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 quarterly period ended: January 30, 2005
----------------
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
--------------
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
[X] Yes [ ] No
As of March 8, 2005 - 14,373,757 shares of Common Stock.
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets -
January 30, 2005 and August 1, 2004 2
Consolidated Statements of Income -
For the Thirteen and Twenty-six weeks ended January 30, 2005
and Thirteen and Twenty-six weeks ended February 1, 2004 3
Consolidated Statement of Shareholders' Equity-
For the Twenty-six weeks ended January 30, 2005 4
Consolidated Statements of Cash Flows -
For the Twenty-six weeks ended January 30, 2005
and February 1, 2004 5
Notes to 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 17
Item 4 - Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 4 - Submission Of Matters To A Vote Of Security Holders 19
Item 6 - Exhibits 19
Signatures 20
PART II - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 30, AUGUST 1,
2005 2004
----------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 67,948 $ 66,181
TRADE ACCOUNTS RECEIVABLE 18,325 24,664
COSTS INCURRED AND INCOME RECOGNIZED IN EXCESS
OF BILLINGS ON UNCOMPLETED CONTRACTS 16,803 14,210
OTHER RECEIVABLES 699 576
INVENTORIES, NET OF ALLOWANCE OF $4,198
IN FISCAL 2005 AND $3,937 IN 2004 44,635 44,909
DEFERRED TAXES AND OTHER 4,130 3,579
---------- ----------
TOTAL CURRENT ASSETS 152,540 154,119
PROPERTY, PLANT AND EQUIPMENT, NET 27,152 25,968
GOODWILL 38,824 35,165
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION OF $929
IN FISCAL 2005 AND $752 IN 2004 4,407 4,555
AVAILABLE-FOR-SALE SECURITIES - 147
OTHER INVESTMENTS 47 117
OTHER ASSETS 2,804 900
---------- ----------
$ 225,774 $ 220,971
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT $ 830 $ 804
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 13,955 16,934
BILLINGS IN EXCESS OF COSTS INCURRED AND
INCOME RECOGNIZED ON UNCOMPLETED CONTRACTS 281 1,303
INCOME TAXES PAYABLE 3,799 2,091
ACCRUAL FOR CONTRACT LOSSES 1,142 954
ACCRUAL FOR WARRANTY COSTS 583 580
ADVANCE PAYMENTS ON CONTRACTS 899 1,180
---------- ----------
TOTAL CURRENT LIABILITIES 21,489 23,846
LONG-TERM DEBT 5,103 5,845
OTHER LONG-TERM LIABILITIES 1,014 932
DEFERRED INCOME TAXES 4,843 4,848
---------- ----------
32,449 35,471
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.10 PAR VALUE; AUTHORIZED
20,000,000 SHARES; ISSUED AND OUTSTANDING
14,360,307 IN FISCAL 2005 AND 14,220,508 IN 2004 1,436 1,422
ADDITIONAL PAID-IN CAPITAL 109,586 107,671
RETAINED EARNINGS 80,781 75,151
ACCUMULATED OTHER COMPREHENSIVE INCOME 1,522 1,256
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 193,325 185,500
---------- ----------
$ 225,774 $ 220,971
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JANUARY 30, FEBRUARY 1, JANUARY 30, FEBRUARY 1,
2005 2004 2005 2004
-------- -------- -------- --------
NET SALES $ 33,754 $ 29,408 $ 67,344 $ 57,675
-------- -------- -------- --------
COST AND EXPENSES:
COST OF PRODUCTS SOLD 23,874 18,888 46,356 36,494
SELLING AND ADMINISTRATIVE EXPENSES 7,405 5,355 13,509 10,154
-------- -------- -------- --------
31,279 24,243 59,865 46,648
-------- -------- -------- --------
OPERATING INCOME 2,475 5,165 7,479 11,027
-------- -------- -------- --------
OTHER INCOME (EXPENSE), NET:
INVESTMENT INCOME 292 187 516 363
INTEREST EXPENSE (58) (82) (137) (169)
FOREIGN EXCHANGE GAIN (LOSS) 185 (70) 185 (243)
-------- -------- -------- --------
419 35 564 (49)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,894 5,200 8,043 10,978
PROVISION FOR INCOME TAXES 817 1,654 2,413 3,491
-------- -------- -------- --------
NET INCOME $ 2,077 $ 3,546 $ 5,630 $ 7,487
======== ======== ======== ========
EARNINGS PER COMMON SHARE - BASIC $ .14 $ .25 $ .39 $ .53
======== ======== ======== ========
