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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ...............to ...............
Commission File No. 0-5411
Herley Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2413500
State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
10 Industry Drive, Lancaster, Pennsylvania 17603
(Address of Principal Executive Offices ) (Zip Code)
Registrant's telephone number, including area code:(717) 397-2777
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
Based on the closing sale price of $9.125 as of October 4, 1996 the aggregate
market value of the voting stock held by non-affiliates of the registrant was
$16,913,005.
The number of shares outstanding of registrant's common stock, $ .10 par value
was 2,938,522 as of October 4, 1996
Documents incorporated by reference:
Registrant's definitive proxy statement to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934.
HERLEY INDUSTRIES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1 Business 1
Item 2 Properties 6
Item 3 Legal Proceedings 6
Item 4 Submission of Matters to a Vote of Security Holders 6
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6 Selected Financial Data 7
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8 Financial Statements and Supplementary Data 10
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10
PART III
Item 10 Directors and Executive Officers of the Registrant 10
Item 11 Executive Compensation 10
Item 12 Security Ownership of Certain Beneficial
Owners and Management 10
Item 13 Certain Relationships and Related Transactions 10
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8K 11
SIGNATURES 12
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES F-1
PART I
Item 1. Business
Herley Industries, Inc. ("Herley" or the "Company") principally designs,
manufactures and sells flight instrumentation products, primarily to aerospace
companies, the U.S. government, and several foreign governments. One of the
Company's main products is a variety of transponders which are used to enhance
radar signals to accurately track the flight of space launch vehicles and
aircraft.
The transponders are used in conjunction with target command and control
systems, also manufactured by the Company, in the training of troops and the
testing of weapons. These command and control systems are housed in shelters on
training and testing ranges in the U. S. and in foreign countries. The Company
has an established base of approximately 100 command and control systems
installed around the world. These command and control systems are both shelter
mounted and portable radar units. Herley also manufactures microwave devices
used in its flight instrumentation products and in connection with the radar and
defense electronic systems on tactical fighter aircraft.
Since its inception in 1965, the Company has designed and manufactured microwave
devices for use on various tactical military programs. In June 1986 the Company
acquired a small engineering company engaged in the design and development of
transponders. This acquisition enabled the Company to enter the flight
instrumentation business beginning with the design and manufacture of range
safety transponders. In September 1992, the Company acquired substantially all
of the assets of Micro-Dynamics, Inc. of Woburn, Massachusetts, a microwave
subsystem designer and manufacturer. In June of 1993, the Company acquired Vega
Precision Laboratories, Inc. ("Vega") of Vienna, Virginia, and moved the
operations to Lancaster, Pennsylvania in October, 1993. In March 1994, the
Company entered into an exclusive license agreement for the manufacture,
marketing and sale of the Multiple Aircraft GPS Integrated Command & Control
(MAGIC2) systems. In July, 1995, the Company acquired certain assets and the
business of Stewart Warner Electronics Corp. of Chicago, Illinois, a
manufacturer of high frequency radio and IFF interrogator systems.
With these recent acquisitions, the Company has reorganized into three operating
facilities; HERLEY-VEGA SYSTEMS ("HVS"), operating in Lancaster, Pennsylvania;
HERLEY-MDI ("MDI") operating in Woburn, Massachusetts, and Stewart Warner
Electronics Co. ("SWE") operating in Chicago, Illinois. In January 1996 the
Company created its Global Security Systems ("GSS") division, a marketing group,
to serve the international marketplace.
The Company manufactures flight instrumentation products, encompassing
transponder products and command & control systems; and microwave products
including microwave integrated circuits ("MIC's"), receiver-protectors, and
magnetrons. Revenues from flight instrumentation products accounted for
approximately 69%, 58% and 62%, and revenues from microwave products accounted
for approximately 31%, 42% and 38%, of net revenues for the fiscal years 1996,
1995 and 1994, respectively.
Herley's business strategy is to expand its product line by acquisition and by
designing and manufacturing other flight instrumentation products for sale to
the Company's existing domestic customers. In addition, the Company due to its
broad product line, will seek to expand its foreign business. These major
products include transponders, flight termination receivers, telemetry systems
and telemetry data encoders. The Company believes that significant growth
potential for the sale of flight instrumentation products to the space launch
industry has been created by changes in government space policy, enabling
private industry to launch satellites, and new technologies providing for
broader use of satellites.
1
Products
The Company manufactures and sells transponders, microwave devices, command and
control systems, and other related products, in one industry segment, military
electronics. The Company's business is not considered to be seasonal in nature.
Transponders
The Company manufactures a variety of transponders, including range safety,
identification friend or foe (IFF), command and control, and scoring systems.
Transponders are small electronic systems consisting of a transmitter, sensitive
receiver and internal signal processing equipment. These electronic boxes are
comprised of active and passive components, including microwave subassemblies
such as amplifiers, oscillators and circulators. The transponder receives
signals from radars, changes and amplifies the frequency of the signals, and
sends back a reply on a different frequency and signal level. This reply will be
a strong signal, free of noise, upon which the tracking radar can "lock." The
transponder is generally placed upon the booster stage of a space launch
vehicle, a missile being tested, a target at which a missile is being directed,
or another unmanned or remotely piloted vehicle being operated and/or tested.
Frequently, transponders are destroyed in the process of a test or space launch.
The transponder provides "enhancement" or "augmentation" to the radar return,
which is superior to the weak noise-filled echo produced by the skin reflection
of the target. Certain transponders also provide communication with the vehicle
in which the transponder is installed.
In range safety applications, transponders enable accurate tracking of the
vehicle so that its position and direction are known throughout its flight. In
the case of several defense and commercial space launch vehicles (i.e., Delta,
Atlas, Titan and Pegasus), the Herley transponder is tracked by the ground
launch team all the way to space orbit, and in certain instances through several
orbits, as a reference location point in space to assure that the launch payload
has been properly placed in orbit. The use of the transponder is far more
effective than simple skin tracking, particularly under adverse weather
conditions after the launch.
Identification friend or foe (IFF) transponders, which are used in conjunction
with the FAA Air Traffic Control System, enable ground controllers to identify
the unmanned targets, drones and cruise missiles on which these units fly. The
transponders on board these vehicles reply to the ground interrogation with a
unique signature response which both identifies the vehicle as unmanned and
provides the means to track it. The ground controller can then ensure that
commercial and private aircraft are vectored away from the flight path of the
unmanned vehicle and kept at safe separations from it.
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
which 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.
Command And Control Systems (C2S)
For over thirty years, Vega Precision Laboratories, (now part of HERLEY-VEGA
SYSTEMS ("HVS") in Lancaster, Pennsylvania) has been a leader in the radar
enhancement field. HERLEY-VEGA command and control systems have been used to
remotely fly a large variety of unmanned aerial vehicles, typically missiles
2
or aircraft used as target drones or Remote Piloted Vehicles (RPV's), and some
surface targets. Operations have been conducted by many users on the open ocean,
remote land masses, and instrumented test and training ranges. HERLEY-VEGA
command and control systems are currently in service throughout the world,
making HVS a primary supplier after three decades of experience and C2S
specialization. The HERLEY-VEGA pulse-positioned-coded (PPC) concept enables the
use of standard radar technology to track and control unmanned vehicles. Using
the radar beacon mode, PPC pulse groups are transmitted and received for
transfer of command and telemetry data while employing the location precision
and advantages of radar techniques.
Command and control systems permit a ground operation to fly a target or an
Unmanned Airborne Vehicle (UAV) through a pre-planned mission. That mission may
be for reconnaissance, where the vehicle is equipped with high definition TV
sensors and the necessary data links to send information back to its C2 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.
Many foreign governments that maintain armed forces are users of HVS C2 S.
A multi-million dollar development effort by Vega Precision Laboratories has
resulted in the introduction of a new line of Target Tracking Control Systems
(TTCS), the 6104 series. This new system technology centers largely around a
multiple processor design, which provides improved operator control, system
signal conditioning, high resolution graphics displays, resident software driven
built-in-test, and enhanced system versatility.
The new HERLEY-VEGA Model 6104 TTCS is a highly flexible design which can be
field configured within minutes to fly or control any selected vehicle for which
it is equipped. The system is delivered with the necessary command panels and
graphics display software to operate with a large variety of vehicles. A basic
TTCS configuration is normally supplied with a standard HERLEY-VEGA command
panel and the software peculiar to one vehicle. Telemetry display software is
embedded for the specified vehicle, and a magnetic hard disk drive is supplied
with a mission map set prepared in accordance with a customer-supplied detailed
map of the area.
