UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 30, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...............to ...............
Commission File No. 0-5411
Herley Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-2413500
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State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
10 Industry Drive, Lancaster, Pennsylvania 17603
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(Address of Principal Executive Offices ) (Zip Code)
Registrant's telephone number, including area code: (717) 397-2777
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .10 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
Based on the closing sale price of $20.50 as of October 11, 2000 the aggregate
market value of the voting stock held by non-affiliates of the registrant was
$106,351,335.
The number of shares outstanding of registrant's common stock, $ .10 par value
as of October 11, 2000 was 5,994,338.
Documents incorporated by reference:
-----------------------------------
Registrant's definitive proxy statement to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934.
<PAGE>
HERLEY INDUSTRIES, INC.
TABLE OF CONTENTS
Page
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PART I
Item 1 Business 1
Item 2 Properties 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A Quantitative and Qualitative Disclosures About Market Risk 15
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III
Item 10 Directors and Executive Officers of the Registrant 16
Item 11 Executive Compensation 16
Item 12 Security Ownership of Certain Beneficial
Owners and Management 16
Item 13 Certain Relationships and Related Transactions 16
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8K 17
SIGNATURES 18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES F-1
<PAGE>
PART I
Forward-Looking Statements
All statements other than statements of historical fact included in this Annual
Report, including without limitation statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations, are
forward-looking statements. When used in this Annual Report, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or its management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
factors including but not limited to, competitive factors and pricing pressures,
changes in legal and regulatory requirements, technological change or
difficulties, product development risks, commercialization and trade
difficulties and general economic conditions. Such statements reflect the
current views of the Company with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to the operations,
results of operations, growth strategy and liquidity of the Company. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
Item 1. Business
Herley Industries, Inc. ("Herley" or "Company") a Delaware corporation was
incorporated in 1965. The Company's executive offices are located at 10 Industry
Drive, Lancaster, PA 17603. The Company's common stock is listed on The Nasdaq
National Market under the symbol "HRLY".
Herley is a microwave technology company with five manufacturing facilities,
over sixty microwave engineers and approximately 600 employees. The Company
operates in a single business segment consisting of research, engineering,
product development, and manufacturing of complex microwave radio frequency (RF)
and millimeter wave components and subsystems for commercial wireless, defense
and space customers worldwide.
Herley has over 35 years of experience in the design and manufacture of
sophisticated RF, microwave and millimeter wave electronic components for the
defense industry. These products receive, transmit and process wireless data
signals. During 1998 the Company began to explore the commercial wireless
industry to determine the level of market potential for its technology.
Herley believes a significant portion of its microwave technology is
transferable to commercial wireless applications. As an example, the
Interference Cancellation System ("ICS") was derived from technology developed
during the creation of military systems that deliberately jam microwave signals.
ICS generates an equal amplitude and opposite phase signal that effectively
cancels the interfering signal.
The Company's defense business is expected to continue its current rate of
growth, generating consistent earnings that would be available, if needed, to
invest in the commercial wireless opportunities to achieve top line growth.
Herley's acquisition of General Microwave in January 1999 was the first step in
this process. The acquisition added depth and breadth to the defense product
line, strengthened an already strong team of engineers, and gave the Company an
immediate entry into commercial wireless markets with General Microwave's
commercial products catalog.
Subsequent to the General Microwave acquisition, Herley began to coordinate the
direction of its facilities, determine the viability of the existing line of
commercial wireless products, and ascertain how best to apply existing microwave
technology in the development of new products. Herley Wireless Technologies,
Inc. was
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formed in February 2000 to pursue commercial wireless opportunities through
product development, teaming agreements, investments and acquisitions.
Herley's technology range covers the entire wireless spectrum, from RF (at 900
MHz to 1800 MHz), microwave frequencies (2.4 GHz through 18.0 GHz), to
millimeter wave frequencies (20 GHz through 40 GHz). This capability gives the
Company the ability to select opportunities in both fixed wireless broadband and
mobile wireless applications.
Strategy
The Company's strategy is to attempt to continue to leverage its proprietary
technology, microwave development and manufacturing capabilities to further
expand its penetration in the wireless communications and defense markets. Key
components of the Company's strategy include the following:
Increase Levels of Component Integration and Value Added Content
Due to acquisitions, product development and growth of engineering expertise,
the Company has increased its capability to provide more component integration.
Component integration adds value and will enable Herley to increase content and
revenue levels on wireless and defense systems.
Further Expansion into Commercial Markets
The Company has over 35 years experience in microwave technology used in
designing and manufacturing complex microwave products for the defense industry.
The Company recently successfully leveraged this experience into the wireless
communications markets and will continue to expand its presence in select
markets.
Maintain Leadership in Microwave Technology
The Company intends to pursue further technological advances through continued
investment in research and development. The Company will seek to advance its
leadership in microwave technology by continuing its participation in selected
defense programs that involve highly sophisticated state-of-the-art microwave
technology.
Strengthen and Expand Customer Relationships
The Company has developed mutually beneficial relationships with defense and
commercial companies. The Company expects to continue to build and strengthen
relationships with industry leaders by recognizing their needs and providing
them with timely and cost effective solutions.
Enhance High Volume Manufacturing Capability
The Company intends to continue to implement process manufacturing automation
and believes that its ability to develop a high level of automated production
and test capability will help to further improve its cost effectiveness and time
to market.
Pursue Strategic Acquisitions
The Company intends to continue to augment its existing technology base by
acquiring specialized technology companies that complement its product offerings
and market strategies. The Company believes that expansion of its core
competencies through the acquisition of such specialized technology companies,
when combined with its technological and manufacturing skills, will provide
improved levels of integration, leading to subsystems and complete systems
products.
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Company Products
Commercial Wireless
Herley has selected the following applications to focus upon within the
commercial wireless market: point-to- point access and point-to-multipoint
access; handset, radio and infrastructure test equipment; power amplifiers,
repeaters, and interference cancellation systems, and fiber optic communication.
Test Equipment
Test equipment is used in the manufacturing of cell phones, base stations and
radio requiring components and assemblies with very high performance and
quality. These systems operate over bandwidths much greater than the
transmission bandwidth in order to check parameters outside of the operating
band. Herley has pushed the state of the art in wideband components, such as
attenuators, IQ modulators and up/down converters.
The Company initially focused on this segment of the wireless market because of
the wide range of catalog products it can offer and because the price pressures
are significantly less than in the higher volume infrastructure equipment.
The wireless equipment (handsets and infrastructure) market is likely to
increase by approximately 30% in 2000, to $119 billion. Wireless telecom
equipment should remain one of the fastest-growing segments of the $340 billion
telecom equipment market. It is expected that the market will post a compound
annual growth rate of 18% - 20% over the next five years, driven by new
applications such as data as well as higher penetration rates.
The key driver for wireless equipment spending is the conveniences of "anytime,
anywhere" voice communications. Herley expects voice (both minutes of use and
new subscribers) to remain a critical catalyst of telecom equipment spending
over the next 12-18 months. However, in 2001, as the penetration rate begins to
exceed 50% in the developed countries and 10%-15% in many developing countries,
the growth rate for wireless voice products is likely to begin to level off. The
overall worldwide penetration rate was estimated at 8% at the end of 1999 and
should reach over 12% by the end of 2000.
Point-to-Point and Point-to-Multipoint Radio
Point-to-point radios have been used for some time in line of sight
communications where land-based telecommunication was absent. The rapid growth
of this market has resulted from the use of radios to connect base stations in
the cellular infrastructure.
Point-to-point fixed wireless connects a central building to the fiber backbone.
It has multiple antennas; each targeted at a single antenna on a customer
building, giving each customer the full bandwidth of the antenna, i.e. higher
speeds. Maximum speed is 155 million bits per second as compared to a "high
speed" line that provides 1.54 million bits per second.
Point-to-multipoint fixed wireless connects multiple buildings to the fiber
backbone through a central building. For example, the central building has four
antennas. Each antenna covers 90 degrees so the central building can communicate
with all surrounding buildings. In most cases, all customers share the four
antennas. Costs of Point-to-multipoint are less, but this application offers
lower speed services. Herley supplies subsystems (receiver/transmitter modules)
to digital microwave radio original equipment manufacturers ("OEMs").
Power Amplifiers, Repeaters, and Interference Cancellation System
Herley has recently broadened its technical and marketing capability in the area
of power amplifiers, which opens opportunities in various power-based products.
The cellular infrastructure uses power amplifiers in the base stations and in
tower top amplifiers and repeaters to extend the range and capacity of the base
stations. The Company's initial focus will be on supplying power amplifiers to
service providers.
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Herley has an additional advantage and opportunity in this market segment. The
Company has signed a teaming agreement with Cyber Dynamics to introduce
interference cancellation systems into repeaters, which would significantly
enhance their performance. This product is unique in the market and is based on
patented and proprietary technology from Cyber Dynamics and Herley. It is
particularly useful in wideband multicarrier systems expected to dominate the
next generation (3G) systems. The interference cancellation system is presently
in production for a military communication system and field trials are planned
with domestic and international cellular service providers.
Fiberoptic Communications
The fixed and mobile Internet infrastructure has boosted again the use of
high-speed fiberoptics. The speed in fiberoptic communication has been
increasing steadily and has now reached into the 10 to 40 Gbit range. This
necessitates the use of microwave circuits to drive the optical components.
Herley engineers have long predicted the merger of fiberoptics and microwave
technologies. In 1993, one of the Company's leading engineers designed an
optical device based on Lithium Niobate that can transmit signals at 40 Gbit for
which the Company has received a patent.
In simple terms, fiber optic technology uses a strand of glass as thin as hair
that transmits both voice and data signals in the form of light pulses.
Information is encoded in digital signals (binary code) and transmitted through
a fiber by modulating a light source similar to a laser effect. At the signal's
destination, the signal is decoded and reconstructed as the original
information.
The fiber optic cable has a core through which the signal travels and a cladding
that surrounds and protects the core confining the light signal. These lightwave
signals are guided through the core of the optical fiber similar to the way that
radio frequency (RF) signals are guided through coaxial cable.
Fiber optics are produced in single or multimode. Single mode has smaller cores
resulting in higher transmission rates and lower signal losses. Single mode
fiber optics have higher transmission and receiving costs but carry 50 to 100
times more capacity. On the other hand, multimode fiber optics are used for
short distances or for slower transmission requirements.
Fiber is designed to last approximately 20 years or more. Fiber optic cable
offers much greater bandwidth than the older copper technologies, is more secure
and robust, and has been developed to coexist with next generation networking
technologies. The major trunk lines, those between one telephone company switch
to another, are now primarily fiber optic cables. However, the cabling from the
Telephone Company to residential and some business areas still consists
primarily of older coaxial cable and copper pairs. The Company supplies
microwave products to fiber optic manufacturers, including voltage controlled
oscillators.