BASIC WEIGHTED AVERAGE SHARES 14,335 14,073 14,294 14,043
======== ======== ======== ========
EARNINGS PER COMMON SHARE - DILUTED $ .14 $ .24 $ .38 $ .50
======== ======== ======== ========
DILUTED WEIGHTED AVERAGE SHARES 15,044 14,880 14,990 14,826
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
TWENTY-SIX WEEKS ENDED JANUARY 30, 2005
(IN THOUSANDS EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------ PAID-IN RETAINED COMPREHENSIVE
CAPITAL EARNINGS INCOME (LOSS) TOTAL
SHARES AMOUNT ------- -------- ------------- -----
------ ------
BALANCE AT AUGUST 01, 2004 14,220,508 $ 1,422 107,671 75,151 1,256 $ 185,500
EXERCISE OF STOCK OPTIONS 139,799 14 1,585 1,599
TAX BENEFIT UPON EXERCISE OF STOCK
OPTIONS 330 330
----------- ----------- ----------- ----------- ----------- -----------
SUBTOTAL 14,360,307 1,436 109,586 75,151 1,256 187,429
----------- ----------- ----------- ----------- ----------- -----------
NET INCOME 5,630 5,630
OTHER COMPREHENSIVE INCOME:
UNREALIZED (LOSS) ON INTEREST RATE SWAP (13) (13)
FOREIGN CURRENCY TRANSLATION GAIN 279 279
-----------
COMPREHENSIVE INCOME 5,896
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JANUARY 30, 2005 14,360,307 $ 1,436 109,586 80,781 1,522 $ 193,325
=========== =========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
----------------------
JANUARY 30, FEBRUARY 1,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 5,630 $ 7,487
-------- --------
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATIONS:
DEPRECIATION AND AMORTIZATION 2,389 1,976
FOREIGN EXCHANGE LOSS 22 214
GAIN ON SALE OF SECURITIES (20) -
EQUITY IN INCOME OF LIMITED PARTNERSHIP (6) (6)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE ACCOUNTS RECEIVABLE 6,610 (1,184)
(INCREASE) IN COSTS INCURRED AND INCOME
RECOGNIZED IN EXCESS OF BILLINGS
ON UNCOMPLETED CONTRACTS (2,593) (8,519)
(INCREASE) IN OTHER RECEIVABLES (123) (339)
DECREASE (INCREASE) IN INVENTORIES 484 (2,463)
(INCREASE) IN DEFERRED TAXES AND OTHER (549) (177)
(DECREASE) INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES (3,121) 574
(DECREASE) INCREASE IN BILLINGS IN EXCESS OF
COSTS INCURRED AND INCOME RECOGNIZED
ON UNCOMPLETED CONTRACTS (1,022) 423
INCREASE IN INCOME TAXES PAYABLE 2,038 396
INCREASE IN ACCRUAL FOR CONTRACT LOSSES 22 204
(DECREASE) INCREASE IN ADVANCE PAYMENTS ON CONTRACTS (281) 549
OTHER, NET 220 790
-------- --------
TOTAL ADJUSTMENTS 4,070 (7,562)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 9,700 (75)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
ACQUISITION OF BUSINESS, NET OF CASH ACQUIRED (3,753) -
DEPOSIT FOR TECHNOLOGY LICENSE (1,000) -
DEPOSIT ON PURCHASE PRICE OF ACQUIRED BUSINESS (1,014) -
PROCEEDS FROM SALE OF SECURITIES 165 -
PARTIAL DISTRIBUTION FROM LIMITED PARTNERSHIP 78 39
CAPITAL EXPENDITURES (3,274) (3,124)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (8,798) (3,085)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 1,599 1,277
PAYMENTS OF LONG-TERM DEBT (734) (642)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 865 635
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,767 (2,525)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 66,181 81,523
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,948 $ 78,998
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
1. Interim Reporting
-----------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q and do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for interim periods are not necessarily indicative of the results of
operations that may be expected for a full year. These statements should be read
in conjunction with the consolidated financial statements and notes thereto, and
the Company's description of critical accounting policies, included in the
Company's 2004 Annual Report on Form 10-K for the fiscal year ended August 1,
2004, as filed with the Securities and Exchange Commission.
