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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended August 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ...............to ...............
Commission File No. 0-5411
Herley Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2413500
-------------------------------- -------------------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
10 Industry Drive, Lancaster, Pennsylvania 17603
------------------------------------------ ----------
(Address of Principal Executive Offices ) (Zip Code)
Registrant's telephone number, including area code: (717) 397-2777
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .10 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ ] Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[X]
Based on the closing sale price of $13.875 as of October 1, 1997 the aggregate
market value of the voting stock held by non-affiliates of the registrant was
$36,423,859.
The number of shares outstanding of registrant's common stock, $ .10 par value
as of October 1, 1997 was 4,539,729 (after a 4-for-3 stock split effective
September 30, 1997).
Documents incorporated by reference:
Registrant's definitive proxy statement to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934.
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HERLEY INDUSTRIES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1 Business 1
Item 2 Properties 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8 Financial Statements and Supplementary Data 13
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
PART II
Item 10 Directors and Executive Officers of the Registrant 13
Item 11 Executive Compensation 13
Item 12 Security Ownership of Certain Beneficial
Owners and Management 13
Item 13 Certain Relationships and Related Transactions 13
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8K 14
SIGNATURES 15
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES F-1
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PART I
Forward-Looking Statements
All statements other than statements of historical fact included in this Annual
Report, including without limitation statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations, are
forward-looking statements. When used in this Annual Report, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or its management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
factors including but not limited to, competitive factors and pricing pressures,
changes in legal and regulatory requirements, technological change or
difficulties, product development risks, commercialization and trade
difficulties and general economic conditions. Such statements reflect the
current views of the Company with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to the operations,
results of operations, growth strategy and liquidity of the Company. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
Item 1. Business
Herley Industries, Inc. ("Herley" or the "Company") principally designs,
manufactures and sells flight instrumentation components and systems, primarily
to the U.S. government, foreign governments, and aerospace companies. Flight
instrumentation products include command and control systems, transponders,
flight termination receivers, telemetry transmitters and receivers, pulse code
modulator ("PCM") encoders and decoders, and scoring systems. Flight
instrumentation products are used to: (i) accurately track the flight of space
launch vehicles, targets, and unmanned airborne vehicles (UAV's), (ii)
communicate between ground systems and the airborne vehicle, (iii) if necessary,
destroy the vehicle if it is veering from its planned trajectory, and (iv) train
troops and test weapons.
The Company's command and control systems are used on training and testing
ranges in the U. S. and foreign countries. The Company has an established base
of approximately 100 command and control systems installed around the world,
which are either shelter mounted or portable radar units. Herley also
manufactures microwave devices used in its flight instrumentation products and
in connection with the radar and defense electronic systems on tactical fighter
aircraft.
The Company has grown internally and through selected acquisitions. As a result
of acquisitions made by the Company in the past five years, the Company has
evolved from a components to a systems manufacturer and has broadened its
interests to the commercial and international markets. Since its inception in
1965, the Company has designed and manufactured microwave devices for use on
various tactical military programs. In June 1986, the Company acquired a small
engineering company, Mission Design, Inc., engaged in the design and development
of transponders. This acquisition enabled the Company to enter the flight
instrumentation business beginning with the design and manufacture of range
safety transponders. In September 1992, the Company acquired substantially all
of the assets of Micro-Dynamics, Inc. ("MDI") of Woburn, Massachusetts, a
microwave subsystem designer and manufacturer. In June 1993, the Company
acquired Vega Precision Laboratories, Inc. ("Vega") of Vienna, Virginia, and
moved the operations to Lancaster, Pennsylvania in October 1993. In March 1994,
the Company entered into an exclusive license agreement for the manufacture,
marketing and sale of the Multiple Aircraft GPS Integrated Command & Control
(MAGIC2) systems. In July 1995, the Company acquired certain assets and the
business of Stewart Warner Electronics Corp. of Chicago, Illinois, a
manufacturer of high frequency radio and IFF interrogator systems. In August
1997,
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the Company acquired Metraplex Corporation ("Metraplex") of Frederick, Maryland,
which has enabled the Company to enter the airborne PCM and FM telemetry and
data acquisition systems market.
With these recent acquisitions, the Company has four operating facilities;
HERLEY-VEGA SYSTEMS ("HVS"), operating in Lancaster, Pennsylvania; HERLEY-MDI
("MDI") operating in Woburn, Massachusetts, Stewart Warner Electronics Co.
("SWE") operating in Chicago, Illinois; and Metraplex Corporation operating in
Frederick, Maryland. In January 1996 the Company created its Global Security
Systems ("GSS") division, a marketing group, to serve the international
marketplace.
Products
Command and Control Systems (C 2S)
For over thirty years, Vega has been manufacturing products in the radar
enhancement field. The Company's command and control systems have been used to
fly remotely a large variety of unmanned aerial vehicles, typically aircraft
used as target drones or Remotely Piloted Vehicles ("RPVs") and some surface
targets. Operations have been conducted by many users on the open ocean, remote
land masses, and instrumented test and training ranges.
The Company believes that its command and control systems are currently in
service throughout the world. The Company's pulse-positioned-coded ("PPC")
concept enables the use of standard radar technology to track and control
unmanned vehicles. Using the radar beacon mode, PPC pulse groups are transmitted
and received for transfer of command and telemetry data while employing the
location precision and advantages of radar techniques.
Command and control systems permit a ground operator to fly a target or a UAV
through a pre-planned mission. That mission may be for reconnaissance, where the
vehicle is equipped with high definition TV sensors and the necessary data links
to send information back to its C2S ground station. The UAV may also be used as
a decoy, since the operator can direct the flight operations that will make the
small drone appear to be a larger combat aircraft.
With the 1994 licensing of the MAGIC2 systems, the Company has increased the
selection of command and control systems that it offers. The 6104 TTCS (Target
Tracking and Control System) unit is a reliable line-of-sight C2S with an
installed base of equipment worldwide. The Company's engineers and marketers are
now able to offer the MAGIC2 system as a supplement to, or replacement for, this
installed base of equipment. The MAGIC2 affords over-the-horizon C2 S using GPS
guidance and control of multiple targets from a single ground station. Thus,
control of multiple targets at increased distances represents a significant
product improvement. The increasing demand for enhanced performance by the U.S.
Navy as well as foreign navies in littoral warfare scenarios can be ideally met
by the use of the MAGIC2 system.
The new Model 6104 TTCS is a highly flexible, multiple processor design with
high resolution graphics, which can be field configured within minutes to fly or
control any selected vehicle for which it is equipped. The system is delivered
with the necessary command panels and graphics display software to operate with
a large variety of vehicles. A basic TTCS configuration is normally supplied
with a standard command panel and the software peculiar to one vehicle.
Telemetry display software is embedded for the specified vehicle, and a magnetic
hard drive is supplied with a mission map prepared in accordance with a customer
supplied detailed map of the area.
Military surveillance operations typically use UAVs, RPVs, or drones to avoid
the cost and risk of manned surveillance vehicles in the event of an accident or
if the vehicle is shot down. These inexpensive drones are controlled in flight
by a Company C2 S, which may be mounted in a trailer that may be moved from
place to place by helicopter or truck. The Company also supplies portable
command and control systems that are mounted on tripods that can be easily
transported by an operational team. The portable units permit ready deployment
in rugged terrain and may also be used on ships during open ocean exercises.
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In recent years, teaming arrangements between prime military contractors and the
Company have increased. Large companies bidding on major programs seek to align
themselves with parts and systems manufacturers such as the Company for economic
reasons as well as for the technical expertise afforded by such alliance.
Teaming arrangements with Tracor Corporation and Northrop Grumman Corporation
have resulted in recent awards to the Company for C2 S in Australia and
Singapore and the Company is presently negotiating additional teaming
arrangements.
Telemetry Systems
Missile, UAV, or target testing on domestic and international test ranges
require 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 C2 S uplink to accomplish their
mission. The Company has developed a telemetry system capability that can be
configured to meet individual customers' needs. Various components of the system
include data encoders, transmitters and flight termination receivers. Each has a
distinctive role and each is key to the success of the mission.
In 1972 Metraplex began developing data encoding and acquisition, and signal
conditioning equipment. The Company believes that Metraplex is now a leading
manufacturer of PCM and FM telemetry and data acquisition systems for severe
environment applications. Metraplex products are used worldwide for testing
space launch vehicle instrumentation, aircraft flight testing, and amphibian,
industrial and automotive vehicle testing. A product portfolio ranges in size
and complexity from miniature encoders to completely programmable data
acquisition systems.
The Company's recent acquisition of Metraplex will allow the Company to offer a
complete airborne telemetry system package. With the digital experience of
Metraplex in data encoding and acquisition elements combined with the radio
frequency capability of the Company in providing its telemetry transmitters and
flight termination receivers, the Company can offer a full line of narrow or
wide band airborne telemetry systems to meet a wide variety of industry needs,
both domestically and internationally.
Transponders
The Company manufactures a variety of expendable transponders, including range
safety, identification friend or foe ("IFF"), command and control, and scoring
systems.
Transponders are small, expendable, electronic systems consisting of a
transmitter, sensitive receiver and internal signal processing equipment
comprised of active and passive components, including microwave subassemblies
such as amplifiers, oscillators and circulators. The transponder receives
signals from radars, changes and amplifies the frequency of the signals, and
sends back a reply on a different frequency and signal level. This reply will be
a strong, noise free signal upon which the tracking radar can "lock", and one
which is far superior to skin reflection tracking.
In range safety applications, transponders enable accurate tracking of space
launch and unmanned aerial vehicles, missiles, and target drones so that
position and direction are known throughout its flight. In the case of several
defense and commercial space launch vehicles (i.e., Delta, Atlas, Titan and
Pegasus), the Herley transponder is tracked by the ground launch team all the
way to space orbit, and in certain instances through several orbits, as a
reference location point in space to assure that the launch payload has been
properly placed in orbit. The use of the transponder is far more effective than
simple skin reflection tracking, particularly under adverse weather conditions
after the launch.