Defense and Space Products
The Company has focused its efforts on providing microwave products to defense
programs, which have extended production cycles. Herley's subsystems and
integrated components use specialized combinations of components that perform
various microwave functions including filters, switches, oscillators, and
amplifiers, among others.
The Company is involved in the following applications:
Carrier Landing Systems
Electronic Countermeasure Systems
Rear Warning Receivers
Space Launch
Fire Control Radar
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Microwave Components
Herley manufactures microwave devices at its facilities in Woburn,
Massachusetts; in Nashua New Hampshire, in Farmingdale, New York; and in
Jerusalem, Israel for existing long-term military programs, for new production
units, as well as for spare parts and repair services. These microwave devices
are used in a variety of radar, communications and missile applications,
including airborne and shipboard navigation and missile guidance systems.
The Company designs and manufactures complex microwave integrated circuits
("MICs"), which consist of sophisticated assemblies that perform many functions,
primarily involving switching of microwave signals. MICs manufactured by the
Company are employed in many defense electronics military systems as well as
missile programs. The Company also manufactures magnetrons, which are the power
source utilized in the production of the Company's transponders.
Command and Control Systems (C2)
The Company's command and control systems have been used to fly remotely a large
variety of unmanned aerial vehicles ("UAVs"), typically aircraft used as target
drones or Remotely Piloted Vehicles ("RPVs") and some surface targets.
Operations have been conducted by users on the open ocean, remote landmasses,
and instrumented test and training ranges.
Telemetry Systems
Missile, UAV, or target testing on domestic and international test ranges
requires flight safety and performance data transmission to maximize flight
safety during the test operation. Surveillance and intelligence gathering UAVs
also require a data transmission downlink and a command and control systems
uplink to accomplish their mission. The Company has developed a telemetry system
capability that can be configured to meet individual customers' needs. Various
components of the system include data encoders, transmitters and flight
termination receivers. Each has a distinctive role and each is key to the
success of the mission.
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
that is far superior to skin reflection tracking, particularly under adverse
weather conditions after the launch.
Flight Termination Receiver
A flight termination receiver ("FTR") is installed in a test missile, a UAV, a
target or a space launch vehicle as a safety device. The FTR has a built-in
decoder that enables it to receive a complex series of audio tones which, when
appropriate, will set off an explosive charge that will destroy the vehicle. A
Range Safety Officer ("RSO") using the range safety transponder will track the
vehicle in flight to determine if it is performing as required. If the RSO
detects a malfunction in the test or launch vehicle that causes it to veer from
a planned trajectory in a manner that may endanger personnel or facilities, the
RSO will transmit a coded signal to the onboard FTR to explode the vehicle
harmlessly.
HF Communications and IFF Interrogators
The Company also designs and manufactures high frequency radio and IFF
interrogators. This high frequency communications equipment is used by the U.S.
Navy and foreign navies that conduct joint military exercises
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with the U.S. Navy. The IFF interrogators are used as part of shipboard
equipment and are also placed on coastlines, where they are employed as silent
sentries. The Company has been a significant supplier to the Republic of Korea
("ROK") for over twenty years and has a large, established installed base of
equipment. The Company has been, and continues to be, a supplier to the ROK KDX
destroyer program.
Customers
During the fiscal year ended July 30, 2000, approximately 26% of the Company's
sales were attributable to contracts with offices and agencies of the U. S.
Government. No other customers accounted for shipments in excess of 10% of
consolidated net sales.
During fiscal year 2000, sales to foreign customers accounted for approximately
23% of the Company's consolidated net sales and included shipments to 31
countries. All of the Company's contracts with foreign customers are payable in
U. S. dollars.
Sales to foreign customers for each of the last three fiscal years were
$16,506,000, $17,680,000 and $11,943,000 in fiscal 2000, 1999, and 1998,
respectively.
Herley sells commercial wireless communications products primarily to OEMs,
which in turn integrate its products into wireless infrastructure equipment
solutions sold to network service providers. In addition, Herley sells certain
niche products directly to network service providers. Some of Herley's customers
for commercial wireless subsystems include:
Alcatel
Digital Microwave
Teradyne
P-Com
Tadiran
Matra BAe
The Company also offers defense electronics equipment to major defense prime
contractors for integration into larger systems. Some of its customers for
defense electronics equipment include:
Boeing
British Aerospace
Harris
Lockheed Martin
Litton
Northrop Grumman
Raytheon
Business Acquisition
The Company entered into an agreement, as of January 3, 2000 to acquire
substantially all of the assets of Robinson Laboratories, Inc. ("Robinson" or
"Robinson Labs"), a New Hampshire corporation, which is being operated as a
division of Herley Industries, Inc. Robinson designs, develops and manufactures
microwave components and subassemblies for the defense, space and
telecommunications markets. The transaction, which closed on February 1, 2000,
provided for the payment of $6,000,000 in cash, the issuance of 33,841 shares of
Common Stock of the Company valued at $15.188 per share, and the assumption of
approximately $3,140,000 in liabilities. In addition, the agreement provides for
the issuance of additional shares of Common Stock at a future date, aggregating
97,841 shares, based on new orders booked through January 2001. The cash portion
of the purchase price was financed by borrowing under the Company's existing
line of credit with its bank. The transaction has been accounted for under the
purchase method. Accordingly the consolidated statement of income includes the
results of Robinson's operations from January 3, 2000. Excess cost over the fair
value of net assets acquired of approximately $5,467,000 is being amortized over
20 years.
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Sales and Marketing
The Company markets its products worldwide to OEMs and service providers in
commercial markets and prime contractors in defense markets primarily through a
sales force generally organized by geographic territory and markets. In
addition, the Company has contracts with manufacturers' representatives in the
United States and international representatives who are located in Western
Europe, the Middle East and Asia. As part of its marketing efforts, the Company
advertises in major trade publications and attends major industrial shows in the
commercial wireless communications and defense markets.
After the Company has identified key potential customers, the Company makes
sales calls with its own sales, management and engineering personnel and its
manufacturers' representative.
In order to promote widespread acceptance of its products and provide customers
with support for their wireless communications needs, the Company's sales and
engineering teams work closely with its customers to develop tailored solutions
to their requirements. The Company believes that its customer engineering
support provides it with a key competitive advantage.
Manufacturing
The Company manufactures its products from standard components, as well as from
items that are manufactured by vendors to the company's specifications. A
majority of the Company's commercial and defense electronics assemblies and
subsystems products contain proprietary technology which is designed and tested
by the Company's engineers and technicians and is manufactured at the Company's
own facilities.
The Company continues to invest in the advancement of its proprietary
manufacturing processes and in automation of the manufacturing processes.
Automation is critical in meeting its customers' demands for price
competitiveness, world class quality and on-time delivery. The Company is also
investing to enhance its responsiveness to production demands from its
customers.
Electronic components and other raw materials used in the Company's products are
purchased by the Company from a large number of suppliers and all of such
materials are readily available from alternate sources.
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.
Quality assurance checks are performed on manufacturing processes, purchased
items, work-in-process and finished products. Due to the complexity of the
Company's products, final tests are performed on some products by highly skilled
engineers and technicians.
Herley's primary manufacturing facilities have earned the ISO 9001 Registration.
The ISO 9000 series standards are internationally recognized quality management
system requirements. ISO 9001, the most comprehensive Standard in the ISO 9000
Series covers design, manufacturing, installation, and servicing systems.
Assembly, test, package and shipment of products are done at the Company's
manufacturing facilities located in the following cities:
Lancaster, Pennsylvania
Farmingdale, New York
Woburn, Massachusetts
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Nashua, New Hampshire
Jerusalem, Israel
Backlog
The Company's total backlog of orders was approximately $53,127,000 on July 31,
2000 as compared to $49,230,000 on August 1, 1999. Of the Company's total
backlog of $53,127,000 at July 30, 2000, $31,178,000 is attributable to domestic
orders and $21,949,000 is attributable to foreign orders. Management anticipates
that approximately $41,835,000 of its backlog will be shipped during the fiscal
year ending July 29, 2001.
All of the orders included in backlog are covered by signed contracts or
purchase orders. Backlog is not directly indicative of future sales.
Accordingly, the Company does not believe that its backlog as of any particular
date is representative of actual sales for any succeeding period.
Substantially all of the Company's contracts are fixed price contracts, some of
which require delivery over time periods in excess of one year. With this type
of contract, the Company agrees to deliver products at a fixed price except for
costs incurred because of change orders issued by the customer.
In accordance with Department of Defense procedures, all contracts involving
government programs may be terminated by the government, in whole or in part, at
the government's discretion. In the event of such a termination, prime
contractors on such contracts are required to terminate their subcontracts on
the program and the government or the prime contractor is obligated to pay the
costs incurred by the Company under the contract to the date of termination plus
a fee based on the work completed.
Research and Development
The Company believes that its growth depends, in part, on its ability to renew
and expand its technology, products, and design and manufacturing processes with
an emphasis on cost effectiveness. The Company's primary efforts are focused on
engineering design and product development activities rather than pure research.
A substantial portion of the Company's development activities has been funded by
the Company's customers. Certain of the Company's officers and engineers are
involved at various times and in varying degrees in these activities. The
Company's policy is to assign the required engineering and support people, on an
ad hoc basis, to new product development as needs require and budgets permit.
The cost of these development activities, including employees' time and
prototype development, net of amounts paid by customers, were approximately
$1,727,000, $1,685,000, and $1,562,000 in fiscal 2000, 1999, and 1998,
respectively.
Competition
The microwave component and subsystems industry is highly competitive and the
Company competes against many companies, both foreign and domestic, many of
these are larger, have greater financial resources and are better known. As a
supplier, the Company also experiences significant competition from the in-house
capabilities of its actual prospective customers.
Competition is generally based upon technology, design, price and past
performance. The Company's ability to compete depends, in part, on its ability
to offer better design and performance than its competitors and its readiness in
facilities, equipment and personnel to undertake to complete the programs.
Government Regulation
The Company's wireless communications products are incorporated into wireless
telecommunications systems that are subject to regulation domestically by the
FCC and internationally by other government agencies. In addition, because of
its participation in the defense industry, the Company is subject to audit from
time to time for its compliance with government regulations by various
government agencies. The Company is also subject to a variety of local, state
and federal government regulations relating to, among other things, the storage,
discharge, handling, omission, generation, manufacture and disposal of toxic or
other hazardous substances
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used to manufacture the Company's products. The Company believes that it
operates its business in material compliance with applicable laws and
regulations. However, any failure to comply with existing or future laws or
regulations could have a material adverse impact on the Company's business,
financial condition and result of operations.
