UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 1, 2004
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.
101 North Pointe Blvd., Lancaster, Pennsylvania 17601
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Address of Principal Executive Offices Zip Code
Registrant's telephone number, including area code: (717) 735-8117
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Securities registered pursuant to Section 12(b) of the Act: None
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the Registrant's voting Common Stock held by
non-affiliates of the Registrant, based on the closing sale price of the Common
Stock of $21.80 as reported on the Nasdaq National Market as of February 1,
2004, the last business day of the Registrant's most recently completed second
fiscal quarter, was approximately $278,597,000.
The number of shares outstanding of Registrant's Common Stock, $ .10 par value
on October 4, 2004 was 14,282,857.
Documents incorporated by reference:
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Portions of the Registrant's definitive proxy statement for use in connection
with its Annual Meeting of Stockholders to be held in January 2005, to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, are
incorporated by reference into Part III of this Annual Report Form 10-K.
HERLEY INDUSTRIES, INC.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business. 1
Item 2. Properties. 11
Item 3. Legal Proceedings. 12
Item 4. Submission of Matters to a Vote of Security Holders. 13
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities. 14
Item 6. Selected Financial Data. 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 25
Item 8. Financial Statements and Supplementary Data. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 26
Item 9A. Controls and Procedures. 26
Item 9B. Other Information 26
PART III
Item 10. Directors and Executive Officers of the Registrant. 27
Item 11. Executive Compensation. 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management. 27
Item 13. Certain Relationships and Related Transactions. 27
Item 14. Principal Accounting Fees and Services 27
PART IV
Item 15. Exhibits and Financial Statement Schedules. 27
SIGNATURES 29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
PART I
Item 1. Business
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 our financial position, business strategy and our plans and objectives
of management for future operations, are forward-looking statements.
Forward-looking statements involve various important assumptions, risks,
uncertainties and other factors which could cause our actual results to differ
materially from those expressed in such forward-looking statements.
Forward-looking statements in this Annual Report can be identified by words such
as "anticipate," "believe," "estimate," "expect," "plan," "intend," "may,"
"should" or the negative of these terms or similar expressions. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, performance or achievement.
Actual results could differ materially from those contemplated by the
forward-looking statements as a result of certain factors 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 as well as the factors set forth in our public filings with
the Securities and Exchange Commission.
You are cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date of this Annual Report or the date of any
document incorporated by reference, in this Annual Report. We are under no
obligation, and expressly disclaim any obligation, to update or alter any
forward-looking statements, whether as a result of new information, future
events or otherwise.
For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in Section 21E of the Securities Exchange
Act of 1934.
GENERAL
The Company's corporate offices are located at 101 North Pointe Boulevard,
Lancaster, Pennsylvania 17601. The telephone number of the Company at that
location is (717) 735-8117. The Company's web site is located at www.herley.com.
The Company makes its periodic and current reports available, free of charge, on
its web site as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission. The Company's Common Stock is listed on the NASDAQ national market
under the symbol "HRLY."
BACKGROUND
Herley is a leading supplier of microwave products and systems to defense and
aerospace entities worldwide. Our primary customers include large defense prime
contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing),
the U.S. Government (including the Department of Defense, NASA and other U.S.
Government agencies) and international customers (including the Egyptian,
German, Japanese and South Korean militaries and suppliers to international
militaries). We are a leading provider of microwave technologies for use in
command and control systems, flight instrumentation, weapons sensors and
electronic warfare systems. We have served the defense industry since 1965 by
designing and manufacturing microwave devices for use in high technology defense
electronics applications. Our products and systems are currently deployed on a
wide range of high profile military platforms, including the F-16 Falcon, the
F/A-18E/F Super Hornet, the RC-135 Rivet Joint, the E-2C Hawkeye, the AEGIS
class surface combatants, the EA-6B Prowler, the AMRAAM air to air missile, and
unmanned aerial vehicles, or UAVs, as well as high priority national security
programs such as National Missile Defense and the Trident II D-5.
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ACQUISITIONS
We have grown internally and through strategic acquisitions and have evolved
from a component manufacturer to a systems and service provider. We have
successfully integrated these acquisitions by targeting microwave technology
companies and focusing their strengths into our existing operations.
- - In September 1992, we acquired Micro-Dynamics, Inc. of Woburn, Massachusetts,
a microwave subsystem designer and manufacturer.
- - In June 1993, we acquired Vega Precision Laboratories, Inc. of Vienna,
Virginia, a manufacturer of flight instrumentation products.
- - In July 1995, we acquired Stewart Warner Electronics Corp. of Chicago,
Illinois, a manufacturer of high frequency radio and IFF interrogator systems.
- - In August 1997, we acquired Metraplex Corporation of Frederick, Maryland, a
manufacturer of airborne PCM and FM telemetry and data acquisition systems.
- - In January 1999, we acquired General Microwave Corporation of Farmingdale, New
York, a manufacturer of microwave components and electronic systems.
- - In January 2000, we acquired Robinson Laboratories, Inc. of Nashua, New
Hampshire, a designer, developer and manufacturer of microwave components and
assemblies primarily for defense applications.
- - In September 2000, we acquired American Microwave Technology, Inc. of Anaheim,
California, a manufacturer of high power, solid state amplifiers for the
scientific and medical markets, which enabled us to enter these markets.
- - In September 2002, we acquired EW Simulation Technology, Limited ("EWST"), a
company located in Aldershot, in the United Kingdom. EWST designs, develops and
produces electronic warfare simulator systems for prime defense contractors and
countries worldwide.
- - In March 2004, we acquired Communication Techniques, Inc. ("CTI"), of
Whippany, New Jersey. CTI designs, develops and produces state-of-the-art signal
generation components and integrated assemblies for digital radio, SONET,
SatCom, test and instrumentation, datacom, and wired and wireless applications
to 45 Gigahertz ("GHz") and 45 Gigabits Per Second ("Gb/s").
- - In September 2004, we acquired Reliable System Services Corporation ("RSS"),
of Melbourne, Florida, a manufacturer of satellite based command and control
systems for defense customers. The RSS Iridium based command and control system
provides secure (encryption, anti-spoof) global service coverage, allowing
multiple target operations, and is complementary with the Company's MAGIC2
command and control systems.
BUSINESS STRATEGY
Our goal is to continue to leverage our proprietary technology, microwave
expertise and manufacturing capabilities to further expand our penetration in
our market. Our strategies to achieve our objectives include:
- - INCREASE LEVELS OF COMPONENT INTEGRATION AND VALUE ADDED CONTENT. Due to
growth of engineering expertise, new product development, and acquisitions, we
have increased our capability to provide more component integration. Management
believes component integration adds value and will enable us to increase content
in defense platforms and systems, thereby increasing our revenue and
profitability.
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- - MAINTAIN LEADERSHIP IN MICROWAVE TECHNOLOGY. We intend to pursue further
technological advances through continued investment in internally-funded and
customer-funded research and product development.
- - STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. We have developed mutually
beneficial relationships with various agencies of the U.S. Government and
defense and commercial companies. We expect to continue to build and strengthen
these relationships with industry leaders by anticipating and recognizing their
needs and providing them with on-time and cost-effective solutions.
- - CAPITALIZE ON OUTSOURCING DYNAMICS IN THE AEROSPACE AND DEFENSE INDUSTRY.
Microwave technology has traditionally been an in-house resource of the prime
contractors. However, the prime contractors are beginning to outsource the
design and manufacture of this specialized engineering work to system
sub-contractors. We are well positioned to generate more business as prime
contractors continue to focus primarily on integration of defense electronics.
- - PURSUE STRATEGIC ACQUISITIONS. We intend to continue to augment our existing
technological base by acquiring specialized companies that complement or expand
our product offerings and market strategies. We believe that expansion of our
core competencies through the acquisition of such specialized technology
companies, when combined with our current technological and manufacturing
skills, will provide us with improved levels of horizontal and vertical
integration, leading to the creation of subsystems and complete system products.
- - ENHANCE MANUFACTURING CAPABILITIES. We intend to continue to implement process
manufacturing automation, and believe that our ability to develop a high level
of automated production and test capability will help to further improve our
cost effectiveness and time to market.
- - PURSUE SELECTIVE COMMERCIAL OPPORTUNITIES. We seek to identify and pursue
selected commercial applications for our products and technologies where we can
add value based on our microwave expertise.
COMPETITIVE STRENGTHS
Our competitive strengths include:
- - TECHNICAL EXPERTISE. We have developed a leading position in the field of
microwave technology through our 38 year focus on research and development and
our state-of-the-art design and production capabilities. In fiscal 2002 we
completed the expansion of our facilities in Lancaster, Pennsylvania, including
state-of-the-art manufacturing capacity, where we now have a full range of
capabilities including long and short run production, hardware assembly and
full-service engineering. In addition, we have highly capable manufacturing
facilities located in Woburn, Massachusetts; Farmingdale, New York; Whippany,
New Jersey; Melbourne, Florida; Aldershot, England; and Jerusalem, Israel. We
continue to develop and reward our engineers in order to maintain our expertise
in-house.
- - HIGH PROPORTION OF LONG-TERM SOLE-PROVIDER PRODUCTION PROGRAMS. We generate a
significant proportion of our revenue from continuing, long-term programs, both
in the production and upgrade phases, and continue to target high growth, high
priority defense programs. Typically, on such long-term defense programs we are
the sole provider of microwave equipment.