IFF transponders, which are used in conjunction with the FAA Air Traffic Control
System, enable ground controllers to identify the unmanned targets, drones and
cruise missiles on which these units fly and to vector other manned aircraft
safely away from the flight path of the unmanned aerial vehicle.
Command and control transponders provide the link through the telemetry system
for relaying ground signals to direct the vehicle's flight. The uplink from the
ground control station, a series of coded pulse
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groups, carries the signals that command the flight control guidance system of
the vehicle. The downlink to the ground provides both tracking signals for range
safety, as well as acknowledgment and status of the uplink commands and their
implementation in the vehicle. The transponder is therefore the means to fly the
vehicle.
Scoring systems are mounted on both airborne and sea targets. Scoring systems
enable test and evaluation engineers to determine the "miss-distance" between a
projectile and the target at which it has been launched.
Flight Termination Receiver
A flight termination receiver ("FTR") is installed in a test missile, UAV,
target or a space launch vehicle as a safety device. The FTR has a built-in
decoder that enables it to receive a complex series of audio tones which, when
appropriate, will set off an explosive charge that will destroy the vehicle. A
Range Safety Officer ("RSO") using the range safety transponder will track the
vehicle in flight to determine if it is performing as required. If the RSO
detects a malfunction in the test or launch vehicle that causes it to veer from
a planned trajectory in a manner that may endanger personnel or facilities, the
RSO will transmit a coded signal to the onboard FTR to explode the vehicle
harmlessly. The FTR can be programmed for complex combinations of audio tone
frequencies so that it will not accidentally explode the vehicle, but will not
fail to explode the vehicle when so commanded.
Microwave Devices
Herley manufactures solid state microwave devices in both Lancaster,
Pennsylvania and at its MDI facility in Woburn, Massachusetts for use in its
transponders and in existing long-term military programs, both as part of new
production and for spare parts and repair services. These microwave devices are
used in a variety of radar, communications and missile applications, including
airborne and shipboard navigation and missile guidance systems.
At MDI, the Company designs and manufactures complex microwave integrated
circuits ("MICs"), which consist of sophisticated assemblies that perform many
functions, primarily involving switching of microwave signals. MICs manufactured
by the Company are employed in many defense electronics military systems as well
as missile programs.
The Company also produces receiver protector devices at MDI. These high power
devices protect a radar receiver from transient bursts of microwave energy and
are employed in almost every military and commercial radar system. With the
contraction of the defense business, the Company believes that it has only a
single competitor in this market.
In its Chicago facility, the Company designs and manufactures high frequency
radio and IFF interrogators. This high frequency communications equipment is
used by the U.S. Navy and foreign navies that conduct joint military exercises
with the U. S. Navy. The IFF interrogators are used as part of shipboard
equipment and are also placed on coastlines, where they are employed as silent
sentries.
New Product Development and Applications
The Company believes that its growth depends on its ability to renew and expand
its technology, products, and design and manufacturing processes with an
emphasis on cost effectiveness. The Company's primary efforts are focused on
engineering design and product development activities rather than pure research.
A substantial portion of the Company's development activities have been funded
by the Company's customers. Certain of the Company's officers and engineers are
involved at various times and in varying degrees in these activities. The
Company's policy is to assign the required engineering and support people, on an
ad hoc basis, to new product development as needs and budgets require. The cost
of these development activities, including employees' time and prototype
development, net of amounts paid by
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customers, were approximately $1,828,000, $1,453,000, and $970,000 in fiscal
1997, 1996, and 1995, respectively.
Over the past two years, the Company has been seeking commercial applications
for its magnetron tube capability. In 1995, the Company signed agreements to
develop miniature cost-effective magnetron tubes, using electrode-less high
density ("EHD") techniques, for medical and industrial lighting applications.
The Company believes that its partner in this joint engineering program is one
of the largest lighting companies in the world. Based on initial engineering
results, prototype tubes were designed, manufactured and tested satisfactorily
to the specifications required. The Company and its partner are currently
planning limited production of magnetron tubes to be used in an EHD industrial
lighting application.
The new products and systems that the Company plans to design, manufacture and
sell are data link systems, which encompass telemetry systems and telemetry data
encoders. These products are currently being sold by others to the Company's
existing customers. Together with transponders, they comprise the principal
airborne flight instrumentation package for space launches. The Company believes
that transponders represent approximately 5% to 10% of the total cost for the
flight instrumentation package on a space launch vehicle. The Company
anticipates sales of these new products to commence April 1998.
Telemetry Systems
Telemetry systems contain transmitters, amplifiers and receivers and provide the
means of communication between the control tower, the ground station and the
test or launch vehicle. Telemetry systems are the equivalent of telephone links
between the air and ground portions of launch vehicles or test and training
ranges. The uplink communication to the airborne vehicle is transmitted via a
telemetry signal from the ground to the vehicle. The telemetry signals are used
to command the airborne vehicle through its command control transponder. The
transponder will then change the flight control guidance system as directed. The
downlink signals from the airborne telemetry transmitter to the ground telemetry
receiver provide tracking signals for range safety, confirmation of the uplink
command and their implementation by the vehicle and compilation of the data from
on-board sensors gathered by the data encoder.
Telemetry Data Encoders
Airborne targets and flight test missiles must have many critical parameters
simultaneously monitored from the ground to gain the data required for
verification of satisfactory performance or for identification of details of
hardware requiring design improvements. On-board sensors may measure
temperature, strain levels, vibration level and frequency, acoustic noise
levels, air pressure, air velocity, humidity and other parameters of interest.
The function of the encoder system is to convert the output of each of these
sensors to a signal form that may be sequentially sampled by an electronic
switch (multiplexer) in a known sequence and rate so as to create a data stream
that may be transmitted to the ground by the telemetry system.
Government Contracts
A substantial part of the Company's sales are made to U.S. government agencies
or prime contractors or subcontractors on military or aerospace programs.
Government contracts are awarded either on a competitive bid basis or on a
negotiated sole source procurement basis. Contracts awarded on a bid basis
involve several competitors bidding on the same program with the contract being
awarded based upon price and ability to perform. Negotiated sole source
procurement is utilized if the Company is deemed by the customer to have
developed proprietary equipment not available from other parties or where there
is a very stringent delivery schedule.
All of the Company's government contracts are fixed price contracts, some of
which require delivery over time periods in excess of one year. With this type
of contract, the Company agrees to deliver products at a fixed price except for
costs incurred because of change orders issued by the customer.
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In accordance with Department of Defense procedures, all contracts involving
government programs may be terminated by the government, in whole or in part, at
the government's discretion. In the event of such a termination, prime
contractors on such contracts are required to terminate their subcontracts on
the program and the government or the prime contractor is obligated to pay the
costs incurred by the Company under the contract to the date of termination plus
a fee based upon the work completed.
Marketing and Distribution
The Company's marketing approach is to determine customer requirements in the
early stages of a program. Marketing and engineering personnel work directly
with the customer's engineering group to develop product specifications. The
Company receives its awards based upon an evaluation of a number of factors
including technical ranking, price, overall capability and past performance.
Follow-up contracts on the same program are normally negotiated with customers
rather than being subject to a competitive bidding process.
Backlog
The Company's backlog of firm orders was approximately $36,911,000 on August 3,
1997 ($26,135,000 in domestic orders and $10,776,000 in foreign orders) as
compared to approximately $23,770,000 on July 28, 1996 ($13,632,000 in domestic
orders and $10,138,000 in foreign orders). Management anticipates that
approximately $30,330,000 of the backlog will be shipped during the fiscal year
ending August 2, 1998. There can be no assurance that the Company's backlog will
result in sales in any particular period or at all, or that the contracts
included in the backlog that result in sales will be profitable.
Manufacturing, Assembly and Testing
Flight instrumentation devices manufactured by the Company for military and
space launch applications are subject to stringent testing procedures based upon
customer requests. All of such testing is performed by the Company at its
Lancaster facility.
All electronic parts are procured in controlled lots that are subjected to
extensive physical inspection and screening at Herley before use in products.
Physical inspection requires the use of high power microscopes and laser scanned
optical comparators, which match the characteristics of the part under
inspection to previously stored images.
The testing of high reliability space equipment is performed by complex computer
controlled consoles that take measurements that continuously monitor and analyze
operating parameters. Flight instrumentation products are tested over their full
operating temperature range, after which the equipment is evaluated under
combined vibration and temperature cycling. For initial design qualification,
this testing may extend for several months and include evaluation of
electromagnetic interference behavior (EMI), ability to survive pyrotechnic
shock (simulating explosive charge detonation for space vehicle stage
separation) and the combined effects of external vacuum with heating and
cooling.
Electronic components and other raw materials used in the Company's products are
purchased by the Company from a large number of suppliers and all of such
materials are readily available from alternate sources.
The Company does not maintain any significant level of finished products
inventory. Raw materials are generally purchased for specific contracts and
common components are purchased for stock based on the Company's firm fixed
backlog.
There are no significant environmental control procedures required concerning
the discharge of materials into the environment that would require the Company
to invest in any significant capital equipment or that would have a material
effect on the earnings of the Company or its competitive position.
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Competition
The flight instrumentation products which the Company manufactures are subject
to varied competition depending on the product and market served. Competition is
generally based upon technology, design, price and past performance. The
Company's ability to compete for defense contracts depends, in part, on its
ability to offer better design and performance than its competitors and its
readiness in facilities, equipment and personnel to undertake to complete the
programs. In certain products on programs, the Company believes that it is sole
source, which means that all work is directed to a single manufacturer. In other
cases, there may be other suppliers who have the capability to compete for the
programs involved, but they can only enter or reenter the market if the
government should choose to reopen the particular program to competition.
