UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended: February 1, 2004
----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-5411
HERLEY INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE #23-2413500
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 North Pointe Boulevard, Lancaster, Pennsylvania 17601
- --------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (717) 735-8117
--------------
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
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.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of March 11, 2004 -14,112,749 shares of Common Stock.
HERLEY INDUSTRIES, INC
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
February 1, 2004 and August 3, 2003 2
Condensed Consolidated Statements of Income -
For the Thirteen and Twenty-six weeks ended February 1, 2004
and Thirteen and Twenty-seven weeks ended February 2, 2003 3
Condensed Consolidated Statement of Shareholders' Equity-
For the Twenty-six weeks ended February 1, 2004 4
Condensed Consolidated Statements of Cash Flows -
For the Twenty-six weeks ended February 1, 2004
and Twenty-seven weeks ended February 2, 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 - Controls and Procedures 19
PART II -OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 6 - Exhibits and Reports on Form 8K 22
Signatures 23
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
February 1, August 3,
2004 2003
----------- ---------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 78,998 $ 81,523
Accounts receivable 17,709 16,525
Costs incurred and income recognized in excess
of billings on uncompleted contracts 15,479 6,960
Other receivables 1,166 827
Inventories, net of allowance of $2,789 in fiscal 2004
and $2,739 in fiscal 2003 40,008 37,545
Deferred taxes and other 3,384 3,207
-------- --------
Total Current Assets 156,744 146,587
Property, Plant and Equipment, net 23,742 22,406
Goodwill 26,448 25,729
Intangibles, net of accumulated amortization of $541 in fiscal
2004 and $403 in fiscal 2003 1,589 1,542
Available-For-Sale Securities 75 75
Other Investments 129 162
Other Assets 945 1,063
-------- --------
$ 209,672 $ 197,564
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 801 $ 686
Accounts payable and accrued expenses 14,600 14,026
Billings in excess of costs incurred and
income recognized on uncompleted contracts 423 0
Income taxes payable 2,657 2,670
Reserve for contract losses 940 736
Advance payments on contracts 1,405 856
-------- --------
Total Current Liabilities 20,826 18,974
Long-term Debt 5,940 6,403
Deferred Income Taxes 4,919 4,945
-------- --------
31,685 30,322
-------- --------
Commitments and Contingencies (Notes 5 and 6)
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
14,110,449 at February 1, 2004 and 13,969,151 at August 3, 2003 1,411 1,397
Additional paid-in capital 106,223 104,551
Retained earnings 68,965 61,478
Accumulated other comprehensive income (loss) 1,388 (184)
-------- --------
Total Shareholders' Equity 177,987 167,242
-------- --------
$ 209,672 $ 197,564
======== ========
The accompanying notes are an integral part of these financial statements.
2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share data)
Thirteen weeks ended Twenty-six Twenty-seven
-------------------- weeks ended weeks ended
February 1, February 2, February 1, February 2,
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ 29,408 $ 25,015 $ 57,675 $ 52,305
-------- -------- -------- --------
Cost and expenses:
Cost of products sold 19,045 16,342 36,670 34,441
Selling and administrative expenses 5,198 4,232 9,978 8,617
-------- -------- -------- --------
24,243 20,574 46,648 43,058
-------- -------- -------- --------
Operating Income 5,165 4,441 11,027 9,247
-------- -------- -------- --------
Other income (expense), net:
Investment income 187 296 363 664
Interest expense (82) (82) (169) (177)
Foreign exchange (loss) (70) -- (243) --
-------- -------- -------- --------
35 214 (49) 487
-------- -------- -------- --------
Income before income taxes 5,200 4,655 10,978 9,734
Provision for income taxes 1,654 1,368 3,491 3,095
-------- -------- -------- --------
Net income $ 3,546 $ 3,287 $ 7,487 $ 6,639
======== ======== ======== ========
Earnings per common share - Basic $ .25 $ .23 $ .53 $ .45
======== ======== ======== ========
Basic weighted average shares 14,073 14,464 14,043 14,665
======== ======== ======== ========
Earnings per common share - Diluted $ .24 $ .22 $ .50 $ .43
======== ======== ======== ========
Diluted weighted average shares 14,880 15,124 14,826 15,411
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
26 weeks ended February 1, 2004
(In thousands except share data)
Accumulated
Common Stock Additional Other
------------ Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
Balance at August 03, 2003 13,969,151 $ 1,397 104,551 61,478 (184) $ 167,242
Net income 7,487 7,487
Exercise of stock options 141,298 14 1,263 1,277
Tax benefit upon exercise of stock
options 409 409
Other comprehensive loss:
Unrealized loss on interest rate swap (54) (54)
Foreign currency translation gain 1,626 1,626
---------- -------- ------- ------ ----- ---------
Balance at February 1, 2004 14,110,449 $ 1,411 106,223 68,965 1,388 $ 177,987
========== ======== ======= ====== ===== =========
The accompanying notes are an integral part of these financial statements.
4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Twenty-six Twenty-seven
weeks ended weeks ended
February 1, February 2,
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 7,487 $ 6,639
-------- --------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 1,976 1,988
Foreign exchange loss 214 --
Equity in income of limited partnership (6) (12)
(Increase) in deferred tax assets -- (86)
(Increase) in deferred taxes & other (177) --
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,184) (3,081)
(Increase) decrease in costs incurred and income
recognized in excess of billings on uncompleted contracts (8,519) 292
(Increase) in other receivables (339) (342)
(Increase) in inventories (2,463) (3,944)
Decrease in prepaid expenses and other -- 122
Increase (decrease) in accounts payable and accrued expenses 574 (324)
Increase in billings in excess of revenue 423 --
Increase (decrease) in reserve for contract losses 204 (356)
Increase in advance payments on contracts 549 3,756
Increase in income taxes payable 396 --
Other, net 790 112
-------- --------
Total adjustments (7,562) (1,875)
-------- --------
Net cash (used in) provided by operating activities (75) 4,764
-------- --------
Cash flows from investing activities:
Acquisition of business, net of cash acquired -- (2,384)
Proceeds from sale of fixed assets -- 5
Partial distribution from limited partnership 39 27
Capital expenditures (3,124) (2,338)
-------- --------
Net cash used in investing activities (3,085) (4,690)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,277 482
Payments of long-term debt (642) (159)
Purchase of treasury stock -- (4,789)
-------- --------
Net cash provided by (used in) financing activities 635 (4,466)
-------- --------
Net (decrease) in cash and cash equivalents (2,525) (4,392)
Cash and cash equivalents at beginning of period 81,523 86,210
-------- --------
Cash and cash equivalents at end of period $ 78,998 $ 81,818
======== ========
The accompanying notes are an integral part of these financial statements.