- - DIVERSE PRODUCT AND CUSTOMER BASE. We have a diverse product and customer
base, with only the U.S. Government at approximately 17%, and Raytheon at
approximately 10%, representing 10% or more of our fiscal 2004 revenues. We are
a first-tier supplier to all of the prime defense contractors, as well as a
direct supplier to all of the service branches of the U.S. military, including
products found on over 120 individual platforms. Foreign customers accounted for
approximately 32% of our revenues in fiscal 2004.
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- - LONG-STANDING INDUSTRY RELATIONSHIPS. We have established long-standing
relationships with the U.S. Government and other key organizations in the
aerospace and defense industry after 38 years in the defense electronic
industry. Over this period, we have become recognized for our ability to develop
new technologies and meet stringent program requirements.
- - SUCCESSFUL ACQUISITION TRACK RECORD. We have demonstrated that we can
successfully integrate acquired companies. We are experienced at evaluating
prospective operations in order to increase efficiencies and capitalize on
market and technological synergies.
- - EMPHASIS ON RESEARCH AND DEVELOPMENT. In fiscal year 2004, we spent
approximately $11.1 million on new product development, of which our customers
funded approximately $5.7 million. Our emphasis on new product development
enables us to maintain our technological leadership in current products and to
develop new capabilities. This spending helps solidify and strengthen our
position on different programs and may serve as a barrier to entry for
competitors.
- - EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over 23 years
of experience in the defense electronics industry.
PRODUCTS AND SERVICES
We are a leading supplier of microwave products and systems to defense and
aerospace entities worldwide. We design and manufacture microwave components and
subassemblies which are embedded in a variety of radars, flight instrumentation,
weapons sensors, electronic warfare systems and guidance systems. Our microwave
devices are used on our subassemblies and integrated systems (e.g. command and
control systems, telemetry systems, transponders, flight termination receivers
and identification friend or foe, or IFF, interrogators), in addition to being
sold on a component basis.
The following are descriptions of our major systems and products:
Telemetry Systems. Telemetry systems provide wireless data transmission between
two or more sites for recording and analysis. Missile, UAV, or target testing on
domestic and international test ranges requires flight safety and performance
data transmission to maximize flight safety during the test operation.
Surveillance and intelligence gathering UAVs also require a data transmission
downlink and a command and control systems uplink to accomplish their mission.
We have developed a telemetry system capability that can be configured to meet
individual customers' needs. Various components of the system include data
encoders, transmitters and flight termination receivers. Each has a distinctive
role and each is key to the success of the mission.
We are a leading manufacturer of Pulse Code Modulation, or PCM, and Frequency
Modulation, or FM, telemetry and data acquisition systems for severe environment
applications, and our products are used worldwide for testing space launch
vehicle instrumentation, aircraft flight testing, and amphibian, industrial and
automotive vehicle testing. The product portfolio ranges in size and complexity
from miniature encoders to completely programmable data acquisition systems.
We offer a complete airborne data link system. With our digital capability in
data encoding and acquisition elements combined with our radio frequency
capability in providing telemetry transmitters and flight termination receivers,
we offer a full line of narrow and wide-band airborne telemetry systems to meet
a wide variety of industrial needs, both domestically and internationally.
Command and Control Systems. Our command and control ("C2") systems principally
are used to fly remotely a large variety of unmanned aerial vehicles, or UAVs,
typically aircraft used as target drones or Remotely Piloted Vehicles, or RPVs.
Our C2 systems also control surface targets. Operations have been conducted by
users on the open ocean, remote land masses, and instrumented test and training
ranges. Our C2 systems are currently in service throughout the world. C2 systems
permit a ground operator to fly a target or a UAV through a pre- planned
mission. The mission may be for reconnaissance, where the vehicle is equipped
with high definition
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TV sensors and the necessary data links to send information back to its C2
systems ground station. The UAV may also be used as a decoy, since the operator
can direct the flight operations that will make the small drone appear to be a
larger combat aircraft.
Our MAGIC2 system affords over-the-horizon C2 using GPS guidance and control of
multiple targets from a single ground station. The ability to control multiple
targets at increased distances represents a significant product improvement. The
MAGIC2 is a highly flexible, multiple processor design with high resolution
graphics, which can be field-configured within minutes to fly or control any
selected vehicle for which it is equipped. The MAGIC2 is used in support of
missile, aircraft and other weapons systems development and testing. The system
meets a growing requirement to test against multiple threats with the automated
defense capabilities of ships like the AEGIS cruiser and the E-2C aircraft.
In September 2004, we closed on the purchase of Reliable System Services
Corporation ("RSS"). In addition to complementing and adding to our capabilities
in Telemetry, Electronic Warfare ("EW") Simulation Equipment, EW Jamming
Equipment and Range Safety Commanding applications, RSS will significantly
enhance our C2 capabilities for UAV platforms, in that RSS provides a C2 system
for UAVs that operates through the Iridium satellite system. The RSS Iridium
based C2 system provides secure (encryption, anti-spoof) global service
coverage, allowing multiple target operations. The addition of this RSS Iridium
based alternate for UAV C2 systems will enable us to provide a broader array of
systems configuration solutions to our defense industry customers.
Transponders. We manufacture a variety of expendable transponders, including
range safety, IFF, command and control, and range scoring systems. Transponders
are small, expendable, electronic systems consisting of a transmitter, sensitive
receiver and internal signal processing equipment comprised of active and
passive components, including microwave subassemblies such as amplifiers,
oscillators and circulators. The transponder receives signals from radars,
changes and amplifies the frequency of the signals, and transmits back a reply
on a different frequency and signal level. This reply is a strong, noise-free
signal upon which the tracking radar can "lock," and one which is far superior
to skin reflection tracking, particularly under adverse weather conditions after
the launch.
In range safety applications, transponders enable accurate tracking of space
launch and unmanned aerial vehicles, missiles, and target drones so that
position and direction are known throughout its flight. In the case of several
defense and commercial space launch vehicles (i.e., Delta, Atlas, Titan and
Pegasus), our transponder is tracked by the ground launch team all the way to
space orbit, and in certain instances through several orbits, as a reference
location point in space to assure that the launch payload has been properly
placed in orbit.
IFF transponders, which are used in conjunction with the Federal Aviation
Authority Air Traffic Control System, enable ground controllers to identify the
unmanned targets, drones and cruise missiles on which these units fly and to
vector other manned aircraft safely away from the flight path of the unmanned
aerial vehicle.
Command and control transponders provide the link through the telemetry system
for relaying ground signals to direct the vehicle's flight. The uplink from the
ground control station, a series of coded pulse groups, carries the signals that
command the flight control guidance system of the vehicle. The downlink to the
ground provides both tracking signals for range safety, as well as
acknowledgment and status of the uplink commands and their implementation in the
vehicle. The transponder is therefore the means to fly the vehicle. Scoring
systems are mounted on both airborne and sea targets. Scoring systems enable
test and evaluation engineers to determine the "miss-distance" between a
projectile and the target at which it has been launched.
Flight Termination Receiver. A flight termination receiver, or FTR, is installed
in a test missile, UAV, target or space launch vehicle as a safety device. The
FTR has a built-in decoder that enables it to receive a complex series of audio
tones which, when appropriate, will set off an explosive charge that will
destroy the vehicle. A Range Safety Officer, or RSO, using the range safety
transponder will track the vehicle in flight to determine if it is performing as
required. If the RSO detects a malfunction in the test or launch vehicle that
causes it to veer
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from a planned trajectory in a manner that may endanger personnel or facilities,
the RSO will transmit a coded signal to the onboard FTR to explode the vehicle.
HF Communications and IFF Interrogators. We design and manufacture high
frequency radio and IFF interrogators. This high frequency communications
equipment is used by the U.S. Navy and foreign navies that conduct joint
military exercises with the U.S. Navy. The IFF interrogators are used as part of
shipboard equipment and are also placed on coastlines, where they are employed
as silent sentries. We have been a significant supplier to the Republic of Korea
for over twenty years and have a large, established installed base of equipment.
We have been, and continue to be, a supplier to the Republic of Korea KDX
destroyer program.
High Power Amplifier. We design and manufacture high power amplifier systems
with frequencies ranging from 1.5 Megahertz (" MHz") to 12 GHz with power levels
from multi-kilowatts up to 15W, depending on the frequency. Our high power
amplifier applications include but are not limited to defense communication,
electronic warfare, radar and avionics. We have an exclusive sales and marketing
agreement through MRCM GmbH, Germany for high power amplifiers used in
monitoring, reconnaissance and countermeasures.
Microwave Integrated Circuits. We design and manufacture complex microwave
integrated circuits, or MICs, which consist of sophisticated assemblies that
perform many functions, primarily involving switching of microwave signals. Our
MICs are employed in many defense electronics systems and missile programs.
High/Low Power Integrated Assembly. Our high power microwave devices are used in
radar system transmitters and in long-range missiles. High power devices
frequently use small amounts of nuclear material to enhance breakdown of high
energy pulses, and we are one of very few companies with an active nuclear
license that permits the handling of these trace amounts of nuclear materials.
There are relatively few companies with the expertise or facilities to design,
manufacture and test high power devices. We also produce lower power, broad band
microwave integrated assemblies for the defense electronics industry. These
complex assemblies combine microwave functions such as amplification,
attenuation, switching of multiple signals, and phase and amplitude control.
Their applications include Rear Warning Receivers, or RWRs, Electronics
Countermeasure, or ECM, systems and highly sensitive receiver systems.
Solid State Receiver Protector. We have become a preeminent supplier of
solid-state receiver protector devices that are able to withstand high energy
pulses without the use of nuclear materials. These high power devices protect a
radar receiver from transient bursts of microwave energy and are employed in
almost every military and commercial radar system. For our engineering efforts
in designing solid-state receiver protectors for the F- 16, we received cash
awards from the United States Air Force as part of the government's value
engineering program.