Competition in follow-on procurements is generally limited after an initial
award unless the original supplier has had performance problems. Many of
Herley's competitors are larger and may have greater financial resources than
the Company. Competitors include Aydin Corporation, L3 Communications,
Microsystems, Inc., AMP, Inc., and REMEC, Inc.
Employees
As of October 12, 1997, the Company employed 286 full-time persons. A total of
203 employees were engaged in manufacturing, 38 in engineering, 20 in marketing,
contract administration and field services and the balance in general and
administrative functions. None of the Company's employees are covered by
collective bargaining agreements and the Company considers its employee
relations to be satisfactory.
The Company believes that its future success will depend, in part, on its
continued ability to recruit and retain highly skilled technical, managerial and
marketing personnel. To assist in recruiting and retaining such personnel, the
Company has established competitive benefits programs, including a 401k employee
savings plan, and stock option plans.
Intellectual Property
The Company does not presently hold any significant patents applicable to its
products. In order to protect its intellectual property rights, the Company
relies on a combination of trade secret, copyright and trademark laws and
certain employee and third-party non-disclosure agreements, as well as limiting
access to and distribution of proprietary information. There can be no assurance
that the steps taken by the Company to protect its intellectual property rights
will be adequate to prevent misappropriation of the Company's technology or to
preclude competitors from independently developing such technology. Trade secret
and copyright laws afford the Company limited protection. Furthermore, there can
be no assurance that, in the future, third parties will not assert infringement
claims against the Company or with respect to its products for which the Company
has indemnified certain of its customers. Asserting the Company's rights or
defending against third party claims could involve substantial costs and
diversion of resources, thus materially and adversely affecting the Company's
business, results of operations and financial condition. In the event a third
party were successful in a claim that one of the Company's products infringed
its proprietary rights, the Company would have to pay substantial royalties or
damages, remove that product from the marketplace or expend substantial amounts
to modify the product so that it no longer infringe such proprietary rights, any
of which could have a material adverse effect on the Company's business, results
of operations and financial condition.
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Item 2. Properties
The Company's properties are as follows:
Area Owned
Occupied or
Location Purpose of Property (Sq. Ft.) Leased
- ----------------- ------------------------------------------ --------- ------
Lancaster, PA (1) Production, engineering, administrative 71,200 Owned
and executive offices
Woburn, MA Production, engineering and administration 60,000 Owned
Chicago, IL Production, engineering and administration 9,700 Leased
Frederick, MD Production, engineering and administration 14,700 Leased
Lancaster, PA Land held for expansion 26 Acres Owned
- --------------
(1) The Company's executive offices occupy approximately 4,000 sq. ft. of
space at this facility with engineering and administrative offices occupying
10,000 sq. ft. each. The Company believes that its facilities are adequate for
its current and presently anticipated future needs.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
(a) The Company's Common Stock is traded in the over-the-counter National
Market System under the symbol HRLY. The following table sets forth
the high and low closing sales price as reported by NASDAQ - National
Market System for the Company's Common Stock for the periods
indicated.
Common Stock
High Low
Fiscal Year 1996
First Quarter.................................. 4.59 3.66
Second Quarter................................. 6.19 3.84
Third Quarter.................................. 7.97 5.25
Fourth Quarter................................. 9.19 6.00
Fiscal Year 1997
First Quarter.................................. 7.97 6.19
Second Quarter................................. 10.69 7.31
Third Quarter.................................. 8.91 6.09
Fourth Quarter................................. 10.69 6.19
The closing price on October 1, 1997 was $13.875.
(b) As of October 1, 1997, there were approximately 1,000 record holders
of the Company's Common Stock.
(c) There have been no cash dividends declared or paid by the Company on
its Common Stock during the past two years. The above prices have been
adjusted to give effect to a 4-for-3 stock split on September 30,
1997.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
53 Weeks 52 Weeks ended
Ended ----------------------------------------
August 3, July 28, July 30, July 31, August 1,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $32,195,168 29,001,404 24,450,267 30,508,211 21,334,985
Earnings (loss) from continuing operations $ 4,803,659 3,668,956 (4,890,166) 1,861,429 1,391,098
Loss from discontinued operations $ - - - - (2,463,642)
Cumulative effect of
accounting change $ - - - - 2,081,028
---------- --------- ---------- ---------- ----------
Net income (loss) $ 4,803,659 3,668,956 (4,890,166) 1,861,429 1,008,484
========== ========= ========== ========== ==========
Earnings (loss) per common
and common equivalent share (1):
Continuing operations $ 1.01 .86 (.98) .33 .26
Discontinued operations - - - - (.47)
Change in accounting - - - - .40
---- ---- ---- ---- ----
Net income (loss) $ 1.01 .86 (.98) .33 .19
==== ==== ==== ==== ====
(1) As adjusted to give effect to a 4-for-3 stock split effective September
30, 1997.
Total Assets $39,257,186 42,508,942 42,229,282 53,752,454 58,813,878
Total Current Liabilities $ 9,813,376 7,559,306 9,973,866 10,217,598 14,369,213
Long-Term Debt net of current portion $ 2,890,000 11,021,000 10,525,000 14,822,834 14,054,128
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company principally designs, manufactures and sells flight instrumentation
components and systems, primarily to the U.S. government, foreign governments,
and aerospace companies. Flight instrumentation products include command and
control systems, transponders, flight termination receivers, telemetry
transmitters and receivers, PCM encoders and decoders, and scoring systems.
Flight instrumentation products are used to: (i) accurately track the flight of
space launch vehicles, targets, and UAVs, (ii) communicate between ground
systems and the airborne vehicle, (iii) if necessary, destroy the vehicle if it
is veering from its planned trajectory, and (iv) train troops and test weapons.
Of the Company's total backlog of $36,911,000 at August 3, 1997, $26,135,000 is
attributable to domestic orders and $10,776,000 is attributable to foreign
orders. Management anticipates that approximately $30,330,000 of its backlog
will be shipped during the fiscal year ending August 2, 1998. The Company
includes in its backlog only firm orders for which it has accepted a written
purchase order. In accordance with Department of Defense procedures, all
contracts involving government programs may be terminated by the government, in
whole or in part, at the government's discretion. In the event of such a
termination, prime contractors on such contracts are required to terminate their
subcontracts on the program and the government or the prime contractor is
obligated to pay the costs incurred by the Company under the contract to the
date of termination plus a fee based upon work completed.
Substantially all of the Company's contracts are fixed price contracts, wherein
sales and related costs are generally recorded as deliveries are made. Many o f
these contracts include options exercisable by the customer for additional
products or systems at a fixed price. Certain costs under long-term fixed price
contracts, principally directly or indirectly with the U.S. Government, which
include non-recurring engineering, are deferred until these costs are
contractually billable. The failure to anticipate technical problems, estimate
costs accurately or control costs during a fixed price contract, including with
respect to any option for additional products or systems, may reduce the
Company's profitability or cause a loss under the contract. Revenue under
certain long-term, fixed price contracts, principally command and control
shelters, is recognized using the percentage of completion method of accounting.
Revenues recognized on these contracts are based on estimated completion to
date, which is the total contract amount multiplied by percent of performance,
based on direct labor costs. There were no long-term contracts of this nature as
of August 3, 1997 or July 28, 1996. Losses, if any, on contracts are recorded
when first reasonably determined.
The Company believes that its growth depends on its ability to renew and expand
its technology, products, and design and manufacturing processes with an
emphasis on cost effectiveness. The Company's primary efforts are focused on
engineering design and product development activities, rather than pure
research. The cost of these development activities, including employees' time
and prototype development, net of amounts paid by customers, was approximately
$1,828,000, $1,453,000 and $970,000 in fiscal years 1997, 1996 and 1995,
respectively. Costs of the Company's internally funded product development
efforts are included in the Company's operating expenses as cost of products
sold. Revenue from customer funded product development is included in net sales
and the related product development costs also are included in cost of products
sold.
The Company's effective tax rate for fiscal 1996 and 1997 was 2.7% and 9.1%,
respectively, reflecting the utilization of prior year net operating loss
carryforwards and the reversal of a valuation allowance established in 1995. The
valuation allowance was established based on management's uncertainty that past
performance would be indicative of future earnings. In August 1997, the Company
established a foreign sales corporation as part of an overall domestic tax
strategy to reduce its effective income tax rate. The Company anticipates that
its effective income tax rate for fiscal 1998 will be approximately 34%.
10
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of operations
expressed as a percentage of net sales. There can be no assurance that trends in
sales growth or operating results will continue in the future.
52 Weeks ended 53 Weeks
---------------- ended
July 30, July 28, August 3,
1995 1996 1997
---- ---- ----
Net sales 100.0 % 100.0 % 100.0 %
Cost of products sold 74.1 % 68.3 % 64.5 %
----- ---- ----
Gross profit 25.9 % 31.7 % 35.5 %
Selling and administrative expenses 20.7 % 20.1 % 19.5 %
----- ---- ----
Income before unusual item 5.2 % 11.6 % 16.0 %
Unusual item 22.3 % - -
----- ---- ----
Operating income (loss) (17.1)% 11.6 % 16.0 %
----- ---- ----
Other income (expense):
Net gain (loss) on available-for-sale
securities and other investments (1.5)% 3.1 % 1.3 %
Dividend and interest income 2.5 % 1.3 % 0.8 %
Interest expense (3.9)% (3.0)% (1.7)%
----- ---- -----
(2.9)% 1.4 % 0.4 %
----- ---- -----
Income (loss) before income taxes (20.0)% 13.0 % 16.4 %
Provision for income taxes 0.0 % 0.4 % 1.5 %
----- ---- ----
Net income (loss) (20.0)% 12.7 % 14.9 %
----- ---- ----
Fiscal 1997 Compared to Fiscal 1996
Net sales for the 53 weeks ended August 3, 1997 were approximately $32,195,000
compared to $29,001,000 for fiscal 1996. The sales increase of $3,194,000 (11%)
is primarily attributable to an increase in the sales of flight instrumentation
products, including a Target Tracking Control System for the Republic of Korea.