5
Herley Industries, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements - (Unaudited)
1. The condensed consolidated financial statements include the accounts of
Herley Industries, Inc. and its subsidiaries, all of which are
wholly-owned. All significant inter-company accounts and transactions have
been eliminated in consolidation.
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
consolidated financial position and results of operations and cash flows
for the periods presented. These financial statements are unaudited and
have not been reported on by independent public accountants.
Results of operations for interim periods are not necessarily indicative of
the results of operations for a full year due to external factors which are
beyond the control of the Company.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." The statement is
effective for fiscal years beginning after December 31, 2002. SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. Adoption of this Standard did not have a
material impact on the Company's financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified
subsequent to December 31, 2002. The liabilities should reflect the fair
value, at inception, of the guarantors' obligations to stand ready to
perform, in the event that the specified triggering events or conditions
occur. Adoption of this Interpretation did not have a material effect on
the Company's results of operations or financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123." The new statement is effective, with respect to the transition
provisions, for fiscal years ending after December 15, 2002; and with
respect to the disclosure provisions, for financial reports containing
condensed financial statements for interim periods beginning after December
15, 2002. SFAS No. 148 provides transition alternatives for companies
adopting the fair value recognition provisions of FASB Statement No. 123
for stock-based employee compensation; and requires the pro forma
disclosures of SFAS No. 123 in interim condensed financial statements for
companies continuing to rely on APB Opinion No. 25 as if the provisions of
SFAS No. 123 had been adopted. The statement also requires that the pro
forma disclosures of the impact on earnings and earnings-per-share be
provided in a tabular format and included in the Summary of Significant
Accounting Policies or equivalent.
The effect of the adoption of SFAS No. 148 was the inclusion of the
required disclosures in the Company's condensed consolidated interim
financial statements in its quarterly reports, and the addition of a
significant accounting policies note included in the Company's Annual
Report on Form 10K.
The Company has various fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. The Company
continues to use the intrinsic value method in accordance with the
recognition and measurement principles of APB Opinion No. 25 and related
Interpretations in accounting for these plans. Statement of Financial
Accounting Standards No.123, "Accounting for Stock-Based Compensation"
6
("SFAS 123") was issued by the FASB in 1995 and , if fully adopted, changes
the methods for recognition of cost on plans similar to those of the
Company. The Company has adopted the disclosure-only provisions of SFAS 123
and SFAS 148. Accordingly, no stock-based employee compensation cost has
been recognized for options granted under the stock option plans. Pro forma
information regarding net income and earnings per share as required by
Statements 123 and 148 has been determined as if the Company had accounted
for its employee stock options under the fair value method of Statement
123.
The fair value for options granted is estimated at the date of grant using
a Black-Scholes option pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility.
For purposes of computing pro forma (unaudited) consolidated net earnings,
the following assumptions were used to calculate the fair value of each
option granted for all periods presented:
Expected life of options 1.51 years
Volatility .68
Risk-free interest rate 2.8%
Dividend yield zero
Had compensation cost for stock options granted in the first six months of
fiscal years 2004 and 2003 been determined based on the fair value at the
grant date consistent with the provisions of SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below using the statutory income tax rate of 34% (in
thousands except per share data):
Thirteen weeks ended Twenty-six Twenty-seven
-------------------- weeks ended weeks ended
February 1, February 2, February 1, February 2,
2004 2003 2004 2003
---- ---- ---- ----
Net income - as reported $ 3,546 $ 3,287 $ 7,487 $ 6,639
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (87) (474) (293) (1,372)
----- ----- ----- -----
Net income - pro forma $ 3,459 $ 2,813 $ 7,194 $ 5,267
===== ===== ===== =====
Earnings per share - as reported
Basic $ .25 $ .23 $ .53 $ .45
Diluted .24 .22 .50 .43
Earnings per share - pro forma
Basic $ .25 $ .19 $ .51 $ .36
Diluted .23 .19 .49 .34
The effects of applying the pro forma disclosures of SFAS 123 are not
likely to be representative of the effects on reported net income for
future years due to the various vesting schedules.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." In December 2003 this Interpretation was
replaced by FASB Interpretation No. 46(R) ("FIN 46(R)"), which clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which the equity investors do
not have the characteristics of a controlling financial interest or do not
7
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46(R) requires an enterprise to consolidate a variable interest entity if
that enterprise will absorb a majority of the entity's expected losses, is
entitled to receive a majority of the entity's expected residual returns,
or both. FIN 46(R) is effective for entities being evaluated under FIN
46(R) for consolidation no later than the end of the first reporting period
that ends after March 15, 2004. Management does not believe the adoption of
FIN 46(R) will have a material impact on the Company's financial position,
results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. The Statement is effective for contracts
entered into or modified after June 30, 2003, except as stated below and
for hedging relationships designated after June 30, 2003.