With the 1994 licensing of the MAGIC2 systems, HVS has significantly increased
the selection of command and control systems it offers. The 6104 TTCS unit is a
reliable line-of-sight C2 using system with a large installed base of equipment
worldwide. HVS engineers and marketers are now able to offer the MAGIC2 system
as a supplement to this installed base of equipment. The MAGIC2 affords
over-the-horizon C2 using GPS guidance and control of multiple targets from a
single ground station. The increasing interest by the U. S. Navy as well as
foreign navies in littoral warfare scenarios can be ideally met by the use of
the MAGIC2 system.
In today's military world, surveillance of one's neighbors using UAV's, RPV's,
or drones has become a standard operational discipline. A key advantage of the
use of a UAV is that in the event of an accident or if the vehicle is shot down,
the user is not faced with a hostage problem. These inexpensive drones are
controlled in their flight by a HERLEY-VEGA shelter C2S, which is mounted in a
trailer that may be moved from place to place by helicopter or truck.
HERLEY-VEGA also supplies portable command and control systems that are mounted
on tripods that can be easily transported by an operational team. The portable
units permit ready deployment in rugged terrain and may also be used on
shipboard during open ocean exercises.
Microwave Devices
Herley manufactures solid state microwave devices in both Lancaster,
Pennsylvania and in Woburn, Massachusetts for use in its transponders and for
use in existing long-term military programs both as part of new production and
for spare parts and repair services. These microwave devices are used in a
variety of radar, communications and missile applications, including airborne
and shipboard navigation and missile guidance systems.
3
In Woburn, HERLEY-MDI designs and manufactures complex MIC's, which consist of
sophisticated assemblies that perform many functions, primarily involving
switching of microwave signals. MIC's manufactured by MDI are employed in almost
all defense electronics military systems as well as in missile programs.
A growing part of MDI's business is the production of receiver protector
devices. These high power devices protect a radar receiver from transient bursts
of microwave energy and are employed in almost every military and commercial
radar. With the contraction of the defense business, only two domestic primary
producers of receiver protectors remain - HERLEY-MDI and C.P.I., Inc.
In Chicago, Stewart Warner Electronics Co. designs and manufactures high
frequency radio and IFF interrogators. The high frequency communications
equipment is used extensively by the U S. Navy as well as by 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.
Government Contracts
A substantial part of the Company's sales are made to U.S. government agencies
or prime contractors or subcontractors on military or aerospace programs.
Government contracts are awarded either on a competitive bid basis or on a
negotiated sole source procurement basis. Contracts awarded on a bid basis
involve several competitors bidding on the same program with the contract being
awarded based upon price and ability to perform. Negotiated sole source
procurement is utilized if the Company is deemed by the customer to have
developed proprietary equipment not available from other parties or where there
is a very stringent delivery schedule.
All of the Company's government contracts are fixed price contracts, some of
which require delivery over time periods in excess of one year. With this type
of contract, the Company agrees to deliver products at a fixed price except for
costs incurred because of change orders issued by the customer.
In accordance with Department of Defense procedures, all contracts involving
government programs may be terminated by the government, in whole or in part, at
the government's discretion. In the event of such a termination, prime
contractors on such contracts are required to terminate their subcontracts on
the program and the government or the prime contractor is obligated to pay the
costs incurred by the Company under the contract to the date of termination plus
a fee based upon work completed.
Marketing and Distribution
The Company's marketing approach is to determine customer requirements in the
early stages of a program. Marketing and engineering personnel work directly
with the customer's engineering group to develop product specifications. The
Company receives its awards based upon an evaluation of a number of factors
including technical ranking, price, overall capability and past performance.
Follow-up contracts on the same program are normally negotiated with customers
rather than being subject to a competitive bidding process.
Backlog
The Company's backlog of firm orders was approximately $23,770,000 on July 28,
1996 ($13,632,000 in domestic orders and $10,138,000 in foreign orders) as
compared to approximately $24,975,000 on July 30, 1995 ($17,754,000 in domestic
orders and $7,221,000 in foreign orders). Approximately $17,000,000 of the
backlog is expected to be shipped during the fiscal year ending August 3, 1997.
4
Manufacturing, Assembly and Testing
Flight instrumentation devices manufactured by the Company for military and
space launch applications are subject to stringent testing procedures based upon
customer requests. All of such testing is performed by the Company at its
Lancaster facility.
All electronic parts are procured in controlled lots which are subjected to
extensive physical inspection and screening at Herley before use in products.
Physical inspection requires the use of high power microscopes and laser scanned
optical comparators, which match the characteristics of the part under
inspection to previously stored images.
The testing of high reliability space equipment is performed by complex
computer-controlled consoles which take measurements that continuously monitor
and analyze operating parameters. Flight instrumentation products are tested
over their full operating temperature range, after which the equipment is
evaluated under combined vibration and temperature cycling. For initial design
qualification, this testing may extend for several months and includes
evaluation of electromagnetic interference behavior (EMI), ability to survive
pyrotechnic shock (simulating explosive charge detonation for space vehicle
stage separation) and the combined effects of external vacuum with heating and
cooling.
Electronic components and other raw materials used in the Company's products are
purchased by the Company from a large number of suppliers and all of such
materials are readily available from alternate sources.
The Company does not maintain any significant level of finished products
inventory. Raw materials are generally purchased for specific contracts and
common components are purchased for stock based on the Company's firm fixed
backlog.
There are no significant environmental control procedures required concerning
the discharge of materials into the environment that would require the Company
to invest in any significant capital equipment or that would have a material
effect on the earnings of the Company or its competitive position.
Product Development
The Company believes that its growth depends on its ability to constantly renew
and expand its technology, products, and design and manufacturing processes with
an emphasis on cost effectiveness. The Company's primary efforts are focused on
engineering design and product development activities rather than pure research.
Several of the Company's officers and engineers have been involved at various
times and in varying degrees in these activities. The cost of these development
activities, including employees' time and prototype development, net of amounts
paid by customers, was approximately $1,453,000, $970,000, and $1,367,000 in
fiscal 1996, 1995, and 1994, respectively.
Competition
The flight instrumentation products which the Company manufactures are subject
to varied competition dependent on the product and market serviced. Competition
is generally based upon technology, design, price and past performance. Many of
Herley's competitors are larger and may have greater financial resources than
the Company. Competitors include Aydin Corporation, Lockheed Martin, Motorola,
Inc., Microsystems, Inc, and AMP, Inc. Competition in follow-on procurements is
generally limited after an initial award unless the original supplier has had
performance problems.
5
Employees
As of October 1, 1996, the Company employed 222 full-time persons. A total of
159 employees were engaged in manufacturing, 29 in engineering, 13 in marketing,
contract administration and field services and the balance in general and
administrative functions. None of the Company's employees are covered by
collective bargaining agreements and the Company considers its employee
relations to be satisfactory.
The Company believes that its future success will depend, in part, on its
continued ability to recruit and retain highly skilled technical, managerial and
marketing personnel. To assist in recruiting and retaining such personnel, the
Company has established competitive benefits programs, including an incentive
stock option plan.
Item 2. Properties
The Company's operations are conducted at the following facilities:
Area Owned
Occupied or
Location Purpose of Facility (sq. ft) Leased
- -------- ------------------- -------- ------
Lancaster, PA (1) Production, engineering, administrative 71,200 Owned
and executive offices
Woburn, MA Production, engineering and administration 60,000 Owned
Chicago, IL Production, engineering and administration 9,700 Leased
- ---------------------------
(1) The Company's executive offices occupy approximately 4,000 sq. ft. of
space at this facility with engineering and administrative offices occupying
10,000 sq. ft. each. The Company believes that its facilities are adequate for
its current and presently anticipated future needs.
Item 3. Legal Proceedings
In May and June 1994, the Company was served with two class action complaints
against the Company and certain of its officers and directors in the United
States District Court for the Eastern District of Pennsylvania. The claims were
made under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder. One of the claims is also based upon alleged negligence.
The claims relate to the Company's acquisition of Carlton Industries, Inc. and
its subsidiary, Vega Precision Laboratories, Inc. The claims were combined into
one matter and a consolidated Complaint. In April, 1995, the Court certified
that the claims based on the Securities Exchange Act may proceed as a Class
Action pursuant to Rule 23(b) (3), but without prejudice to the rights of the
parties thereafter to seek modification of the Class or revocation of leave to
proceed. The Court refused to certify the negligence claim as a Class Action. In
May, 1995, the parties negotiated a settlement of all claims in consideration
for a payment of $450,000 subject to Notice to the Class and Court approval. A
hearing on the proposed settlement is scheduled for October 15, 1996.