Gross profit of 35.5% for the 53 weeks ended August 3, 1997 exceeded the prior
year of 31.7% due to an increase of $2,842,000 in higher margin foreign sales
from $6,556,000 in 1996 to $9,398,000 in 1997, as well as an increase in
absorption of fixed costs due to the higher sales volume.
Selling and administrative expenses for the 53 weeks ended August 3, 1997 were
$6,293,000 compared to $5,832,000 for fiscal 1996, an increase of $461,000 of
which $360,000 was attributable to settlement and litigation costs involving two
class action law suits, $325,000 to performance incentives, and $52,000 to
additional travel costs. These increases were offset by a reduction in
representative fees on foreign sales
11
<PAGE>
of $205,000 (partially due to a negotiated decrease in the rate paid), and a
reduction of $75,000 in personnel and related expenses. As a percentage of net
sales, selling and administrative expenses decreased from 20.1% in 1996 to 19.5%
in 1997.
Other income (expense) for the 53 weeks ended August 3, 1997 decreased $265,000
from the prior year due to decreases in gains on the sale of investments and
dividend and interest income of $488,000 and $118,000, respectively, offset by a
decrease in interest expense of $341,000.
The effective tax rate in 1997 was 9.1%. The 1997 and 1996 tax provisions
reflect the utilization of prior year net operating loss carryforwards. In 1995
a valuation allowance had been provided to reduce deferred tax assets to their
net realizable value primarily based on management's uncertainty that past
performance would be indicative of future earnings. In 1997 the valuation
allowance was reversed through the deferred tax provision. A determining factor
in assessing the change was the cumulative income in recent years. See Note I
entitled "Income Taxes" to the Consolidated Financial Statements.
Fiscal 1996 Compared to Fiscal 1995
Net sales for the 52 weeks ended July 28, 1996 were approximately $29,001,000
compared to $24,450,000 for fiscal 1995. The sales increase of $4,551,000
(18.6%) is attributable to an increase of approximately $5,845,000 in flight
instrumentation products, of which Stewart Warner Electronics Co., acquired in
July 1995, contributed $4,321,000, offset by a decrease of $1,294,000 in
microwave components.
Gross profit of 31.7% for the 52 weeks ended July 28, 1996 exceeded the prior
year of 25.9% due to an increase of $2,648,000 in higher margin foreign sales
from $3,908,000 in 1995 to $6,556,000 in 1996, as well as an increase in
absorption of fixed costs due to the higher sales volume.
Selling and administrative expenses for the 52 weeks ended July 28, 1996 were
$5,832,000 compared to $5,072,000 for fiscal 1995, an increase of $760,000 of
which $388,000 is attributable to increased representative fees on foreign
sales, an increase of $233,000 in personnel and related expenses and other
expenses of $46,000, offset by a reduction of $150,000 in the provision for
customer disputed charges, and decreases in group insurance of $90,000,
depreciation of $69,000 and outside services of $48,000. The addition of Stewart
Warner Electronics Co. added $450,000 in selling and administrative expenses in
fiscal 1996, the specific expenses of which are included in the above numbers.
As a percentage of net sales, selling and administrative expenses decreased from
20.7% in 1995 to 20.1% in 1996.
Income before unusual items in 1996 was $3,370,882 as compared to $1,260,553 in
1995. Included in unusual items in 1995 are settlement costs in connection with
certain legal actions of $4,310,000, legal fees of $829,000, and related
expenses of $308,000.
Other income (expense) for the 52 weeks ended July 28, 1996 increased $1,100,000
from the prior year due to net gains on available-for-sale securities and other
long-term investments of $898,000 as compared to losses of $356,000 in 1995, and
a decrease in interest expense of $88,000; offset by decreased dividend and
interest income of $242,000.
The effective tax rate in 1996 was 2.7%. The 1996 tax provision reflects the
utilization of prior year net operating loss carryforwards. No income tax
benefit was recorded in 1995 due to an increase in the valuation allowance. The
valuation allowance was provided relating to that portion of net operating loss
carryforwards that management believed might expire unutilized.
Liquidity and Capital Resources
As of August 3, 1997 and July 28, 1996, working capital was approximately
$10,662,000 and $8,704,000, respectively, and the ratio of current assets to
current liabilities was 2.09 to 1 and 2.15 to 1, respectively. At August 3,
1997, the Company had cash and cash equivalents of approximately $1,195,000.
12
<PAGE>
As is customary in the defense industry, inventory is partially financed by
advance payments. The unliquidated balance of these advance payments was
approximately $3,091,000 in 1997, and $1,480,000 in 1996.
Net cash provided from operations and investing activities in 1997 and 1996 was
approximately $3,647,000, and $6,159,000, respectively. Cash provided by
investing activities resulted primarily from the liquidation of all the
available-for-sale securities, and the sale of the Company's interest in the M.
D. Sass Re/Enterprise-II, L.P., limited partnership. The Company used
approximately $9,715,000 of these funds in financing activities primarily for
the net payment of outstanding bank debt of $7,250,000, and the purchase of
treasury stock for $2,783,000.
The Company maintains a revolving credit facility with a bank for an aggregate
of $11,000,000, which expires January 31, 1999. No borrowings were outstanding
on this line at August 3, 1997. As of July 28, 1996, the Company had borrowings
outstanding of $6,950,000.
During the fiscal year ended August 3, 1997 the Company acquired 244,519 shares
of its outstanding common stock for $2,782,686 through open market purchases,
pursuant to a stock purchase plan to acquire up to 300,000 pre-split shares of
Common Stock, which was terminated in June 1997. The Company also acquired
463,639 shares, valued at $6,429,124 in connection with certain
"stock-for-stock" exercises of stock options by which certain employees elected
to surrender "mature" shares owned in settlement of the option price. Such
exercises are treated as an exercise of a stock option and the acquisition of
treasury shares by the Company. See "Management Stock Plans."
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in the Index on Page F-1
are filed as a part of this report.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not applicable
PART III
The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in December 1997, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended August 3, 1997.
13
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation, as amended (Exhibit 3(a) of Form S-1
Registration Statement No. 2-87160).
3.2 By-Laws, as amended (Exhibit 3(b) of Form S-1 Registration Statement No.
2-87160).
10.1 1996 Stock Option Plan (Exhibit 10.1 of Annual Report on Form 10-K for the
fiscal year ended July 28, 1996).
10.2 1997 Stock Option Plan (Eshibit 10.1 of Report on Form 10-Q dated June 10,
1997).
10.3 Employment Agreement between Herley Industries, Inc. and Lee N. Blatt dated
as of January 1, 1997 (Exhibit 10.2 of Report on Form 10-Q dated June 10,
1997).
10.4 Employment Agreement between Herley Industries, Inc. and Myron Levy dated
as of January 1, 1997 (Exhibit 10.3 of Report on Form 10-Q dated June 10,
1997).
10.5 (a) Employment Agreement with Gerald I. Klein dated April 1, 1990, (Exhibit
10.5 of Annual Report on Form 10-K for the fiscal year ended July
31, 1990).
(b) Employment Agreement with Gerald I. Klein dated January 1, 1992,
(Exhibit 10.7 of Form S-2 Registration Statement No. 33-44959).
(c) Modification Agreement to Employment Agreement with Gerald I. Klein
dated November 30, 1992, (Exhibit 10(b) of Report on Form 8-K dated
November 30, 1992).
10.6 (a) Revised Non-Negotiable Promissory Note of Lee N. Blatt dated June 2,
1997 (Exhibit 10.4 of Report on Form 10-Q dated June 10, 1997).
(b) Revised Non-Negotiable Promissory Note of Gerald I Klein dated June 2,
1997 (Exhibit 10.5 of Report on Form 10-Q dated June 10, 1997).
(c) Revised Non-Negotiable Promissory Note of Myron Levy dated June 2,
1997 (Exhibit 10.6 of Report on Form 10-Q dated June 10, 1997).
10.7 Loan Agreement between Registrant and Allstate Municipal Income
Opportunities Trust (Exhibit 10.6 of Annual Report on Form 10-K for the
fiscal year ended July 31, 1989).
10.8 Asset Purchase Agreement dated as of September 1, 1992 between
Micro-Dynamics, Inc. and Herley Industries, Inc. (Exhibit 7(c) of Report on
Form 8-K dated October 22, 1992).
10.9 Stock Purchase Agreement dated as of June 1, 1993 between Herley
Industries, Inc., Herley Interim Corp., Milton C. Barnard, Edward M.
Webber, Marvin Adler and Carlton Industries, Inc. (Exhibit 7(c) of Report
on Form 8-K dated June 18, 1993).
10.10 Agreement and Plan of Reorganization dated as of July 8, 1997 among the
Company, Metraplex Acquisition Corporation and Metraplex Corporation
(Exhibit 2.1 of Registration Statement Form S-3 dated September 4, 1997).
11. Computation of per share earnings.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule (for electronic submission only).
(b) Financial Statements
See Index to Consolidated Financial Statements at Page F-1.
(c) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES:
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 30th day of October, 1997.
HERLEY INDUSTRIES, INC.