The unaudited consolidated financial statements include the accounts of Herley
Industries, Inc. and its wholly-owned subsidiaries, collectively referred to as
the "Company." All significant intercompany accounts and transactions have been
eliminated.
Certain prior period balances have been reclassified to conform to the current
period's presentation.
2. Acquisitions
------------
The Company entered into an agreement as of March 29, 2004 to acquire certain
assets and the business, subject to the assumption of certain liabilities, of
Communication Techniques, Inc., a Delaware corporation doing business in
Whippany, New Jersey. The facility operates as a wholly-owned subsidiary of the
Company as Herley-CTI, Inc. ("CTI"). CTI designs, develops and produces
state-of-the-art signal generation components and integrated assemblies for
digital radio, SONET, SatCom, test and instrumentation, datacom, and wired and
wireless applications to 45 GHz and 45 Gb/s. CTI also recently developed a fast
frequency changing direct synthesizer which, when combined with the capabilities
of Herley-Israel, puts the Company at the forefront of producing broadband
microwave sources for radar, communication, electronic warfare, and microwave
test systems.
The transaction provided for a net payment of $14,914,000 in cash and the
assumption of certain liabilities. 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.
The allocation of the aggregate purchase price, based on a detailed review of
the fair value of the assets acquired and liabilities assumed, including the
fair value of identified intangible assets, is as follows (in thousands):
Current assets $ 2,861
Property, plant and equipment 1,492
Intangible assets 3,200
Goodwill 8,753
Current liabilities (1,392)
------
Aggregate purchase price $ 14,914
======
The Company entered into an agreement as of September 1, 2004 to purchase the
majority of the assets and assume the majority of the liabilities of Reliable
System Services Corporation ("RSS"), of Melbourne, Florida for $3,725,000 in
cash. The Company operates the RSS business as a wholly-owned subsidiary under
the name Herley-RSS, Inc. Herley-RSS designs, develops and produces
satellite-based command and control systems for prime defense contractors and
entities worldwide.
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. The consolidated financial
statements reflect preliminary estimates of the fair value of the assets
acquired and liabilities assumed and the related allocations of the purchase
price, and preliminary estimates of adjustments necessary to conform RSS data to
the Company's accounting policies. The final determination of the fair value of
assets acquired and liabilities assumed and final allocation of the purchase
price is expected to be completed no later than the third quarter of fiscal
2005, and may differ from the amounts included in the accompanying consolidated
financial statements. The excess cost over the preliminary estimated fair value
of net assets acquired of approximately $3,456,000 has been recorded as
goodwill.
6
The allocation of the aggregate purchase price, including expenses of
acquisition of $28,000, based on a preliminary review of the fair value of the
assets acquired and liabilities assumed is as follows (in thousands):
Current assets $ 483
Property, plant and equipment 72
Goodwill 3,456
Current liabilities (258)
-----
Aggregate purchase price $ 3,753
=====
3. Inventories
-----------
Inventories at January 30, 2005 and August 1, 2004 are summarized as follows (in
thousands):
January 30, 2005 August 1, 2004
---------------- --------------
Purchased parts and raw materials $23,206 $23,031
Work in process 23,200 22,878
Finished products 2,427 2,412
------- -------
48,833 48,321
Less reserve for excess and obsolete materials 4,198 3,412
------- -------
$44,635 $44,909
======= =======
4.Goodwill and Other Intangible Assets
------------------------------------
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 January
30, 2005 is as follows (in thousands):
Balance at August 1, 2004 $ 35,165
Goodwill acquired during the period 3,484
Foreign currency translation adjustment 175
------
Balance at January 30, 2005 $ 38,824
======
The increase in goodwill was attributable to the acquisition of RSS ($3,456),
and an increase of $28 related to the acquisition of CTI, (See Note 2).