In May, 1995, the Company was served with a Class Action Complaint against the
Company and its Chief Executive Officer in the United States District Court for
the Eastern District of Pennsylvania. The claim was made under Section 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5 thereunder. The
claim relates to the Company's settlement of the Litton Action in the Essex
Superior Court of Massachusetts and alleges, inter alia, that there was
insufficient disclosure by the Company of its true potential exposure in that
claim. Cross motions for summary judgment have been filed and are pending before
the Court. The Company believes it has a meritorious defense and intends to
vigorously defend against the action.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
6
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
(a) The Company's Common Stock is traded in the over-the-counter National
Market System under the symbol HRLY. The following table sets forth the high and
low closing sales price as reported by NASDAQ National Market System for the
Company's Common Stock for the periods indicated.
Common Stock
------------
High Low
---- ---
Fiscal Year 1995
First Quarter.................................. 5-1/2 3-5/8
Second Quarter................................. 4-1/8 2-9/16
Third Quarter ................................. 3-13/16 1-3/4
Fourth Quarter ................................ 5-5/8 3-3/16
Fiscal Year 1996
First Quarter.................................. 6-1/8 4-7/8
Second Quarter................................. 8-1/4 5-1/8
Third Quarter ................................. 10-5/8 7
Fourth Quarter ................................ 12-1/4 8
The closing price on October 4, 1996 was $9.125.
(b) As of October 4, 1996, there were approximately 1,000 record holders
of the Company's Common Stock.
(c) There have been no cash dividends declared or paid by the Company on
its Common Stock during the past two years.
Item 6. Selected Financial Data
52 Weeks ended
------------------------------------------------
July 28, July 30, July 31, August 1, August 2,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net Revenues $ 29,001,404 24,450,267 30,508,211 21,334,985 14,880,260
Earnings (loss) from continuing operations $ 3,668,956 (4,890,166) 1,861,429 1,391,098 2,495,960
Loss from discontinued operations $ - - - (2,463,642) (261,577)
Cumulative effect of
accounting change $ - - - 2,081,028 -
---------- ---------- ---------- ---------- ----------
Net Income (loss) $ 3,668,956 (4,890,166) 1,861,429 1,008,484 2,234,383
========== ========== ========== ========== ==========
Earnings (loss) per common
and common equivalent share:
Continuing operations $ 1.15 (1.31) .44 .35 .73
Discontinued operations - - - (.62) (.07)
Change in accounting - - - .53 -
---- ---- --- --- ---
Net Income (loss) $ 1.15 (1.31) .44 .26 .66
==== ==== === === ===
Total Assets $ 42,508,942 42,229,282 53,752,454 58,813,878 31,972,809
Total Current Liabilities $ 7,559,306 9,973,866 10,217,598 14,369,213 3,116,177
Long-Term Debt
net of current portion $ 11,021,000 10,525,000 14,822,834 14,054,128 4,270,000
7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
As of July 28, 1996 and July 30, 1995, working capital was approximately
$8,704,000 and $5,479,000, respectively, and the ratio of current assets to
current liabilities was 2.15 to 1 and 1.55 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
progress payments. The unliquidated balance of these advanced payments was
approximately $1,480,000 in 1996, and $1,477,000 in 1995.
Net cash provided from operations was approximately $4,687,000 in 1996. The
Company used approximately $4,013,000 in financing activities primarily for the
payment of the litigation settlement of $2,000,000, and the purchase of treasury
stock for $1,734,000.
Net cash provided from investing activities of approximately $7,469,000 in 1995
results primarily from the liquidation of $8,105,000 of the Company's marketable
securities. The Company used the proceeds from the sales of securities to pay
down $6,000,000 of its long term bank debt, and $2,105,000 for the purchase of
treasury stock.
The Company maintains a revolving credit facility with a bank for an aggregate
of $11,000,000 which expires January 31, 1998. As of July 28, 1996 and July 30,
1995, the company had borrowings outstanding of $6,950,000 and $7,000,000,
respectively.
The Company paid the final installment of $2,000,000 in July 1996 to Litton
Systems, Inc. Electron Devices Division in connection with the settlement of an
action brought against the Company in April, 1992. The Company borrowed the
funds under its credit facility to satisfy this obligation.
During the year the Company acquired 270,339 shares of its outstanding common
stock for $1,734,233 through open market purchases, and 215,959 shares, valued
at $2,483,552, in connection with the cashless exercise of stock options.
At July 28, 1996, the Company owned high grade investment securities having a
market value of approximately $4,912,000, and cash and cash equivalents of
approximately $1,104,000. In September 1996 the investment securities were sold
and the proceeds were used to reduce outstanding bank debt.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
Net sales for the 52 weeks ended July 28, 1996 were approximately $29,001,000
compared to $24,450,000 for fiscal 1995. The sales increase of $4,551,000
(18.6%) is attributable to an increase of approximately $5,845,000 in flight
instrumentation products, of which Stewart Warner Electronics Co., acquired in
July 1995, contributed $4,321,000; offset by a decrease of $1,294,000 in
microwave components.
Gross profit of 31.7% for the 52 weeks ended July 28, 1996 exceeded the prior
year of 25.9% due to an increase of $2,648,000 in higher margin foreign sales
from $3,908,000 in 1995 to $6,556,000 in 1996, as well as an increase in
absorption of fixed costs due to the higher sales volume.
8
Selling and administrative expenses for the 52 weeks ended July 28, 1996 were
$5,832,000 compared to $5,072,000 for fiscal 1995, an increase of $760,000 of
which $388,000 is attributable to increased representative fees on foreign
sales, an increase of $233,000 in personnel and related expenses and other
expenses of $46,000; offset by the reduction of $150,000 in the provision for
customer disputed charges, and decreases in group insurance of $90,000,
depreciation of $69,000 and outside services of $48,000. The addition of Stewart
Warner Electronics Co. added $450,000 in selling and administrative expenses in
fiscal 1996.
Included in unusual items in 1995 are settlement costs in connection with
certain legal actions of $4,310,000, legal fees of $829,000, and related
expenses of $308,000.
Other income (expense) for the 52 weeks ended July 28, 1996 increased $1,100,000
from the prior year due to net gains on available-for-sale securities and other
long-term investments of $898,000 as compared to losses of $356,000 in 1995, and
a decrease in interest expense of $88,000; offset by decreased dividend and
interest income of $242,000.
The effective tax rate in 1996 was 2.7%. The 1996 tax provision reflects the
utilization of prior year net operating loss carryforwards. No income tax
benefit was recorded in 1995 due to an increase in the valuation allowance. The
valuation allowance has been provided relating to that portion of net operating
loss carryforwards which management believes may expire unutilized.
Fiscal 1995 Compared to Fiscal 1994
Net sales from continuing operations for the 52 weeks ended July 30, 1995 were
approximately $24,450,000 compared to $30,508,000 for fiscal 1994. The sales
decrease of $6,058,000 (20%) is attributable to a decrease of approximately
$4,699,000 in flight instrumentation products and $1,359,000 in microwave
components.
Gross profit decreased for the 52 weeks ended July 30, 1995 as compared to the
prior year from 35.7% in 1994 to 25.9% in 1995 due to the decrease of $3,983,000
in higher margin foreign sales from $7,891,000 in 1994 to $3,908,000 in 1995, as
well as a decrease in absorption of fixed costs due to the significantly lower
sales volume.
Selling and administrative expenses for the 52 weeks ended July 30, 1995 were
$5,072,000 compared to $7,743,000 for fiscal 1994, a decrease of $2,671,000 of
which $1,794,000 is attributable to decreased representative fees on foreign
sales, and $315,000 to a reduction in personnel and related expenses; offset by
a provision of $150,000 for customer disputed charges, and an increase in
employee medical benefits of $122,000.
Included in unusual items in 1995 are settlement costs in connection with
certain legal actions of $4,310,000, legal fees of $829,000, and related
expenses of $308,000.
During the fiscal year ended July 31, 1994, the Company incurred unusual charges
of $745,663 in excess of reserves in connection with warranty claims for
products shipped by Vega Precision Laboratories, Inc. prior to its acquisition
by the Company. These claims were resolved during the 1994 fiscal year.
Other income (expense) for the 52 weeks ended July 30, 1995 decreased $842,000
from the prior year due to net losses on the sales of certain long-term
investments of $356,000 as compared to gains of $524,000 in 1994, decreased
dividend and interest income of $182,000, and a decrease of $156,000 in other
income (primarily rental income in 1994); offset by a decrease in interest
expense of $375,000.
No income tax benefit was recorded in 1995. A valuation allowance has been
provided relating to that portion of net operating loss carryforwards which
management believes may expire unutilized.
9
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in the Index on Page F-1
are filed as a part of this report.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not applicable
PART III
The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in December 1996, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended July 28, 1996.
10
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation, as amended (Exhibit 3(a) of Form S-1
Registration Statement No. 2-87160).
3.2 By-Laws, as amended (Exhibit 3(b) of Form S-1 Registration Statement
No. 2-87160).