Digitally Tuned Oscillators (DTO's). We produce microwave sources, which
generate signals that are used in microwave oscillators. Our microwave sources
are sold to the U.S. defense industry and to various foreign governments. We
specialize in digitally tuned oscillators, or DTOs, a critical component in many
ECM systems.
Simulation Equipment. EW Simulation Technology Limited ("EWST"), a U.K. company
and wholly owned subsidiary, designs and manufactures radar threat and
electronic countermeasures simulation equipment for electronic warfare training
and test and evaluation applications. Radar threat and countermeasures simulator
products include but are not limited to the following:
CHAMELEON is a real time electronic countermeasures ("ECM") jamming simulator.
It uses a variety of ECM techniques and radar target modeling for training and
testing of both radar and EW operators and systems. The system offers a fully
programmable ECM capability using Digital RF Memories ("DRFM") technology; and
offers fully coherent jamming in both range and velocity through the use of
8-bit DRFM technology together with GUI software. The CHAMELEON is suited for
ground-based and airborne ECM test and training systems.
The RSS8000 Series Radar Threat Simulator generates real-time user programmable
radar threats and provides output configurations in digital (On-board
trainer-OBT) and RF (RSS series) formats. The system can be used
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for EW system test and evaluation as well as for EW operator training in
laboratory and more rugged environments. The RSS8000 equipment covers the 100MHz
to 40 GHz range and can be configured to suit any application from a portable
single RF source unit to a multiple RF source and multiple port DF system. The
DF systems are available in amplitude, DTOA and/or phase formats with the ports
being capable of angular rotation.
Mobile EW and Radar Test Systems ("MERTS") is a mobile EW and radar test system
providing complete jamming and radar threat test facility for field use. It
provides a turnkey test and evaluation equipment for field applications and
includes both the CHAMELEON and RSS8000 systems integrated into one operational
unit. The MERTS equipment is housed within an air-conditioned ISO container
mounted on a four-wheel drive truck that allows on-site test and evaluation of
radar and EW systems as well as operator training.
Scientific Products. Our scientific products are used extensively in Nuclear
Magnetic Resonance (NMR) systems. These amplifiers, which have dual mode
capability and can be operated in either a pulsed or continuous wave, cover the
frequency ranges of 6 MHz to 950 MHz, with power levels as high as 2.0KW peak
power at 10% duty cycle. Scientific customers include Original Equipment
Manufacturers ("OEM"), system manufacturers and research centers.
Medical Products. Our medical products vary in complexity from single modules,
to rack mounted amplifiers, to complete systems. The rack-mounted amplifiers and
complete systems typically include detection/protection circuitry, built-in
power supplies, front panel metering and digital and/or analog interface
controls. Both forced air and/or water cooling are used, depending on the
customer's requirements. Our medical products are used in Magnetic Resonance
Imaging, or MRI, systems. All amplifiers have dual mode capability and can be
operated in either a pulsed or continuous wave mode, and cover the frequency
ranges of 10 MHz to 200 MHz with power levels as high as 12.0KW peak power at
10% duty cycle. Medical customers include both OEM, as well as universities and
research centers.
All products feature highly reliable technical solutions designed for improved
production and reliability. Producibility is enhanced through the use of surface
mount components and circuit designs which eliminate the need for excessive
alignment during the production cycle. High reliability is achieved through the
implementation of conservative thermal and RF circuit design and sophisticated
self-protection schemes. Reliability is further enhanced during the design phase
by employing detailed environmental testing.
CUSTOMERS
During the fiscal year ended August 1, 2004, approximately 17% of our net sales
were attributable to contracts with offices and agencies of the U.S. Government,
and Raytheon accounted for approximately 10% of net sales. No other customers
accounted for shipments of 10% or more of net sales.
We provide defense electronics equipment to major defense prime contractors for
integration into larger platforms and systems. Some of our customers for defense
electronics equipment include:
Boeing BAE Systems Harris
Lockheed Martin Northrop Grumman Raytheon
During fiscal 2004, sales to foreign customers accounted for approximately 32%
of our net sales. Domestic sales to foreign customers accounted for 15% of net
sales. Sales from England were 7%, and Israel 10% of net sales to foreign
customers. The governments of Egypt, Japan, South Korea, Taiwan and the United
Kingdom are all significant customers of ours. All of our domestic contracts
with foreign customers are payable in U.S. dollars. Contracts with customers
originating in Israel and England are either in U.S. dollars or the local
functional currency. International sales are subject to numerous risks,
including political and economic instability in foreign markets, currency and
economic difficulties in the Pacific Rim, restrictive trade policies of foreign
governments, inconsistent product regulation by foreign agencies or governments,
imposition of product tariffs and burdens and costs of complying with a wide
variety of international and U.S. export laws and regulatory requirements. Our
international sales also are subject to us obtaining export licenses for certain
products and
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systems.
SALES AND MARKETING
We market our products worldwide to the United States Government, prime
contractors and various countries in defense markets, and to OEM, research
institutions and universities in commercial markets. Sales are primarily through
a sales force generally organized by geographic territory and markets. In
addition, we have contracts with manufacturers' representatives in the United
States and international representatives who are located in Western Europe, the
Middle East and Asia. As part of our marketing efforts, we advertise in major
trade publications and attend major industrial shows in the commercial, medical,
satellite communications and defense markets.
After we have identified key potential customers, we make sales calls with our
own sales, management and engineering personnel. In order to promote widespread
acceptance of our products and provide customers with support, our sales and
engineering teams work closely with our customers to develop tailored solutions
to their requirements. We believe that our customer engineering support provides
us with a key competitive advantage.
We also produce microwave components that are sold through our catalog, which
for almost forty years has been an industry leader, and sell attenuating devices
and IQ modulation and phase shifters through the microwave engineer's handbook.
MANUFACTURING
We manufacture our products from standard components, as well as from items that
are manufactured by vendors to our specifications. A majority of our defense
electronics and commercial assemblies and subsystems contain proprietary
technology which is designed and tested by our engineers and technicians and is
manufactured at our own facilities.
We continue to invest in improving our proprietary manufacturing processes and
the automation of the manufacturing processes. Automation is critical in meeting
our customers' demands for price competitiveness, world class quality and
on-time delivery. We are also investing to enhance our responsiveness to the
production demands of our customers.
We purchase electronic components and other raw materials used in our products
from a large number of suppliers and all such materials are readily available
from alternate sources.
We maintain minimal levels of finished products inventory to meet the needs of
our medical products customers. We generally purchase raw materials for specific
contracts, and we purchase common components for stock based on our firm fixed
backlog.
There are no significant environmental control procedures required concerning
the discharge of materials into the environment that require us to invest in any
significant capital equipment or that would have a material effect on our
earnings or our competitive position.
Quality assurance checks are performed on manufacturing processes, purchased
items, work-in-process and finished products. Due to the complexity of our
products, final tests are performed on some products by highly skilled engineers
and technicians.
Our primary manufacturing facilities have earned the ISO 9001 Registration. The
ISO 9000 series standards are internationally recognized quality management
system requirements. ISO 9001, the most comprehensive Standard in the ISO 9000
Series, covers design, manufacturing, installation, and servicing systems.
8
Assembly, test, package and shipment of products are done at our manufacturing
facilities located in the following cities:
Lancaster, Pennsylvania
Farmingdale, New York
Woburn, Massachusetts
Whippany, New Jersey (acquired in March 2004)
Melbourne, Florida (acquired in September 2004)
Jerusalem, Israel
Aldershot, England
BACKLOG
Our total backlog of orders was approximately $100 million on August 1, 2004 as
compared to approximately $90 million on August 3, 2003. Of our total backlog at
August 1, 2004, $71 million (71%) is attributable to domestic orders and $29
million (29%) is attributable to foreign orders. Management anticipates that
approximately 88% of this backlog will be shipped during the fiscal year ending
July 31, 2005.
All of the orders included in backlog are covered by signed contracts or
purchase orders. Backlog is not directly indicative of future sales.
Accordingly, we do not believe that our backlog as of any particular date is
representative of actual sales for any succeeding period.
Substantially all of our contracts are fixed price contracts, some of which
require delivery over time periods in excess of one year. With this type of
contract, we agree to deliver products at a fixed price except for costs
incurred because of change orders issued by the customer.
In accordance with Department of Defense procedures, all contracts involving
government programs may be terminated by the government, in whole or in part, at
the government's discretion for cause or convenience. In the event of a
termination for convenience, prime contractors on such contracts are required to
terminate their subcontracts on the program, and the government or the prime
contractor is obligated to pay the costs incurred by us under the contract to
the date of termination plus a fee based on the work completed.
PRODUCT DEVELOPMENT
We believe that our growth depends, in part, on our ability to renew and expand
our technology, products, and design and manufacturing processes with an
emphasis on cost effectiveness. We focus our primary efforts on engineering
design and product development activities rather than pure research. Our policy
is to assign the required engineering and support people, on an ad hoc basis, to
new product development as needs require and budgets permit. The cost of these
development activities, including employees' time and prototype development, was
approximately $11.1 million in fiscal 2004, $6.3 million in fiscal 2003 and $5.6
million in fiscal 2002. The portion of these costs not reimbursed by customers
was approximately $5.4 million in fiscal 2004, $3.1 million in fiscal 2003 and
$2.3 million in 2002. These increases in development spending were undertaken to
continue to provide future business opportunities for the Company. Future
product development costs will depend on the availability of appropriate
development opportunities within the markets served by the Company.