The provisions of Statement 149 that relate to Statement 133 implementation
issues that have been effective for fiscal quarters that began prior to
June 15, 2003, will continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to
forward purchases or sales of when-issued securities or other securities
that do not yet exist, will apply to existing contracts, as well as new
contracts entered into after June 30, 2003. Management has determined that
the adoption of this Statement will not have a significant impact on the
financial position, results of operations or cash flows of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
The Statement establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. Many of such
instruments were previously classified as equity. The statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. The Statement is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance of the date
of the Statement and still existing at the beginning of the interim period
of adoption. Restatement is not permitted. The adoption of this Statement
did not have a significant impact on the financial position, results of
operations or cash flows of the Company.
2. Inventories at February 1, 2004 and August 3, 2003 are summarized as
follows (in thousands):
February 1, 2004 August 3, 2003
---------------- --------------
Purchased parts and raw materials $ 20,397 $ 19,690
Work in process 19,744 18,646
Finished products 2,656 1,948
------- -------
42,797 40,284
Less reserve for excess and obsolete materials 2,789 2,739
------- -------
$ 40,008 $ 37,545
====== ======
3. The Company recognizes all derivatives on the balance sheet at fair value.
On the date the derivative instrument is entered into, the Company
generally designates the derivative as either (1) a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment
("fair value hedge") or (2) a hedge of a
8
forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability ("cash flow hedge").
Changes in the fair value of a derivative that is designated as, and meets
all the required criteria for, a cash flow hedge are recorded in
accumulated other comprehensive income (loss) and reclassified into
earnings as the underlying hedged item affects earnings.
In October 2001, the Company entered into an interest rate swap with a bank
pursuant to which it exchanged floating rate interest in connection with
the East Hempfield Township Industrial Development Authority Variable Rate
Demand/Fixed Rate Revenue Bonds Series 2001 (the "Bonds") on a notional
amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending
October 1, 2011. The notional amount reduces each year in tandem with the
annual installments due on the Bonds. The fixing of the interest rate for
this period offsets the Company's exposure to the uncertainty of floating
interest rates on the Bonds, and as such has been designated as a cash flow
hedge. The hedge is deemed to be highly effective and any ineffectiveness
will be recognized in interest expense in the reporting period. The fair
value of the interest rate swap was a liability of approximately $153,000
as of February 1, 2004. There was no material hedge ineffectiveness related
to cash flow hedges during the period to be recognized in earnings. There
was no gain or loss reclassified from accumulated other comprehensive
income into earnings during the quarter ended February 1, 2004 as a result
of the discontinuance of a cash flow hedge due to the probability of the
original forecasted transaction not occurring.
4. The Company adopted the provisions of SFAS No. 142 "Goodwill and Other
Intangible Assets" on July 30, 2001. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain
intangibles are not amortized into results of operations, but instead are
reviewed for impairment and written down and charged to results of
operations in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The adoption of SFAS
No.142 resulted in the Company's discontinuation of amortization of its
goodwill and certain intangible assets. An annual impairment test is
performed in the fourth quarter of each fiscal year and any future
impairment of goodwill will be charged to operations.
The change in the carrying amount of goodwill for the six months ended
February 1, 2004 is as follows (in thousands):
Balance at August 3, 2003 $ 25,729
Foreign currency translation adjustment 719
------
Balance at February 1, 2004 $ 26,448
======
Intangibles consist of the following (in thousands):
February 1, August 3, Estimated
2004 2003 useful life
---- ---- -----------
Technology (1) $ 1,021 $ 1,021 15 years
Backlog (1) 325 325 2 years
Non-compete (1) 31 31 5 years
Foreign currency translation
Adjustment (1) 185 -
Patents 568 568 14 years
----- -----
2,130 1,945
Accumulated amortization 541 403
----- -----
$ 1,589 $ 1,542
===== =====
9
---------
(1) Related to the acquisition of EWST (See Note 10.)
Amortization expense for the thirteen weeks ended February 1, 2004 and
February 2, 2003 was approximately $69,000 and $10,000, respectively , and
for the twenty-six weeks ended February 1, 2004 and twenty-seven weeks
ended February 2, 2003 was approximately $138,000 and $21,000,
respectively.
Estimated aggregate amortization expense for each of the next five fiscal
years is as follows (in thousands):
2004 $ 277
2005 129
2006 116
2007 115
2008 109
The carrying amount of intangibles is evaluated on a recurring basis.
5. The Company is involved in various legal proceedings and claims which arise
in the ordinary course of its business. While any litigation contains an
element of uncertainty, management believes that the outcome of such
litigation will not have a material adverse effect on the Company's
financial position or results of operations. In connection with the
Robinson Laboratories, Inc. ("RLI") litigation, as discussed in Part II,
Item 1. "Legal Proceedings", at a proceeding in April 2003 the Court
decided to delay ruling on all of the petitions for fees and costs until
after appeals are exhausted. In January 2004, the Second Circuit affirmed
the trial court judgment in its entirety, however, RLI submitted a letter
request to the trial court for relief from the judgment on RLI's claim for
the earn-out stock. Herley submitted its response in opposition and on
February 26, 2004, the parties appeared before the Court concerning the
various applications and were directed to submit legal briefs on various
legal issues.
6. The Company has outstanding an aggregate of approximately $19,000,000 in
open purchase orders as of February 1, 2004. These open purchase orders
represent executory contracts for the purchase of goods and services which
will be substantially fulfilled in the next six months.
7. The following tables show the calculation of basic and diluted
weighted-average shares outstanding (in thousands):
Thirteen weeks ended
--------------------
February 1, 2004 February 2, 2003
---------------- ----------------
Basic weighted-average shares 14,073 14,464
Effect of dilutive securities:
Employee stock options and warrants 807 660
------ -------
Diluted weighted-average shares 14,880 15,124
====== ======
There were no anti-dilutive options outstanding during the quarter ended
February 1, 2004. Options to purchase 704,500 weighted shares of common
stock, with exercise prices ranging from $16.80 to $19.52, were outstanding
during the second quarter of fiscal 2003, but were not included in the
computation of diluted EPS because the exercise price is greater than the
average market price of the common stock.