Intangibles consist of the following (in thousands):
January 30, August 1, Estimated
2005 2004 useful life
---- ---- -----------
Technology $ 3,421 $ 3,421 15 years
Drawings 800 800 15 years
Backlog 325 325 2 years
Non-compete 31 31 5 years
Foreign currency translation adjustment 191 162
Patents 568 568 14 years
----- -----
5,336 5,307
Accumulated amortization 929 752
----- -----
$ 4,407 $ 4,555
===== =====
7
Amortization expense for the thirteen weeks ended January 30, 2005 and February
1, 2004 was approximately $82,000 and $69,000, respectively, and for the
twenty-six weeks ended January 30, 2005 and February 1, 2004 was approximately
$177,000 and $138,000, respectively.
Estimated aggregate amortization expense for each of the next five fiscal years
is as follows (in thousands):
2005 $ 342
2006 329
2007 328
2008 322
2009 322
The carrying amount of intangibles is reviewed for recoverability when events or
changes in circumstances occur that indicate that the carrying value of the
assets may not be recovered.
The Company made a deposit payment of $1,000,000 in connection with a proposed
license agreement for certain technology to be used in missile and millimeter
wave products. The deposit payment is secured by a note receivable which will be
cancelled upon execution of the license agreement. In the event an agreement is
not reached, the note will become due with interest at 10% per annum on June 22,
2005. The agreement, if and when definitized, would provide for additional
payments of up to $3,000,000 upon completion of certain development milestones.
A royalty agreement is also being negotiated. The down payment is included in
the Consolidated Balance Sheet under the caption "Other Assets."
5. Product Warranties
------------------
The Company warrants its products generally for a period of one year. Product
warranty costs are accrued based on historical claims expense. Accrued warranty
costs are reduced as warranty repair costs are incurred. The following table
presents the change in the accrual for product warranty costs for the six months
ended January 30, 2005 (in thousands):
Thirteen weeks ended
--------------------
January 30, 2005 February 1, 2004
---------------- ----------------
Balance at beginning of period $ 580 $ 359
Provision for warranty obligations 315 393
Warranty costs charged to the reserve (312) (301)
--- ---
Balance at end of period $ 583 $ 451
=== ===
6. Litigation
----------
The Company is involved in various legal proceedings and claims which arise in
the ordinary course of its business. While any litigation contains an element of
uncertainty, management believes that the outcome of such litigation will not
have a material adverse effect on the Company's financial position or results of
operations. See the discussion in Part II, Item 1 - "Legal Proceedings".
7. Comprehensive Income
--------------------
The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended Twenty-six weeks ended
-------------------- -----------------------
January 30, February 1, January 30, February 1,
2005 2004 2005 2004
---- ---- ---- ----
Net income $ 2,077 $ 3,546 $ 5,630 $ 7,487
Unrealized gain (loss) on interest rate swap 21 (19) (13) (54)
Foreign currency translation gain (loss) 164 1,382 279 1,626
------- ------ ------- ------
Comprehensive income $ 2,262 $ 4,909 $ 5,896 $ 9,059
===== ===== ====== ======
8
The components of accumulated other comprehensive income (loss) is as follows
(in thousands):
January 30, 2005 August 1, 2004
---------------- --------------
Unrealized (loss) from available-for-sale securities $ 1 $ 1
Unrealized (loss) on interest rate swap (86) (73)
Foreign currency translation gain (loss) 1,607 1,328
----- -----
Accumulated other comprehensive income (loss) $ 1,522 $ 1,256
===== =====
8. Stock-Based Compensation
------------------------
The Company has various fixed stock option plans which reserve shares of common
stock for issuance to executives, key employees and directors.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
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. 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 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 Company has adopted the disclosure-only provisions of SFAS 123 and SFAS 148.