COMPETITION
The microwave component and subsystems industry is highly competitive and we
compete against many companies, both foreign and domestic. Many of these
companies are larger, have greater financial resources and are better known. As
a supplier, we also experience significant competition from the in-house
capabilities of our customers.
Competition is generally based upon technology, design, past performance and
price. Our ability to compete depends, in part, on our ability to offer better
design and performance than our competitors and our readiness
9
in facilities, equipment and personnel to complete the programs. Many of the
programs in which we participate are long standing programs in which we are the
sole provider of our product.
GOVERNMENT REGULATION
Because of our participation in the defense industry, we are subject to audits
by various government agencies for our compliance with government regulations.
We are also subject to a variety of local, state and federal government
regulations relating to, among other things, the storage, discharge, handling,
omission, generation, manufacture and disposal of toxic or other hazardous
substances used to manufacture our products. We believe that we operate our
business in material compliance with applicable laws and regulations. However,
any failure to comply with existing or future laws or regulations could have a
material adverse impact on our business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
We rely primarily on a combination of trade secrets and employee and third-party
non-disclosure agreements to protect our intellectual property, as well as
limiting access to the distribution of proprietary information. We cannot assure
you that the steps taken to protect our intellectual property rights will be
adequate to prevent misappropriation of our technology or to preclude
competitors from independently developing such technology. Furthermore, we
cannot assure you that, in the future, third parties will not assert
infringement claims against us with respect to our products. Asserting our
rights or defending against third party claims could involve substantial costs
and diversion of resources, thus materially and adversely affecting our
business, financial condition and results of operations. In the event a third
party were successful in a claim that one of our products infringed its
proprietary rights, we may have to pay substantial royalties or damages, remove
that product from the marketplace or expend substantial amounts in order to
modify the product so that it no longer infringes on such proprietary rights,
any of which could have a material adverse effect on our business, financial
condition and results of operations.
EMPLOYEES
As of August 1, 2004 we had 832 employees. We believe that our employee
relations are satisfactory. None of our approximately 690 U.S. based employees
are represented by a labor union. Employment by functional area as of August 1,
2004 is as follows:
Executive 10
Administration 41
Manufacturing 578
Engineering 160
Sales and Marketing 43
----
Total 832
===
We believe that our future success will depend, in part, on our continued
ability to recruit and retain highly skilled technical, managerial and marketing
personnel, including microwave engineers. To assist in recruiting and retaining
such personnel, we have established competitive benefits programs, including a
401(k) employee savings plan for our U.S. employees, and stock option plans.
10
OFFICERS OF THE REGISTRANT
Name Age Served as Officer Since Position(s) and Offices
- ---- --- ----------------------- -----------------------
Lee N. Blatt 76 1965 Chairman of the Board
Myron Levy 63 1988 Vice Chairman, Chief
Executive Officer, and
Director
John M. Kelley 51 1998 President
William Wilson 56 2002 Vice President and
Chief Operating Officer
Thomas V. Gilboy 50 2004 Vice President and
Chief Financial Officer
Rozalie Schachter 58 2000 Vice President - Business
Development
Anello C. Garefino 57 1993 Vice President - Finance
John A. Carroll 53 2003 Vice President - Human
Resources
Richard Poirier 39 2003 Vice President
Item 2. Properties
Our facilities are as follows:
Owned
or
Location Purpose of Property Area Leased
- -------- ------------------- ------- ------
Lancaster, PA Corporate headquarters 3,300 sq. ft. Leased
Lancaster, PA Production, engineering and administration 86,200 sq. ft. Owned
Woburn, MA Production, engineering and administration 60,000 sq. ft. Owned
Farmingdale, NY (1) Production, engineering and administration 46,000 sq. ft. Leased
14,000 sq. ft. Leased
Whippany, NJ (2) Production, engineering and administration 23,000 sq. ft. Leased
Melbourne, FL (3) Production, engineering and administration 12,000 sq. ft. Leased
Jerusalem, Israel Production, engineering and administration 20,000 sq. ft. Owned
Aldershot, England (4) Production, engineering and administration 6,300 sq. ft. Leased
Chicago, IL Engineering and administration 3,000 sq. ft. Leased
Lancaster, PA Land held for expansion 20.4 Acres Owned
- --------------
(1) On September 23, 1999 we 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 two 10 year lease agreements with a
partnership owned by the children of Messrs Blatt and Levy. The leases provide
for initial minimum annual rent of approximately $312,000 and $92,000,
respectively, in each case subject to escalation of approximately 4% annually
throughout the 10 year term.
(2) We entered into an agreement as of March 29, 2004 to acquire certain
assets and the business of Communication Techniques, Inc. as discussed in Note B
of the financial statements.
(3) As of September 1, 2004, we entered into an agreement to acquire
certain assets and the business of Reliable System Services Corporation as
discussed in Note S of the financial statements.
(4) As of September 1, 2002, we entered into an agreement to acquire all of
the issued and outstanding common stock of EW Simulation Technology, Limited as
discussed in Note B of the financial statements.
We believe that these facilities are adequate for our current and presently
anticipated future needs.
11
Item 3. Legal Proceedings
On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson
("Robinson") filed an Amended Complaint against Herley Industries, Inc.
("Herley"). Although the Amended Complaint sets forth fifteen counts, the core
allegations are (i) that Herley failed to issue 97,841 shares of common stock in
connection with certain earn out requirements contained in an Asset Purchase
Agreement dated February 1, 2000; (ii) that Herley breached an Employment
Agreement with Robinson by terminating his employment on August 5, 2001; and
(iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with
Robinson. RLI and Robinson asserted (i) violations of state and federal
securities laws; (ii) fraud claims; (iii) breach of contract claims; and (iv)
other equitable claims arising from the above core factual allegations.
On September 17, 2001, Herley filed an Answer, Affirmative Defenses and
Counterclaims in this matter. In the Answer and Affirmative Defenses, Herley
denied the material allegations of the Amended Complaint. Herley also filed
Counterclaims against both RLI and Robinson. In these counterclaims, Herley's
core allegations concern Robinson's misconduct (i) in connection with the manner
he attempted to satisfy RLI's earn out requirements; (ii) misrepresentations
made in connection with the Asset Purchase Agreement; (iii) wrongdoing as a
Herley employee leading to his termination and (iv) post-Herley employment
wrongdoing in connection with a new company known as RH Laboratories. In
addition to seeking a Declaratory Judgment pursuant to 28 U.S.C. ss. 2201 et.
seq., Herley also asserted claims for, among other things, fraud, breach of
contract, breach of fiduciary duty, unfair competition and tortious interference
with actual and prospective contractual relationships.
On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August
21, 2002 in which the jury determined, among other things, that (i) Herley was
not required to pay any additional stock; (ii) Herley breached the Employment
Agreement with Robinson and awarded Robinson $1.5 million in damages; (iii)
Herley breached the Lease Agreement with Robinson and awarded Robinson
approximately $552,000 in compensatory damages; (iv) Robinson breached fiduciary
duties to Herley and awarded Herley $400,000 in compensatory damages; (v)
Robinson and RLI breached indemnity obligations and awarded Herley $100,000 in
damages; (vi) RLI breached representations and warranties given to Herley and
awarded Herley $320,000 in damages.
On October 18, 2002, the Court entered a final judgment consistent with the
above, and both parties filed post- trial motions. Additionally, as the
prevailing party in connection with the claims asserted by RLI relating to the
earn-out stock, as well as claims advanced relating to the various breaches of
the Asset Purchase Agreement, Herley filed a petition for fees and costs against
both RLI and Robinson on November 27, 2002 for approximately $2,000,000. RLI and
Robinson also filed petitions to recover attorney's fees of approximately
$240,000 for certain claims in which they contend that they were the prevailing
party. On February 5, 2003, the Court denied the post-trial motions filed by the
parties, thus leaving the jury verdict undisturbed.
At a proceeding on April 28, 2003, the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order dated May 6, 2003, the Court denied without prejudice all of the
parties' petitions. On May 12, 2003, Herley filed its appeal to the United
States Court of Appeals for the Second Circuit. On May 28, 2003, RLI filed a
notice of cross-appeal. Robinson did not appeal. Herley filed its brief in
support of its appeal before the Second Circuit on August 22, 2003. RLI timely
filed its brief in response to Herley's appeal and in support of RLI's
cross-appeal. Herley timely filed a response to RLI's brief and thereafter RLI
timely filed a response to Herley's brief. Oral argument was held on December
18, 2003.
By Summary Order on January 26, 2004, the Second Circuit affirmed the trial
court judgment in its entirety. On February 4, 2004, RLI submitted a letter
request to the trial court for relief from the judgment on RLI's claim for the
earn-out stock under Federal Rule of Civil Procedure 60. RLI contended that it
has "newly discovered evidence," first learned in August 2003, to justify its
requested relief. Herley submitted its response in opposition by letter dated
February 10, 2004. On February 26, 2004, the parties appeared before the Court
concerning the various applications and were directed to submit legal briefs on
various legal issues. By Order dated May 28, 2004 the trial court denied RLI's
Motion for a New Trial. The Court also denied Herley's request that it exercise
its general equitable power to hold Ben Robinson personally liable for any fees
Herley might recover against RLI.