10
Twenty-six Twenty-seven
weeks ended weeks ended
February 1, 2004 February 2, 2003
---------------- ----------------
Basic weighted-average shares 14,043 14,665
Effect of dilutive securities:
Employee stock options and warrants 783 746
------ ------
Diluted weighted-average shares 14,826 15,411
====== ======
Options to purchase 637,758 weighted shares of common stock, with an
exercise price of $19.52, were outstanding during the first six months of
fiscal 2004, but were not included in the computation of diluted EPS
because the exercise price is greater than the average market price of the
common stock. The options, which expire May 21, 2012, were still
outstanding as of February 1, 2004. Options to purchase 694,188 weighted
shares of common stock, with exercise prices ranging from $17.42 to $19.52,
were outstanding during the first six months of fiscal 2003, but were not
included in the computation of diluted EPS because the exercise price is
greater than the average market price of the common stock.
8. The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended Twenty-six Twenty-seven
-------------------- weeks ended weeks ended
February 1, February 2, February 1, February 2,
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 3,546 $ 3,287 $ 7,487 $ 6,639
Unrealized loss on interest rate swap (19) - (54) (12)
Foreign currency translation gain (loss) 1,382 (42) 1,626 (41)
----- ----- ----- -----
Comprehensive income $ 4,909 $ 3,245 $ 9,059 $ 6,586
===== ===== ===== =====
The components of accumulated other comprehensive income (loss) is as
follows (in thousands):
February 1, 2004 August 3, 2003
---------------- --------------
Unrealized (loss) from available-for-sale
securities $ (48) $ (48)
Unrealized (loss) on interest rate swap (104) (50)
Foreign currency translation gain 1,540 (86)
----- ---
Accumulated other comprehensive income $ 1,388 $ (184)
===== ===
9. Geographic net sales for the second quarter, based on place of contract
performance, were as follows (in thousands):
Thirteen weeks ended Thirteen weeks ended
February 1, 2004 February 2, 2003
---------------- ----------------
United States $ 23,495 $ 20,647
Israel 2,972 3,025
England 2,941 1,343
------ ------
$ 29,408 $ 25,015
====== ======
11
Geographic net sales for the six months, based on place of contract
performance, were as follows (in thousands):
Twenty-six weeks ended Twenty-seven weeks ended
February 1, 2004 February 2, 2003
---------------- ----------------
United States $ 45,566 $ 43,804
Israel 6,028 5,836
England 6,081 2,665
------ ------
$ 57,675 $ 52,305
====== ======
Net property, plant and equipment by geographic area was as follows (in
thousands):
February 1, August 3,
2004 2003
---- ----
United States $ 19,738 $ 18,945
Israel 3,108 3,071
England 896 390
------ ------
$ 23,742 $ 22,406
====== ======
10. The Company entered into an agreement as of September 1, 2002, to acquire
all of the issued and outstanding common stock of EW Simulation Technology,
Limited ("EWST"), a British company of Aldershot, UK, which operates as a
wholly-owned subsidiary of the Company. EWST designs, develops and produces
electronic warfare simulator systems for prime defense contractors and
countries worldwide. The acquisition of EW Simulation Technology was driven
by a two part strategic initiative: a) to leverage the Company's microwave
expertise vertically into the international threat and jamming simulator
markets, and b) to increase the amount of microwave content supplied by the
Company on each simulator platform. The transaction, which closed on
September 20, 2002, provides for payment of $3,000,000 in cash and a note
for $1,500,000, including interest at 1.8% based on LIBOR at the date of
acquisition. The note has a balance of $1,214,000 at February 1, 2004
(adjusted for foreign exchange rate fluctuations) payable in two remaining
installments annually on October 1, of $607,000. The transaction has been
accounted for in accordance with the provisions of SFAS No. 141, "Business
Combinations", which requires that all business combinations be accounted
for using the purchase method.
11. Supplemental cash flow information is as follows (in thousands):
Twenty-six Twenty seven
weeks ended weeks ended
February 1, 2004 February 2, 2003
---------------- ----------------
Cash paid during the period for:
Interest $ 160 $ 180
Income taxes 3,178 2,950
Tax benefit related to stock options 409 641
Deferred purchase price of business acquired - 1,500
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this report are "forward-looking statements"
that involve various important assumptions, risks, uncertainties and other
factors which could cause the Company's actual results to differ materially
12
from those expressed in such forward-looking statements. Forward-looking
statements can be identified by terminology such as "may",
"will","should","expects","intends","anticipates","believes","estimates",
"predicts","continue", or the negative of these terms or other comparable
terminology. These important factors include, without limitation, a large
percentage of sales are under government contracts, cost overruns under fixed
price contracts, doing business in foreign markets, customer concentration,
competitive factors and pricing pressures, effective integration of acquired
businesses, management of future growth, recruiting and retaining qualified
technical personnel, general economic conditions, as well as other risks
previously disclosed in the Company's securities filings and press releases.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
performance or achievements. Further, the Company is under no duty to update any
of the forward-looking statements after the date of this quarterly report to
conform such statements to actual results.
Results of Operations
- ---------------------
Thirteen weeks ended February 1, 2004 and February 2, 2003
- ----------------------------------------------------------
Net sales for the thirteen weeks ended February 1, 2004 were approximately
$29,408,000 compared to $25,015,000 in the fourteen weeks ended February 2,
2003, an increase of $4,393,000 (17.6%). Net sales at EWST accounted for
$1,598,000 of the increase, and defense electronics microwave systems and
components increased by $3,035,000. This increase includes revenue from products
shipped under certain new programs and price increases on legacy products and
programs. This was offset by a decrease of $240,000 in commercial technologies,
which continues to experience a drop in orders in medical and scientific
products.