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 the
Black-Scholes option pricing model which requires 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 determine the fair value of each option granted during
the periods presented:
Thirteen weeks ended Twenty-six weeks ended
-------------------- -----------------------
January 30, February 1, January 30, February 1,
2005 2004 2005 2004
---- ---- ---- ----
Expected life (years) .75 1.51 .75 1.51
Volatility .90 .68 .90 .68
Risk-free interest rate 2.89% 2.80% 2.89% 2.80%
Dividend yield zero zero zero zero
9
If the Company had elected to recognize compensation expense based upon the fair
value at the date of grant for stock options issued under the plans, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands except per share data):
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
January 30, February 1, January 30, February 1,
2005 2004 2005 2004
---- ---- ---- ----
Net income - as reported $ 2,077 $ 3,546 $ 5,630 $ 7,487
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (635) (87) (797) (293)
----- ----- ----- -----
Net income - pro forma $ 1,442 $ 3,459 $ 4,833 $ 7,194
===== ===== ===== =====
Earnings per share - as reported
Basic $ .14 $ .25 $ .39 $ .53
Diluted .14 .24 .38 .50
Earnings per share - pro forma
Basic $ .10 $ .25 $ .34 $ .51
Diluted .10 .23 .32 .49
As discussed in Note 12, "New Accounting Pronouncements", the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123(R) ("SFAS 123R") which will require the Company to measure all employee
stock-based compensation awards using a fair value method and record such
expense in its financial statements. Until the Company adopts SFAS 123(R) in
fiscal 2006, the Company will continue to account for stock compensation in
accordance with APB 25, SFAS 123 and SFAS 148.
9. Earnings Per Share
------------------
The following tables show the calculation of basic and diluted weighted-average
shares outstanding (in thousands):
Thirteen weeks ended
--------------------
January 30, 2005 February 1, 2004
---------------- ----------------
Basic weighted-average shares 14,335 14,073
Effect of dilutive securities:
Employee stock options and warrants 709 807
------ ------
Diluted weighted-average shares 15,044 14,880
====== ======
Options to purchase 122,319 weighted shares of common stock, with exercise
prices ranging from $19.66 to $20.45, were outstanding during the second quarter
of fiscal 2005, 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 at various dates through December 2009, were still
outstanding at January 30, 2005. There were no anti-dilutive options outstanding
during the quarter ended February 1, 2004.
Twenty-six weeks ended
-----------------------
January 30, 2005 February 1, 2004
---------------- ----------------
Basic weighted-average shares 14,294 14,043
Effect of dilutive securities:
Employee stock options and warrants 696 783
------ ------
Diluted weighted-average shares 14,990 14,826
====== ======
Options to purchase 704,385 weighted shares of common stock, with exercise
prices ranging from $19.22 to $20.45, were outstanding during the first six
months of fiscal 2005, 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 at various dates through February 2010,
were still outstanding as of January 30, 2005. 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.