4.1 Convertible Note issued to certain officers and directors, including
Form of Warrant (Exhibit 4.1 of Annual Report on Form 10-K for the
fiscal year ended July 31, 1989).
10.1 1996 Stock Option Plan.
10.2 (a) Employment Agreement with Lee N. Blatt as modified, (Exhibit 10 of
Report on Form 8-K dated June 11, 1984 and Exhibit 10 of Report on
Form 8-K dated May 19, 1988).
(b) Modification Agreement to Employment Agreement with Lee N. Blatt dated
February 1, 1990 and
July 31, 1990, (Exhibit 10.3(b) of Annual Report on Form 10-K for the
fiscal year ended July 31, 1990).
(c) Modification Agreement to Employment Agreement with Lee N. Blatt dated
as of April 1, 1992, (Exhibit 10.4(c) of Annual Report on Form 10-K
for the fiscal year ended August 2, 1992).
(d) Modification Agreement to Employment Agreement with Lee N. Blatt dated
November 30, 1992, (Exhibit 10(a) of Report on Form 8-K dated November
30, 1992).
10.3 (a) Employment Agreement with Myron Levy (Exhibit 10 of Report on Form 8-K
dated October 6, 1988).
(b) Modification Agreement to Employment Agreement with Myron Levy dated
February 1, 1990, (Exhibit 10.4(b) of Annual Report on Form 10-K for
the fiscal year ended July 31, 1990).
(c) Modification Agreement to Employment Agreement with Myron Levy dated
as of April 1, 1992, (Exhibit 10.4(c) of Annual Report on Form 10-K
for the fiscal year ended August 2, 1992).
(d) Modification Agreement to Employment Agreement with Myron Levy dated
November 30, 1992, (Exhibit 10(c) of Report on Form 8-K dated November
30, 1992).
10.4 (a) Employment Agreement with Gerald I. Klein dated April 1, 1990,
(Exhibit 10.5 of Annual Report on Form 10-K for the fiscal year ended
July 31, 1990).
(b) Employment Agreement with Gerald I. Klein dated January 1, 1992,
(Exhibit 10.7 of Form S-2 Registration Statement No. 33-44959).
(c) Modification Agreement to Employment Agreement with Gerald I. Klein
dated November 30, 1992, (Exhibit 10(b) of Report on Form 8-K dated
November 30, 1992).
10.5 Loan Agreement between Registrant and Allstate Municipal Income
Opportunities Trust (Exhibit 10.6 of Annual Report on Form 10-K for
the fiscal year ended July 31, 1989).
10.6 Asset Purchase Agreement dated as of September 1, 1992 between Micro-
Dynamics, Inc. and Herley Industries, Inc. (Exhibit 7(c) of Report on
Form 8-K dated October 22, 1992).
10.7 Stock Purchase Agreement dated as of June 1, 1993 between Herley
Industries, Inc., Herley Interim Corp., Milton C. Barnard, Edward M.
Webber, Marvin Adler and Carlton Industries, Inc. (Exhibit 7(c) of
Report on Form 8-K dated June 18, 1993).
11. Computation of per share earnings.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule (for electronic submission only).
(b) Financial Statements
See Index to Consolidated Financial Statements at Page F-1.
(c) Reports on Form 8-K
None
11
SIGNATURES:
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 8 day of October, 1996.
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 8, 1996 by the following persons in the
capacities indicated:
By: /S/ Lee N. Blatt
--------------------- Chairman of the Board
Lee N. Blatt (Principal Executive Officer)
By: /S/ Myron Levy
------------------- President and Director
Myron Levy
By: /S/ Gerald I. Klein
------------------------ Chief Technical Officer and Director
Gerald I. Klein
By: /S/ Anello C. Garefino
--------------------------- Vice President Finance, CFO, Treasurer
Anello C. Garefino (Principal Financial Officer)
By: /S/ David H. Lieberman
--------------------------- Director
David H. Lieberman
By: /S/ Thomas J. Allshouse
---------------------------- Director
Thomas J. Allshouse
By: /S/ John A. Thonet
----------------------- Director
John A. Thonet
12
Item 8. Financial Statements and Supplementary Data
HERLEY INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS............................... F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets, July 28, 1996 and July 30, 1995........ F-4
Consolidated Statements of Operations for the 52 Weeks Ended
July 28, 1996, July 30, 1995 and July 31, 1994...................... F-5
Consolidated Statements of Shareholders' Equity for the 52 Weeks Ended
July 28, 1996, July 30, 1995 and July 31, 1994..................... F-6
Consolidated Statements of Cash Flows for the 52 Weeks Ended
July 28, 1996, July 30, 1995 and July 31, 1994...................... F-7
Notes to Consolidated Financial Statements............................ F-8
Schedules have been omitted as not applicable.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Herley Industries, Inc.
We have audited the accompanying consolidated balance sheets of Herley
Industries, Inc. and Subsidiaries as of July 28, 1996, and July 30, 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the 52 weeks ended July 28, 1996 and July 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements for the 52 weeks ended July 31, 1994, were
audited by other auditors whose report dated October 13, 1994, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Herley Industries,
Inc. and Subsidiaries as of July 28, 1996, and July 30, 1995, and the
consolidated results of their operations and cash flows for the 52 weeks ended
July 28, 1996, and July 30, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Lancaster, PA
September 27, 1996
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Herley Industries, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Herley Industries, Inc. and Subsidiaries
for the 52 weeks ended July 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations of Herley
Industries, Inc. and Subsidiaries and their consolidated cash flows for the 52
weeks ended July 31, 1994 in conformity with generally accepted accounting
principles.
WOLINETZ, GOTTLIEB & LAFAZAN, P. C.
Rockville Centre, New York
October 13, 1994
F-3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 28, July 30,
1996 1995
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,104,445 $ 272,755
Accounts receivable 3,249,225 4,679,917
Notes receivable-officers 2,083,543 -
Other receivables 124,992 163,402
Inventories 8,010,687 9,330,053
Deferred taxes and other 1,689,988 1,006,503
----------- -----------
Total Current Assets 16,262,880 15,452,630
Property, Plant and Equipment, net 12,579,044 13,775,710
Intangibles, net of amortization of $861,650 in 1996
and $589,550 in 1995 4,580,236 4,852,336
Available-for-sale Securities 4,912,387 4,114,614
Other Investments 3,000,000 3,727,506
Other Assets 1,174,395 306,486
=========== ===========
$ 42,508,942 $ 42,229,282
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 300,000 $ 357,078
Accounts payable and accrued expenses 5,123,868 7,644,148
Income taxes payable 166,295 -
Reserve for contract losses 489,110 496,000
Advance payments on contracts 1,480,033 1,476,640
----------- -----------
Total Current Liabilities 7,559,306 9,973,866
Long-term Debt 11,021,000 10,525,000
Deferred Income Taxes 1,923,058 1,282,179
Excess of fair value of net assets of business
acquired over cost, net of amortization of
$486,833 in 1996 973,667 1,460,500
----------- -----------
21,477,031 23,241,545
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
10,000,000 shares; issued and outstanding
2,936,122 in 1996 and 3,015,988 in 1995 293,612 301,599
Additional paid-in capital 11,448,827 13,040,622
Retained earnings 9,289,472 5,620,516
----------- -----------
21,031,911 18,962,737
Unrealized gain on available-for-sale
securities - 25,000
----------- -----------
Total Shareholders' Equity 21,031,911 18,987,737
=========== ===========
$ 42,508,942 $ 42,229,282
=========== ===========
The accompanying notes are an integral part of these financial
statements.
F-4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
52 weeks ended
-----------------------------
July 28, July 30, July 31,
1996 1995 1994
----------- ----------- -----------
Net sales $ 29,001,404 $ 24,450,267 $ 30,508,211
----------- ----------- -----------
Cost and expenses:
Cost of products sold 19,798,692 18,117,874 19,624,788
Selling and administrative expenses 5,831,830 5,071,840 7,743,059
Unusual items - 5,447,005 745,663
----------- ----------- -----------
25,630,522 28,636,719 28,113,510
----------- ----------- -----------
Operating income (loss) 3,370,882 (4,186,452) 2,394,701
----------- ----------- -----------
Other income (expense):
Net gain (loss) on available-for-sale
securities and other investments 897,919 (355,709) 523,612
Dividend and interest income 376,007 617,645 799,478
Other income - - 155,996
Interest expense (873,452) (961,650) (1,336,358)
----------- ----------- -----------
400,474 (699,714) 142,728
----------- ----------- -----------
Income (loss) before income taxes 3,771,356 (4,886,166) 2,537,429
Provision for income taxes 102,400 4,000 676,000
----------- ----------- -----------
Net income (loss) $ 3,668,956 $ (4,890,166) $ 1,861,429
=========== =========== ===========
Earnings (loss) per common and common
equivalent share $ 1.15 $(1.31) $ .44
==== ==== ====
Weighted average number of common and
common equivalent shares outstanding 3,190,339 3,734,151 4,276,422
=========== ========= =========
The accompanying notes are an integral part of these financial statements.
