), of the Company. In order to induce you and the other Underwriters underwrite the Offering, the undersigned hereby agrees that, without the prior written consent of Bear, Stearns & Co. Inc. ("Bear Stearns"), during the period from the date hereof until ninety (90) days from the date of the final prospectus for the Offering (the "Lock-Up Period"), the undersigned (a) will not, directly or indirectly, offer, sell, agree to offer or sell, solicit offers to purchase, grant any call option or purchase any put option with respect to, pledge, borrow or otherwise dispose of any Relevant Security (as defined below), and (b) will not establish or increase any "put equivalent position" or liquidate or decrease any "call equivalent position" with respect to any Relevant Security (in each case within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder), or otherwise enter into any swap, derivative or other transaction or arrangement that transfers to another, in whole or in part, any economic consequence of ownership of Relevant Security, whether or not such transaction is to be settled by delivery of Relevant Securities, other securities, cash or other consideration. As used herein "Relevant Security" means the Stock, any other equity security of the Company or any of its subsidiaries and any security convertible into, or exercisable or exchangeable for, any Stock or other such equity security. The undersigned hereby authorizes the Company during the Lock-Up Period to cause any transfer agent for the Relevant Securities to decline to transfer, and to note stop transfer restrictions on the stock register and other records relating to, Relevant Securities for which the undersigned is the record holder and, in the case of the Relevant Securities for which the undersigned is the beneficial but not the record holder, agrees during the A-3-1 Lock-Up Period to cause the record holder to cause the relevant transfer agent to decline to transfer, and to note stop transfer restrictions on the stock register and other records relating to, such Relevant Securities. The undersigned hereby further agrees that, without the prior written consent of Bear Stearns, during the Lock-Up Period the undersigned (x) will not file or participate in the filing with the Securities and Exchange Commission of any registration statement, or circulate or participate in the circulation of any preliminary or final prospectus or other disclosure document with respect to any proposed offering or sale of a Relevant Security and (y) will not exercise any rights the undersigned may have to require registration with the Securities and Exchange Commission of any proposed offering or sale of a Relevant Security. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Agreement and that this Agreement constitutes the legal, valid and binding obligation of the undersigned, enforceable in accordance with its terms. Upon request, the undersigned will execute any additional documents necessary in connection with enforcement hereof. Any obligations of the undersigned shall be binding upon the successors and assigns of the undersigned from the date first above written. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Delivery of a signed copy of this letter by telecopier or facsimile transmission shall be effective as delivery of the original hereof. Very truly yours, By: ________________________________ Print Name: _________________________ A-3-2 EX-21 4 y58816ex21.txt LIST OF SUBSIDIARIES Exhibit 21
SUBSIDIARY PLACE OF INCORPORATION - ---------- ---------------------- General Microwave Corp. New York General Microwave Israel Corporation Delaware General Microwave Israel (1987) Limited Israel Herley Wireless Technologies, Inc. Delaware HMS Investments,Inc. Delaware HMS Trading, Inc. Delaware Micro-El Patent Corporation Delaware Syrix Corp. Delaware
EX-23.1 5 y58816ex23-1.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report included in this registration statement and to the incorporation by reference in this registration statement of our report dated October 3, 2001 (except with respect to the matters discussed in Note P, as to which the date is March 1, 2002) included in Herley Industries, Inc.'s Form 10-K for the year ended July 29, 2001 and to all references to our Firm included in this S-3 Registration Statement. /s/ Arthur Andersen LLP Lancaster, Pennsylvania March 27, 2002 EX-99 6 y58816ex99.txt LETTER RE: REPRESENTATION OF ARTHUR ANDERSEN LLP Exhibit 99 Securities and Exchange Commission March 27, 2002 Washington, DC 20549 Ladies and Gentlemen: Arthur Andersen LLP has represented to Herley Industries, Inc. that its audit was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on the audit, availability of national office consultation and availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the audit. Herley Industries, Inc. By: /s/ Anello C. Garefino ------------------------------- Anello C. Garefino Vice President - Finance Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----