12
On June 28, 2004, Herley filed suit against Ben Robinson and Frank Holt in the
Superior Court of Hillsborough County, New Hampshire, asserting claims for
fraudulent conveyance and piercing the corporate veil to hold Robinson
personally liable for the fees incurred by Herley in defending RLI's claims
discussed above. In response, Robinson took steps to collect damages awarded to
him under the jury verdict. On July 21, 2004, Herley brought an Emergency Motion
for Injunctive Relief and moved for an immediate order from the New Hampshire
court allowing Herley to escrow the judgment owed to Robinson to be offset
against any award of fees to Herley. The court entered an order denying the
requested relief. On July 27, 2004, Herley paid $1,594,621 (including interest)
to Ben Robinson, an amount calculated by deducting Herley's award against
Robinson from the amounts awarded to Robinson on his claims under the Employment
Agreement and the Lease Agreement. On July 28, 2004, the parties filed a Notice
of Partial Satisfaction of Judgment. Herley's judgment against RLI remains
unsatisfied. Cross petitions for attorney's fees are still pending.
We are involved in various other legal proceedings and claims. While any legal
proceedings or claims contain an element of uncertainty, we believe that the
outcome of such legal proceedings or claims will not have a material adverse
effect on the Company's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
13
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities.
(a) Our Common Stock is traded in the NASDAQ National Market under the
symbol HRLY. The following table sets forth the high and low closing
sales price as reported by the NASDAQ National Market for our Common
Stock for the periods indicated.
Common Stock
------------
High Low
---- ---
Fiscal Year 2003
First Quarter............................................. $ 21.30 $ 14.50
Second Quarter............................................ 18.54 14.00
Third Quarter............................................. 17.43 13.06
Fourth Quarter............................................ 18.56 14.50
Fiscal Year 2004
First Quarter............................................. 20.55 17.50
Second Quarter............................................ 22.85 18.24
Third Quarter............................................. 21.90 18.88
Fourth Quarter............................................ 21.92 18.50
Fiscal Year 2005
First Quarter (through October 11, 2004).................. 19.77 17.45
The closing price on October 11, 2004 was $18.89.
As of October 1, 2004, there were approximately 210 holders of record of
our Common Stock.
There have been no cash dividends declared or paid by us on our Common
Stock during the past two fiscal years.
(b) Not applicable.
(c) We did not repurchase any of our Common Stock during the fourth quarter
of fiscal 2004.
14
Item 6. Selected Financial Data (in thousands except per share data):
52 weeks 53 weeks 52 weeks ended
ended ended ----------------------------------
August 1, August 3, July 28, July 29, July 30,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net sales (3) $ 122,154 110,223 92,881 76,494 70,537
Income from continuing operations $ 13,673 13,937 10,730 7,573 7,639
Loss from discontinued operations $ - - (921) (168) -
Cumulative effect of adopting SFAS 142 $ - - (4,637) - -
Net income $ 13,673 13,937 5,172 7,405 7,639
Per share data from continuing operations (1) (2)
Basic $ .97 .97 .89 .75 1.05
Assuming Dilution $ .92 .93 .83 .69 .96
Total Assets $ 220,971 197,564 190,202 114,597 86,656
Total Current Liabilities $ 23,846 18,125 14,557 17,976 12,239
Long-Term Debt net of current portion $ 5,845 6,403 5,684 2,740 2,931
Other Long-Term Liabilities $ 932 849 706 756 544
(1) Earnings per share from continuing operations are presented and
calculated before discontinued operations in 2002 and 2001, and before
cumulative effect of accounting change in 2002.
(2) No cash dividends have been distributed in any of the years presented.
(3) See "Acquisitions" under Item 1. "Business".
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
We are a leading supplier of microwave products and systems to defense and
aerospace entities worldwide. Our primary customers include large defense prime
contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing),
the U.S. Government (including the Department of Defense, NASA and other U.S.
Government agencies) and international customers (including the Egyptian,
German, Japanese and South Korean militaries and suppliers to international
militaries). We are a leading provider of microwave technologies for use in
command and control systems, flight instrumentation, weapons sensors and
electronic warfare systems. We have served the defense industry since 1965 by
designing and manufacturing microwave devices for use in high technology defense
electronics applications. Our products and systems are currently deployed on a
wide range of high profile military platforms, including the F-16 Falcon, the
F/A-18E/F Super Hornet, the RC-135 Rivet Joint, the E-2C Hawkeye, the AEGIS
class surface combatants, the EA-6B Prowler, the AMRAAM air to air missile, and
unmanned aerial vehicles, or UAVs, as well as high priority national security
programs such as National Missile Defense and the Trident II D-5.
The following table sets forth for the periods indicated certain financial
information derived from our consolidated statements of income expressed as a
percentage of net sales. There can be no assurance that trends in sales growth
or operating results will continue in the future.
52 weeks 53 weeks 52 weeks
ended ended ended
August 1, August 3, July 28,
2004 2003 2002
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 65.1% 66.4% 66.7%
----- ---- ----
Gross profit 34.9% 33.6% 33.3%
Selling and administrative expenses 17.3% 14.7% 14.3%
Litigation costs 1.6% 1.1% 2.2%
Plant closing costs - - 0.4%
---- ---- ----
Income from operations 16.0% 17.8% 16.4%
---- ---- ----
Other income (expense), net:
Investment income 0.6% 1.0% 0.8%
Interest expense (0.3)% (0.3)% (0.4)%
Foreign exchange (loss) (0.1)% - -
--- --- -----
0.1% 0.7% 0.4%
--- --- ----
Income from continuing operations before
income taxes 16.2% 18.5% 16.8%
Provision for income taxes 5.0% 5.9% 5.2%
---- ---- -----
Income from continuing operations 11.2% 12.6% 11.6%
Loss from discontinued operations - - 1.0%
---- ---- -----
Income before cumulative effect of change
In accounting principle 11.2% 12.6% 10.6%
Cumulative effect of adopting SFAS 142 - - (5.0)%
---- ---- -----
Net income 11.2% 12.6% 5.6%
==== ==== ===
16
Fiscal 2004 Compared to Fiscal 2003
Net sales for the 52 weeks ended August 1, 2004 were approximately $122,154,000
compared to $110,223,000 for fiscal 2003. The net sales increase of $11,931,000
(11%) is attributable to increased revenue in defense electronics microwave
systems and components of $9,426,000 (including $1,078,000 attributable to the
acquisition of CTI as of March 29, 2004). This increase also includes revenue
from products shipped under new programs as well as increases on legacy products
and programs. Net sales in commercial technologies increased by $2,505,000,
which includes revenue attributable to the acquisition of CTI of $3,045,000,
offset by a decrease of $540,000 in medical and scientific products due to the
decline in demand in the industry for Magnetic Resonance Imaging and Nuclear
Magnetic Resonance systems. As a result, we expect revenues in medical and
scientific products to remain relatively flat.
The gross profit margin for the 52 weeks ended August 1, 2004 was 35% as
compared to the margin of 34% in fiscal 2003. Gross profit increased $5,648,000
primarily as a result of increased volume over fiscal 2003 and greater
absorption of fixed costs. Margins also improved in microwave components due to
production efficiencies, including the automation of certain processes. This
improvement was offset by lower margins on revenue relating to engineering
programs which are essential for long-term technology development and future
revenue growth. In addition, consolidated gross profit margins were negatively
impacted by approximately one half percent due to revisions in total cost
estimates (including the effect of foreign exchange translations on non-
Sterling denominated contracts) at our EWST subsidiary in the UK.
Selling and administrative expenses for the fifty-two weeks ended August 1, 2004
were 17% of net sales as compared to 15% in fiscal 2003. There was a net
increase in expenses of $4,936,000 which includes expenses of CTI of
approximately $900,000, an increase in incentive compensation under employment
contracts and discretionary bonuses of $320,000, and additional administrative
and business development personnel and related costs of $2,019,000. The Company
reorganized and expanded its business development group to focus and capitalize
on worldwide market opportunities for all of its products. Other increases
include amortization of acquired intangibles of $90,000, sales representative
fees and commissions of $623,000, and $303,000 in consulting fees primarily in
connection with our Sarbanes-Oxley, Section 404 preparation which will continue
in fiscal 2005.
Litigation costs in fiscal 2004 increased $777,000 from the level incurred in
fiscal 2003. These costs are directly related to the Robinson Labs litigation
and include a payment of the jury award to Ben Robinson of approximately
$1,595,000 in July 2004. We do not anticipate our litigation costs in connection
with this matter to be significant in the future. (See Item 3. "Legal
Proceedings").
Income from operations for the year was $19,602,000 or 16% of net sales, as
compared to $19,667,000 or 18% of net sales in fiscal 2003. The decrease in
operating income is primarily attributable to the increases in selling and
administrative expenses and litigation costs as discussed above. In addition,
our foreign operations contributed $3,017,000 in operating income for the year
as compared to $4,250,000 in fiscal 2003. Revenues from our foreign operations
decreased by $520,000 as compared to fiscal 2003. The drop in revenue and
operating income within our foreign operations was due to revisions in total
cost estimates (including the effect of foreign exchange translations on
non-Sterling denominated contracts) at our EWST subsidiary in the UK.
Investment income decreased by $439,000 in fiscal 2004 as a result of a 29%
decline in the rate of interest earned on the investment of excess cash reserves
during the 2004 fiscal year as compared to interest rates in fiscal 2003, and a
decrease on average of approximately $6,655,000 in funds invested.