By: /S/ Lee N. Blatt
-----------------------------------
Lee N. Blatt, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on October 30, 1997 by the following persons in the
capacities indicated:
By: /S/ Lee N. Blatt
------------------ Chairman of the Board
Lee N. Blatt (Principal Executive Officer)
By: /S/ Myron Levy President and Director
----------------
Myron Levy
By: /S/ Anello C. Garefino Vice President Finance, CFO, Treasurer
------------------------ (Principal Financial Officer)
Anello C. Garefino
By: /S/ David H. Lieberman Director
------------------------
David H. Lieberman
By: /S/ Thomas J. Allshouse Director
-------------------------
Thomas J. Allshouse
By: /S/ John A. Thonet Director
--------------------
John A. Thonet
15
<PAGE>
Item 8. Financial Statements and Supplementary Data
HERLEY INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................ F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets, August 3, 1997 and July 28, 1996...... F-3
Consolidated Statements of Operations for the 53 Weeks Ended
August 3, 1997, and the 52 Weeks Ended July 28, 1996
and July 30, 1995................................................. F-4
Consolidated Statements of Shareholders' Equity for the 53 Weeks
Ended August 3, 1997, and the 52 Weeks Ended July 28, 1996
and July 30, 1995................................................ F-5
Consolidated Statements of Cash Flows for the 53 Weeks Ended
August 3, 1997, and the 52 Weeks Ended July 28, 1996 and
July 30, 1995.................................................... F-6
Notes to Consolidated Financial Statements.......................... F-7
Schedules have been omitted as not applicable.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Herley Industries, Inc.
We have audited the accompanying consolidated balance sheets of Herley
Industries, Inc. and Subsidiaries as of August 3, 1997 and July 28, 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the 53 weeks ended August 3, 1997 , and the 52 weeks ended July 28,
1996 and July 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Herley Industries,
Inc. and Subsidiaries as of August 3, 1997 and July 28, 1996, and the
consolidated results of their operations and their cash flows for the 53 weeks
ended August 3, 1997, and the 52 weeks ended July 28, 1996, and July 30, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Lancaster, PA
September 19, 1997
F-2
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 3, July 28,
1997 1996
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,194,650 $ 1,104,445
Accounts receivable 5,176,523 3,249,225
Notes receivable-officers 2,100,913 2,083,543
Other receivables 152,148 124,992
Inventories 9,790,382 8,010,687
Deferred taxes and other 2,061,066 1,689,988
---------- ----------
Total Current Assets 20,475,682 16,262,880
Property, Plant and Equipment, net 11,704,755 12,579,044
Intangibles, net of amortization of $1,133,750
in 1997 and $861,650 in 1996 4,308,136 4,580,236
Available-for-sale Securities - 4,912,387
Other Investments 1,313,502 3,000,000
Other Assets 1,455,111 1,174,395
========== ==========
$39,257,186 $42,508,942
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 335,000 $ 300,000
Note payable to related party 846,000 -
Accounts payable and accrued expenses 4,986,740 5,123,868
Income taxes payable 76,635 166,295
Reserve for contract losses 478,000 489,110
Advance payments on contracts 3,091,001 1,480,033
---------- ----------
Total Current Liabilities 9,813,376 7,559,306
Long-term Debt 2,890,000 11,021,000
Deferred Income Taxes 2,696,394 1,923,058
Excess of fair value of net assets of business
acquired over cost, net of amortization
of $973,666 in 1997 and $486,833 in 1996 486,833 973,667
---------- ----------
15,886,603 21,477,031
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
10,000,000 shares; issued and outstanding
4,209,365 in 1997 and 2,936,122 in 1996 420,936 293,612
Additional paid-in capital 8,856,516 11,448,827
Retained earnings 14,093,131 9,289,472
---------- ----------
Total Shareholders' Equity 23,370,583 21,031,911
========== ==========
$39,257,186 $42,508,942
========== ==========
The accompanying notes are an integral part of these financial
statements.
F-3
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
53 weeks
ended 52 weeks ended
August 3, July 28, July 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 32,195,168 $ 29,001,404 $ 24,450,267
----------- ----------- -----------
Cost and expenses:
Cost of products sold 20,753,707 19,798,692 18,117,874
Selling and administrative expenses 6,293,199 5,831,830 5,071,840
Unusual items - - 5,447,005
----------- ----------- -----------
27,046,906 25,630,522 28,636,719
----------- ----------- -----------
Operating income (loss) 5,148,262 3,370,882 (4,186,452)
----------- ----------- -----------
Other income (expense):
Net gain (loss) on available-for-sale
securities and other investments 409,399 897,919 (355,709)
Dividend and interest income 257,676 376,007 617,645
Interest expense (531,678) (873,452) (961,650)
----------- ----------- -----------
135,397 400,474 (699,714)
----------- ----------- -----------
Income (loss) before income taxes 5,283,659 3,771,356 (4,886,166)
Provision for income taxes 182,400 102,400 4,000
----------- ----------- -----------
Net income (loss) $ 5,101,259 $ 3,668,956 $ (4,890,166)
=========== =========== ===========
Earnings (loss) per common and common
equivalent share $ 1.44 $ 1.15 $ (1.31)
===== ===== ======
Weighted average number of common and
common equivalent shares outstanding 3,550,262 3,190,339 3,734,151
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
53 weeks ended August 3, 1997, and 52 weeks ended July 28, 1996 and July 30, 1995
Unrealized
Gain (Loss)
Additional on Available-
Common Stock Paid-in Retained for-sale Treasury
Shares Amount Capital Earnings Securities Stock Total
------ ------ ------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1994 4,278,189 $ 427,819 17,989,374 10,510,682 (201,117) (445,620) $ 28,281,138
Net (loss) (4,890,166) (4,890,166)
Issuance of common stock 35,000 3,500 99,313 102,813
Unrealized gain on
available-for-sale
securities 226,117 226,117
Purchase of 1,194,701 shares
of treasury stock (4,732,165) (4,732,165)
Retirement of 1,297,201 shares
of treasury stock (1,297,201) (129,720) (5,048,065) 5,177,785 -
----------- ---------- ------------ ----------- --------- ----------- ------------
Balance at July 30, 1995 3,015,988 $ 301,599 13,040,622 5,620,516 25,000 - $ 18,987,737
Net income 3,668,956 3,668,956
Exercise of stock options 406,432 40,643 2,577,360 (2,483,552) 134,451
Unrealized loss on
available-for-sale
securities (25,000) (25,000)
Purchase of 270,339 shares
of treasury stock (1,737,233) (1,734,233)
Retirement of treasury shares (486,298) (48,630) (4,169,155) 4,217,785 -
----------- ---------- ------------ ----------- --------- ----------- ------------
Balance at July 28, 1996 2,936,122 $ 293,612 11,448,827 9,289,472 - - $ 21,031,911
Net income 4,803,659 4,803,659
Exercise of stock options
and warrants 929,060 92,906 6,653,917 (6,429,124) 317,699
Four-for-three stock split 1,052,341 105,234 (105,234) -
Purchase of 244,519 shares
of treasury stock (2,782,686) (2,782,686)
Retirement of treasury shares (708,158) (70,816) (9,140,994) 9,211,810 -
----------- ---------- ------------ ----------- --------- ----------- ------------
Balance at August 3, 1997 4,209,365 $ 420,936 8,856,516 14,093,131 - - $ 23,370,583
=========== ========== ============ =========== ========= =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
53 weeks
ended 52 weeks ended
August 3, July 28, July 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (loss) $ 4,803,659 $ 3,668,956 $ (4,890,166)
------------ ------------ ------------
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation and amortization 1,538,283 1,563,354 2,116,233
(Gain) loss on sale of available-for-sale
securities and other investments (409,572) (1,018,643) 355,709
Decrease (increase) in deferred tax assets - (393,389) 596,055
Increase in deferred tax liabilities 773,336 376,723 255,240
Unrealized loss on available-for-sale securities - 121,550 -
Unusual item - - 5,447,005
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (1,927,298) 1,430,692 1,285,694
(Increase) in notes receivable-officers (17,370) (2,083,543) -
Decrease (increase) in other receivables (27,156) 38,410 136,635
Decrease (increase) in inventories (1,779,695) 1,319,366 2,208,137
(Increase) in prepaid expenses and other (371,078) (25,940) (753,838)
(Decrease) in accounts payable and
accrued expenses (137,128) (513,649) (3,879,974)
Increase (decrease) in income taxes payable (89,660) 166,295 (162,543)
(Decrease) in reserve for contract losses (11,110) (6,890) (4,000)
Increase (decrease) in advance payments
on contracts 1,610,968 3,393 (1,397,334)
Other, net (309,500) 40,000 153,335
------------ ------------ ------------
Total adjustments (1,156,980) 1,017,729 6,356,354
------------ ------------ ------------
Net cash provided by operations 3,646,679 4,686,685 1,466,188
------------ ------------ ------------
Cash flows from investing activities:
Purchase of available-for-sale securities
and other investments (159,364) (11,077,331) (22,766,138)
Proceeds from sale of fixed assets 15,468 - -
Proceeds from sale of available-for-sale securities
and other investments 7,164,538 11,879,157 30,417,016
Capital expenditures (862,129) (643,330) (182,241)
------------ ------------ ------------
Net cash provided by investing activities 6,158,513 158,496 7,468,637
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under bank line of credit 2,825,000 9,875,000 4,044,668
Proceeds from exercise of stock options 317,699 134,451 -
Payments under lines of credit (9,775,000) (9,925,000) (8,025,000)
Payments under litigation settlement - (2,000,000) (2,000,000)
Payments of long-term debt (300,000) (363,709) (512,735)
Purchase of treasury stock (2,782,686) (1,734,233) (2,708,732)
------------ ------------ ------------
Net cash (used in) financing activities (9,714,987) (4,013,491) (9,201,799)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 90,205 831,690 (266,974)
Cash and cash equivalents at beginning of period 1,104,445 272,755 539,729
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,194,650 $ 1,104,445 $ 272,755
============ ============ ============
Supplemental cash flow information:
Cashless exercise of stock options $ 6,429,124 $ 2,483,552
============ ============
Liabilities assumed in connection with acquisition $ 915,000
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Operations
The Company principally designs, manufactures and sells flight
instrumentation and microwave products, primarily to aerospace companies,
the U.S. government, and several foreign governments. The Company's main
products include a variety of transponders which are used to enhance
radar signals to accurately track the flight of space launch vehicles and
aircraft, as well as microwave devices and command and control systems.