Intellectual Property
While the Company holds several patents, the Company relies primarily on a
combination of trade secret, employee and third-party nondisclosure agreements
to protect its intellectual property, as well as limiting access to the
distribution of proprietary information. There can be no assurance that the
steps taken by the Company to protect its intellectual property rights will be
adequate to prevent misappropriation of the Company's technology or to preclude
competitors from independently developing such technology. Furthermore, there
can be no assurance that, in the future, third parties will assert infringement
claims against the Company or with respect to its products for which the Company
has indemnified certain of its customers. Asserting the Company's rights or
defending against third party claims could involve substantial costs and
diversion of resources, thus materially and adversely affecting the Company's
business, financial condition and results of operations. In the event a third
party were successful in a claim that one of the Company's products infringed
its proprietary rights, the Company may have to pay substantial royalties or
damages, remove that product from the marketplace or expand substantial amounts
in order to modify the product so that it no longer infringes such proprietary
rights, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Employees
As of October 1, 2000, the Company employed 583 persons full time. Of these
employees, 61 comprise the engineering staff, 438 constitute manufacturing
personnel, 30 occupy sales and marketing positions, and 35 are in management and
support functions. None of the Company's employees are covered by collective
bargaining agreements and the Company considers its employee relations to be
satisfactory. The Company believes that its future success will depend, in part,
on its continued ability to recruit and retain highly skilled 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.
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Item 2. Properties
The Company's properties are as follows:
<TABLE>
<CAPTION>
Owned
or
Location Purpose of Property Area Leased
------------------- ------------------------------------------ -------------- ------
<S> <C> <C> <C>
Lancaster, PA (1) Production, engineering, administrative 71,200 sq. ft. Owned
and executive offices
Woburn, MA Production, engineering and administration 60,000 sq. ft. Owned
Farmingdale, NY (2) Production, engineering and administration 46,000 sq. ft. Leased
Jerusalem, Israel Production, engineering and administration 12,000 sq. ft.. Owned
Nashua, NH (3) Production, and engineering 20,000 sq. ft. Leased
Chicago, IL Engineering and administration 3,000 sq. ft. Leased
Lancaster, PA Land held for expansion 20.4 Acres Owned
--------------
</TABLE>
[FN]
(1) The Company's executive offices occupy approximately 4,000 sq. ft. of
space at this facility with engineering and administrative offices occupying
10,000 sq. ft. each.
(2) On September 23, 1999 the Company closed on the sale of its prior owned
facility in Amityville, NY and relocated the plant to this leased facility in
Farmingdale, NY. The Company entered into a 10 year lease agreement with a
partnership owned by the children of certain officers of the Company. The lease
provides for initial minimum annual rent of $312,390, subject to escalation of
approximately 4% annually throughout the 10 year term.
(3) As of January 3, 2000 the Company acquired substantially all of the
assets of Robinson Laboratories, Inc. which operates as a division at this
location.
</FN>
In addition to the above operating facilities, the Company has an idle facility
in Billerica, MA which is under lease. The Company is looking to sublease this
facility.
The Company believes that its facilities are adequate for its current and
presently anticipated future needs.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
(a) The Company's Common Stock is traded in the NASDAQ National Market
under the symbol HRLY. The following table sets forth the high and
low sales price as reported by the NASDAQ National Market for the
Company's Common Stock for the periods indicated.
Common Stock
--------------
High Low
----- -----
Fiscal Year 1999
First Quarter................................ 10.50 7.63
Second Quarter............................... 15.31 9.56
Third Quarter................................ 15.13 11.13
Fourth Quarter............................... 16.19 11.50
Fiscal Year 2000
First Quarter................................ 15.00 12.19
Second Quarter............................... 15.50 11.13
Third Quarter................................ 19.38 13.88
Fourth Quarter............................... 19.06 15.69
Fiscal Year 2001
First Quarter (through October 11, 2000)..... 22.75 17.44
The closing price on October 11, 2000 was $20.50.
(b) As of October 11, 2000, there were approximately 1,000 record holders
of the Company's Common Stock.
(c) There have been no cash dividends declared or paid by the Company on
its Common Stock during the past two fiscal years.
Item 6. Selected Financial Data (in thousands except per share data)
<TABLE>
<CAPTION>
52 Weeks ended
------------------------------------------------------------
July 30, August 1, August 2, August 3, July 28,
2000 (2) 1999 (3) 1998 (4) 1997 1996
-------- -------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 70,537 61,036 40,798 32,195 29,001
====== ====== ====== ====== ======
Net income $ 7,639 7,735 5,497 4,804 3,669
====== ====== ======= ======= =======
Earnings per common share (1)
Basic $ 1.57 1.48 1.11 1.18 .97
==== ==== ==== ==== ===
Assuming Dilution $ 1.45 1.37 1.02 1.01 .86
==== ==== ==== ==== ===
Total Assets $ 86,656 74,056 57,553 39,257 42,509
Total Current Liabilities $ 12,783 10,513 9,843 9,813 7,559
Long-Term Debt net of current portion $ 2,931 15,437 4,111 2,890 11,021
</TABLE>
[FN]
(1) As adjusted to give effect to a 4-for-3 stock split effective September
30, 1997.
(2) On January 3, 2000, the Company acquired Robinson Laboratories, Inc.
See Note B of the financial statements.
(3) On January 4, 1999, the Company acquired General Microwave Corporation.
See Note B of the financial statements.
(4) On August 4, 1997, the Company acquired Metraplex Corporation. See Note
B of the financial statements.
</FN>
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of income
expressed as a percentage of net sales. There can be no assurance that trends in
sales growth or operating results will continue in the future.
<TABLE>
<CAPTION>
52 weeks ended
----------------------------------
<S> <C> <C> <C>
July 30, August 1, August 2,
2000 1999 1998
---- ---- ----
Net sales 100.0 % 100.0 % 100.0 %
Cost of products sold 62.9 % 60.2 % 59.2 %
---- ---- ----
Gross profit 37.1 % 39.8 % 40.8 %
Selling and administrative expenses 19.2 % 19.5 % 20.4 %
---- ---- ----
Operating income 17.9 % 20.3 % 20.4 %
---- ---- ----
Other income (expense), net:
Investment income 0.3 % 0.5 % 1.4 %
Interest expense (1.6)% (1.2)% (1.1)%
---- ---- ----
(1.3)% (0.7)% 0.3 %
---- ---- ----
Income before income taxes and extraordinary item 16.6 % 19.6 % 20.7 %
Provision for income taxes 5.8 % 6.7 % 7.2 %
---- ---- ----
Income before extraordinary item 10.8 % 12.9 % 13.5 %
Extraordinary item - (0.2)% -
---- ---- ----
Net income 10.8 % 12.7 % 13.5 %
---- ---- ----
</TABLE>
12
<PAGE>
Fiscal 2000 Compared to Fiscal 1999
Net sales for the 52 weeks ended July 30, 2000 were approximately $70,537,000
compared to $61,036,000 for fiscal 1999. The sales increase of $9,501,000
(15.6%) is partially attributable to the acquisition of Robinson Labs as of
January 3, 2000 which contributed $4,690,000 in revenues, and the acquisition of
GMC as of January 4, 1999 which contributed $5,101,000 additional revenue over
the volume generated in fiscal 1999, as well as an increase in net sales of
approximately $2,478,000 in microwave component. Space and communications
products experienced a drop in revenue of approximately $2,768,000.
Gross profit of 37.1% for the 52 weeks ended July 30, 2000 is less than the
prior year of 39.8%. The decline in margin of 2.7% is due primarily to lower
margins on microwave components, which includes the revenues from Robinson Labs
and GMC.
Selling and administrative expenses for the 52 weeks ended July 30, 2000 were
$13,497,000 compared to $11,877,000 for fiscal 1999, an increase of $1,620,000.
The primary increase is due to the acquisition of Robinson Labs which added
$1,069,000 in selling and administrative expenses in fiscal 2000. As a
percentage of revenues, expenses declined from 19.5% in 1999 to 19.2% in 2000.
Interest expense increased approximately $390,000 due to additional bank
borrowings to fund the acquisitions of GMC and Robinson.
The effective income tax rate increased to 35.0% in fiscal 2000 from 34.3% in
1999 due primarily to a decreased benefit received from the Company's foreign
sales corporation in fiscal 2000.
Fiscal 1999 Compared to Fiscal 1998
Net sales for the 52 weeks ended August 1, 1999 were approximately $61,036,000
compared to $40,798,000 for fiscal 1998. The sales increase of $20,238,000
(49.6%) is primarily attributable to the acquisition of GMC as of January 4,
1999 which contributed $14,374,000 in revenues in fiscal 1999,as well as an
increase in net sales of approximately $3,508,000 in space and communications
products, and approximately $2,356,000 in microwave components.
Gross profit of 39.8% for the 52 weeks ended August 1, 1999 is less than the
prior year of 40.8%. The decline in margin of 1% is due primarily to lower
margins on microwave components, as well as the lower margins generated from the
added GMC revenues.
Selling and administrative expenses for the 52 weeks ended August 1, 1999 were
$11,877,000 compared to $8,339,000 for fiscal 1998, an increase of $3,538,000.
The acquisition of GMC added $3,222,000 in selling and administrative expenses
in fiscal 1999. As a percentage of revenues, expenses declined from 20.4% in
1998 to 19.5% in 1999.
Investment income declined $288,000 from the prior year due to a decrease in
investments, the proceeds of which were used to partially fund the acquisition
of GMC. In addition, bank borrowings of approximately $11,400,000 used to fund
the balance of the acquisition price resulted in additional interest expense of
approximately $302,000.
The effective income tax rate decreased from 34.8% in fiscal 1998 to 34.3% in
fiscal 1999.
In February 1999, the Company refinanced the existing mortgage on its property
located in Lancaster, Pa. The proceeds of the new mortgage loan were used to
prepay the existing mortgage note having an outstanding principal balance of
$2,890,000 plus a prepayment premium of $115,600. Unamortized debt expenses of
$79,226 and the $115,600 prepayment premium related to the early extinguishment
of the existing mortgage debt were charged to expense as an extraordinary loss,
net of an income tax benefit of $68,000.
13
<PAGE>
Liquidity and Capital Resources
As of July 30, 2000 and August 1, 1999, working capital was approximately
$35,476,000 and $25,703,000, respectively, and the ratio of current assets to
current liabilities was 3.78 to 1 and 3.44 to 1, respectively. At July 30, 2000,
the Company had cash and cash equivalents of approximately $7,665,000.
As of January 3, 2000, the Company acquired substantially all of the assets of
Robinson Laboratories, Inc. ("Robinson" or "Robinson Labs"), a New Hampshire
corporation, which is being operated as a division of Herley Industries, Inc.