17
The net foreign exchange loss of $194,000 in fiscal 2004 is attributable to the
weaker U.S. Dollar during the fiscal year causing our foreign denominated
liabilities to increase in value, and the U.S. Dollar denominated contracts in
the United Kingdom to decrease in value. In addition, we recorded an unrealized
gain on U.S. Dollar denominated loans to EWST which are expected to be repaid
during fiscal 2005. The realized and unrealized exchange gains and (losses) are
as follows:
Gain (Loss)
---------------------
Unrealized Realized
---------- --------
Foreign denominated liabilities $ (212,000) $ (56,000)
U.S. Dollar denominated contracts
In the United Kingdom (102,000)
Other foreign exchange transactions 23,000
U.S. Dollar denominated loans to EWST 153,000
------- ------
$ (161,000) $ (33,000)
======= ======
The effective income tax rate for fiscal 2004 was 30.8% as compared to 31.8% in
fiscal 2003. The overall effective tax rate is lower than the statutory income
tax rate of 35% in fiscal 2004 due to various favorable tax benefits including a
lower effective tax rate on foreign-source income, the tax benefit attributable
to extra territorial income, and research and development credits.
Fiscal 2003 Compared to Fiscal 2002
Net sales for the 53 weeks ended August 3, 2003 were approximately $110,223,000
compared to $92,881,000 for fiscal 2002. The net sales increase of $17,342,000
(19%) is attributable to increased revenue in defense electronics of $23,131,000
(including $11,212,000 through the acquisition of EWST); offset by a decrease of
$5,789,000 in commercial technologies.
Gross profit of 34% for the 53 weeks ended August 3, 2003 is slightly better
than the prior year of 33%. We benefited from increased absorption of fixed
overhead costs and production efficiencies, including automation of certain
processes. Offsetting these benefits was the increased investment in product
development up from approximately $2.3 million in fiscal 2002 to $3.1 million in
fiscal 2003. In addition, the margins on the EWST sales were lower than our
historical margins.
Selling and administrative expenses for the 53 weeks ended August 3, 2003 were
15% of net sales as compared to 14% in fiscal 2002. There was a net increase in
expenses of $2,958,000 which includes expenses of EWST of $1,096,000, and
increases in: incentive compensation under employment contracts of $1,072,000,
amortization of acquired intangibles of $217,000 related to EWST, audit and tax
fees of $134,000, payroll costs of $322,000, and travel expenses of $121,000;
offset by a decrease in commissions and fees of $174,000. Various other line
item expenses increased during the 53 weeks ended August 3, 2003 by $170,000 on
a net basis.
Litigation costs in fiscal 2003 decreased $932,000 from the fees incurred in
fiscal 2002. The litigation costs are directly related to the Robinson Labs
litigation. (See Item 3. "Legal Proceedings").
Plant closing costs in connection with the facilities in Nashua, NH and Anaheim,
CA were accrued in October 2001 in the amount of $406,000 of which $389,000 was
paid as of August 3, 2003.
Other income increased on a net basis approximately $383,000 from the prior year
primarily due to interest earned on the investment of cash reserves including
the proceeds of approximately $64,812,000 received from the sale of common stock
to the public at the end of April 2002.
The effective income tax rate for fiscal 2003 was 31.8% as compared to 31.2% in
fiscal 2002. The overall effective tax rate is lower than the statutory income
tax rate of 34% due to various favorable tax benefits including a lower
effective tax rate on foreign-source income and the tax benefit attributable to
extra territorial income.
18
Discontinued operations
We entered into an agreement effective as of the close of business September 30,
2000, to acquire all of the issued and outstanding common stock of Terrasat,
Inc. ("Terrasat"), a California corporation for cash in the amount of
$6,000,000, $3,000,000 of which was paid in December 2000 and $3,000,000 of
which was paid in December 2001. In addition, the agreement provided for
additional cash payments in the future up to $2,000,000, based on gross revenues
through December 31, 2001. The targeted gross revenues under the agreement were
not achieved, therefore no additional cash payments were required.
In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets and for long- lived assets to
be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
but retains the fundamental provisions of Statement 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. SFAS 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for segments of a business to be disposed of, but
retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations, and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. The provisions of
this statement were adopted by us effective on July 30, 2001.
In January 2002 we decided to discontinue the operations of Terrasat and to seek
a buyer for the business. We believed that Terrasat would not be able to
generate sufficient returns to justify continued investment due to the
overcapacity in the telecom industry and deteriorating economic conditions in
Terrasat's primary markets. Consequently, the accompanying consolidated
financial statements reflect Terrasat as discontinued operations in accordance
with SFAS No. 144. Results of operations and cash flows of Terrasat have been
classified as "Loss from discontinued operations," and "Net cash provided by
discontinued operations," respectively.
The sale of certain assets and liabilities, and the business of Terrasat was
consummated on March 1, 2002, effective the close of business January 27, 2002,
to certain current employees of Terrasat for cash and a note which approximates
the carrying value of the net assets held for sale as of January 27, 2002 of
$878,000.
Change in accounting principle
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142 "Goodwill and Other Intangible Assets" which requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill will not be amortized
into results of operations, but instead will be reviewed for impairment which
will be charged to results of operations in the periods in which the recorded
value of goodwill is more than its fair value. The provisions of this statement
were adopted by us on July 30, 2001. The adoption of SFAS No.142 resulted in our
discontinuation of amortization of goodwill as of July 30, 2001.
In connection with the adoption of SFAS 142, we were required to assess goodwill
for impairment within six months of adoption, and we completed our assessment in
the second quarter of fiscal 2002.
We operate as a single integrated business and as such have one operating
segment which is also the reportable segment as defined in SFAS 131. Within the
operating segment in fiscal 2001, we identified two components as reporting
units as defined under SFAS 142, 'defense electronics' and 'commercial
technologies.' We determined the carrying value of each reporting unit by
assigning assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of July 30, 2001. In January 2002, we
decided to discontinue the operations of Terrasat (the only business in the
commercial technologies reporting unit), and to
19
seek a buyer for the business. In connection with this decision in fiscal 2002,
we determined that an impairment of goodwill in the commercial technologies unit
had occurred. Accordingly, a transition adjustment in the amount of $4,637,000
was recorded as of July 30, 2001 as a cumulative effect of a change in
accounting principle. There was no tax benefit associated with the adjustment
since the impaired goodwill is not deductible for income tax purposes.
An impairment test based on a single reporting unit was performed in the fourth
quarter of fiscal 2004 using our current market capitalization, which in an
active market for our common stock, we consider a reasonable indication of
implied fair value. Based on this initial step in the test for impairment, we
concluded there was no impairment of goodwill at August 1, 2004. An annual
impairment test will be performed in the fourth quarter of each fiscal year, or
when an indication of impairment exists, and any future impairment of goodwill
will be charged to operations.
Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the 52 weeks ended August 1, 2004 and for the 53 weeks ended August 3, 2003 (in
thousands, except for per share data).
2004
----
November 2, February 1, May 2, August 1,
2003 2004 2004 2004
---- ---- ---- ----
Net sales $ 28,267 29,408 30,233 34,246
Gross profit 10,642 10,363 10,768 10,876
Net income $ 3,941 3,546 3,876 2,310
======= ======= ======= =======
Earnings per common share - Basic $ .28 .25 .27 .16
=== === === ===
Basic weighted average shares 14,013 14,073 14,129 14,205
====== ====== ====== ======
Earnings per common share - Diluted $ .27 .24 .26 .15
=== === === ===
Diluted weighted average shares 14,782 14,880 14,932 14,962
====== ====== ====== ======
2003
----
November 3, February 2, May 4, August 3,
2002 2003 2003 2003
---- ---- ---- ----
Net sales $ 27,290 25,015 26,897 31,021
Gross profit 9,191 8,673 8,851 10,286
Net income $ 3,352 3,287 3,359 3,939
======= ======= ======= =======
Earnings per common share - Basic $ .23 .23 .24 .28
=== ==== ==== ====
Basic weighted average shares 14,668 14,464 14,218 13,921
====== ====== ====== ======
Earnings per common share - Diluted $ .22 .22 .23 .27
==== ==== ==== ===
Diluted weighted average shares 15,506 15,124 14,848 14,600
====== ====== ====== ======
The fourth quarter has historically been our strongest quarter for shipments.
The third and fourth quarter of fiscal 2004 includes revenue attributable to the
acquisition of CTI of $1,116,000 and $3,007,000, respectively.
20
The gross margin percentage in the fourth quarter of 2004 was negatively
impacted (as compared to 2003) due to revisions in total cost estimates on
certain long term contracts at our EWST subsidiary, offset by an improvement in
margins at one of our other facilities in the U.S. due to costs incurred in last
year's fourth quarter in connection with the start up of a new product line at
that facility. In addition, the gross profit margin also varies from quarter to
quarter due to changes in product mix.
Included in the results of the fourth quarter of 2004 is a $1.6 million pretax
payment in connection with the Robinson Labs litigation. (See Item 3. "Legal
Proceedings").
Liquidity and Capital Resources
As of August 1, 2004 and August 3, 2003, working capital was $130,273,000 and
$128,462,000, respectively, and the ratio of current assets to current
liabilities was 6.5 to 1 and 8.1 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
progress payments. In addition, it is customary for us to receive advanced
payments from customers on major contracts at the time a contract is entered
into. The unliquidated balance of these advanced payments was approximately
$1,180,000 at August 1, 2004, and $856,000 at August 3, 2003.
Net cash provided by continuing operations was approximately $3,610,000 in
fiscal 2004 as compared to $14,567,000 in 2003. Significant items contributing
to the sources of funds include the following:
-------------------------------------- ----------------------------- -----------------------------------
Income from operations $17,917,000 in fiscal 2004 as As adjusted for depreciation and
compared to $18,239,000 in amortization.
fiscal 2003
-------------------------------------- ----------------------------- -----------------------------------
Increase in accounts payable and $3,431,000 Due to growth of business.
accrued expenses
-------------------------------------- ----------------------------- -----------------------------------
Increase in billings in excess of $1,303,000 Due to growth of business and in
costs incurred on certain contacts incorporating payments
uncompleted contracts in advance of costs incurred.