2. Fiscal Year
The Company's fiscal year ends on the Sunday closest to July 31. Normally
each fiscal year consists of 52 weeks, but every five or six years the
fiscal year will consist of 53 weeks. Fiscal year 1997 consisted of 53
weeks, and fiscal years 1996 and 1995 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 intercompany accounts and transactions have been eliminated
in consolidation. The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements as well as revenues and expenses during
the period. Actual results could differ from those estimates.
4. Revenue and Cost Recognition
Under fixed-price contracts, sales and related costs are recorded
primarily as deliveries are made. Certain costs under long-term,
fixed-price contracts (principally either directly or indirectly with the
U.S. Government), which include non-recurring billable engineering, are
deferred until these costs are contractually billable. Revenue under
certain long-term, fixed price contracts, principally shelters, is
recognized using the percentage of completion method of accounting.
Revenue recognized on these contracts is based on estimated completion to
date (the total contract amount multiplied by percent of performance,
based on direct labor dollars). Losses on contracts are recorded when
first reasonably determined.
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.
5. Inventories
Inventories, other than inventory costs relating to long-term contracts
and programs, are stated at lower of cost (principally first-in,
first-out) or market. Inventory costs relating to long-term contracts and
programs are stated at the actual production costs, including factory
overhead, reduced by amounts identified with revenue recognized on units
delivered or progress completed.
Inventory costs relating to long-term contracts and programs are reduced
by any amounts in excess of estimated realizable value. The costs
attributed to units delivered under long-term contracts and programs are
based on the average costs of all units produced.
F-7
<PAGE>
6. 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.
7. Intangibles
Intangibles are comprised of customer lists, installed products base,
drawings, patents, licenses, certain government qualifications and
technology and goodwill in connection with the acquisition of Vega
Precision Laboratories, Inc. in 1993. Intangibles are being amortized
over twenty years.
The carrying amount of intangibles is evaluated on a recurring basis.
Current and future profitability as well as current and future
undiscounted cash flows of the acquired businesses are primary indicators
of recoverability. For the three fiscal years ended August 3, 1997, there
were no adjustments to the carrying amount of the cost in excess of net
assets acquired resulting from these evaluations.
8. Marketable Securities
The Company accounts for its investments in marketable securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the
securities to maturity. Marketable equity securities and debt securities
not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component
of shareholders' equity. Realized gains and losses and declines in value
judged to be other-than-temporary are included in other income (expense).
The cost of securities sold is based on the specific identification
method. Interest and dividends on securities are included in other income
(expense).
9. Other Investments
The Company is a limited partner in certain nonmarketable limited
partnerships in which it owns approximately a 10% interest. Beginning in
1997 other investments are accounted for under the equity method.
Previously, the cost method was utilized as the amount was not
significantly different from the equity method.
10. 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.
11. 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
F-8
<PAGE>
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.
12. Earnings Per Common Share
Earnings per common share and common equivalent share is based on the
weighted average number of outstanding shares of common stock (reflective
of a 4-for-3 stock split on September 15, 1997), including common stock
equivalents (options and warrants) as determined under the treasury stock
method as follows: 4,733,682 shares in 1997; 4,253,785 shares in 1996;
and 4,978,868 shares in 1995.
13. Cash and Cash Equivalents
For purposes of the statement of cash flows, short-term investments which
have a maturity of ninety days or less at the date of acquisition are
considered cash equivalents.
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
$1,828,000, $1,453,000, and $970,000 in fiscal 1997, 1996, and 1995,
respectively.
15. New Accounting Standards
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which is effective for both interim and annual periods ending
after December 15, 1997. SFAS 128 supersedes APB No. 15 to conform
earnings per share with international standards as well as to simplify
the complexity of the computation under APB No. 15. The previous primary
earnings per share ("EPS") calculation is replaced with a basic EPS
calculation. The basic EPS differs from the primary EPS calculation in
that the basic EPS does not include any potentially dilutive securities.
Fully dilutive EPS is replaced with diluted EPS and should be disclosed
regardless of dilutive impact to basic EPS. Earlier application of this
Statement is not permitted. Therefore, the EPS in the Consolidated
Statements of Operations are presented under APB No. 15.
NOTE B - ACQUISITIONS AND DISPOSALS
In July 1995, the Company entered into an agreement effective as of the
close of business June 30, 1995, to acquire certain assets and the
business (consisting principally of inventories and trade receivables) of
Stewart Warner Electronics Corporation, a Delaware corporation. The
transaction, which closed on July 28, 1995, provided for the payment of
$250,000 in cash and the assumption of approximately $915,000 in
liabilities and has been accounted for by the purchase method. The
acquisition resulted in excess of fair value over cost of net assets
acquired of $1,460,500 which is being amortized over a three-year period.
NOTE C - NOTES RECEIVABLE-OFFICERS
In fiscal 1996 the Company loaned $1,400,000, $300,000, and $300,000 to
certain officers, as authorized by the Board of Directors, pursuant to
the terms of nonnegotiable promissory notes. The notes were initially due
November 1996, November 1996 and March 1997, respectively. The notes may
be renewed by the Company from year to year. The notes were extended by
the Company in fiscal 1997
F-9
<PAGE>
and are now due April 30, 1998, January 31, 1998, and January 31, 1998,
respectively. The loans are secured by 594,365 shares of common stock of
the Company. Interest is payable at maturity at the average rate of
interest paid by the Company on borrowed funds during the fiscal year.
The pledge agreement also provides for the Company to have the right of
first refusal to purchase the pledged securities, based on a formula as
defined, in the event of the death or disability of the officer.
NOTE D - INVENTORIES
The major components of inventories are as follows:
August 3, July 28,
1997 1996
Purchased parts and raw materials $ 4,780,336 $ 3,358,256
Work in process 4,899,551 4,580,538
Finished products 110,495 71,893
------------ -----------
$ 9,790,382 $ 8,010,687
========== =========
NOTE E - AVAILABLE-FOR-SALE SECURITIES
In September 1996, the Company liquidated all of its available-for-sale
securities for approximately $4,912,000 and used the proceeds to reduce
its long-term bank debt. A provision for unrealized losses of $121,550 is
included in the statement of operations for fiscal year 1996. The fair
value of available-for-sale securities at July 28, 1996 was $4,912,387.
NOTE F - OTHER INVESTMENTS
In April 1996, the Company acquired a limited partnership interest in
M.D. Sass Re/Enterprise-II, L.P., a Delaware limited partnership for
$2,000,000. The objective of the partnership is to achieve superior
long-term capital appreciation through investments consisting primarily
of securities of companies that are experiencing significant financial or
business difficulties. In April 1997, the Company sold its investment and
terminated its limited partnership interest for $2,080,630 realizing a
gain of $80,630.
In December 1995, the Company sold its investment and terminated its
limited partnership interest in M.D. Sass Re/Enterprise Partners, L.P., a
Delaware limited partnership for $3,823,233 realizing a gain of
$1,095,727.
In July 1994, the Company invested $1,000,000 for a limited partnership
interest in M.D. Sass Municipal Finance Partners-I, a Delaware limited
partnership. The objectives of the partnership are the preservation and
protection of its capital and the earning of income through the purchase
of certificates or other documentation that evidence liens for unpaid
local taxes on parcels of real property. At August 3, 1997 and July 28,
1996 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.
F-10
<PAGE>
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
August 3, July 28, Estimated
1997 1996 Useful Life
---- ---- -----------
Land $ 880,270 $ 880,270
Building and building
improvements 5,438,663 5,362,409 10-40 years
Machinery and equipment 17,515,954 16,788,901 5- 8 years
Furniture and fixtures 494,056 494,056 5-10 years
Tools 24,869 24,869 5 years
Leasehold improvements 288,757 288,757 5-10 years
---------- ----------
24,642,569 23,839,262
Less accumulated depreciation 12,937,814 11,260,218
---------- ----------
$11,704,755 $12,579,044
========== ==========
NOTE H - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, production and warehouse space as well as
computer equipment and automobiles under noncancellable operating leases.
Rent expense for the 53 weeks ended August 3, 1997, and the 52 weeks
ended July 28, 1996 and July 30, 1995 was approximately $229,900,
$284,600, and $158,000, respectively.
Minimum annual rentals under noncancellable leases are as follows:
Amount
-------
Year ending fiscal 1998 $204,800
1999 153,900
2000 97,400
Employment Agreements
The Company has employment agreements with various executives and
employees of the Company, which, as amended, expire at various dates
through December 31, 2002, subject to extension each January 1 for six
years from that date not to extend, in any event, beyond December 31,
2006. These agreements provide for aggregate annual salaries of
$1,185,000. Certain agreements provide for an annual increment equal to
the greater of a cost of living adjustment based on the consumer price
index or 10%, and also provide for incentive compensation related to
pretax income. Incentive compensation in the amount of $665,352 was
expensed in fiscal year ended August 3, 1997. Incentive compensation of
$446,750 was expensed in fiscal 1996. No incentive compensation was due
for the fiscal year ended July 30, 1995.
Certain agreements also provide that, in the event there is a change in
control of the Company, as defined, the executives have the option to
terminate the agreements and receive a lump-sum payment. As of August 3,
1997, the amount payable in the event of such termination would be
approximately $2,050,000.
One of the employment contracts provides for a consulting agreement
commencing January 1, 2002 and terminating December 31, 2010 at the
annual rate of $100,000. Another one of the employment contracts, as
amended January 1, 1997, provides for a consulting period commencing at
the end of the
F-11
<PAGE>
period of active employment and continuing for a period of five years at
the annual rate of $60,000. One officer of the Company has a severance
agreement providing for a lump-sum payment of $220,000 through June 1999,
adjusted to $110,000 through June 2002.
Litigation
In November 1996, the Company settled all claims in connection with two
class action complaints, related to the Company's acquisition of Carlton
Industries, Inc. and its subsidiary, Vega Precision Laboratories, Inc.
for $450,000.