F-5
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
52 weeks ended July 28, 1996, July 30, 1995 and July 31, 1994
Unrealized
Gain (Loss)
Additional on Available-
Common Stock Paid-in Retained for-sale Treasury
Shares Amount Capital Earnings Securities Stock Total
------ ------ ------- -------- ---------- ----- -----
Balance at August 1, 1993 4,273,189 $ 427,319 18,166,054 8,649,253 (60,610) - $ 27,182,016
Net income 1,861,429 1,861,429
Decrease in market value
of non-current
marketable securities (140,507) (140,507)
Cancellation of common stock
in connection with
business acquired (35,000) (3,500) (272,125) (275,625)
Common stock issued
as compensation 1,000 100 6,525 6,625
Exercise of stock options 39,000 3,900 88,920 92,820
Purchase of 102,500 shares
of treasury stock (445,620) (445,620)
---------- ------- ---------- ---------- -------- --------- ----------
Balance at July 31, 1994 4,278,189 $ 427,819 17,989,374 10,510,682 (201,117) (445,620) $ 28,281,138
Net (loss) (4,890,166) (4,890,166)
Issuance of common stock 35,000 3,500 99,313 102,813
Unrealized gain on
available-for-sale
securities 226,117 226,117
Purchase of 1,194,701 shares
of treasury stock (4,732,165) (4,732,165)
Retirement of 1,297,201 shares
of treasury stock (1,297,201) (129,720) (5,048,065) 5,177,785 -
---------- ------- ---------- ---------- ------- ---------- ----------
Balance at July 30, 1995 3,015,988 $ 301,599 13,040,622 5,620,516 25,000 - $ 18,987,737
Net income 3,668,956 3,668,956
Exercise of stock options 406,432 40,643 2,577,360 2,618,003
Unrealized loss on
available-for-sale
securities (25,000) (25,000)
Purchase of 486,298 shares
of treasury stock (4,217,785) (4,217,785)
Retirement of treasury shares (486,298) (48,630) (4,169,155) 4,217,785 -
---------- ------- ---------- ---------- ------- --------- ----------
Balance at July 28, 1996 2,936,122 $ 293,612 11,448,827 9,289,472 - - $ 21,031,911
========== ======== ========== ========== ======= ========= ==========
The accompanying notes are an integral part of these financial statements.
F-6
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
52 weeks ended
--------------------------------
July 28, July 30, July 31,
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net Income (loss) $ 3,668,956 $ (4,890,166) $ 1,861,429
----------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation and amortization 1,563,354 2,116,233 2,085,245
(Gain) loss on sale of available-for-sale
securities and other investments (1,018,643) 355,709 (595,334)
Decrease (increase) in deferred tax assets (393,389) 596,055 (421,215)
Increase in deferred tax liabilities 376,723 255,240 623,522
Common stock issued as compensation - - 6,625
Unrealized loss on available-for-sale securities 121,550 - 71,721
Unusual item - 5,447,005 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,430,692 1,285,694 (645,786)
(Increase) in notes receivable-officers (2,083,543) - -
Decrease (increase) in other receivables 38,410 136,635 69,584
Decrease (increase) in inventories 1,319,366 2,208,137 1,260,010
Decrease (increase) in prepaid expenses
and other (25,940) (753,838) 1,198,343
(Decrease) in accounts payable and
accrued expenses (513,649) (3,879,974) (1,604,711)
Increase (decrease) in income taxes payable 166,295 (162,543) 162,543
(Decrease) in reserve for contract losses (6,890) (4,000) (2,129,113)
Increase (decrease) in advance payments
on contracts 3,393 (1,397,334) (1,034,346)
Other, net 40,000 153,335 (126,457)
----------- ----------- -----------
Total adjustments 1,017,729 6,356,354 (1,079,369)
----------- ----------- -----------
Net cash provided by operations 4,686,685 1,466,188 782,060
----------- ----------- -----------
Cash flows from investing activities:
Purchase of available-for-sale securities
and other investments (11,077,331) (22,766,138) (32,674,407)
Proceeds from sale of available-for-sale securities
and other investments 11,879,157 30,417,016 32,178,382
Capital expenditures (643,330) (182,241) (936,314)
----------- ----------- -----------
Net cash provided by (used in) investing activities 158,496 7,468,637 (1,432,339)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under bank line of credit 9,875,000 4,044,668 4,174,316
Proceeds from exercise of stock options 134,451 - 92,820
Payments under lines of credit (10,200,000) (8,025,000) (2,500,000)
Payments under litigation settlement (2,000,000) (2,000,000) -
Payments of long-term debt (88,709) (512,735) (727,223)
Purchase of treasury stock (1,734,233) (2,708,732) (445,620)
----------- ----------- -----------
Net cash provided by (used in) financing activities (4,013,491) (9,201,799) 594,293
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 831,690 (266,974) (55,986)
Cash and cash equivalents at beginning of period 272,755 539,729 595,715
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,104,445 $ 272,755 $ 539,729
=========== =========== ===========
Supplemental cash flow information:
Cashless exercise of stock options $ 2,483,552
===========
Intangibles arising from basis differences in connection
with acquisitions $ (2,540,948)
===========
Liabilities assumed in connection with acquisition $ 915,000
===========
Cancellation of 35,000 shares of common stock
reclassified as an accrued liability $ 275,625
===========
The accompanying notes are an integral part of these financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Operations
The Company principally designs, manufactures and sells flight
instrumentation products, primarily to aerospace companies, the U.S.
government, and several foreign governments. One of the Company's main
products is a variety of transponders which are used to enhance radar
signals to accurately track the flight of space launch vehicles and
aircraft.
2. Fiscal Year
The Company's fiscal year ends on the Sunday closest to July 31. Normally
each fiscal year consists of 52 weeks, but every five or six years the
fiscal year will consist of 53 weeks. Fiscal years 1994 through 1996
consisted of 52 weeks.
3. Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Herley
Industries, Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements as well as revenues and expenses during
the period. Actual results could differ from those estimates.
4. Revenue and Cost Recognition
Under fixed-price contracts, sales and related costs are recorded
primarily as deliveries are made. Certain costs under long-term,
fixed-price contracts (principally either directly or indirectly with the
U. S. Government), which include non-recurring billable engineering are
deferred until these costs are contractually billable. Revenue under
certain long-term, fixed price contracts, principally shelters, is
recognized using the percentage of completion method of accounting.
Revenue recognized on these contracts is based on estimated completion to
date (the total contract amount multiplied by percent of performance,
based on direct labor dollars). Losses on contracts are recorded when
first reasonably determined.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred.
5. Inventories
Inventories, other than inventory costs relating to long-term contracts
and programs, are stated at lower of cost (principally first-in,
first-out) or market. Inventory costs relating to long-term contracts and
programs are stated at the actual production costs, including factory
overhead, reduced by amounts identified with revenue recognized on units
delivered or progress completed.
Inventory costs relating to long-term contracts and programs are reduced
by any amounts in excess of estimated realizable value. The costs
attributed to units delivered under long-term contracts and programs are
based on the average costs of all units produced.
F-8
6. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided principally by the straight-line method over the
estimated useful lives of the related assets. Gains and losses arising
from the sale or disposition of property, plant and equipment are recorded
in income.
7. Intangibles
Intangibles are comprised of customer lists, installed products base,
drawings, patents, licenses, certain government qualifications and
technology and goodwill in connection with the acquisition of Vega
Precision Laboratories, Inc. in 1993. Intangibles are being amortized over
twenty years.
The carrying amount of intangibles is evaluated on a recurring basis.
Current and future profitability as well as current and future
undiscounted cash flows of the acquired businesses are primary indicators
of recoverability. For the three years ended July 28, 1996, there were no
adjustments to the carrying amount of the cost in excess of net assets
acquired resulting from these evaluations.
8. Marketable Securities
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for certain
Investments in Debt and Equity Securities." The Company adopted the
provisions of the new standard for investments held as of August 1, 1994.
Adoption of this statement did not have a material effect on the financial
statements of the Company.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance
sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to
maturity. Marketable equity securities and debt securities not classified
as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component
of shareholders' equity. Realized gains and losses and declines in value
judged to be other-than-temporary are included in other income (expense).
The cost of securities sold is based on the specific identification
method. Interest and dividends on securities are included in other income
(expense).