10
10. Geographic Information
----------------------
The Company operates as a single integrated business and as such has one
operating segment. Geographic net sales for the first quarter, based on place of
contract performance, were as follows (in thousands):
Thirteen weeks ended Twenty-six weeks ended
-------------------- -----------------------
January 30, February 1, January 30, February 1,
2005 2004 2005 2004
---- ---- ---- ----
United States $ 28,278 $ 23,495 $ 56,974 $ 45,566
Israel 3,150 2,972 6,184 6,028
England 2,326 2,941 4,186 6,081
------ ------ ------ ------
$ 33,754 $ 29,408 $ 67,344 $ 57,675
====== ====== ====== ======
Net property, plant and equipment by geographic area was as follows (in
thousands):
January 30, 2005 August 1, 2004
---------------- --------------
United States $ 21,341 $ 21,544
Israel 4,783 3,499
England 1,028 925
------ ------
$ 27,152 $ 25,968
====== ======
11. Supplemental cash flow information is as follows (in thousands):
----------------------------------------------------------------
Twenty-six weeks ended
----------------------
January 30, 2005 February 1, 2004
---------------- ----------------
Net cash paid during the period for:
Interest $ 156 $ 160
Income taxes 194 3,178
Tax benefit related to stock options 330 409
12. New Accounting Pronouncements
-----------------------------
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment," which is a
revision of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." SFAS 123R is effective for publicly-traded companies
for interim or annual periods beginning after June 15, 2005, supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values and will rescind the acceptance of pro forma disclosure. SFAS 123R
will be effective for the Company beginning with the first quarter of fiscal
2006. The Company has not yet completed an evaluation but expects the adoption
of SFAS 123R to have an effect on its financial statements based on the
unamortized pro forma expense related to unvested options outstanding at the
date of adoption.
13. Subsequent Events
-----------------
The Company entered into an agreement as of February 1, 2005 to acquire all of
the capital stock of Micro Systems, Inc. ("MSI"), Ft. Walton Beach, Florida. The
facility will operate as a wholly-owned subsidiary of the Company. MSI is a
recognized market leader in engineering, design and manufacturing of command &
control systems for operation and tracking of unmanned aerial, seaborne and
ground targets and missiles. Revenues for fiscal year ended December 31, 2004
were approximately $14 million.
The transaction provided for a cash payment of approximately $20 million which
came from the Company's cash reserves. A deposit of approximately $1.0 million
was paid in January 2005 and is included in the Consolidated Balance Sheet under
the caption "Other Assets." The transaction will be 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
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 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.
Business Overview
- -----------------
We are a leading supplier of microwave products and systems to defense and
aerospace entities worldwide. Our primary customers include large defense prime
contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing),
the U.S. Government (including the Department of Defense, NASA and other U.S.
Government agencies) and international customers (including the Egyptian,
German, Japanese and South Korean militaries and suppliers to international
militaries). We are a leading provider of microwave technologies for use in
command and control systems, flight instrumentation, weapons sensors and
electronic warfare systems. We have served the defense industry since 1965 by
designing and manufacturing microwave devices for use in high technology defense
electronics applications. Our products and systems are currently deployed on a
wide range of high profile military platforms, including the F-16 Falcon, the
F/A-18E/F Super Hornet, the RC-135 Rivet Joint, the E-2C Hawkeye, the AEGIS
class surface combatants, the EA-6B Prowler, the AMRAAM air to air missile, and
unmanned aerial vehicles, or UAVs, as well as high priority national security
programs such as National Missile Defense and the Trident II D-5.
Results of Operations
- ---------------------
Twenty-six weeks ended January 30, 2005 and Twenty-seven weeks ended February 1,
2004
- --------------------------------------------------------------------------------
Net sales for the twenty-six weeks ended January 30, 2005 were approximately
$67,344,000 compared to $57,675,000 in the first six months of fiscal 2004, an
increase of $9.7 million (16.8%). Net sales at our one acquisition completed in
Fiscal 2005, RSS, accounted for an increase of approximately $1 million, or 10%
of the increase for the two quarters ended January 2005. We also experienced an
approximate $8.7 million increase in sales at our other operations; attributable
to the general increases in the U.S. defense budget, as follows:
o An increase in sales of signal generation components and digital sources used
in network centric systems;
o Increased shipments of hardware used in electronic jamming systems,
offset by
o A decrease in revenues recognized by EWST, our UK electronic warfare
simulation subsidiary. During the first two quarters of fiscal 2004, EWST had a
number of high value contracts that were at a stage where significant direct
costs were incurred. As EWST uses the percentage of completion method for
revenue recognition, these high value/ high direct cost contracts last year, and
the reduced direct costs in the first two quarters of fiscal 2005, accounted for
the reduction in revenue recognized in the first two quarters of fiscal 2005.