In August 1997, the Company settled all claims in connection with a class
action complaint filed in 1995 for $170,000. The claim related to the
Company's settlement of the Litton Action in the Essex Superior Court of
Massachusetts which alleged, inter alia, that there was insufficient
disclosure by the Company of its true potential exposure in that claim.
In July 1996, the Company was notified by the American Arbitration
Association of the decision of the arbitrators in an action commenced in
March 1994 by the principal selling shareholders of Carlton Industries,
Inc. and its subsidiary, Vega Precision Laboratories, Inc. According to
the award, the Company was to pay to the claimants the sum of $1,052,900,
inclusive of interest. Correspondingly, the claimants were to pay the
Company the sum of $277,719, inclusive of interest. The Company paid
$775,181 to claimants, representing the difference between the award to
the claimants and the award to the Company, in August, 1996. The award to
the claimants was offset by $593,162 otherwise payable to one of the
selling shareholders.
The Company is also involved in other legal proceedings and claims which
arise in the ordinary course of its business. While any litigation
contains an element of uncertainty, management believes that the outcome
of such litigation will not have a material adverse effect on the
Company's financial position or results of operations.
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, 1999. At August 3, 1997
stand-by letters of credit aggregating $3,241,392 were outstanding under
this facility.
NOTE I - INCOME TAXES
Income tax provision consisted of the following:
52 Weeks ended
53 Weeks ended --------------------
August 3, July 28, July 30,
1997 1996 1995
---- ---- ----
Current
Federal $ (52,000) $ 90,000 $ -
State 89,000 12,400 -
--------- -------- -----
37,000 102,400 -
--------- ------- -----
Deferred
Federal (142,000) - 4,000
State 585,000 - -
-------- ------- -----
443,000 - 4,000
-------- ------- -----
$ 480,000 $ 102,400 $ 4,000
======= ======= =====
F-12
<PAGE>
The Company paid income taxes of approximately $178,000 in 1997, $19,000
in 1996, and $122,000 in 1995. The following is a reconciliation of the
U. S. statutory income tax rate and the effective tax rate on pretax
income: 53 Weeks ended 52 Weeks ended
August 3, July 28, July 30,
1997 1996 1995
---- ---- ----
U.S. Federal statutory rate 34.0 % 34.0 % (34.0) %
State taxes, net of
federal tax benefit 12.2 0.2 -
Alternative minimum tax - 2.4 -
Benefit of net operating loss
carryforward (30.8) (35.2) -
Non-deductible expenses .3 1.3 -
Increase (decrease)in valuation
allowance (9.4) - 34.0
Other, net 2.8 - -
----- ----- -----
Effective tax rate 9.1 % 2.7 % - %
===== ===== =====
The 1997 and 1996 tax provisions reflect the utilization of prior year
net operating loss carryforwards. In 1995 a valuation allowance had been
provided to reduce deferred tax assets to their net realizable value
primarily based on management's uncertainty that past performance would
be indicative of future earnings. In 1997 the valuation allowance was
reversed through the deferred tax provision. A determining factor in
assessing the change was the cumulative income in recent years.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes.
As of August 3, 1997, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $2,000,000 which expire
in 2010.
Components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
August 3, 1997 July 28, 1996
---------------------- -----------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Intangibles $ - $1,681,375 $ 807,537 $ -
Alternative minimum tax 265,906 - 176,707 -
Accrued vacation pay 123,644 - 118,104 -
Accrued bonus 343,398 - 243,760 -
Warranty costs 220,000 - 220,000 -
Inventory 985,703 - 910,081 -
Depreciation - 2,006,038 - 1,923,058
Net operating loss carryforwards 725,113 - 2,781,480 -
Litigation settlement - - 495,080 -
Contract losses 275,635 - 215,208 -
Other 71,917 78,967 97,645 -
--------- --------- --------- ----------
3,011,316 3,766,380 6,065,602 1,923,058
Valuation allowance - - 4,454,627 -
--------- --------- --------- ---------
$3,011,316 $3,766,380 $1,610,975 $1,923,058
========= ========= ========= =========
</TABLE>
F-13
<PAGE>
NOTE J- LONG-TERM DEBT
Long-term debt is summarized as follows:
August 3, July 28,
Rate 1997 1996
------------- ---- ----
Note payable bank (a) 6.22% -8.50% $ - $ 6,950,000
Mortgage note (b) 10.4% 3,225,000 3,525,000
Long term liability (c) - - 846,000
--------- ----------
3,225,000 11,321,000
Less current portion 335,000 300,000
--------- ----------
$2,890,000 $ 11,021,000
========= ==========
(a) In January 1997, the Company renewed the revolving credit agreement
with its bank that provides for the extension of credit in the
aggregate principal amount of $11,000,000 and may be used for general
corporate purposes, including business acquisitions. The facility
requires the payment of interest only on a monthly basis and payment
of the outstanding principal balance on January 31, 1999. Interest is
set biweekly at 1% over the FOMC Target Rate applied to outstanding
balances up to 80% of the net equity value of available-for-sale
securities, and at the bank's Base Rate for outstanding balances in
excess of this limit. There were no borrowings outstanding at August
3, 1997. The premium rate portion of the facility would be secured by
any available-for-sale securities.
The agreement contains various financial covenants, including, among
other matters, the maintenance of working capital, tangible net
worth, and restrictions on cash dividends and other borrowings.
(b) The mortgage note provides for annual principal payments at varying
amounts through 2004 plus semiannual interest payments. Land and
buildings in Lancaster, Pa. are pledged as collateral.
The mortgage note agreement contains various financial covenants,
including, among other matters, the maintenance of specific amounts
of working capital and tangible net worth. In connection with this
loan, the Company paid approximately $220,000 in financing costs.
Such costs are included in Other Assets in the accompanying
consolidated balance sheets at August 3, 1997 and July 28,1996 and
are being amortized over the term of the loan (15 years).
(c) Under a contract for the purchase of an industrial parcel of land
from its Chairman, the Company is obligated to pay $846,000 at
settlement on or before April 30, 1998.
The Company paid interest of approximately $567,000 in 1997, $854,000 in
1996, and $1,010,000 in 1995.
Future payments required on long-term debt are as follows:
Fiscal year ending during: Amount
------
1998 $335,000
1999 370,000
2000 410,000
2001 450,000
2002 500,000
Thereafter 1,160,000
---------
$3,225,000
F-14
<PAGE>
NOTE K - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
August 3, July 28,
1997 1996
--------- ---------
Accounts payable $ 1,841,468 $ 1,579,230
Accrued payroll and bonuses 1,483,915 1,160,345
Accrued commissions 205,692 247,687
Accrued interest 55,900 95,925
Accrued litigation expenses 297,538 1,206,914
Accrued expenses 1,102,227 833,794
---------- -----------
$ 4,986,740 $ 5,123,868
========== ==========
NOTE L - EMPLOYEE BENEFIT PLANS
In August 1985, the Board of Directors approved an Employee Savings Plan
which qualified as a thrift plan under Section 401(k) of the Internal
Revenue Code. This Plan, as amended and restated, allows employees to
contribute between 2% and 15% of their salaries to the Plan. The Company,
at its discretion can contribute 100% of the first 2% of the employees'
contribution and 25% of the next 4%. Additional Company contributions can
be made depending on profits. The aggregate benefit payable to an
employee is dependent upon his rate of contribution, the earnings of the
fund, and the length of time such employee continues as a participant.
The Company has accrued approximately $178,000 for the 53 weeks ended
August 3, 1997, and contributed approximately $159,000, and $151,000 to
this plan for the 52 weeks ended July 28, 1996, and July 30, 1995,
respectively.
NOTE M - SHAREHOLDERS' EQUITY
The Company has two fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. The
Company applies APB Opinion No, 25 and related Interpretations in
accounting for these plans. Statement of Financial Accounting Standards
No.123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued
by the FASB in 1995 and , if fully adopted, changes the methods for
recognition of cost on plans similar to those of the Company. The Company
has adopted the disclosure-only provisions of SFAS 123. Accordingly, no
compensation cost has been recognized for the stock option plans. Pro
forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 6.1%; volatility
factor of the expected market price of the Company's common stock of .63;
and a weighted-average expected life of the option of .4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management' s opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
Had compensation cost for stock options granted in fiscal 1997 been
determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
F-15
<PAGE>
1997
---------
Net earnings - as reported $4,803,659
Net earnings - pro forma $3,451,882
Earnings per share - as reported $1.01
Earnings per share - pro forma $.73
No options were granted in fiscal 1996.
The effects of applying the pro forma disclosures of SFAS 123 are not
likely to be representative of the effects on reported net earnings for
future years due to the various vesting schedules.
In May 1997, the Board of Directors approved the 1997 Stock Option Plan
which covers 1,666,666 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted is
determined at the time of grant by the Board of Directors. The options
expire ten years from the date of grant, subject to certain restrictions.
Options for 801,660 shares were granted during the fiscal year ended
August 3, 1997.
In October 1995, the Board of Directors approved the 1996 Stock Option
Plan which covers 666,666 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted is
determined at the time of grant by the Board of Directors. If not
specified, 100% of the shares can be exercised one year after the date of
grant. The options expire ten years from the date of grant. Options for
663,989 shares were granted during the fiscal year ended August 3, 1997.
In December 1992, the Board of Directors approved the 1992 Non-Qualified
Stock Option Plan which covers 1,333,333 shares, as amended, of the
Company's common stock. Under the terms of the Plan, the purchase price
of the shares, subject to each option granted, is 100% of the fair market
value at the date of grant. The date of exercise is determined at the
time of grant by the Board of Directors; however, if not specified, 50%
of the shares can be exercised each year beginning one year after the
date of grant. The options expire ten years from the date of grant.
Options for 339,986 shares were granted during the fiscal year ended July
30, 1995. These options may be exercised cumulatively at the rate of 25%
per year beginning one year after the date of grant. This plan was
terminated in December 1995, except for outstanding options thereunder.