Realized gains or losses are determined on the specific identification
method and are reflected in income. Net unrealized losses on non-current
marketable securities are recorded directly in a separate shareholders'
equity account except those unrealized losses that are deemed to be other
than temporary, which losses are reflected in income.
9. Other Investments
The Company is a limited partner in certain nonmarketable limited
partnerships in which it owns approximately a 10% interest. The Company
has no ability to influence the operating or financial policies of the
partnership. These investments are carried at cost, adjusted for any
permanent impairment in value.
10. Income Taxes
Income taxes are accounted for by the asset/liability approach in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred taxes represent the expected
future tax consequences when the reported amounts of assets and
liabilities are recovered or paid. They arise from temporary differences
between the financial reporting and tax bases of assets and liabilities
and are adjusted for changes in tax laws and tax rates when those changes
are enacted. The provision for income taxes represents the total of income
taxes paid or payable for the current year, plus the change in deferred
taxes during the year.
F-9
11. Earnings Per Common Share
Earnings per common share and common equivalent share is based on the
weighted average number of outstanding shares of common stock including
common stock equivalents (options and warrants) as determined under the
treasury stock method as follows: 3,190,339 shares in 1996; 3,734,151
shares in 1995; and 4,276,422 shares in 1994.
12. Cash and Cash Equivalents
For purposes of the statement of cash flows, short-term investments which
have a maturity of ninety days or less at the date of acquisition are
considered cash equivalents.
13. Product Development
The Company's primary efforts are focused on engineering design and
product development activities rather than pure research. The cost of
these development activities, including employees' time and prototype
development, net of amounts paid by customers, was approximately
$1,453,000, $970,000, and $1,367,000 in fiscal 1996, 1995, and 1994,
respectively.
14. New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS
121"), which is required to be adopted by fiscal 1997. SFAS 121
establishes the accounting standards for the impairment of long-lived
assets, certain intangible assets and cost in excess of net assets
acquired to be held and used, and for long-lived assets and certain
intangible assets to be disposed of. The Company adopted this statement
during fiscal year ended July 30, 1995; it did not have a material impact
on the consolidated financial position of the Company.
NOTE B - ACQUISITIONS AND DISPOSALS
In July 1995, the Company entered into an agreement effective as of the
close of business June 30, 1995, to acquire certain assets and the
business (consisting principally of inventories and trade receivables) of
Stewart Warner Electronics Corporation, a Delaware corporation. The
transaction, which closed on July 28, 1995, provided for the payment of
$250,000 in cash and the assumption of approximately $915,000 in
liabilities and has been accounted for by the purchase method. The
acquisition resulted in excess of fair value over cost of net assets
acquired of $1,460,500 which is being amortized over a three-year period.
NOTE C - NOTES RECEIVABLE-OFFICERS
In November 1995, and March 1996 the Company lent $1,700,000 and $300,000
respectively, to certain officers, as authorized by the Board of
Directors, pursuant to the terms of nonnegotiable promissory notes. The
loans are secured by 445,774 shares of common stock of the Company. The
notes are due November 1996 and March 1997, respectively, and may be
renewed by the Company for up to four additional one-year periods.
Interest is payable at maturity at the average rate of interest paid by
the Company on borrowed funds during the fiscal year. The pledge agreement
also provides for the Company to have the right of first refusal to
purchase the pledged securities, based on a formula as defined, in the
event of the death or disability of the officer.
F-10
NOTE D - INVENTORIES
The major components of inventories are as follows:
July 28, July 30,
1996 1995
Purchased parts and raw materials $ 3,358,256 $ 5,749,455
Work in process 4,580,538 3,478,268
Finished products 71,893 102,330
$ 8,010,687 $ 9,330,053
NOTE E - AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component
of shareholders' equity. Realized gains and losses and declines in value
judged to be other-than-temporary are included in other income (expense).
The cost of securities sold is based on the specific identification
method. Interest and dividends on securities are included in other income
(expense).
The following is a summary of available-for-sale securities:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
July 28, 1996
Government bonds $ 3,783,402 $ - $ - $ 3,783,402
Other 1,125,700 - - 1,125,700
--------- ------ ------ ---------
Total 4,909,102 - - 4,909,102
Equity securities 3,285 - - 3,285
--------- ------ ------ ---------
$ 4,912,387 $ - $ - $ 4,912,387
========= ====== ====== =========
July 30, 1995
Government bonds $ 3,878,937 $ 72,968 $ 31,302 $ 3,920,603
Other 189,919 - - 189,919
--------- ------ ------ ---------
Total 4,068,856 72,968 31,302 4,110,522
Equity securities 4,092 - - 4,092
--------- ------ ------ ---------
$ 4,072,948 $ 72,968 $ 31,302 $ 4,114,614
========= ====== ====== =========
In September 1996 the Company liquidated its available-for-sale securities
for approximately $4,912,000 and used the proceeds to reduce its long-term
bank debt. A provision for unrealized losses of $121,550 is included in
the statement of operations.
NOTE F - OTHER INVESTMENTS
In December 1995 the Company sold its investment and terminated its
limited partnership interest in M.D. Sass Re/Enterprise Partners, L.P., a
Delaware limited partnership for $3,823,233 realizing a gain of
$1,095,727.
In April 1996 the Company acquired a limited partnership interest in M.D.
Sass Re/Enterprise-II, L.P., a Delaware limited partnership for
$2,000,000. The objective of the partnership is to achieve superior
long-term capital appreciation through investments consisting primarily of
securities of companies that are experiencing significant financial or
business difficulties. At July 28, 1996 the percentage of ownership was
approximately 10%. The Company's interest in the partnership may be
redeemed, based upon its proportionate share of partnership capital, upon
ninety-days notice to the managing general partner.
F-11
Redemptions are generally made as of the last day of a fiscal quarter. The
estimated fair market value, as determined by the general partner, at July
28, 1996 was $2,002,838.
In July 1994 the Company invested $1,000,000 for a limited partnership
interest in M.D. Sass Municipal Finance Partners-I, a Delaware limited
partnership. The objectives of the partnership are the preservation and
protection of its capital and the earning of income through the purchase
of certificates or other documentation that evidence liens for unpaid
local taxes on parcels of real property. At July 28, 1996 and July 30,
1995 the percentage of ownership was approximately 10%. The Company's
interest in the partnership may be transferred to a substitute limited
partner, upon written notice to the managing general partners, only with
the unanimous consent of both general partners at their sole discretion.
The estimated fair market value, as determined by the general partner, at
July 28, 1996 and July 30, 1995 was $1,247,313 and $1,104,243
respectively.
These investments are carried at cost in the consolidated financial
statements at July 28, 1996 and July 30, 1995.
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
July 28, July 30, Estimated
1996 1995 Useful Life
---- ---- -----------
Land $ 880,270 $ 880,270
Building and building
improvements 5,362,409 5,310,925 10-40 years
Machinery and equipment 16,788,901 16,329,395 5-8 years
Furniture and fixtures 494,056 492,597 5-10 years
Automotive equipment - 30,243 3 years
Tools 24,869 24,869 5 years
Leasehold improvements 288,757 251,876 5-10 years
---------- ----------
23,839,262 23,320,175
Less accumulated depreciation 11,260,218 9,544,465
---------- ---------
$12,579,044 $13,775,710
========== ==========
NOTE H - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, production and warehouse space as well as
computer equipment and automobiles under noncancellable operating leases.
Rent expense for the 52 weeks ended July 28, 1996, July 30, 1995 and July
31, 1994 was approximately $284,600, $158,000, and $584,000 respectively.
Rent expense in 1994 includes $308,000 for a facility formerly occupied by
Vega Precision Laboratories, Inc. This lease was terminated in December,
1993.
Minimum annual rentals under noncancellable leases are as follows:
Amount
Year ending fiscal 1997 $172,000
1998 147,800
1999 116,900
2000 66,900
F-12
Employment Agreements
The Company has employment agreements with various executives and
employees of the Company, which, as amended, expire at various dates
through December 31, 2002, subject to extension each January 1 for six
years from that date not to extend, in any event, beyond December 31, 2006
. These agreements provide for aggregate annual salaries of $1,185,000.
Certain agreements provide for an annual increment equal to the greater of
a cost of living adjustment based on the consumer price index or 10%, and
also provide for incentive compensation related to pretax income.
Incentive compensation in the amount of $446,750 has been accrued for the
fiscal year ended July 28, 1996. No incentive compensation was due for the
fiscal year ended July 30, 1995. Incentive compensation for the year ended
July 31, 1994 was waived by these executives.
Certain agreements also provide that, in the event there is a change in
control of the Company, as defined, the executives have the option to
terminate the agreements and receive a lump-sum payment. As of July 28,
1996, the amount payable in the event of such termination would be
approximately $2,013,500.