The transaction provided for the payment of $6,000,000 in cash, the issuance of
33,841 shares of Common Stock of the Company valued at $15.188 per share, and
the assumption of approximately $3,140,000 in liabilities. In addition, the
agreement provides for the issuance of additional shares of Common Stock at a
future date, aggregating 97,841shares, based on new orders booked through
January 2001.
As of January 4, 1999, the Company completed the acquisition of all of the
issued and outstanding common stock of GMC, a New York corporation, including
outstanding stock options, for $18.00 per share and 966,675 three-year warrants
to purchase one share of the Company's common stock, at an aggregate purchase
price of approximately $24,556,000. The purchase price includes shares of common
stock of General Microwave purchased in the open market, acquisition of the
remaining shares of common stock outstanding, an estimate of the fair market
value of the warrants based on the trading price of similar warrants currently
on the market, and transaction expenses. The warrants are exercisable at $15.60
per share of common stock of the Company and expire in January 2002.
On August 4, 1997, the Company completed the acquisition of Metraplex
Corporation, a Maryland corporation for 313,139 (as adjusted) shares of common
stock of the Company, with a fair market value of $3,170,471, in exchange for
all of the issued and outstanding common stock of Metraplex.
As is customary in the defense industry, inventory is partially financed by
advance payments. The unliquidated balance of these advance payments was
approximately $1,006,000 in 2000, and $439,000 in 1999.
Net cash provided by operations was approximately $9,854,000, and $12,723,000,
in 2000 and 1999 respectively.
Net cash used in investing activities in 2000 of approximately $4,571,000
relates to the acquisition of Robinson Labs, in part for cash of approximately
$6,000,000 which was funded by borrowings under the bank line of credit, and
capital expenditures of $2,618,000, including building and leasehold
improvements of $1,676,000 to accommodate the move of GMC from Amityville, NY to
a leased facility in Farmingdale, NY, and consolidation of the GMC leased
facilities in Billerica, MA with the Company's Woburn, MA facility. Offsetting
the cash outflows were the net proceeds from the sale of the facility in
Amityville of $4,125,000.
Net cash used in investing activities in 1999 of approximately $21,757,000
relates primarily to the acquisition of GMC, net of cash acquired, which was
funded by available cash balances and borrowings under the bank line of credit.
Net cash flows from financing activities in fiscal 2000 included: (1) net
payments under the bank line of credit of $12,500,000; (2) proceeds from the
exercise of stock options and warrants of $21,574,000, including the exercise of
approximately 1,314,000 of the warrants issued in connection with the sale of
common stock to the public in 1997 resulting in proceeds of approximately
$20,492,000; and (3) the acquisition of treasury stock in the aggregate amount
of $7,565,000.
Net cash flows from financing activities in fiscal 1999 included: (1) net
borrowings under the bank line of credit of $11,000,000 the proceeds of which
were used to partially fund the acquisition of GMC; (2) refinancing of the
existing mortgage on the property in Lancaster, Pa., which reduced the interest
rate from 10.4% to 7.43% and extended the repayment schedule to 10 years; and
(3) the acquisition of treasury stock in the aggregate amount of $7,688,000.
14
<PAGE>
Net cash provided by financing activities in fiscal 1998 consists of net
proceeds of $7,452,000 from the sale of 700,000 shares of common stock, and
1,265,000 Common Stock Purchase Warrants to the public. Net borrowings under a
bank line of credit provided $1,500,000 in financing. Cash was used in financing
activities for payments of long-term debt of $2,257,000 and the purchase of
treasury stock of $1,084,000.
The Company maintains a revolving credit facility with a bank for an aggregate
of $30,000,000, as amended in January 2000, which expires January 31, 2002. As
of August 1, 1999 the Company had borrowings outstanding under this facility of
$12,500,000. No borrowings were outstanding as of July 30, 2000.
During the fiscal years ended July 30, 2000 and August 1, 1999 the Company
acquired 512,000 and 561,050 shares of its outstanding common stock for
approximately $7,565,000 and $7,688,000, respectively through open market
purchases, pursuant to a stock repurchase plan to acquire up to 1,250,000 shares
of Common Stock. In January 1998, the Company purchased 89,888 shares of its
outstanding common stock for $1,084,326 from certain officers of the Company
based on the fair market value of the stock on the date acquired.
The Company also acquired 8,982, 410,593 and 42,016 shares of common stock in
fiscal 2000, 1999 and 1998, respectively, valued at $80,000, $5,989,000 and
$538,000, respectively, in connection with certain "stock-for- stock" exercises
of stock options by which certain employees elected to surrender "mature" shares
owned in settlement of the option price. Such exercises are treated as an
exercise of a stock option and the acquisition of treasury shares by the
Company. See "Management - Stock Plans."
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities.
Subsequent Events
The Company entered into an agreement, as of August 28, 2000, to acquire
substantially all of the assets of American Microwave Technology, Inc. ("AMT"),
a California corporation. AMT designs, develops and manufactures radio frequency
and microwave power amplifiers for the medical and scientific markets. The
transaction, which closed on October 12, 2000, provided for the payment of
$5,400,000 in cash, and the assumption of approximately $1,153,000 in
liabilities. The transaction will be accounted for under the purchase method of
accounting. The allocation of the aggregate estimated purchase price will be
determined based on detailed reviews of the fair value of assets acquired and
liabilities assumed. Any excess cost over the fair value of net assets acquired
will be amortized over 20 years. The Company also entered into an exclusive
license agreement with AMT related to certain application specific and wireless
products under which the Company will pay a royalty of 10% of net sales of these
products for a period of four years, after which no additional royalty will be
due.
On October 13, 2000 the Company notified the holders of the warrants issued in
connection with the acquisition of GMC (see Note Q) of its intent to call the
warrants at a price of $1.00 per warrant effective 30 days after notice. The
holders of the warrants may elect to exercise the warrant for one share of
common stock of the Company at $15.60 per share.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in interest rates
and stock prices. The Company has not entered into any derivative financial
instruments to manage the above risks and the Company has not entered into any
market risk sensitive instruments for trading purposes. The Company's debt
consists of a working capital credit facility with a bank having an interest
rate that is set at 1.65% over the FOMC Federal Funds Target Rate based on
tangible net worth in excess of $25,000,000, or at an increment of 1.80% if
tangible net worth is less than $25,000,001, and a mortgage on its facility in
Lancaster, Pa. at a fixed rate of 7.43%. The FOMC Federal Funds Target Rate at
July 30, 2000 was 6.50%. The credit line is reviewed on an annual basis. Since
the acquisition of GMC, the Company is subject to movements in foreign currency
rate changes related to GMC's Israel operations. The Company does not anticipate
any other material changes in its primary market risk exposures in fiscal 2000.
15
<PAGE>
As of July 30, 2000, the Company holds an investment in the common stock of a
public company that is exposed to price risk with a cost basis and a fair market
value basis of $143,330.
The table below provides information about the Company's debt that is sensitive
to changes in interest rates. The table presents principal cash flows by
maturity date. Future principal payment cash flows by maturity date required
under the mortgage and line of credit, and corresponding fair values are as
follows:
Fiscal year ending during: Mortgage
------------------------- --------
2001 $ 69
2002 74
2003 80
2004 85
2005 93
2006 and later 2,439
-----
$2,840
Fair value $2,840
=====
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in the Index on Page F-1
are filed as a part of this report.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not applicable
PART III
The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in January 2001, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended July 30, 2000.
16
<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 (Exhibit 10.1 of Report on Form 10-Q dated June
10, 1997).
10.3 1998 Stock Option Plan (Exhibit 10.3 of Annual Report on Form 10-K for
the fiscal year ended August 1, 1999).
10.4 Amendments dated January 26, 1999 and July 30, 1999 to Employment
Agreement between Herley Industries, Inc. and Lee N. Blatt dated as
of October 1, 1998 (Exhibit 10.4 of Annual Report on Form 10-K for
the fiscal year ended August 1, 1999).
10.5 Amendments dated January 26, 1999 and July 30, 1999 to Employment
Agreement between Herley Industries, Inc. and Myron Levy dated as of
October 1, 1998 (Exhibit 10.5 of Annual Report on Form 10-K for the
fiscal year ended August 1, 1999).
10.6 Agreement and Plan of Reorganization dated as of July 8, 1997 among
the Company, Metraplex Acquisition Corporation and Metraplex
Corporation (Exhibit 2.1 of Registration Statement Form S-3 dated
September 4, 1997).
10.7 Agreement and Plan of Merger dated as of August 21, 1998 among General
Microwave Corp., Eleven General Microwave Corp., Shareholders, GMC
Acquisition Corporation and Registrant (Exhibit 1 of Schedule 13D
dated August 28, 1998).
10.8 Lease Agreement dated September 1, 1999 between Registrant and RSK
Realty LTD. (Exhibit 10.8 of Annual Report on Form 10-K for the fiscal
year ended August 1, 1999).
10.9 Loan Agreement dated February 16, 1999 between Registrant and The
First National Bank of Maryland, a division of FMB Bank. (Exhibit 10.9
of Annual Report on Form 10-K for the fiscal year ended August 1,
1999).
10.10 Asset Purchase Agreement dated as of February 1, 2000 between
Registrant and Robinson Laboratories, Inc. (Exhibit 10.2 of Form
10-Q dated March 13, 2000).
10.11 Amendment to Loan Agreement dated January 11, 2000 between Registrant
and Allfirst Bank, successor to The First National Bank of Maryland
(Exhibit 10.1 of Form 10-Q dated March 13, 2000).
10.12 Asset Purchase Agreement dated as of October 12, 2000 between
Registrant and American Microwave Technology Inc.
10.13 Lease Agreement dated March 1, 2000 between Registrant and RSK Realty
LTD.
23.1 Consent of Arthur Andersen LLP.
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
17
<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 23th day of October, 2000.
HERLEY INDUSTRIES, INC.
By: /S/ Lee N. Blatt
-----------------------------------
Lee N. Blatt, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on October 23, 2000 by the following persons in the
capacities indicated:
By: /S/ Lee N. Blatt Chairman of the Board
------------------------ (Principal Executive Officer)
Lee N. Blatt
By: /S/ Myron Levy President and Director
------------------------
Myron Levy
By: /S/ Anello C. Garefino Vice President Finance, CFO, Treasurer
--------------------------- (Principal Financial Officer)
Anello C. Garefino
By: /S/ David H. Lieberman Secretary and Director
---------------------------
David H. Lieberman
By: /S/ Thomas J. Allshouse Director
----------------------------
Thomas J. Allshouse
By: /S/ John A. Thonet Director
-----------------------
John A. Thonet
By: /S/ Alvin M. Silver Director
-----------------------
Alvin M. Silver
By: /S/ Edward K. Walker, Jr. Director
-----------------------------
Edward K. Walker, Jr.
