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U.S. puts Herley on its suspended list
By Tim Mekeel
Lancaster New Era

Published: Jun 14, 2006 1:57 PM EST

LANCASTER COUNTY, PA - Last week, when Herley Industries was indicted for fraud, there were hints that the defense contractor’s troubles might get even deeper.

And they have.

Herley said Tuesday that the federal government has placed the company’s three largest plants under suspension, meaning they can’t get new federal contracts.

Affected are its biggest plant — a 300-employee facility here on Industry Drive — plus plants in Woburn, Mass., and Farmingdale, N.Y., as well as a Chicago marketing office.

Those locations were used in the company’s fraudulent schemes, the indictment alleged.

The late-afternoon news sent Herley’s stock into a tailspin, tumbling 34 percent to close at $10.06 a share — its lowest point since November 1998.

Herley stock had traded in the $21 range just two months ago.

The suspension is “pending the outcome of legal proceedings,” said Herley, referring to the 35-count indictment against Herley and chairman Lee N. Blatt, who resigned last week.

The impact of the action “cannot easily be determined at this time” for several reasons, said Herley in a four-paragraph statement disclosing the suspension.

First, Herley’s backlog of $142 million in contracts that already have been awarded is excluded from the suspension, according to the company.

The backlog consists of products to be delivered to customers within one to two years.

Second, the suspension allows the plants to get new federal contracts, or extensions of existing contracts, under “special exceptions.”

A special exception can be granted “if the head of the (federal) agency states in writing the compelling reason to do so,” Herley explained.

Herley noted that in “a significant portion” of its business, it is “the only qualified supplier” of high-tech electronic parts for “critical defense programs.”

Lancaster-based Herley designs and makes microwave-technology parts and systems used in military planes, missiles and ships. It also supplies the aerospace and medical industries.

This latest disclosure capped a devastating eight days for Herley.

The tumult began the previous Tuesday when a federal grand jury indicted Herley and Blatt for allegedly cheating the military out of $2.8 million, by falsely inflating prices for two radar-system parts. Blatt resigned Thursday.

Both the company and its former chairman have said they are innocent.

The news that Herley’s legal troubles had triggered financial troubles was foreshadowed last week by a federal prosecutor and a company investor.

At a press conference announcing the indictment, U.S. Attorney Patrick Meehan raised the possibility that Herley might be “precluded” from bidding on federal contracts “to some extent.”

The next day, Chicago-based investor Discovery Group, which owns 5 percent of Herley, noted the same thing in a letter to the Herley board of directors.

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