One of the employment contracts, as amended November 30, 1992, provides
for a consulting agreement commencing January 1, 1998 and terminating
December 31, 2010 at the annual rate of $100,000
Litigation
In May and June 1994, the Company was served with two class action
complaints against the Company and certain of its officers and directors
in the United States District Court for the Eastern District of
Pennsylvania. The claims were made under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. One of the
claims is also based upon alleged negligence. The claims relate to the
Company's acquisition of Carlton Industries, Inc. and its subsidiary, Vega
Precision Laboratories, Inc. The claims were combined into one matter and
a consolidated Complaint. In April, 1995, the Court certified that the
claims based on the Securities Exchange Act may proceed as a Class Action
pursuant to Rule 23(b) (3), but without prejudice to the rights of the
parties thereafter to seek modification of the Class or revocation of
leave to proceed. The Court refused to certify the negligence claim as a
Class Action. In May, 1995, the parties negotiated a settlement of all
claims in consideration for a payment of $450,000 subject to Notice to the
Class and Court approval. A hearing on the proposed settlement is
scheduled for October 15, 1996.
In May, 1995, the Company was served with a Class Action Complaint against
the Company and its Chief Executive Officer in the United States District
Court for the Eastern District of Pennsylvania. The claim was made under
Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10(b)-5 thereunder. The claim relates to the Company's settlement of the
Litton Action in the Essex Superior Court of Massachusetts and alleges,
inter alia, that there was insufficient disclosure by the Company of its
true potential exposure in that claim. Cross motions for summary judgment
have been filed and are pending before the Court. The Company believes it
has a meritorious defense and intends to vigorously defend against the
action.
In July 1996, the Company was notified by the American Arbitration
Association of the decision of the arbitrators in an action commenced in
March 1994 by the principal selling shareholders of Carlton Industries,
Inc. and its subsidiary, Vega Precision Laboratories, Inc. According to
the award, the Company was to pay to the claimants the sum of $1,052,900,
inclusive of interest. Correspondingly, the claimants were to pay the
Company the sum of $277,719, inclusive of interest. The Company paid
$775,181 to claimants, representing the difference between the award to
the claimants and the award to the Company, in August, 1996. The award to
the claimants was offset by $593,162 otherwise payable to one of the
selling shareholders.
The Company is also involved in other legal proceedings and claims which
arise in the ordinary course of its business. While any litigation
contains an element of uncertainty, management believes that the outcome
of such litigation, including actions described above, will not have a
material adverse effect on the Company's financial position or results of
operations.
F-13
Stand-by Letters of Credit
The Company maintains a letter of credit facility with a bank that
provides for the issuance of stand-by letters of credit and requires the
payment of a fee of 1.0% per annum of the amounts outstanding under the
facility. The facility expires January 31, 1998. At July 28, 1996 stand-by
letters of credit aggregating $1,526,292 were outstanding under this
facility.
NOTE I - INCOME TAXES
Income tax provision consisted of the following:
52 Weeks ended
-----------------------------
July 28, July 30, July 31,
1996 1995 1994
---- ---- ----
Current
Federal $ 90,000 $ - $ -
State 12,400 - 236,000
Deferred, Federal
and State - 4,000 440,000
------- ----- -------
$ 102,400 $ 4,000 $ 676,000
======= ===== =======
The Company paid income taxes of approximately $19,000 in 1996, $122,000
in 1995, and $77,000 in 1994. The following is a reconciliation of the
U. S. statutory income tax rate and the effective tax rate on pretax
income:
52 weeks ended
--------------------------
July 28, July 30, July 31,
1996 1995 1994
---- ---- ----
U.S. Federal statutory rate 34.0 % (34.0) % 34.0 %
State taxes, net of
federal tax benefit 0.2 - 6.2
Alternative minimum tax 2.4 - -
Benefit of net operating loss
carryforward (35.2) - (10.8)
Non-taxable income - - (9.2)
Non-deductible expenses 1.3 - -
Increase in valuation allowance - 34.0 -
Other, net - - (6.4)
---- ---- ----
Effective tax rate 2.7 % - % 26.6 %
==== ==== ====
The effective tax rate in 1996 was 2.7%. The 1996 tax provision reflects
the utilization of prior year net operating loss carryforwards. No income
tax benefit was recorded in 1995 due to an increase in the valuation
allowance. A valuation allowance has been provided to reduce deferred tax
assets to their net realizable value for amounts which management believes
may expire unutilized. The uncertainty that past performance will be
indicative of future earnings due to the unpredictable nature of the
industry in which the Company operates was a determining factor in
assessing the need for a valuation allowance.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes.
As of July 28, 1996, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $8,181,000, of which
$1,134,000 expires in 2008, $2,843,000 in 2009, and $4,204,000 in 2010.
F-14
Components of deferred tax assets and liabilities are as follows:
July 28, 1996 July 30, 1995
------------- -------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Intangibles $ 807,537 $ - $ - $ 73,687
Alternative minimum tax 176,707 - 86,707 -
Accrued vacation pay 118,104 - 126,231 -
Accrued bonus 243,760 - - -
Warranty costs 220,000 - - -
Inventory 910,081 - 503,360 -
Depreciation - 1,923,058 - 1,455,982
Net operating loss
carryforwards 2,781,480 - 4,209,952 -
Litigation settlement 495,080 - 880,000 -
Contract losses 215,208 - 218,240 -
Other 97,645 - 171,600 16,666
6,065,602 1,923,058 6,196,090 1,546,335
--------- --------- --------- ---------
Valuation allowance 4,454,627 - 4,978,504 -
--------- --------- --------- ---------
$1,610,975 $1,923,058 $1,217,586 $1,546,335
========= ========= ========= =========
NOTE J- LONG-TERM DEBT
Long-term debt is summarized as follows:
July 28, July 30,
Rate 1996 1995
---- ---- ----
Note payable bank (a) 6.26%-8.25% $ 6,950,000 $ 7,000,000
Mortgage note (b) 10.4% 3,525,000 3,800,000
Long term liability (c) - 846,000 -
Other Various - 82,078
11,321,000 10,882,078
Less current portion 300,000 357,078
---------- ----------
$ 11,021,000 $ 10,525,000
========== ==========
(a)In January 1996, the Company entered into a revolving credit agreement
with a new bank that provides for the extension of credit in the
aggregate principal amount of $11,000,000 and may be used for general
corporate purposes, including business acquisitions. The facility
requires the payment of interest only on a monthly basis and payment of
the outstanding principal balance on January 31, 1998. Interest is set
biweekly at 1% over the bank's Federal Funds Rate (5.26% at July 28,
1996) applied to outstanding balances up to 80% of the net equity value
of available-for-sale securities, and at the bank's Base Rate (8.25% at
July 28, 1996) for outstanding balances in excess of this limit. The
premium rate portion of the facility is secured by the marketable
securities. The credit facility also provides for the issuance of
stand-by letters of credit with a fee of 1.0% per annum of the amounts
outstanding under the facility. At July 28, 1996, stand-by letters of
credit aggregating $1,526,292 were outstanding.
The agreement contains various financial covenants, including, among
other matters, the maintenance of working capital, tangible net worth,
and restrictions on cash dividends and other borrowings.
(b)The mortgage note provides for annual principal payments at varying
amounts through 2004 plus semiannual interest payments. Land and
buildings in Lancaster, Pa. are pledged as collateral.
The mortgage note agreement contains various financial covenants,
including, among other matters, the
F-15
maintenance of specific amounts of working capital and tangible net
worth. In connection with this loan, the Company paid approximately
$220,000 in financing costs. Such costs are included in Other Assets in
the accompanying consolidated balance sheets at July 28, 1996 and July
30,1995 and are being amortized over the term of the loan (15 years).
(c)Under a contract for the purchase of an industrial parcel of land from
its Chairman, the Company is obligated to pay $846,000 at settlement on
or before April 30, 1998.
The Company paid interest of approximately $854,000 in 1996, $1,010,000 in
1995, and $1,296,000 in 1994.
Future payments required on long-term debt are as follows:
Fiscal year ending during: Amount
-------------------------- ---------
1997 $ 300,000
1998 8,131,000
1999 370,000
2000 410,000
2001 450,000
Thereafter 1,660,000
---------
$11,321,000
==========
NOTE K - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
July 28, July 30,
1996 1995
---- ----
Accounts payable $ 1,579,230 $ 1,302,789
Accrued payroll and bonuses 1,160,348 553,276
Accrued commissions 247,687 390,097
Accrued interest 95,925 98,141
Accrued litigation expenses 1,206,914 3,282,430
Accrued expenses 833,764 2,017,415
--------- ---------
$ 5,123,868 $ 7,644,148
========= =========
NOTE L - EMPLOYEE BENEFIT PLANS
In August 1985, the Board of Directors approved an Employee Savings Plan
which qualified as a thrift plan under Section 401(k) of the Internal
Revenue Code. This Plan, as amended and restated, allows employees to
contribute between 2% and 15% of their salaries to the Plan. The Company,
at its discretion can contribute 100% of the first 2% of the employees'
contribution and 25% of the next 4%. Additional Company contributions can
be made depending on profits. The aggregate benefit payable to an employee
is dependent upon his rate of contribution, the earnings of the fund, and
the length of time such employee continues as a participant.