18
<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, July 30, 2000 and August 1, 1999...... F-3
Consolidated Statements of Income for the 52 weeks ended
July 30, 2000, August 1, 1999, and August 2, 1998................ F-4
Consolidated Statements of Shareholders' Equity for the 52 weeks
ended July 30, 2000, August 1, 1999, and August 2, 1998.......... F-5
Consolidated Statements of Cash Flows for the 52 weeks ended
July 30, 2000, August 1, 1999, and August 2, 1998................ 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 July 30, 2000 and August 1, 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for the 52 weeks ended July 30, 2000, August 1, 1999 and August 2, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidted financial position of Herley
Industries, Inc. and Subsidiaries as of July 30, 2000, August 1, 1999, and
August 2, 1998, and the consolidated results of their operations and their cash
flows for the 52 weeks ended July 30, 2000, August 1, 1999 and August 2, 1998 in
conformity with accounting principles generally accepted in the United States.
/S/ ARTHUR ANDERSEN LLP
Lancaster, PA
September 20, 2000
(except with respect to the matters discussed
in Note Q, as to which the date is October 13, 2000)
F-2
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
July 30, August 1,
2000 1999
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 7,665 $ 2,741
Accounts receivable 14,315 10,679
Costs incurred and income recognized in excess
of billings on uncompleted contracts 146 --
Other receivables 293 273
Inventories 23,045 19,880
Deferred taxes and other 2,795 2,643
------ ------
Total Current Assets 48,259 36,216
Property, Plant and Equipment, net 18,004 21,888
Intangibles, net of amortization of $3,095 in 2000
and $2,137 in 1999 18,096 13,574
Available-For-Sale Securities 146 148
Other Investments 1,020 948
Other Assets 1,131 1,282
------ ------
$86,656 $74,056
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 282 $ 258
Accounts payable and accrued expenses 9,602 8,035
Income taxes payable 1,426 276
Reserve for contract losses 467 1,505
Advance payments on contracts 1,006 439
------ ------
Total Current Liabilities 12,783 10,513
Long-term Debt 2,931 15,437
Deferred Income Taxes 5,571 5,144
Minority Interest -- 62
------ ------
21,285 31,156
------ ------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
5,993,870 in 2000 and 5,030,283 in 1999 599 503
Additional paid-in capital 29,808 15,072
Retained earnings 34,964 27,325
------ ------
Total Shareholders' Equity 65,371 42,900
------ ------
$86,656 $74,056
====== ======
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
52 weeks ended
July 30, August 1, August 2,
2000 1999 1998
------- ------- -------
Net sales $ 70,537 $ 61,036 $ 40,798
------- ------- -------
Cost and expenses:
Cost of products sold 44,382 36,749 24,169
Selling and administrative expenses 13,497 11,877 8,339
------- ------- -------
57,879 48,626 32,508
------- ------- -------
Operating income 12,658 12,410 8,290
------- ------- -------
Other income (expense), net:
Investment income 232 298 587
Interest expense (1,138) (748) (446)
------- ------- -------
(906) (450) 141
------- ------- -------
Income before income taxes and
extraordinary item 11,752 11,960 8,431
Provision for income taxes 4,113 4,098 2,934
------- ------- -------
Income before extraordinary item 7,639 7,862 5,497
Extraordinary item - loss on extinguishment
of debt (net of income tax benefit
of $ 68) -- 127 --
------- ------- -------
Net income $ 7,639 $ 7,735 $ 5,497
======= ======= =======
Earnings per common share - Basic
Earnings before extraordinary item 1.57 1.50 1.11
Extraordinary loss on extinguishment
of debt - .02 -
---- ---- ----
Net earnings per common share - Basic $ 1.57 $ 1.48 $ 1.11
==== ==== ====
Basic weighted average shares 4,872 5,233 4,969
===== ===== =====
Earnings per common share - Diluted
Earnings before extraordinary item 1.45 1.39 1.02
Extraordinary loss on extinguishment
of debt - .02 -
---- ---- ----
Net earnings per common share - Diluted $ 1.45 $ 1.37 $ 1.02
==== ==== ====
Diluted weighted average shares 5,285 5,660 5,407
===== ===== =====
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
52 weeks ended July 30, 2000, August 1, 1999 and August 2, 1998
(In thousands except share data)
<TABLE>
<CAPTION>
Common Stock Additional
-------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
--------- -------- ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 3, 1997 4,209,365 $ 421 8,857 14,093 - $ 23,370
Net income 5,497 5,497
Net proceeds from public offering
of 700,000 shares of common stock
and 1,265,000 warrants 700,000 70 7,381 7,451
Issuance of common stock in
connection with business acquired 313,139 31 3,139 3,170
Exercise of stock options
and warrants 175,559 18 885 (538) 365
Tax benefit upon exercise of stock
options 1,671 1,671
Purchase of 89,888 shares
of treasury stock (1,084) (1,084)
Retirement of treasury shares (131,904) (13) (1,609) 1,622 -
--------- -------- ---------- -------- -------- --------
Balance at August 2, 1998 5,266,159 $ 527 20,324 19,590 - $ 40,440
Net income 7,735 7,735
Issuance of warrants in
connection with business acquired 1,450 1,450
Exercise of stock options
and warrants 735,767 73 4,752 (5,989) (1,164)
Tax benefit upon exercise of stock
options 2,127 2,127
Purchase of 561,050 shares
of treasury stock (7,688) (7,688)
Retirement of treasury shares (971,643) (97) (13,581) 13,678 -
--------- -------- ---------- -------- -------- --------
Balance at August 1, 1999 5,030,283 $ 503 15,072 27,325 - $ 42,900
Net income 7,639 7,639
Issuance of common stock in
connection with business acquired 33,841 3 511 514
Exercise of warrants issued in
connection with public offering
in 1998 1,313,613 131 20,361 20,492
Exercise of stock options
and warrants 137,115 14 1,213 (140) 1,087
Tax benefit upon exercise of stock
options 304 304
Purchase of 512,000 shares
of treasury stock (7,565) (7,565)
Retirement of treasury shares (520,982) (52) (7,653) 7,705 -
--------- -------- ---------- -------- -------- --------
Balance at July 30, 2000 5,993,870 $ 599 29,808 34,964 - $ 65,371
========= ======== ========== ======== ======== ========
</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
(In thousands)
<TABLE>
<CAPTION>
52 weeks ended
July 30, August 1, August 2,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 7,639 $ 7,735 $ 5,497
------ ------ ------
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 3,998 3,289 1,869
Gain on sale of fixed assets (21) -- --
Extraordinary loss on extinguishment
of debt, net of income taxes -- 127 --
Equity in income of limited partnership (71) (99) (129)
(Increase) decrease in deferred tax assets (148) 483 1,207
Increase (decrease) in deferred tax liabilities 342 (141) 173
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,568) (361) (768)
Decrease in notes receivable-officers -- -- 2,101
(Increase) decrease in costs incurred
and income recognized in excess of
billings on uncompleted contracts (146) 1,665 (1,665)
(Increase) decrease in other receivables (20) 36 (23)
Decrease (increase) in prepaid income taxes -- 377 (377)
(Increase) decrease in inventories (1,625) 729 (3,758)
Decrease (increase) in prepaid expenses and other 4 199 (55)
Increase (decrease) in accounts payable and
accrued expenses 685 (2,119) 773
Increase in income taxes payable 1,458 2,019 469
(Decrease) increase in reserve for contract losses (1,038) 360 667
Increase (decrease) in advance payments
on contracts 195 (1,620) (1,364)
Other, net 170 44 (46)
------ ------ ------
Total adjustments 2,215 4,988 (926)
------ ------ ------
Net cash provided by operations 9,854 12,723 4,571
------ ------ ------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (6,095) (20,101) --
Proceeds from sale of fixed assets 4,142 6 1
Partial distribution from limited partnership -- -- 593
Capital expenditures (2,618) (1,662) (1,645)
------ ------ ------
Net cash used in investing activities (4,571) (21,757) (1,051)
------ ------ ------
Cash flows from financing activities:
Net proceeds from public offering of common stock -- -- 7,452
Borrowings under bank line of credit 13,900 29,500 4,050
Proceeds from refinance of mortgage note -- 2,915 --
Proceeds from exercise of stock options and warrants, net 21,574 (1,164) 364
Payments under bank line of credit (26,400) (18,500) (2,550)
Payments of long-term debt (1,868) (971) (2,257)
Extinguishment of debt -- (3,006) --
Purchase of treasury stock (7,565) (7,688) (1,084)
------ ------ ------
Net cash (used in) provided by financing activities (359) 1,086 5,975
------ ------ ------
Net increase (decrease) in cash and cash equivalents 4,924 (7,948) 9,495
Cash and cash equivalents at beginning of period 2,741 10,689 1,194
------ ------ ------
Cash and cash equivalents at end of period $ 7,665 $ 2,741 $ 10,689
====== ====== ======
Supplemental cash flow information:
Cashless exercise of stock options $ 80 $ 5,989 $ 538
====== ====== ======
Stock issued for business acquired $ 514 -- 3,170
====== ====== ======
Warrants issued for business acquired $ -- 1,450 --
====== ====== ======
Tax benefit related to stock options $ 304 2,127 1,671
====== ====== ======
</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, a Delaware corporation, is engaged in research, engineering,
product development, and manufacturing of complex microwave radio
frequency (RF) and millimeter wave components and subsystems for
commercial wireless, defense and space customers worldwide.
2. Fiscal Year
The Company's fiscal year ends on the Sunday closest to July 31. Normally
each fiscal year consists of 52 weeks, but every five or six years the
fiscal year will consist of 53 weeks. All fiscal years presented
consisted of 52 weeks.
3. Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Herley
Industries, Inc. and its subsidiaries, all of which are wholly-owned. All
significant inter-company accounts and transactions have been eliminated
in consolidation. The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements as well as revenues and expenses during
the period. Actual results could differ from those estimates.
4. Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of
three months or less at the date of acquisition to be cash equivalents.
Short-term investments are recorded at the amortized cost plus accrued
interest which approximates market value. The Company limits its credit
risk to an acceptable level by evaluating the financial strength of
institutions at which significant investments are made and based upon
credit ratings.
5. Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit
risk consist primarily of trade accounts receivable. Accounts receivable
are principally from the U.S. Government, major U.S. Government
contractors, several foreign governments, and domestic customers in the
aerospace, communications, and defense industries. Credit is extended
based on an evaluation of the customer's financial condition and
generally collateral is not required. In many cases irrevocable letters
of credit accompanied by advanced payments are received from foreign
customers, and progress payments are received from domestic customers.
The Company performs periodic credit evaluations of its customers and
maintains reserves for potential credit losses.