In October 1987, the Board of Directors approved the 1988 Non-Qualified
Stock Option Plan which covers 666,666 shares of the Company's common
stock. Under the terms of the Plan, the purchase price of the shares,
subject to each option granted, will not be less than 85% of the fair
market value at the date of grant. The date of exercise may be determined
at the time of grant by the Board of Directors; however, if not
specified, 20% of the shares can be exercised each year beginning one
year after the date of grant and generally expire five years from the
date of grant. This plan was terminated in December 1995, except for
outstanding options thereunder.
A summary of stock option activity under all plans for the 53 weeks ended August
3, 1997, and the 52 weeks ended July 28, 1996, and July 30, 1995 follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
Non-Qualified Stock Options
----------------------------------
Weighted
Average Warrant Agreements
Number Price Range Exercise Number Price Range
of shares per share Price of shares per share
<S> <C> <C> <C> <C>
Outstanding July 31, 1994... 929,969 $ 4.27 - 9.01 $5.00 573,333 $5.35
Granted ................. 339,986 2.54 2.54
Canceled................. (13,331) 2.54 - 5.25 4.88
---------- ------------- ---- ------- ----
Outstanding July 30, 1995... 1,256,624 $ 2.54 - 9.01 $4.33 573,333 $5.35
Granted ................. - 293,333 4.64
Exercised................ (541,900) 2.54 - 5.72 4.87
Canceled................. (31,330) 2.54 - 5.25 4.83 (533,333) 5.35
---------- ------------- ---- ------- -----------
Outstanding July 28, 1996... 683,394 $ 2.54 - 9.01 $3.89 333,333 $ 4.64 - 5.35
Granted ................. 1,465,649 6.10 -10.41 6.48
Exercised................(1,225,384) 2.54 - 6.94 5.46 (13,333) 4.64
Canceled................. (7,332) 5.25 - 9.01 8.67 -
---------- ------------- ---- ------- -----------
Outstanding August 3, 1997.. 916,327 $ 2.54 -10.41 $5.87 320,000 $ 4.64 - 5.35
========== =======
</TABLE>
Options to purchase 130,218 shares of common stock were exercisable under
all plans at August 3, 1997 at a weighted average exercise price of $5.59
with a weighted average remaining contractual life of 6.8 years as
follows:
Options Outstanding and Exercisable by Price Range as of August 3, 1997
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$2.5350 -$ 5.2500 151,117 6.43 $ 2.9164 38,672 $ 4.0255
6.0938 - 6.0938 259,997 4.67 6.0938 56,995 6.0938
6.4688 - 6.4688 326,550 9.74 6.4688 8.889 6.4688
6.9375 - 10.4063 178,663 4.31 7.0152 25,662 6.9375
------- ---- ------ ------- ------
$2.5350 -$10.4063 916,327 6.79 $5.8728 130,218 $5.5948
</TABLE>
In April 1993, common stock warrants were issued to certain officers and
directors for the right to acquire 573,333 shares of common stock of the
Company at the fair market value of $5.35 per share at date of issue. In
December 1995 warrants for 533,333 shares were canceled. The warrants
vest immediately and expire April 30, 1998. In December 1995, common
stock warrants were issued to certain officers for the right to acquire
293,333 shares of common stock of the Company at the fair market value of
$4.64 per share at date of issue. The warrants vest immediately and
expire December 13, 2005. Warrants for 13,333 shares were exercised in
fiscal 1997.
In connection with the sale of common stock to the public in 1992, the
Company issued to the underwriter, for its own account, warrants to
purchase 170,529 shares of common stock of the Company (as adjusted under
the agreement), exercisable for a period of four years at a price of
$9.06 per share (as adjusted under the agreement), subject to further
adjustment in certain events. The warrants expired in February 1997.
F-17
<PAGE>
On July 31, 1993, the Company issued 46,666 shares of common stock valued
at $5.91 per share in connection with the acquisition of substantially
all of the assets of Micro-Dynamics, Inc. These shares were subsequently
canceled and reissued in January 1995.
NOTE N - RELATED PARTY TRANSACTIONS
On March 6, 1996, the Board of directors approved the purchase of an
industrial parcel of land from the Chairman of the Company for $940,000.
A deposit of $94,000 was paid on execution of the contract, and the
balance of $846,000 will be paid at settlement on or before April 30,
1998. The Company intends to use this land for possible future expansion.
NOTE O - MAJOR CUSTOMERS
Net sales to the U.S. Government in 1997, 1996, and 1995 accounted for
approximately 34%, 33%, and 30% of net sales, respectively. Net sales to
the Republic of Korea and Lockheed Martin accounted for approximately 22%
of net sales in 1997. Foreign sales amounted to approximately $9,320,000,
$6,556,000, and $3,908,000 in fiscal 1997, 1996, and 1995, respectively.
Included in accounts receivable as of August 3, 1997 and July 28, 1996
are amounts due from the U.S. Government of approximately $1,454,000 and
$933,000, respectively.
NOTE P - UNUSUAL ITEM
The Consolidated Statements of Operations for the fifty-two weeks ended
July 30, 1995 includes an unusual charge of $5,447,005 for settlement
costs, legal fees, and related expenses in connection with the settlement
of certain legal claims against the Company. Payments of $2,000,000 each,
without interest, were made in July 1995 and July 1996 in connection with
the settlement of one of the claims.
NOTE Q - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximated its fair value.
Notes receivable-officers: The carrying amount reported in the balance
sheet for notes receivable from officers approximated its fair value.
Available-for-sale securities: The fair value of available-for-sale
securities was based on quoted market prices.
Long-term debt: The fair value of the mortgage note was estimated using
discounted cash flow analysis, based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.
Off balance sheet financial instruments:
Stand-by letters of credit: These letters of credit primarily
collateralize the Company's obligations to customers for advanced
payments received under contracts. The contract amounts of the letters
of credit approximate their fair value.
F-18
<PAGE>
The carrying amounts and fair values of the Company's financial instruments are
presented below:
August 3, 1997
--------------------------
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $ 1,194,650 $ 1,194,650
Notes receivable-officers 2,100,913 2,100,913
Long-term debt 2,890,000 3,408,000
Stand-by letters of credit - 3,241,392
NOTE R - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit
risk consist primarily of trade accounts receivable. Credit risk with
respect to trade receivables is minimized since most of the Company's
business is direct to the U. S. Government or as a subcontractor to
companies with significant financial resources acting as prime
contractors to the U. S. Government, as well as to foreign governments.
Additionally, shipments to foreign governments are generally under
irrevocable letters of credit.
NOTE S - SUBSEQUENT EVENTS
On August 4, 1997, the Company completed the acquisition of Metraplex
Corporation , a Maryland corporation for 234,895 shares of common stock
of the Company in exchange for all of the issued and outstanding common
stock of Metraplex. Metraplex is a leading manufacturer of pulse code
modulation and frequency modulation, telemetry and data acquisition
systems for severe environment applications. Metraplex products are used
worldwide for testing space launch vehicle instrumentation, aircraft
flight testing, and amphibian, industrial and automotive vehicle testing.
The transaction will be accounted for under the purchase method.
On September 4, 1997 the Board of Directors declared a 4-for-3 stock
split effected as a stock dividend payable September 29, 1997 to holders
of record on September 15, 1997. The effect of the split is presented
within shareholders' equity at August 3, 1997. The distribution increased
the number of shares outstanding from 3,157,024 to 4,209,365. The amount
of $105,234 was transferred from the additional paid-in capital to the
common stock account to record this distribution. All share and per share
data, including stock options and warrants, included in this annual
report have been restated to reflect the stock split.
F-19
Exhibit 11
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC.
AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
52 Weeks ended
53 Weeks ended ------------------------
August 3, 1997 July 28, 1996 July 30,1995
-------------- ------------- ------------
<S> <C> <C> <C>
Net Income (loss) $ 4,803,659 $ 3,668,956 $(4,890,166)
========= ========= =========
Weighted average shares outstanding:
Shares outstanding from beginning
of period 3,914,829 4,021,317 5,567,585
Shares issued for options exercised 371,696 96,363 27,223
Treasury shares acquired (223,020) (331,504) (679,016)
Common equivalents - options and warrants 670,177 467,609 63,076
Weighted average common and common
equivalent shares outstanding 4,733,682 4,253,785 4,978,868
========= ========= =========
Earnings (loss) per common and
common equivalent share $ 1.01 $ .86 $ (.98)
==== ==== ====
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated September 19, 1997 included in this Form 10-K,
into Herley Industries, Inc's. previously filed Registration Statement File Nos.
333-17369, 333-19739, and 333-35485.
ARTHUR ANDERSEN LLP
Lancaster, PA
October 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE 53 WEEKS ENDED AUGUST 3, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-3-1997
<PERIOD-START> JUL-29-1996
<PERIOD-END> AUG-3-1997
<CASH> 1,194,650
<SECURITIES> 0
<RECEIVABLES> 5,176,523
<ALLOWANCES> 0
<INVENTORY> 9,790,382
<CURRENT-ASSETS> 20,475,682
<PP&E> 24,642,569
<DEPRECIATION> 12,937,814
<TOTAL-ASSETS> 39,257,186
<CURRENT-LIABILITIES> 9,813,376
<BONDS> 0
<COMMON> 420,936
0
0
<OTHER-SE> 22,949,647
<TOTAL-LIABILITY-AND-EQUITY> 39,257,186
<SALES> 32,195,168
<TOTAL-REVENUES> 32,195,138
<CGS> 20,753,707
<TOTAL-COSTS> 27,046,906
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 531,678
<INCOME-PRETAX> 5,283,659
<INCOME-TAX> 480,000
<INCOME-CONTINUING> 4,803,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,803,659
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
<FN>
(1) Primary and diluted EPS reflect a 4-for-3 stock split
effective September 30, 1997. Prior Financial Data
Schedules have not been restated for the stock split.
</FN>
</TABLE>