The Company has accrued approximately $159,000 for the fiscal year ended
July 28, 1996, and contributed approximately $151,000, and $199,000 to
this plan for the fifty-two weeks ended July 30, 1995, and July 31, 1994,
respectively.
NOTE M - SHAREHOLDERS' EQUITY
In October 1995, the Board of Directors approved the 1996 Stock Option
Plan which covers 500,000 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified
F-16
under Section 422 of the Internal Revenue Code of 1986 or non-qualified
stock options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of grant.
The nature and terms of the options to be granted is determined at the
time of grant by the Board of Directors. If not specified, 100% of the
shares can be exercised one year after the date of grant The options
expire ten years from the date of grant. No options were granted during
the fiscal year ended July 28, 1996.
In December 1992, the Board of Directors approved the 1992 Non-Qualified
Stock Option Plan which covers 1,000,000 shares, as amended, of the
Company's common stock. Under the terms of the Plan, the purchase price of
the shares, subject to each option granted, is 100% of the fair market
value at the date of grant. The date of exercise is determined at the time
of grant by the Board of Directors; however, if not specified, 50% of the
shares can be exercised each year beginning one year after the date of
grant. The options expire ten years from the date of grant. Options for
255,000, and 254,000 shares were issued during the fiscal years ended July
30, 1995 and July 31, 1994, respectively. These options may be exercised
cumulatively at the rate of 25% per year beginning one year after the date
of grant. Options for 322,023 and 534,800 shares were exercisable at July
28, 1996 and July 30, 1995 respectively. This plan was terminated in
December 1995, except for outstanding options thereunder.
In October 1987, the Board of Directors approved the 1988 Non-Qualified
Stock Option Plan which covers 500,000 shares of the Company's common
stock. Under the terms of the Plan, the purchase price of the shares,
subject to each option granted, will not be less than 85% of the fair
market value at the date of grant. The date of exercise may be determined
at the time of grant by the Board of Directors; however, if not specified,
20% of the shares can be exercised each year beginning one year after the
date of grant and generally expire five years from the date of grant. At
July 31, 1996, July 30, 1995 and July 31, 1994, options to purchase
23,100, 29,775, and 19,850 shares of common stock, respectively, were
exercisable. This plan was terminated in December 1995, except for
outstanding options thereunder.
A summary of stock option activity under all plans for the 52 weeks ended July
28, 1996, July 30, 1995, and July 31, 1994 follows:
Non-Qualified Stock Options Warrant Agreements
--------------------------- ------------------
Number Price Range Number Price Range
of shares per share of shares per share
--------- --------- --------- ---------
Outstanding August 1, 1993... 515,700 $ 2.38-12.01 430,000 $ 7.13
Granted .................. 254,000 6.00- 6.88
Exercised................. (39,000) 2.38
Canceled.................. (33,000) 5.69-12.01
------- ---------- ------- -----------
Outstanding July 31, 1994.... 697,500 $ 5.69-12.01 430,000 $ 7.13
Granted .................. 255,000 3.38
Canceled.................. (10,000) 3.38- 7.00
------- ---------- ------- -----------
Outstanding July 30, 1995.... 942,500 $ 3.38-12.01 430,000 $ 7.13
Granted .................. - 220,000 6.19
Exercised................. (406,432) 3.38- 7.50
Canceled.................. (23,500) 3.38- 7.00 (400,000) 7.13
------- ---------- ------- -----------
Outstanding July 28, 1996.... 512,568 $ 3.38-12.01 250,000 $6.19 - 7.13
======= =======
In April 1993, common stock warrants were issued to certain officers and
directors for the right to acquire 430,000 shares of common stock of the
Company at the fair market value of $7.125 per share at date of issue. In
December 1995 warrants for 400,000 shares were canceled The warrants
expire April 30, 1998. In December 1995, common stock warrants were issued
to certain officers for the right to acquire 220,000 shares of common
stock of the Company at the fair market value of $6.19 per share at date
of issue. The warrants expire December 13, 2005.
In connection with the sale of common stock to the public in 1992, the
Company issued to the underwriter,
F-17
for its own account, warrants to purchase 127,897 shares of common stock
of the Company (as adjusted under the agreement), exercisable for a period
of four years at a price of $12.08 per share (as adjusted under the
agreement), subject to further adjustment in certain events. The warrants
expire in February 1997.
On July 31, 1993, the Company issued 35,000 shares of common stock valued
at $7.875 per share in connection with the acquisition of substantially
all of the assets of Micro-Dynamics, Inc. These shares were subsequently
canceled and reissued in January 1995.
NOTE N - RELATED PARTY TRANSACTIONS
On March 6, 1996, the Board of directors approved the purchase of an
industrial parcel of land from the Chairman of the Company for $940,000. A
deposit of $94,000 was paid on execution of the contract, and the balance
of $846,000 will be paid at settlement on or before April 30, 1998. The
Company intends to use this land for possible future expansion.
NOTE O - MAJOR CUSTOMERS
Net sales to the U.S. Government in 1996, 1995, and 1994 accounted for
approximately 33%, 30%, and 25% of net sales, respectively. No other
customer accounted for 10% or more of net sales in 1996 and 1995. In 1994
sales to a major customer accounted for 16% of net sales. Foreign sales
amounted to approximately $6,556,000, $3,908,000, and $7,891,000 in fiscal
1996, 1995, and 1994, respectively.
Included in accounts receivable as of July 28, 1996 and July 30, 1995 are
amounts due from the U.S. Government of approximately $933,000 and
$718,000, respectively.
NOTE P - UNUSUAL ITEM
The Consolidated Statements of Operations for the fifty-two weeks ended
July 30, 1995 includes an unusual charge of $5,447,005 for settlement
costs, legal fees, and related expenses in connection with the settlement
of certain legal claims against the Company. Payments of $2,000,000 each,
without interest, were made in July 1995 and July 1996 in connection with
the settlement of one of the claims.
During the fiscal year ended July 31, 1994, the Company incurred unusual
charges of $745,663 in excess of reserves in connection with warranty
claims for products shipped by Vega prior to its acquisition by the
Company. These claims were resolved during the fiscal year and the Company
does not anticipate any further costs as a result of these claims.
NOTE Q - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximated its fair value.
Notes receivable-officers: The carrying amount reported in the balance
sheet for notes receivable from officers approximated its fair value.
Available-for-sale securities: The fair value of available-for-sale
securities was based on quoted market prices.
Other investments: The fair value of the Company's limited partnership
interest in M.D. Sass Re/Enterprise-II, L.P. was estimated by the
Managing General Partner based on quoted market prices for
F-18
widely traded securities, at representative "bid" or "asked" quotations
for unlisted securities, and for those securities for which market
quotations are not readily available, by one or more third parties who
are independent of the partnership. Because of the absence of readily
ascertainable market values, the tax liens held by M.D. Sass Municipal
Finance Partners-I are recorded at historical cost with provision for
impairment of values as determined by the Managing General Partners.
Long-term debt: The carrying amount reported in the balance sheet for
notes payable-bank and the real estate contract approximated its fair
value. The fair value of the mortgage note was estimated using
discounted cash flow analysis, based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.
Off balance sheet financial instruments:
Stand-by letters of credit: These letters of credit primarily
collateralize the Company's obligations to customers for advanced
payments received under contracts. The contract amounts of the letters
of credit approximate their fair value.
The carrying amounts and fair values of the Company's financial instruments are
presented below:
July 28, 1996
-------------
Carrying AmountFair Value
-------------------------
Cash and cash equivalents $ 1,104,445 $ 1,104,445
Notes receivable-officers 2,083,543 2,083,543
Available-for-sale securities 4,912,387 4,912,387
Other investments 3,000,000 3,250,151
Long-term debt 11,021,000 12,001,418
Stand-by letters of credit - 1,526,292
NOTE R - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of trade accounts receivable. Credit risk with respect
to trade receivables is minimized since most of the Company's business is
direct to the U. S. Government or as a subcontractor to companies with
significant financial resources acting as prime contractors to the U. S.
Government, as well as to foreign governments. Additionally, shipments to
foreign governments are generally under irrevocable letters of credit.
F-19