6. Inventories
Inventories, other than inventory costs relating to long-term contracts
and programs, are stated at lower of cost (principally first-in,
first-out) or market. Inventory costs relating to long-term contracts and
programs are stated at the actual production costs, including factory
overhead, reduced by amounts identified with revenue recognized on units
delivered or progress completed.
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>
7. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided principally by the straight-line method over
the estimated useful lives of the related assets. Gains and losses
arising from the sale or disposition of property, plant and equipment are
recorded in income.
8. Intangibles
Intangibles are comprised of customer lists, installed products base,
drawings, patents, licenses, certain government qualifications and
technology and goodwill in connection with the acquisitions of Robinson
Laboratories, Inc. in 2000, General Microwave Corporation in 1999,
Metraplex Corporation in 1997, and Vega Precision Laboratories, Inc. in
1993. Intangibles are being amortized over twenty years. Amortization
charges totaled $1,109,000, $754,000, and ($71,000) in fiscal 2000, 1999,
and 1998, respectively. The negative amortization in 1998 is attributable
to the negative goodwill in connection with the acquisition of Stewart
Warner Electronics in 1995.
The carrying amount of intangibles is evaluated on a recurring basis.
Current and future profitability as well as current and future
undiscounted cash flows of the acquired businesses are primary indicators
of recoverability. For the three fiscal years ended July 30, 2000, there
were no adjustments to the carrying amount of the cost in excess of net
assets acquired resulting from these evaluations.
9. Marketable Securities
The Company accounts for its investments in marketable securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to- maturity
when the Company has the positive intent and ability to hold the
securities to maturity. Marketable equity securities and debt securities
not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value. Realized gains
and losses and declines in value judged to be other-than-temporary are
included in other income , net. The cost of securities sold is based on
the specific identification method. Interest and dividends on securities
are included in other income, net.
10. Other Investments
The Company is a limited partner in a nonmarketable limited partnership
in which it owns approximately a 10% interest. This investment is
accounted for under the equity method.
11. Revenue and Cost Recognition
Under fixed-price contracts, revenue and related costs are recorded
primarily as deliveries are made. Certain costs under long-term,
fixed-price contracts (principally either directly or indirectly with the
U.S. Government), which include non-recurring billable engineering, are
deferred until these costs are contractually billable. Revenue under
certain long-term, fixed price contracts is recognized using the
percentage of completion method of accounting. Revenue recognized on
these contracts is based on estimated completion to date (the total
contract amount multiplied by percent of performance, based on total
costs incurred in relation to total estimated cost at completion).
Prospective losses on long-term contracts are based upon the anticipated
excess of inventoriable manufacturing costs over the selling price of the
remaining units to be delivered and are recorded when first reasonably
determinable. Actual losses could differ from those estimated due to
changes in the ultimate manufacturing costs and contract terms.
F-8
<PAGE>
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred.
12. Income Taxes
Income taxes are accounted for by the asset/liability approach in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred taxes represent the expected
future tax consequences when the reported amounts of assets and
liabilities are recovered or paid. They arise from temporary differences
between the financial reporting and tax bases of assets and liabilities
and are adjusted for changes in tax laws and tax rates when those changes
are enacted. The provision for income taxes represents the total of
income taxes paid or payable for the current year, plus the change in
deferred taxes during the year.
13. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. Because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
14. Product Development
The Company's primary efforts are focused on engineering design and
product development activities rather than pure research. The cost of
these development activities, including employees' time and prototype
development, net of amounts paid by customers, was approximately
$1,727,000, $1,685,000, and $1,562,000 in fiscal 2000, 1999, and 1998,
respectively.
NOTE B - ACQUISITIONS
The Company entered into an agreement, as of January 3, 2000, to acquire
substantially all of the assets of Robinson Laboratories, Inc.
("Robinson" or "Robinson Labs"), a New Hampshire corporation, which is
being operated as a division of Herley Industries, Inc. The transaction
provided for the payment of $6,000,000 in cash, the issuance of 33,841
shares of Common Stock of the Company valued at $15.188 per share, and
the assumption of approximately $3,140,000 in liabilities. In addition,
the agreement provides for the issuance of additional shares of Common
Stock at a future date, aggregating 97,841shares, based on new orders
booked through January 2001. The transaction has been accounted for under
the purchase method. Accordingly, the consolidated balance sheet includes
the assets and liabilities of Robinson at July 30, 2000, and the
consolidated statement of income includes the results of Robinson's
operations from January 3, 2000. Excess cost over the fair value of net
assets acquired of approximately $5,467,000 is being amortized over 20
years. Pre-acquisition debt in the amount of $1,479,000 was paid during
the quarter ended April 30, 2000.
On the basis of a pro forma consolidation of the results of operations as
if the acquisition had taken place at the beginning of fiscal 1999,
unaudited consolidated net sales, net income, basic earnings per share,
and diluted earnings per share for the fifty-two weeks ended August 1,
1999 would have been approximately $69,283,000, $7,272,000, $1.39, and
$1.28, and approximately $73,246,000, $7,275,000, $1.49, and $1.38,
respectively, for the fifty-two weeks ended July 30, 2000. The pro forma
information includes adjustments for additional depreciation based on the
estimated fair value of the property, plant, and equipment acquired,
the amortization of intangibles, and additional interest on bank
borrowings arising from the transaction. The pro forma financial
information is not necessarily
F-9
<PAGE>
indicative of the results of operations as they would have been had the
transaction been affected at the beginning of fiscal 1999.
As of January 4, 1999, the Company completed the acquisition of all of
the issued and outstanding common stock of General Microwave Corporation
("GMC"), a New York corporation, including outstanding stock options, for
$18.00 per share and 966,675 three-year warrants to purchase one share of
the Company's common stock, at an aggregate purchase price of
approximately $24,556,000. This transaction was accounted for under the
purchase method. The purchase price includes shares of common stock of
GMC purchased in the open market, acquisition of the remaining shares of
common stock outstanding, an estimate of the fair market value of the
warrants based on the trading price of similar warrants currently on the
market, and transaction expenses. The warrants are exercisable at $15.60
per share of common stock of the Company, subject to a call provision
after October 11, 2000 at $1.00 per warrant if the average last reported
sales price of the common stock of the Company has been not less than
$17.60 per share for fifteen consecutive trading days immediately
preceding the call date. The warrants expire in January 2002.
The aggregate purchase price is calculated as follows (in thousands,
except share and per share data):
365,600 shares previously acquired in the open market $ 6,273
848,675 shares at $18.00 per share 15,276
118,000 stock options at $18.00 per share,
net of exercise price 1,279
966,675 warrants at $1.50 1,450
Transaction expenses 278
Purchase price $ 24,556
The cash portions of the acquisition were financed through available cash
equivalents and borrowings under the Company's line of credit.
GMC designs, manufactures and markets microwave components and
subsystems, and related electronic test and measurement equipment. The
company is headquartered in Farmingdale, New York, and operates another
facility in Israel. The transaction has been accounted for under the
purchase method. Accordingly, the consolidated statements of income
include the results of GMC operations from January 4, 1999. The
acquisition resulted in excess cost over fair value of net assets
acquired of $7,538,501 which is being amortized over 20 years.
As part of the Company's GMC acquisition plans, the Company closed GMC's
Billerica, MA operations and moved it into the Company's existing Woburn,
MA location. In connection with the closure of the Billerica facility,
$180,000 of lease termination costs and $250,000 of severance was accrued
as part of purchase accounting. Through July 30, 2000, $46,000 of lease
termination costs were paid and $200,000 of severance was paid.
On the basis of a pro forma consolidation of the results of operations as
if the acquisition had taken place at the beginning of fiscal 1998,
unaudited consolidated net sales, net income, basic earnings per share,
and diluted earnings per share for the fifty-two weeks ended August 2,
1998 would have been approximately $63,477,000, $6,606,000, $1.33, and
$1.22, and for the fifty-two weeks ended August 1, 1999 would have been
approximately $70,349,000, $7,481,000, $1.43, and $1.32, respectively.
The pro forma information includes adjustments for additional
depreciation based on the estimated fair market value of the property,
plant, and equipment acquired, and the amortization of intangibles
arising from the transaction. The pro forma financial information is not
necessarily indicative of the results of operations as they would have
been had the transaction been effected at the beginning of fiscal 1998.
On August 4, 1997, the Company completed the acquisition of Metraplex
Corporation, a Delaware corporation, for 313,139 (as adjusted) shares of
common stock of the Company, with a fair market value of $3,170,471, in
exchange for all of the issued and outstanding common stock of Metraplex.
Metraplex
F-10
<PAGE>
is a leading manufacturer of pulse code modulation and frequency
modulation, telemetry and data acquisition systems for severe environment
applications. The transaction has been accounted for by the purchase
method. Accordingly, the consolidated statements of income include the
results of Metraplex operations from August 4, 1997. The acquisition
resulted in excess of cost over fair value of net assets acquired of
$2,162,725 which is being amortized over twenty years.
NOTE C - NOTES RECEIVABLE-OFFICERS
In fiscal 1996 the Company loaned an aggregate of $2,000,000 to certain
officers, as authorized by the Board of Directors, pursuant to the terms
of nonnegotiable promissory notes. The loans were paid in full with
accrued interest as of December 19, 1997.
NOTE D - INVENTORIES
The major components of inventories are as follows (in thousands):
July 30, August 1,
2000 1999
---- ----
Purchased parts and raw materials $ 12,804 $ 9,862
Work in process 9,358 8,781
Finished products 883 1,237
------ ------
$ 23,045 $ 19,880
====== ======
NOTE E - OTHER INVESTMENTS
In July 1994, the Company invested $1,000,000 for a limited partnership
interest in M.D. Sass Municipal Finance Partners-I, a Delaware limited
partnership. The objectives of the partnership are the preservation and
protection of its capital and the earning of income through the purchase
of certificates or other documentation that evidence liens for unpaid
local taxes on parcels of real property. At July 30, 2000 and August 1,
1999 the percentage of ownership was approximately 10%. The Company's
interest in the partnership may be transferred to a substitute limited
partner, upon written notice to the managing general partners, only with
the unanimous consent of both general partners at their sole discretion.
In July 1998, the Company received a partial distribution of $593,000
from the Partnership. As of July 30, 2000 the Company's limited
partnership interest had an estimated fair value of $1,020,000.
NOTE F - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following (in
thousands):
July 30, August 1, Estimated
2000 1999 Useful Life
-------- --------- -----------
Land $ 1,161 $ 1,161
Building and building
improvements 8,418 11,731 10-40 years
Machinery and equipment 26,293 24,995 5- 8 years
Furniture and fixtures 915 789 5-10 years
Automobiles 108 131 3 years
Tools 34 34 5 years
Leasehold improvements 1,351 455 5-10 years
------ ------
38,280 39,296
Less accumulated depreciation 20,276 17,408
------ ------
$ 18,004 $ 21,888
====== ======
Depreciation charges totaled $2,889,000, $2,535,000, and $1,940,000 in
fiscal 2000, 1999, and 1998, respectively.