-------------------------------------- ----------------------------- -----------------------------------
The following major items offset the sources of funds noted above:
-------------------------- ------------- ---------------------------------------------------------------
Funds invested in $6,923,000 Due to growth of business.
increases in accounts
receivable
-------------------------- ------------- ---------------------------------------------------------------
Increase in costs incurred $7,250,000 Due to growth of business, including exercise of options on
and income recognized existing contracts, plus the impact of foreign exchange
in excess of billings on translation of costs on certain contacts at EWST to US
uncompleted contracts Dollars.
-------------------------- ------------- ---------------------------------------------------------------
Funds invested in $5,806,000 Due to growth of business, including engineering costs
increases in inventory incurred on new contracts with customers (such as the
ICAP program and certain high power amplifier contracts),
plus the impact of foreign exchange translation of inventory
costs at EWST to US Dollars.
-------------------------- ------------- ---------------------------------------------------------------
Costs incurred and income recognized in excess of billings on uncompleted
contracts are classified in the financial statements as current assets. We
expect to bill and collect substantially all costs incurred and income
recognized in excess of billings within one year. However, we anticipate that it
will incur additional costs and recognize income on uncompleted contracts in the
future, as new contracts are negotiated.
Net cash used in investing activities was approximately $20,724,000 in fiscal
2004 as compared to approximately $6,344,000 in fiscal 2003. Cash used in
investing activities in fiscal 2004 consists of $5,884,000 for capital
expenditures, and $14,914,000 for the acquisition of CTI. In connection with the
acquisition of
21
EWST as of September 1, 2002, we issued a note for 1,000,000 Pounds Sterling,
including interest at 1.8%, payable in annual installments of 333,334 Pounds
Sterling beginning October 1, 2003. Based on the spot rate of exchange at August
1, 2004 of 1.8183 the U.S. Dollar equivalent of the annual installments is
approximately $606,000.
During the fiscal year ended August 1, 2004, we received approximately
$2,458,000 from the exercise of common stock options by employees.
On May 30, 2003 we announced an expansion of the stock repurchase program
initially announced in October 2002 from 1,000,000 to an aggregate of 2,000,000
shares. As of August 1, 2004, we acquired approximately 940,000 shares of common
stock under this program at an aggregate cost of approximately $14,668,000.
In June 2002, we entered into a new $50,000,000 Revolving Credit Loan Agreement
with two banks on an unsecured basis 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, 2006 (as amended). We may elect to
borrow up to a maximum of $5,000,000 with interest based on the Federal Funds
Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of $45,000,000
with interest based on LIBOR plus a margin of 1.35% to 1.65%. The applicable
incremental margin is based on the ratio of total liabilities to tangible net
worth, as those terms are defined in the agreement. The Federal Funds Target
Rate and the LIBOR rate was 1.25% and 1.48%, respectively, at August 1, 2004.
There is a fee of 15 basis points per annum on the unused portion of the
$45,000,000 LIBOR based portion of the credit facility payable quarterly. There
were no borrowings under the line at August 1, 2004 and August 3, 2003. Stand-by
letters of credit were outstanding in the amount of $11,389,000 under the credit
facility at August 1, 2004.
We believe that presently anticipated future cash requirements will be provided
by internally generated funds, our existing unsecured credit facility, and
existing cash reserves. A significant portion of our revenue for fiscal 2005
will be generated from our existing backlog of sales orders. The backlog of
orders at August 1, 2004 was approximately $100 million. All orders included in
backlog are covered by signed contracts or purchase orders. Nevertheless,
contracts involving government programs may be terminated at the discretion of
the government. In the event of the cancellation of a significant amount of
government contracts included in our backlog, we will be required to rely more
heavily on cash reserves and our existing credit facility to fund our
operations. We are not aware of any events which are reasonably likely to result
in any cancellation of its government contracts. We have approximately
$38,611,000 available under our bank credit facility, net of outstanding
stand-by letters of credit of approximately $11,389,000, and cash reserves at
August 1, 2004 of approximately $66,181,000.
Contractual Obligations and Commitments
Our obligations and commitments to make future payments under contracts, such as
purchase orders, and debt and lease agreements, and under contingent
commitments, such as stand-by letters of credit are as follows:
We have outstanding an aggregate of approximately $16,448,000 in open purchase
orders as of August 1, 2004. These open purchase orders represent executory
contracts for the purchase of goods and services which will be substantially
fulfilled in the next six months.
22
Future payments required on long-term debt are as follows (in thousands):
During Industrial
fiscal Mortgage revenue EWST
year Total note bonds note Other
---- ----- ---- ----- ---- -----
2005 $ 804 $ 93 $ 105 $ 606 $ -
2006 817 101 110 606 -
2007 223 108 115 -
2008 236 116 120 - -
2009 198 73 125 - -
Future 4,371 2,033 2,230 - 108
----- ----- ----- ----- ---
$ 6,649 $ 2,524 $ 2,805 $ 1,212 $ 108
===== ===== ===== ===== ===
Minimum annual rentals under noncancellable operating leases are as follows (in
thousands):
During
fiscal
year Amount
---- ------
2005 $ 1,649
2006 1,513
2007 1,272
2008 1,206
2009 1,256
Future 856
Stand-by letters of credit expire as follows (in thousands):
During
fiscal
year Amount
---- ------
2005 $ 4,881
2006 2,437
2007 3,873
2008 30
2009 168
--------
$ 11,389
In addition, we have employment agreements with certain executives of the
Company which expire December 31, 2008, subject to extension for additional
one-year periods annually each January 1 with a final expiration date of
December 31, 2015. The agreements provide for aggregate annual salaries as of
August 1, 2004 of $1,427,000 and provide for a semi-annual cost of living
adjustment based on the consumer price index. The agreements also provide for
incentive compensation at 7% in the aggregate of pretax income of the Company.
The agreements also provide that, in the event there is a change in control of
the Company, the executives have the option to terminate the agreements and
receive a lump-sum payment equal to the sum of the salary payable for the
remainder of the employment term, plus the annual bonuses (based on the average
of the three highest annual bonuses awarded during the ten preceding years) for
the remainder of the employment term. As of August 1, 2004, the amount payable
in the event of such termination would be approximately $16,318,000.
The agreements also provide for consulting periods, one for five and one for ten
years, at the end of the employment period at an annual compensation equivalent
to one-half of the executive's annual salary at the end of the employment
period, subject to annual cost of living adjustments.
23
Critical Accounting Policies and Estimates
Our established policies are outlined in the footnotes to the Consolidated
Financial Statements entitled "Summary of Significant Accounting Policies"
(contained in Part II, Item 8 of this Form 10-K). As part of our oversight
responsibilities, we continually evaluate the propriety of our accounting
methods as new events occur. We believe that our policies are applied in a
manner which is intended to provide the user of our financial statements a
current, accurate and complete presentation of information in accordance with
accounting principles generally accepted in the United States of America.
Important accounting practices that require the use of assumptions and judgments
are outlined below.
We generally recognize revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable. Payments received from customers in advance of products
delivered are recorded as customer advance payments until earned. Substantially
all of our customer contracts are firm, fixed price contracts, providing for a
predetermined fixed price for the products sold, regardless of the costs
incurred. Approximately 13% to 16% of revenues over the last three fiscal years
were derived from long-term, fixed price contracts for which revenues and
estimated profits are recognized using the percentage of completion method of
accounting based on estimated completion to date (the total contract amount
multiplied by the percentage of performance, based on total costs incurred in
relation to total estimated cost at completion). 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. Risks and uncertainties inherent in the estimation process could
affect the amounts reported in our financial statements. The key assumptions
used in the estimate of costs to complete relate to labor costs and indirect
costs required to complete the contract. The estimate of rates and hours as well
as the application of overhead costs is reviewed on a regular basis. If our
business conditions were different, or if we used different assumptions in the
application of this and other accounting policies, it is likely that materially
different amounts would be reported on our financial statements.
Prospective losses on long-term contracts are based upon the anticipated excess
of costs over the selling price of the remaining units to be delivered and are
recorded in the period when first determinable. Actual losses could differ from
those estimated due to changes in the ultimate costs and contract terms.
Inventories are stated at lower of cost (principally first-in, first-out) or
market. A valuation allowance for obsolete and slow-moving inventory is
established based upon an aging of raw material components. Current requirements
for raw materials are evaluated based on current backlog of orders for products
in which the components are used and anticipated future orders.
Under the non-amortization approach in accounting for goodwill under SFAS No.
142, goodwill is not amortized into results of operations but instead is
reviewed for impairment and written down and charged to results of operations in
the period in which the recorded value of goodwill is more than its fair value.
An annual impairment test is performed in the fourth quarter of each fiscal
year, or when an indication of impairment exists, and any impairment of goodwill
is charged to operations.
An impairment test based on a single reporting unit was performed in the fourth
quarter of fiscal 2004 using our current market capitalization, which in an
active market for our common stock, we consider a reasonable indication of
implied fair value. Based on this initial step in the test for impairment, we
concluded there was no impairment of goodwill at August 1, 2004.
Provisions for federal, foreign, state and local income taxes are calculated on
reported financial statement pretax income based on current tax law and also
include the cumulative effect of any changes in tax rates from those used
previously in determining deferred tax assets and liabilities. Such provisions
differ from the amounts currently payable because certain items of income and
expense are recognized in different time periods for financial reporting
purposes than for income tax purposes.
24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk associated with foreign currency exchange and
changes in interest rates. We have not entered into any market risk sensitive
instruments for trading purposes.