The gross profit margin in the thirteen weeks ended February 1, 2004 was 35.2%
compared to 34.7% in the second quarter of fiscal 2003. The increase in gross
profit of $1,690,000 is primarily attributable to the increase in volume for the
quarter, including the increased revenue at EWST as well as higher pricing on
existing products. The gross profit margin increased from microwave components
through production efficiencies due primarily to automation. Billings of
approximately $3,000,000 relating to engineering programs with very low margins,
offset these increases. These programs will now transition into production which
will result in higher margins from the related products.
Selling and administrative expenses for the thirteen weeks ended February 1,
2004 were 17.7% of net sales as compared to 16.9% in the second quarter of
fiscal 2003. Major components of the net increase in expenses of $966,000
includes increased expenses attributable to the acquisition of EWST of $220,000
(including amortization of acquired intangibles and additional personnel); an
increase in incentive compensation under employment contracts and discretionary
bonuses of $287,000; and additional personnel and related costs including fringe
benefits and travel, primarily in domestic and international marketing, of
$473,000. Litigation costs related to the Robinson Labs litigation were $61,000
in the second quarter of fiscal 2004, as compared to $178,000 in the second
quarter of fiscal 2003. (See Part II, Item 1. "Legal Proceedings").
Operating income for the quarter was $5,165,000 or 17.6% of net sales, as
compared to $4,441,000 or 17.8% of net sales in 2003. The increase in operating
income is primarily attributable to the overall increase in revenue for the
quarter. Our foreign operations contributed $854,000 in operating income for the
quarter as compared to $549,000 in fiscal 2003. The offsetting effects of the
improvement in gross profit margin and the increases in selling and
administrative expenses on operating income are discussed above.
Investment income decreased by $109,000 in fiscal 2004 as a result of a 30%
decline in the rate of interest earned on the investment of excess cash reserves
during the quarter as compared to interest rates in fiscal 2003, and a decrease
on average of approximately $1,300,000 in funds invested.
13
The net foreign exchange loss in the second quarter of fiscal 2004 of $70,000 is
attributable to the weaker U. S. dollar during the current quarter causing the
Company's foreign denominated liabilities to increase in value resulting in an
unrealized foreign exchange loss of $84,000. The Company realized a net foreign
exchange gain in the United Kingdom of $14,000.
Twenty-six weeks ended February 1, 2004 and Twenty-seven weeks ended
February 2, 2003
- ----------------
Net sales for the twenty-six weeks ended February 1, 2004 were approximately
$57,675,000 compared to $52,305,000 in the first six months of fiscal 2003. The
sales increase of $5,370,000 (10.3%) is attributable to increased revenue in
defense electronics of $6,875,000 (including $3,416,000 attributable to the
acquisition of EWST). This increase includes revenue from products shipped under
certain new programs and price increases on legacy products and programs. This
was offset by decreased revenue of $1,505,000 in commercial technologies which
has experienced a decrease in new orders in medical and scientific products. The
Company expects revenues in defense electronics to continue at a level above the
prior fiscal year, and revenues from medical products to remain flat for the
balance of fiscal 2004.
The gross profit margin of 36.4% in the twenty-six weeks ended February 1, 2004
was higher than the margin of 34.2% in fiscal 2003. Gross profit increased
$3,141,000 as a result of increased volume over fiscal 2003, including the
increased revenue at EWST of $3,416,000, as well as higher pricing on existing
products. Margins on foreign shipments from the U.S. are higher than similar
products shipped domestically due to the pricing on smaller quantity orders.
Margins also improved in microwave components due to production efficiencies,
including automation. Billings of approximately $3,000,000 relating to
engineering programs with very low margins, offset these increases. These
programs will now transition into production which will result in higher margins
from the related products.
Selling and administrative expenses for the twenty-six weeks ended February 1,
2004 were 17.3% of net sales as compared to 16.5% in the first half of fiscal
2003. There was a net increase in expenses of $1,361,000 which includes expenses
of EWST of $421,000, and an increase in incentive compensation under employment
contracts and discretionary bonuses of $685,000; and additional personnel and
related costs including fringe benefits and travel, primarily in domestic and
international marketing, of $787,000. Litigation costs of $98,000 were incurred
in the six months ended February 1, 2004, as compared to $828,000 in fiscal
2003, in connection with the Robinson Labs litigation. (See Part II, Item 1.
"Legal Proceedings").
Operating income for the six months was $11,027,000 or 19.1% of net sales, as
compared to $9,247,000 or 17.7% of net sales in 2003. The increase in operating
income is primarily attributable to the overall increase in revenue for the
period. Our foreign operations contributed $2,400,000 in operating income for
the six months as compared to $1,241,000 in fiscal 2003. The offsetting effects
of the improvement in gross profit margin and the increases in selling and
administrative expenses on operating income are discussed above.
Investment income decreased by $301,000 in fiscal 2004 as a result of a 39%
decline in the rate of interest earned on the investment of excess cash reserves
during the six months as compared to interest rates in fiscal 2003, and a
decrease on average of approximately $2,900,000 in funds invested.
The foreign exchange loss of $243,000 in the six months ended February 1, 2004
is attributable to the weaker U. S. dollar during the period causing the
Company's foreign denominated liabilities to increase in value resulting in an
unrealized foreign exchange loss of $214,000, and a net foreign exchange loss
realized of $29,000, net of foreign exchange gains in the United Kingdom of
$26,000.
14
Liquidity and Capital Resources
- -------------------------------
As of February 1, 2004 and August 3, 2003, working capital was $135,918,000 and
$127,613,000, respectively, and the ratio of current assets to current
liabilities was 7.5 to 1 and 7.7 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
customer deposits and progress payments. The unliquidated balance of these
deposits and payments was approximately $1,405,000 at February 1, 2004, and
$856,000 at August 3, 2003. The net increase is attributable to advance payments
received on certain foreign contracts.