F-11
<PAGE>
NOTE G - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, production and warehouse space as well as
computer equipment and automobiles under noncancellable operating leases.
Rent expense for the 52 weeks ended July 30, 2000, August 1, 1999, and
August 2, 1998, was approximately $1,053,000, $519,000, and $546,000,
respectively.
Minimum annual rentals under noncancellable operating leases are as
follows (in thousands):
Amount
------
Year ending fiscal 2001 $ 848
2002 727
2003 701
2004 691
2005 624
Future 2,407
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 three
years, commencing January 1, 2000. These agreements provide for aggregate
annual salaries for fiscal 2000 of $1,022,000. Certain agreements provide
for an annual cost of living adjustment based on the consumer price
index, and also provide for incentive compensation based on pretax income
of the Company in excess of $2,000,000. Incentive compensation in the
amount of $971,000, $969,000, and $728,000 was expensed in fiscal years
2000, 1999, and 1998, respectively.
Certain agreements also provide that, in the event there is a change in
control of the Company, as defined, the executives have the option to
terminate the agreements and receive a lump-sum payment of approximately
three times their annual salary. As of July 30, 2000, the amount payable
in the event of such termination would be approximately $3,154,000.
One of the employment contracts provides for a consulting agreement
commencing at the end of the employment period which became effective
October 1, 1998, and terminating December 31, 2010 at the annual rate of
$100,000. Another one of the employment contracts, as amended October 1,
1998, provides for a consulting period commencing at the end of the
period of active employment and continuing for a period of five years at
the annual rate of $100,000. Seven officers of the Company have severance
agreements providing for a lump-sum payment of $2,020,000 through fiscal
2002 in the event of a change of control of the Company as defined in the
agreements.
Litigation
The Company is involved in various 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, 2002. At July 30, 2000
stand-by letters of credit aggregating approximately $1,809,000 were
F-12
<PAGE>
outstanding under this facility.
NOTE H - INCOME TAXES
Income tax provision consisted of the following (in thousands):
52 Weeks ended
---------------------------------------
July 30, August 1, August 2,
2000 1999 1998
---- ---- ----
Current
Federal $ 3,573 $ 3,328 (1) $ 1,469
State 192 399 85
Foreign 154 29 -
3,919 3,756 1,554
Deferred
Federal 215 540 1,308
State (21) (198) 72
194 342 1,380
$ 4,113 $ 4,098 $ 2,934
(1) Excludes benefit of $68 from extraordinary loss incurred as a
result of early extinguishment of long term debt (See Note I).
The Company paid income taxes of approximately $2,241,000, $1,324,000,
and $1,486,000 in fiscal 2000, 1999, and 1998, respectively. The
following is a reconciliation of the U. S. statutory income tax rate and
the effective tax rate on pretax income:
52 Weeks ended
----------------------------------
July 30, August 1, August 2,
2000 1999 1998
---- ---- ----
U.S. Federal statutory rate 34.0 % 34.0 % 34.0 %
State taxes, net of
federal tax benefit 0.9 1.4 1.5
Benefit of foreign sales
corporation (2.1) (3.2) (1.8)
Non-deductible expenses 1.8 1.4 .8
Benefit of foreign and
foreign-source income (1.8) (1.2) -
Other, net 2.2 1.9 .3
Effective tax rate 35.0 % 34.3 % 34.8 %
Income taxes have not been provided on undistributed earnings of foreign
subsidiaries. If remitted as dividends, these earnings could become
subject to additional tax. The Company's intention is to reinvest
unremitted earnings of subsidiaries outside the United States
permanently.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes.
F-13
<PAGE>
Components of deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
July 30, 2000 August 1, 1999
---------------------- -----------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Intangibles $ - $ 1,766$ $ - $ 1,790
Alternative minimum tax - - 643 -
Accrued vacation pay 323 - 242 -
Accrued bonus 578 - 415 -
Accrued pension - - 199 -
Warranty costs 95 - 123 -
Inventory 1,011 - 1,176 -
Depreciation - 3,770 - 4,415
Contract losses 345 - 390 -
Net operating loss
carryforwards 96 - 219 -
Other 201 195 266 210
----- ----- ----- -----
$ 2,649 $ 5,731 $ 3,673 $ 6,415
===== ===== ===== =====
</TABLE>
As of July 30, 2000 the Company has available net operating loss
carryforwards for state income tax purposes of approximately $96,000
which expire from fiscal 2001 through 2009.
NOTE I- LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
July 30, August 1,
Rate 2000 1999
--------------- ---- ----
Revolving loan facility (a) 8.15% and 6.65% $ - $ 12,500
Mortgage note (b) 7.43% 2,840 2,902
Other - 373 293
----- ------
3,213 15,695
Less current portion 282 258
----- ------
$ 2,931 $ 15,437
===== ======
(a) In January 2000, the Company entered into an amendment to its
revolving loan agreement with a bank that provides for a revolving
unsecured loan in the aggregate principal amount of $30,000,000 which
may be used for general corporate purposes, including business
acquisitions. The revolving credit facility requires the payment of
interest only on a monthly basis and payment of the outstanding
principal balance on January 31, 2002. Interest is set at 1.65% over
the FOMC Federal Funds Target Rate based on tangible net worth in
excess of $25,000,000, or at an increment of 1.80% if tangible net
worth is less than $25,000,001. The FOMC Federal Funds Target Rate
was 6.50% at July 30, 2000. There is a fee of 15 basis points per
annum on the unused portion of the credit line in excess of
$20,000,000 payable quarterly. There are no borrowings under the line
at July 30, 2000.
The agreement contains various financial covenants, including, among
other matters, minimum tangible net worth, debt to tangible net
worth, debt service coverage, and restrictions on other borrowings.
(b) The mortgage loan is for a term of ten years with fixed monthly
principal and interest installments of $23,359, including interest at
a fixed rate of 7.43%, and is based upon a twenty year amortization.
The loan is secured by a mortgage on the Company's land and building
in Lancaster, Pennsylvania having a net book value of approximately
$1,946,000. The proceeds of the mortgage loan were used
F-14
<PAGE>
to prepay the existing mortgage note having an outstanding balance of
$2,890,000 plus a prepayment premium of $115,600.
The mortgage note agreement contains various financial covenants,
including, among other matters, the maintenance of specific amounts
of tangible net worth, debt to tangible net worth, debt service
coverage, and restrictions on other borrowings. In connection with
this loan, the Company paid approximately $45,000 in financing costs.
Such costs are included in Other Assets in the accompanying
consolidated balance sheet at July 30, 2000 and are being amortized
over the term of the loan (10 years). Unamortized debt expenses of
$79,226 related to the prior mortgage and the $115,600 prepayment
premium were charged to expense in 1999 as an extraordinary loss in
connection with the prepayment of this mortgage note.
The Company paid interest of approximately $1,200,000 in 2000, $730,000
in 1999, and $441,000 in 1998.
Future payments required on long-term debt are as follows (in thousands):
Fiscal year ending during: Amount
------------------------- ------
2001 $ 282
2002 186
2003 108
2004 106
2005 92
Future 2,439
-----
$ 3,213
=====
NOTE J - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following (in
thousands):
July 30, August 1,
2000 1999
---- ----
Accounts payable $ 3,812 $ 2,668
Accrued payroll and bonuses 3,430 2,636
Accrued commissions 710 488
Accrued interest 19 84
Accrued legal expenses 129 123
Accrued warranty costs 220 284
Accrued pension cost - 499
Accrued severance 594 538
Lease termination cost 134 180
Accrued expenses 554 535
----- -----
$ 9,602 $ 8,035
===== =====
NOTE K - 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.
Employees of GMC became eligible to participate in the Plan as of May 1,
1999. The existing savings and investing plan of GMC did not provide for
F-15
<PAGE>
company matching contributions and has been frozen.
The Company has recognized expenses of approximately $415,000, $266,000
and $197,000 for the 52 weeks ended July 30, 2000, August 1, 1999 and
August 2, 1998, respectively.
At the time of the acquisition, GMC also had a noncontributory defined
benefit pension plan covering all eligible employees of the company. As
part of the acquisition plan, the Company froze all benefits under the
plan effective April 30, 1999 and elected to terminate the plan. As part
of the allocation of the purchase price, the Company recorded a liability
at the date of acquisition of $464,000.
Net pension (income) expense recorded by the Company in fiscal 2000 and
1999 includes the following components (in thousands):
July 30, August 1,
2000 1999
---- ----
Service cost - benefits earned
during the period $ - $ 21
Interest cost 237 137
Return on assets (736) (123)
--- ---
Net pension (income) expense $ (499) $ 35
=== ===
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets at July 30, 2000 and August
1, 1999 (in thousands):
July 30, August 1,
2000 1999
---- ----
Projected benefit obligation,
beginning of period $ 4,841 $ 4,793
Service costs - 21
Interest cost 237 137
Actuarial gain (348) -
Benefit payments (214) (110)
Projected benefit obligation,
end of year $ 4,516 $ 4,841
Change in fair value of plan assets:
Fair value at beginning of period $ 4,342 $ 4,329
Return on assets 823 123
Benefit payments (214) (110)
Fair value at end of year 4,951 4,342
Funded status (435) 499
Unrecognized net gain 435 -
Accrued pension costs $ - $ 499
Assumptions used were:
Discount rate 5.00% 5.00%
Expected return on plan assets 10.00% 5.00%
Assets held by the trust are comprised primarily of U.S. Treasury
securities.
NOTE L - RELATED PARTY TRANSACTIONS
In connection with the move of the Amityville facilities of GMC in fiscal
1999, the Company entered into a 10 year lease agreement with a
partnership owned by the children of certain officers of the Company. The
lease provides for initial minimum annual rent of $312,000 subject to
escalation of approximately 4% annually throughout the 10 year term.
Additionally, in March 2000, The Company
F-16
<PAGE>
entered into another 10 year lease with the same partnership for
additional space. The initial minimum annual rent of $92,000 is subject
to escalation of approximately 4% annually.