The gross profit margin in the twenty-six weeks ended January 30, 2005 was 31.2%
compared to 36.7% in the first two quarters of fiscal 2004, a decline of 5.5%.
Excluding the impact of our one acquisition completed in Fiscal 2005 (RSS), the
decline in gross profit margins would have been similar. The decrease in gross
profit is primarily attributable to:
o Decreases of gross margins at EWST, principally due to changes in contract
cost estimates at that operation versus contract cost estimates in the first two
quarters of fiscal 2004. (The changes in contact cost estimates were principally
due to unanticipated delays in meeting technical requirements and delivery dates
on certain EWST contracts.)
12
o A decline of gross margins at one of our US operations due to lower overall
shipments at that facility and engineering development costs attributable to the
development and start up of a major electronic warfare upgrade program for the
US Navy;
o The transition of several new programs from engineering development to the
early stage of production, with higher engineering costs not yet offset by
production revenues.
Gross Margins at EWST in the second Quarter for fiscal 2005 improved modestly
over the first Quarter, and we expect that the gross margins at EWST will
improve over the balance of fiscal 2005, as the volume of sales increase, and as
the number of sales of systems that are similar in design begins to increase.
Selling and administrative expenses for the twenty-six weeks ended January 30,
2005 were 20.1% of net sales as compared to 17.6% in the first half of fiscal
2004, or an increase of approximately $3,355,000. Large increases during the
period included:
o An increase of approximately $500,000 in legal costs due to continuing actions
associated with the Robinson Labs litigation (See Part II, Item 1. "Legal
Proceedings") and other matters;
o An increase in IR&D spending of $523,000, and
o Increases attributable to our one acquisition completed in Fiscal 2005, RSS.
Operating income for the six months was $7,479,000 or 11.1% of net sales, as
compared to $11,027,000 or 19.1% of net sales in 2004. The decrease in operating
income is primarily attributable to the overall decline in gross margins for the
period (for the reasons outlined above) and the increase of IR&D spending and in
legal costs. Our foreign operations contributed approximately $1.2 million in
operating income for the six months as compared to $2.4 million in fiscal 2004.
The decline in operating income occurred at the Company's U.K. subsidiary as
discussed above.
Investment income increased by $153,000 in the first two quarters of fiscal 2005
because of an approximate 50% increase in the rate of interest earned on the
investment of excess cash reserves during the period as compared to interest
rates in the prior year, offset by a decline on average of approximately $14
million in funds invested. The reduction in the average balance of funds
invested in the first two quarters of fiscal 2005 versus the prior year was
caused by the investments and capital expenditures financed out of our
investment funds, including recent acquisitions.
The Company recognized a net foreign exchange gain of $185,000 through the
second quarter of fiscal 2005, versus a $243,000 net foreign exchange loss in
last year's first two quarters. In fiscal 2005, foreign exchange losses in the
US that are attributable principally to Pound Sterling denominated liabilities
were offset by foreign exchange gains recognized in our UK and Israeli
subsidiaries. The foreign exchange gains at our UK subsidiary were recognized in
connection with temporary advances we have made to our UK subsidiary. In last
year's first two quarters, we deferred any recognition of these foreign exchange
gains. As a result, in fiscal 2004's first two quarters, the foreign exchange
losses recognized in the income statement for our US operations were not offset
by gains recognized in the income statement of our UK operations. This factor,
in addition to the increase in our advances to our UK subsidiary and change in
average rates, accounts for the approximately $428,000 year on year increase in
net foreign exchange gains.