Net cash used in operations during the thirteen weeks ended February 1, 2004 was
approximately $75,000 as compared to net cash provided by operations of
$4,764,000 during the comparable period in the prior year. Significant items
contributing to the sources of funds include income from operations of
$9,677,000 (adjusted for depreciation, amortization, and foreign exchange
losses), and an aggregate increase in various liabilities of $2,936,000.
Offsetting these sources of funds are increases in costs incurred and income
recognized on uncompleted contracts of $8,519,000, accounts receivable of
$1,184,000, and inventory of $2,463,000. EWST contracts accounted for $4,016,000
of the increase in costs incurred and income recognized on uncompleted
contracts. These contracts, which were included in the backlog of EWST at the
date of acquisition, provided for minimal advanced payments and milestone
payments. In accordance with Company policy on long term contracts, new
contracts entered into by EWST now include provisions for advanced payments and
milestone payments. The Company expects to bill approximately $5,585,000 of the
balance at February 1, 2004 by the end of its current fiscal year.
Net cash used in investing activities includes $3,124,000 for capital
expenditures.
Net cash generated from financing activities of $635,000 consists of the
exercise of stock options for $1,277,000, offset by the payment of the deferred
purchase price of $500,000 related to the acquisition of EWST, a payment of
$42,000 on the Mortgage note, and a payment of $100,000 on the Industrial
Revenue Bonds. The Company has a future commitment for $1,214,000 (adjusted for
foreign exchange rate fluctuations), including interest at 1.8%, in connection
with the acquisition of EWST payable in annual installments of $607,000.
In June 2002, the Company entered into a new $50,000,000 revolving credit loan
syndication agreement with two banks on an unsecured basis which may be used for
general corporate purposes, including business acquisitions. The revolving
credit facility requires the payment of interest only on a monthly basis and
payment of the outstanding principal balance on January 31, 2005. The Company
may elect to borrow up to a maximum of $5,000,000 with interest based on the
Federal Funds Target Rate, as established by the Federal Open Market Committee
("FMOC") of the Federal Reserve Board, plus a margin of 1.50% to 1.80%, or up to
a maximum of $45,000,000 with interest based on LIBOR plus a margin of 1.35% to
1.65%. The applicable incremental margin is based on the ratio of total
liabilities to tangible net worth, as those terms are defined in the agreement,
ranging from less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal
Funds Target Rate and the LIBOR rate was 1.00% and 1.10%, respectively, at
February 1, 2004. There is a fee of 15 basis points per annum on the unused
portion of the $45,000,000 LIBOR based portion of the credit facility payable
quarterly. There were no borrowings outstanding as of February 1, 2004 and
August 3, 2003. Stand-by letters of credit were outstanding in the amount of
approximately $12,440,000 under the credit facility at February 1, 2004.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds, its existing unsecured credit facility,
and cash balances of approximately $79,000,000. A significant portion of the
Company's revenue for fiscal 2004 will be generated from its existing backlog of
sales orders. The backlog of orders at February 1, 2004 was approximately
$102,000,000. All orders included in backlog are covered by signed contracts or
purchase orders. Nevertheless, contracts involving government programs may be
terminated at the
15
discretion of the government. In the event of the cancellation of a significant
amount of government contracts included in the Company's backlog, the Company
will be required to rely more heavily on cash reserves and its existing credit
facility to fund its operations. The Company is not aware of any events which
are reasonably likely to result in any cancellation of its government contracts.
The Company has $37,560,000 available under its bank credit facility, net of
outstanding stand-by letters of credit of approximately $12,440,000.
Future payments required on long-term debt are as follows (in thousands):
Twelve months Industrial
ended Mortgage revenue Other
February Total note bonds obligations
-------- ----- ---- ----- -----------
2005 $ 801 $ 89 $ 105 $ 607
2006 814 97 110 607
2007 219 104 115 -
2008 233 113 120 -
2009 246 121 125 -
Thereafter 4,428 2,045 2,230 153
----- ----- ----- -----
$ 6,741 $ 2,569 $ 2,805 $ 1,367
===== ===== ===== =====
Other obligations include the remaining installments due in connection with the
acquisition of EWST (as adjusted for foreign exchange fluctuations) of
(pound)500,000 payable October 1, 2004 and 2005. The $153,000 represents the
fair value of the interest rate swap as of February 1, 2004, which matures
October 1, 2011 (discussed in Note 3).
The Company has outstanding an aggregate of approximately $19,000,000 in open
purchase orders as of February 1, 2004. These open purchase orders represent
executory contracts for the purchase of goods and services which will be
substantially fulfilled in the next six months.
Stand-by letters of credit expire as follows (in thousands):
During
fiscal
year Amount
---- ------
2004 $ 6,229
2005 530
2006 2,090
2007 3,393
2008 30
2009 168
------
$ 12,440
======
16
Minimum annual rentals under noncancellable operating leases are as follows (in
thousands):
During
fiscal
year Amount
---- ------
2004 $ 1,275
2005 1,056
2006 978
2007 983
2008 958
Thereafter 1,171
-----
$ 6,421
=====
Critical Accounting Policies
- ----------------------------
Revenue under certain long-term, fixed price contracts is recognized using the
percentage of completion method of accounting. Revenue recognized on these
contracts is based on estimated completion to date (the total contract amount
multiplied by percent of performance, based on total costs incurred in relation
to total estimated cost at completion). Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance. Risks and uncertainties inherent in the estimation process could
affect the amounts reported in our financial statements. The key assumptions
used in the estimate of costs to complete relate to labor costs and indirect
costs required to complete the contract. The estimate of rates and hours as well
as the application of overhead costs is reviewed on a regular basis. If our
business conditions were different, or if we used different assumptions in the
application of this and other accounting policies, it is likely that materially
different amounts would be reported on our financial statements.