NOTE M - COMPUTATION OF PER SHARE EARNINGS
The following table shows the calculation of basic earnings per share and
earnings per share assuming dilution (in thousands except per share
data):
<TABLE>
<CAPTION>
52 Weeks ended
---------------------------------
July 30, August 1, August 2,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Numerator:
Income before extraordinary item $ 7,639 $ 7,862 $ 5,497
Extraordinary loss - 127 -
----- ----- -----
Net Income $ 7,639 $ 7,735 $ 5,497
===== ===== =====
Denominator:
Basic weighted-average shares 4,872 5,233 4,969
Effect of dilutive securities:
Employee stock options and warrants 413 427 438
----- ----- -----
Diluted weighted-average shares 5,285 5,660 5,407
===== ===== =====
Stock options and warrants not included in computation 1,648 3,047 1,424
===== ===== =====
</TABLE>
The number of stock options and warrants not included in the computation
of diluted EPS relates to stock options and warrants having exercise
prices that are greater than the average market price of the common
shares during the period, and therefore, are antidilutive. The options
and warrants with exercise prices ranging from $15.60 to $17.88, which
expire at various dates through May 26, 2010 were outstanding as of July
30, 2000.
NOTE N - SHAREHOLDERS' EQUITY
At the annual meeting of stockholders held on February 18, 1998, the
stockholders of the Company approved a proposal to amend the Certificate
of Incorporation to increase the authorized shares of Common Stock from
10,000,000 to 20,000,000 shares.
In December 1997, the Company completed the sale of 1,100,000 shares of
common stock to the public, of which 700,000 shares were sold by the
Company and 400,000 shares were sold by certain selling stockholders. In
addition, the Company also sold 1,265,000 Common Stock Purchase Warrants
("Warrant(s)"). The Company received net proceeds of $7,451,579 after
underwriting discounts and commissions and other expenses of the
offering. Each Warrant entitles the holder to purchase one share of
common stock at $15.60 per share (subject to adjustment under certain
conditions) through May 2000, as extended. The Company also issued to the
underwriters, for their own accounts, Managing Underwriters' Warrants
which entitle the holder to purchase 110,000 shares of common stock of
the Company (subject to adjustment under certain circumstances), at a
price of $14.40 per share through December 2002, and the right to
purchase 110,000 Warrants (as described above) at a price of $.12 per
Warrant through May 2000, as extended.
Approximately 1,314,000 of the warrants which were due to expire May 18,
2000 were exercised at $15.60 per share of common stock resulting in
proceeds of approximately $20,492,000. The proceeds were used to pay off
the bank debt under the revolving credit facility.
On September 4, 1997 the Board of Directors declared a 4-for-3 stock
split effected as a stock dividend payable September 30, 1997 to holders
of record on September 15, 1997. The amount of $105,234 was transferred
from additional paid-in capital to the common stock account to record
this distribution. All share and per share data, including stock options
and warrants, included in the financial statements have been restated to
reflect the stock split.
F-17
<PAGE>
The Company has various fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. The
Company applies APB Opinion No. 25 and related Interpretations in
accounting for these plans. Statement of Financial Accounting Standards
No.123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued
by the FASB in 1995 and , if fully adopted, changes the methods for
recognition of cost on plans similar to those of the Company. The Company
has adopted the disclosure-only provisions of SFAS 123. Accordingly, no
compensation cost has been recognized for the stock option plans. Pro
forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that
Statement.
The fair value for options granted is estimated at the date of grant
using a Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management' s opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of computing pro-forma (unaudited) consolidated net
earnings, the following assumptions were used to calculate the fair value
of each option granted:
52 Weeks ended
----------------------------
July 30, 2000 August 1, 1999 August 2, 1998
------------- -------------- --------------
Expected life of options .71 years .65 years .40 years
Volatility .72 .58 .59
Risk-free interest rate 6.1% 5.1% 4.9%
Dividend yield zero zero zero
Had compensation cost for stock options granted in fiscal years 2000,
1999, and 1998 been determined based on the fair value at the grant date
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below using the statutory income tax rate of 34% (in thousands
except per share data):
2000 1999 1998
---- ---- ----
Net income - as reported $7,639 $7,735 $5,497
Net income - pro forma 5,952 5,940 4,925
Earnings per share - as reported
Basic $1.57 $1.48 $1.11
Diluted 1.45 1.37 1.02
Earnings per share - pro forma
Basic $1.22 $1.14 $.99
Diluted 1.13 1.05 .91
The effects of applying the pro forma disclosures of SFAS 123 are not
likely to be representative of the effects on reported net income for
future years due to the various vesting schedules.
In April 1998, the Board of Directors approved the 1998 Stock Option Plan
which covers 1,500,000 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted is
determined at the time of grant by the Board of Directors. The options
expire ten years from the date of grant, subject to certain restrictions.
Options for 646,500 and 375,000 shares
F-18
<PAGE>
were granted during the fiscal years ended July 30, 2000 and August 1,
1999, respectively.
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 86,000, 875,500 and 88,333 shares were granted during the
fiscal years ended July 30, 2000, August 1, 1999 and August 2, 1998,
respectively.
In October 1995, the Board of Directors approved the 1996 Stock Option
Plan which covers 666,666 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted is
determined at the time of grant by the Board of Directors. If not
specified, 100% of the shares can be exercised one year after the date of
grant. The options expire ten years from the date of grant. Options for
663,989 shares were granted during the fiscal year ended August 3, 1997.
A summary of stock option activity under all plans for the 52 weeks ended
July 30, 2000, August 1, 1999 and August 2, 1998 follows:
<TABLE>
<CAPTION>
Non-Qualified Stock Options
-----------------------------------------
Weighted Warrant Agreements
Average ------------------------
Number Price Range Exercise Number Price Range
of shares per share Price of shares per share
--------- -------------- -------- --------- -------------
<S> <C> <C> <C> <C> <C>
Outstanding August 3, 1997........... 916,327 $ 2.54 -10.41 $ 5.87 320,000 $ 4.64 - 5.35
Granted .......................... 88,333 10.31 -13.88 12.04
Exercised......................... (135,594) 2.54 - 6.94 5.08 (40,000) 5.35
Canceled.......................... (8,222) 2.54 - 6.47 5.31
--------- ------------- ----- ------- -----------
Outstanding August 2, 1998........... 860,844 $ 2.54 -13.88 $ 6.65 280,000 $ 4.64
Granted .......................... 1,250,500 9.25 -16.46 11.44
Exercised......................... (669,100) 2.54 - 9.94 6.56 (66,667) 4.64
Canceled.......................... (47,631) 6.47 -16.46 11.16
--------- ------------- ----- ------- -----------
Outstanding August 1, 1999........... 1,394,613 $ 2.54 -16.46 $10.74 213,333 $ 4.64
Granted .......................... 732,500 13.88 -17.88 15.51
Exercised......................... (103,990) 2.54 -14.75 7.03 4.64
Canceled.......................... (13,700) 11.13 -15.69 12.72
--------- ------------- ----- ------- -----------
Outstanding July 30, 2000............ 2,009,423 $ 6.09 -17.88 $12.65 213,333 $ 4.64
========= =======
</TABLE>
F-19
<PAGE>
Options Outstanding and Exercisable by Price Range as of July 30, 2000:
<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>
$ 6.09 - $ 9.25 517,323 7.5 $ 8.27 312,133 $ 7.96
10.41 - 13.88 577,100 8.7 12.46 331,300 12.16
13.94 - 15.00 280,500 8.9 14.01 257,600 13.96
15.69 - 17.88 634,500 8.0 15.80 372,000 15.70
$6.09 - $17.88 2,009,423 8.2 $12.65 1,273,033 $12.53
</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, and the
remaining 40,000 warrants were exercised in fiscal 1998. In December
1995, common stock warrants were issued to certain officers for the right
to acquire 293,333 shares of common stock of the Company at the fair
market value of $4.64 per share at date of issue. The warrants vest
immediately and expire December 13, 2005.
NOTE O - SIGNIFICANT SEGMENTS, MAJOR CUSTOMERS, AND EXPORT SALES
The Company's chief operating decision maker is considered to be the
Chairman and Chief Executive Officer (CEO). The Company's CEO evaluates
both consolidated and disaggregated financial information consisting of
revenue information in deciding how to allocate resources and assess
performance. The CEO uses certain disaggregated financial information for
the Company's two product groups: Space and Communications and Microwave
Components. The Company does not determine a measure of operating income
or loss by product group. The Company's two product groups have similar
long-term economic characteristics, such as application, and are similar
in regards to (a) nature of products and production processes, (b) type
of customers, and (c) method used to distribute products. Accordingly,
the Company is in a single reportable segment as a provider of complex
microwave radio frequency (RF) and millimeter wave components and
subsystems for commercial wireless, defense and space customers
worldwide. All of the Company's revenues result from sales of its
products. Revenues by product group (as defined by the Company) for
fiscal years 2000, 1999 and 1998 were as follows: Space and
Communications, $27,590,000, $33,846,000 and $30,338,000, respectively;
Microwave Components, $42,947,000, $27,190,000, and $10,460,000,
respectively.
Net sales to the U.S. Government in 2000, 1999, and 1998 accounted for
approximately 26%, 17%, and 26% of net sales, respectively. No other
customer accounted for shipments in excess of 10% of consolidated net
sales in fiscal 2000. One customer accounted for 12% of net sales in
1999. Foreign sales amounted to approximately $16,506,000, $17,680,000,
and $11,943,000 in fiscal 2000, 1999 and 1998, respectively.
Included in accounts receivable as of July 30, 2000 and August 1, 1999
are amounts due from the U.S. Government of approximately $2,269,000 and
$2,470,000 respectively.
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximated its fair value.
F-20
<PAGE>
Available-for-sale securities: The fair value of available-for-sale
securities was based on quoted market prices.
Long-term debt: The fair value of the mortgage note was estimated using
discounted cash flow analysis, based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments are
presented below (in thousands):
July 30, 2000
----------------
Carrying Fair
Amount Value
-------- -----
Cash and cash equivalents $7,665 $7,665
Long-term debt 2,931 2,931
NOTE Q - SUBSEQUENT EVENTS
The Company entered into an agreement, as of August 28, 2000, to acquire
substantially all of the assets of American Microwave Technology, Inc. ("AMT"),
a California corporation, which is being operated as Herley- AMT, a division of
Herley Industries, Inc. The transaction, which closed on October 12, 2000,
provided for the payment of $5,400,000 in cash, and the assumption of
approximately $1,153,000 in liabilities. The transaction will be accounted for
under the purchase method of accounting. The allocation of the aggregate
estimated purchase price will be determined based on detailed reviews of the
fair value of assets acquired and liabilities assumed. Any excess cost over the
fair value of net assets acquired will be amortized over 20 years. The Company
also entered into an exclusive license agreement with AMT related to certain
application specific and wireless products under which the Company will pay a
royalty of 10% of net sales of these products for a period of four years, after
which no additional royalty will be due.
On October 13, 2000 the Company notified the holders of the warrants issued in
connection with the acquisition of GMC (see Note B) of its intent to call the
warrants at a price of $1.00 per warrant effective 30 days after notice. The
holders of the warrants may elect to exercise the warrant for one share of
common stock of the Company at $15.60 per share.
F-21