Since the acquisitions of General Microwave Corporation and EWST, we are subject
to movements in foreign currency rate changes related to our operations in
Israel and in England. The movements in the Israeli Shekel versus the U.S.
Dollar have not been significant. Movements in Pounds Sterling (the functional
currency at EWST) have been more significant.
Based on our historical results and expected future results, EWST accounts for
approximately 7% to 10% of our total revenues, based in part on the rate at
which EWST's Sterling denominated financial statements have been or will be
converted into U.S. dollars. Since its acquisition in fiscal year 2003, EWST has
contributed approximately 10% to our consolidated operating income. Having a
portion of our future revenue and income denominated in Sterling exposes us to
market risk with respect to fluctuations in the U.S. dollar value of future
Sterling denominated revenue and earnings. A 10% decline in the average value of
Sterling in fiscal 2004, for example, would have reduced sales by approximately
$910,000, and would have decreased our consolidated operating income by
approximately $75,000 (due to the reduction in the U.S. dollar value of EWST's
sales and operating income).
We have a foreign denominated liability as of August 1, 2004 of approximately
667,000 Pounds Sterling in connection with the acquisition of EWST that is
subject to foreign exchange rate fluctuations. Based on the spot rate of
exchange at August 1, 2004 of 1.818, the U.S. Dollar equivalent of the liability
is approximately $1,212,000.
We have made inter-company advances to EWST in the aggregate amount of
approximately $6 million at August 1, 2004 that were previously considered
long-term advances. However, since the advances are denominated in U.S. Dollars
and EWST anticipates reducing the amount of advances during fiscal year 2005,
the amount outstanding is subject to foreign exchange rate fluctuations.
In October 2001, we entered into an interest rate swap with a bank pursuant to
which it exchanged floating rate interest in connection with the Bonds discussed
in Note H of the financial statements on a notional amount of $3,000,000 for a
fixed rate of 4.07% for a 10 year period ending October 1, 2011. The notional
amount reduces each year in tandem with the annual installments due on the
Bonds. The fixing of the interest rate for this period offsets our exposure to
the uncertainty of floating interest rates on the Bonds, and as such has been
designated as a cash flow hedge. The hedge is deemed to be highly effective and
any ineffectiveness will be recognized in interest expense in the reporting
period. The fair value of the interest rate swap was a liability of
approximately $108,000 as of August 1, 2004. There was no material hedge
ineffectiveness related to cash flow hedges during the fiscal years presented to
be recognized in earnings.
We also have a $50,000,000 Revolving Credit Loan Agreement with two banks on an
unsecured basis 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, 2006. We may elect to borrow up to a maximum of
$5,000,000 with interest based on the Federal Funds Target Rate plus a margin of
1.50% to 1.80%, or up to a maximum of $45,000,000 with interest based on LIBOR
plus a margin of 1.35% to 1.65%. The applicable incremental margin is based on
the ratio of total liabilities to tangible net worth, as those terms are defined
in the Agreement. The Federal Funds Target Rate and the LIBOR rate was 1.25% and
1.48%, respectively, at August 1, 2004. The credit line is reviewed on an annual
basis.
There were no borrowings outstanding under our revolving credit facility as of
August 1, 2004.
25
The table below provides information about our debt that is sensitive to changes
in interest rates. Future principal payment cash flows by maturity date as
required under the industrial revenue bonds, and corresponding fair value is as
follows:
Fiscal year ending: Bonds
------------------ -----
2005 $ 105
2006 110
2007 115
2008 120
2009 125
2010 and later 2,230
-----
$ 2,805
Fair value $ 2,913
=====
We do not anticipate any other material changes in its primary market risk
exposures in fiscal 2005.
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
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management,
including our principal executive officer (Vice Chairman of the
Board/Chief Executive Officer) and principal financial officer (Vice
President/Chief Financial Officer), we have evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") as of August 1, 2004 (the "Evaluation
Date"). Based on such evaluation, the principal executive officer and the
principal financial officer have concluded that, as of the Evaluation
Date, our disclosure controls and procedures are effective, and are
reasonably designed to ensure that all material information (including
our consolidated subsidiaries) required to be included in our reports
filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission.
(b) Changes in Internal Control Over Financial Reporting.
During the quarter ended August 1, 2004, there were no changes in the
Company's internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, such internal
control over financial reporting.
Item 9B. Other Information
Not applicable
26
PART III
The information required by Part III is incorporated by reference to our
definitive proxy statement in connection with our Annual Meeting of Stockholders
scheduled to be held in January 2005, to be filed with the Securities and
Exchange Commission within 120 days following the end of our fiscal year ended
August 1, 2004.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Exhibits
3.1 Certificate of Incorporation, as amended (Exhibit 3(a) of Form S-1
Registration Statement No. 2- 87160).
3.2 By-Laws, as amended August 7, 2001 (Exhibit 3.2 of Annual Report on Form
10-K for the fiscal year ended July 29, 2001).
10.1 1996 Stock Option Plan (Exhibit 10.1 of Annual Report on Form 10-K for the
fiscal year ended July 28, 1996).
10.2 1997 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 10,
1997).
10.3 1998 Stock Option Plan (Exhibit 10.3 of Annual Report on Form 10-K for the
fiscal year ended August 1, 1999).
10.4 2000 Stock Option Plan (Exhibit 4.1 of Report on Form S-8 dated October
12, 2001).
10.5 2003 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 11,
2003).
10.6 Employment Agreement between Herley Industries, Inc. and Lee N. Blatt
dated as of July 29, 2002. (Exhibit 10.5 of Annual Report on Form 10-K for
the fiscal year ended July 28, 2002).
10.7 Employment Agreement between Herley Industries, Inc. and Myron Levy dated
as of July 29, 2002. (Exhibit 10.6 of Annual Report on Form 10-K for the
fiscal year ended July 28, 2002).
10.8 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).
10.9 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).
10.10 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).
10.11 Loan Agreement dated June 19, 2002 among the Registrant, Allfirst Bank and
Fulton Bank. (Exhibit 10.10 of Annual Report on Form 10-K for the fiscal
year ended July 28, 2002).
10.12 Amendment (dated May 2, 2003) to Loan Agreement dated June 19, 2002 among
the Registrant, Manufacturers and Traders Trust Company, successor in
interest to Allfirst Bank, and Fulton Bank. (Exhibit 10.12 of Annual
Report on Form 10-K for the fiscal year ended August 3, 2003).
10.13 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).
10.14 Asset Purchase Agreement dated as of October 12, 2000 between Registrant
and American Microwave Technology Inc. (Exhibit 10.1 of Form 10-Q dated
December 12, 2000).
10.15 Asset Purchase Agreement dated as of March 29, 2004 between Registrant and
Communication Techniques, Inc.
10.16 Lease Agreement dated March 1, 2000 between Registrant and RSK Realty LTD
(Exhibit 10.13 of Annual Report on Form 10-K for the fiscal year ended
July 30, 2000).
10.17 Common Stock Purchase Agreement dated as of September 20, 2002 between
Registrant and EW Simulation Technology, Limited. (Exhibit 10.17 of Annual
Report on Form 10-K for the fiscal year ended July 28, 2002).
10.18 Trust Indenture dated as of October 19, 2001 between Registrant, and East
Hempfield Township Industrial Development Authority and Allfirst Bank, as
Trustee. (Exhibit 10.18 of Annual Report on Form 10-K for the fiscal year
ended July 28, 2002).
27
10.19 Amendment (dated April 2, 2004) to Loan Agreement dated June 19, 2002
among the Registrant, Manufacturers and Traders Trust Company, successor
in interest to Allfirst Bank, and Fulton Bank.
10.20 Asset Purchase Agreement dated as of September 1, 2004 between Registrant
and Reliable System Services Corp.
10.21 Amendment dated December 9, 2003 to Employment Agreement between Herley
Industries, Inc. and Myron Levy dated as of July 29, 2002.
10.22 Amendment dated December 9, 2003to Employment Agreement between Herley
Industries, Inc. and Lee N. Blatt dated as of July 29, 2002.
23.1 Consent of Deloitte & Touche LLP.
31.1 Certification of Myron Levy pursuant to Rule 13a-14(a).
31.2 Certification of Thomas V. Gilboy pursuant to Rule 13a-14(a).
32.1 Certification of Myron Levy pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Thomas V. Gilboy pursuant to 18 U.S.C. Section 1350.
(b) Financial Statements
(1) See Index to Consolidated Financial Statements at Page F-1.
(2) Schedule II - Valuation and Qualifying Accounts filed as part of
this Form 10-K at page 30.
28
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 October 15, 2004.
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 15, 2004 by the following persons in the
capacities indicated:
By: /S/ Lee N. Blatt Chairman of the Board
---------------------------------
Lee N. Blatt
By: /S/ Myron Levy Vice Chairman of the Board
--------------------------------- Chief Executive Officer and Director
Myron Levy (Principal Executive Officer)
By: /S/ Thomas V. Gilboy Vice President and
--------------------------------- Chief Financial Officer
Thomas V. Gilboy (Principal Financial Officer)
By: /S/ John A. Thonet Secretary and Director
---------------------------------
John A. Thonet
By: /S/ David H. Lieberman Director
---------------------------------
David H. Lieberman
By: /S/ Edward K. Walker, Jr. Director
---------------------------------
Edward K. Walker, Jr.
By: /S/ Robert M. Moore Director
---------------------------------
Robert M. Moore
By: /S/ Edward A. Bogucz Director
---------------------------------
Edward A. Bogucz
29
Schedule II - Valuation and Qualifying Accounts (in thousands)
Column A Column B Column