Prospective losses on contracts are based upon the anticipated excess of
manufacturing costs over the selling price of the units to be delivered under
the contract and are recorded when first reasonably determinable. Actual losses
could differ from those estimated due to changes in the ultimate manufacturing
costs.
Inventories are stated at lower of cost (principally first-in, first-out) or
market. A valuation allowance for obsolete and slow-moving inventory is
established based upon an aging of raw material components. Current requirements
for raw materials are evaluated based on current backlog of orders for products
in which the components are used and anticipated future orders.
Under the non-amortization approach in accounting for goodwill under SFAS No.
142, goodwill is not amortized into results of operations but instead is
reviewed for impairment and written down and charged to results of operations in
the period in which the recorded value of goodwill is more than its fair value.
An annual impairment test is performed in the fourth quarter of each fiscal year
and any impairment of goodwill is charged to operations.
Provisions for federal, foreign, state and local income taxes are calculated on
reported financial statement pretax income based on current tax law and also
include the cumulative effect of any changes in tax rates from those used
previously in determining deferred tax assets and liabilities. Such provisions
differ from the amounts currently payable because certain items of income and
expense are recognized in different time periods for financial reporting
purposes than for income tax purposes.
New Accounting Pronouncements
- -----------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities."
17
The statement is effective for fiscal years beginning after December 31, 2002.
SFAS No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Adoption of this Standard did not have a
material impact on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires the recognition of
liabilities for guarantees that are issued or modified subsequent to December
31, 2002. The liabilities should reflect the fair value, at inception, of the
guarantors' obligations to stand ready to perform, in the event that the
specified triggering events or conditions occur. Adoption of this Interpretation
did not have a material effect on the Company's results of operations or
financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123."
The new statement is effective, with respect to the transition provisions, for
fiscal years ending after December 15, 2002; and with respect to the disclosure
provisions, for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. SFAS No. 148 provides
transition alternatives for companies adopting the fair value recognition
provisions of FASB Statement No. 123 for stock-based employee compensation; and
requires the pro forma disclosures of SFAS No. 123 in interim condensed
financial statements for companies continuing to rely on APB Opinion No. 25 as
if the provisions of SFAS No. 123 had been adopted. The statement also requires
that the pro-forma disclosures of the impact on earnings and earnings-per-share
be provided in a tabular format and included in the Summary of Significant
Accounting Policies or equivalent.
The effect of the adoption of SFAS No. 148 was the inclusion of the required
disclosures in the Company's condensed consolidated interim financial statements
in its quarterly reports, and the addition of a significant accounting policies
note included in the Company's Annual Report on Form 10K.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." In
December 2003 this Interprtation was replaced by FASB Interpretation No. 46(R)
("FIN 46(R)"), which clarifies the application of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements," to certain entities in which the
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46(R) requires an enterprise to consolidate a variable interest entity if
that enterprise will absorb a majority of the entity's expected losses, is
entitled to receive a majority of the entity's expected residual returns, or
both. FIN 46(R) is effective for entities being evaluated under FIN 46(R) for
consolidation no later than the end of the first reporting period that ends
after March 15, 2004. Management does not believe the adoption of FIN 46(R) will
have a material impact on the Company's financial position, results of
operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The Statement is effective for contracts entered into or modified
after June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003.
The provisions of Statement 149 that relate to Statement 133 implementation
issues that have been effective for fiscal quarters that began prior to June 15,
2003, will continue to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist, will apply to
existing contracts, as well as new contracts entered into after June 30,
18
2003. Management has determined that the adoption of this Statement will not
have a significant impact on the financial position, results of operations or
cash flows of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. Many of such instruments were previously classified as equity. The
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. The Statement is to be implemented
by reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance of the date of the Statement
and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of this Statement did not have a
significant impact on the financial position, results of operations or cash
flows of the Company.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in interest rates,
and foreign currency exchange. The Company has not entered into any market risk
sensitive instruments for trading purposes. In October 2001, the Company entered
into an interest rate swap with a bank pursuant to which it exchanged floating
rate interest in connection with the Bonds discussed in Note 3 on a notional
amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending
October 1, 2011. The notional amount reduces each year in tandem with the annual
installments due on the Bonds. The fixing of the interest rate for this period
offsets the Company's exposure to the uncertainty of floating interest rates on
the Bonds, and as such has been designated as a cash flow hedge. The hedge is
deemed to be highly effective and any ineffectiveness will be recognized in
interest expense in the reporting period. The fair value of the interest rate
swap was a liability of approximately $153,000 as of February 1, 2004. There was
no material hedge ineffectiveness related to cash flow hedges during the period
to be recognized in earnings. There was no gain or loss reclassified from
accumulated other comprehensive income into earnings during the quarter ended
February 1, 2004, as a result of the discontinuance of a cash flow hedge due to
the probability of the original forecasted transaction not occurring.
Item 4: Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The term "disclosure
controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 as amended (the "Exchange
Act"). These rules refer to the controls and other procedures of a
company that are designed to ensure that information required to be
disclosed by the company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within
the required time periods. The Company's management, with
participation of the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the design, operation and
effectiveness of the Company's disclosure controls and procedures and
have concluded, based on such evaluation, that such controls and
procedures were effective at providing reasonable assurance that
required information will be disclosed in the Company's reports filed
under the Exchange Act as of February 1, 2004.
(b) Changes in internal controls. There were no changes in the Company's
internal controls over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter ended February 1, 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson
("Robinson") filed an Amended Complaint against Herley Industries, Inc.
("Herley"). Although the Amended Complaint sets forth fifteen counts, the core
allegations are (i) that Herley failed to issue 97,841 shares of common stock in
connection with certain earn out requirements contained in an Asset Purchase
Agreement dated February 1, 2000; (ii) that Herley breached an Employment
Agreement with Robinson by terminating his employment on August 5, 2001; and
(iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with
Robinson. RLI and Robinson asserted (i) violations of state and federal
securities laws; (ii) fraud claims; (iii) breach of contract claims; and (iv)
other equitable claims arising from the above core factual allegations.
On September 17, 2001, Herley filed an Answer, Affirmative Defenses and
Counterclaims in this matter. In the Answer and Affirmative Defenses, Herley
denied the material allegations of the Amended Complaint. Herley also filed
Counterclaims against both RLI and Robinson. In these counterclaims, Herley's
core allegations concern Robinson's misconduct (i) in connection with the manner
he attempted to satisfy RLI's earn out requirements; (ii) misrepresentations
made in connection with the Asset Purchase Agreement; (iii) wrongdoing as a
Herley employee leading to his termination and (iv) post-Herley employment
wrongdoing in connection with a new company known as RH Laboratories. In
addition to seeking a Declaratory Judgment pursuant to 28 U.S.C. ss. 2201 et.
seq., Herley also asserted claims for, among other things, fraud, breach of
contract, breach of fiduciary duty, unfair competition and tortious interference
with actual and prospective contractual relationships.
On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August
21, 2002 in which the jury determined, among other things, that (i) Herley was
not required to pay any additional stock; (ii) Herley breached the Employment
Agreement with Robinson and awarded Robinson $1.5 million in damages; (iii)
Herley breached the Lease Agreement with Robinson and awarded Robinson
approximately $552,000 in compensatory damages; (iv) Robinson breached fiduciary
duties to Herley and awarded Herley $400,000 in compensatory damages; (v)
Robinson and RLI breached indemnity obligations and awarded Herley $100,000 in
damages; (vi) RLI breached representations and warranties given to Herley and
awarded Herley $320,000 in damages.
On October 18, 2002, the Court entered a final judgment consistent with the
above, and both parties filed post- trial motions. Additionally, as the
prevailing party in connection with the claims asserted by RLI relating to the
earn-out stock, as well as claims advanced relating to the various breaches of
the Asset Purchase Agreement, Herley filed a petition for fees and costs against
both RLI and Robinson on November 27, 2002 for approximately $2,000,000. RLI and
Robinson also filed petitions to recover attorneys fees of approximately
$240,000 for certain claims in which they contend that they were the prevailing
party. On February 5, 2003, the Court denied the post-trial motions filed by the
parties, thus leaving the jury verdict undisturbed.
At a proceeding on April 28, 2003, the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order dated May 6, 2003, the Court denied without prejudice all of the
parties' petitions. On May 12, 2003, Herley filed its appeal to the United
States Court of Appeals for the Second Circuit. On May 28, 2003, RLI filed a
notice of cross-appeal. Robinson did not appeal. Herley filed its brief in
support of its appeal before the Second Circuit on August 22, 2003. RLI timely
filed its brief in response to Herley's appeal and in support of RLI's
cross-appeal. Herley timely filed a response to RLI's brief and thereafter RLI
timely filed a response to Herley's brief. Oral argument was held on December
18, 2003.
By Summary Order on January 26, 2004, the Second Circuit affirmed the trial
court judgment in its entirety. On
20
February 4, 2004, RLI submitted a letter request to the trial court for relief
from the judgment on RLI's claim for the earn-out stock under Federal Rule of
Civil Procedure 60. RLI contends that it has "newly discovered evidence," first
learned in August 2003, to justify its requested relief. Herley submitted its
response in opposition by letter dated February 10, 2004. On February 26, 2004,
the parties appeared before the Court concerning the various applications and
were directed to submit legal briefs on various legal issues. Herley will submit
its briefs by the end of March 2004.
The Company is involved in various other legal proceedings and claims which
arise in the ordinary course of its business. While any litigation contains an
element of uncertainty, management believes that the outcome of such litigation
will not have a material adverse effect on the Company's financial position or
results of operations.
Item 2 - Changes In Securities:
None
Item 3 - Defaults Upon Senior Securities:
None
Item 4 - Submission Of Matters To A Vote Of Security Holders:
(1) The Registrant held its Annual Meeting of Stockholders on January
15, 2004.
(2) Four directors were elected at the Annual Meeting of Stockholders
as follows:
Class I - To serve until the Annual Meeting of Stockholders in 2006 or
until their successors are chosen and qualified:
Name Votes For Votes Withheld
---- --------- --------------
Lee N. Blatt 8,807,406 4,205,251
Adm. Edward K. Walker, Jr. (Ret.) 12,272,943 739,714
Class II - To serve until the Annual Meeting of Stockholders in 2004 or
until their successors are chosen and qualified:
Name Votes For Votes Withheld
---- --------- --------------
Dr. Edward A. Bogucz 12,272,943 739,714
Class III - To serve until the Annual Meeting of Stockholders in 2005 or
until their successors are chosen and qualified:
Name Votes For Votes Withheld
---- --------- --------------
Adm. Robert M. Moore (Ret.) 12,272,943 739,714
21
Item 5 - Other Information:
None
Item 6 - Exhibits And Reports On Form 8-K:
(a) Exhibits
31.1 Certification of Myron Levy pursuant to Rule 13a-14(a).
31.2 Certification of Anello C. Garefino pursuant to Rule
13a-14(a).
32.1 Certification of Myron Levy pursuant to 18 U.S.C. Section
1350.
32.2 Certification of Anello C. Garefino pursuant to 18 U.S.C.
Section 1350.
(b) Reports on Form 8-K
During the second quarter of fiscal 2004, the Registrant filed
the following report on Form 8-K:
The Company filed a report on December 11, 2003 in connection
with the release of its financial results for the first quarter
of fiscal year 2004 for the quarter ended November 2, 2003.
22
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERLEY INDUSTRIES, INC.
-----------------------
Registrant
BY: /S/ Myron Levy
-----------------------------------
Myron Levy, Chief Executive Officer
BY: /S/ Anello C. Garefino
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Anello C. Garefino, Principal Financial Officer
DATE: March 17, 2004
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