Thirteen weeks ended January 30, 2005 and Thirteen weeks ended February 1, 2004
- -------------------------------------------------------------------------------
Net sales for the thirteen weeks ended January 30, 2005 were approximately
$33,754,000, as compared to $29,408,000 in the thirteen weeks ended February 1,
2004, an increase of $4.3 million (14.8%). Net sales from our one acquisition
completed in Fiscal 2005, RSS, accounted for an increase of approximately
$544,000, or 13% of the increase for the quarter ended January 2005. We also
experienced an approximate $3.8 million increase in sales at our other
operations. Some of the larger changes included the following:
o An increase in the sales of certain microwave components, offset by
o A decline in revenue recognized on certain contracts accounted for on a
percentage of completion basis, because last year's second quarter included
significant costs (and therefore revenue recognition) on those contracts as they
were in a qualification and start up phase. After the second quarter of fiscal
2004, these programs went into fully qualified production, and the costs
accumulated, and revenue recognized in subsequent quarters (including the second
quarter of fiscal 2005) was less.
13
The gross profit margin in the thirteen weeks ended January 30, 2005 was 29.3%
compared to 35.8% in the second quarter of fiscal 2004, a decline of 6.5%.
Excluding the impact of our one acquisition completed in Fiscal 2005 (RSS), the
decline in gross profit margins would have been similar. Some of the larger
contributors to the decline in gross margins during the quarter included the
following:
o The transition of several new programs from engineering development to the
early stage of production, with higher engineering costs not yet offset by
production revenues,
o A decline of gross margins at one of our US operations due to lower overall
shipments at that facility and engineering development costs attributable to the
development and start up of a major electronic warfare upgrade program for the
US Navy,
offset by
o Higher margins contributed by signal generation components and direct sources.
Selling and administrative expenses for the thirteen weeks ended January 30,
2005 were 21.9% of net sales as compared to 18.2% in the second quarter of
fiscal 2004, or an increase of approximately $2,050,000. Large increases during
the period included:
o An increase of approximately $500,000 in legal costs during the second quarter
due to continuing actions associated with the Robinson Labs litigation (See Part
II, Item 1. "Legal Proceedings") and other matters;
o An increase in IR&D spending of approximately $375,000, and
o Increases attributable to our one acquisition completed in Fiscal 2005, RSS.
Operating income for the quarter was $2,475,000 or 7.3% of net sales, as
compared to $5,165,000 or 17.6% of net sales in 2004. The decrease in operating
income is primarily attributable to the decline in gross margin percentage (for
the reasons outlined above) and the 3.7% increase in selling and administrative
costs as a percentage of sales, offset by the beneficial impact of the $4.3
million increase in revenue for the quarter. Our foreign operations contributed
$683,000 in operating income for the quarter as compared to $854,000 in fiscal
2004. The decline in operating income occurred at the Company's U.K. subsidiary
as discussed above.
Investment income increased by $105,000 in the second quarter of fiscal 2005
because of a 60% increase in the rate of interest earned on the investment of
excess cash reserves during the quarter as compared to interest rates in the
prior year, offset by a decline on average of approximately $13 million in funds
invested. The reduction in the average balance of funds invested in the second
quarter of fiscal 2005 versus the prior year is attributable to investing
activities including capital expenditures, including recent acquisitions and
investing in a technology license, all financed out of our investment funds.
The Company recognized a net foreign exchange gain of $185,000 in the second
quarter of fiscal 2005, versus a $70,000 loss in last year's second quarter. In
fiscal 2005, foreign exchange losses in the US that are attributable principally
to Pound Sterling denominated liabilities were substantially offset by foreign
exchange gains recognized in our UK and Israeli subsidiaries. The foreign
exchange gains at our UK subsidiary were recognized in connection with temporary
advances we have made to our UK subsidiary. In last year's second quarter, we
deferred any recognition of these foreign exchange gains. As a result, in fiscal
2004's second quarter, the foreign exchange losses recognized in the income
statement for our US operations were not offset by gains recognized in the
income statement of our UK operations.
Liquidity and Capital Resources
- -------------------------------
As of January 30, 2005 and August 1, 2004, working capital was $131,051,000 and
$130,273,000, respectively, and the ratio of current assets to current
liabilities was 7.1 to 1 and 6.5 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 $899,000 at January 30, 2005, and
$1,180,000 at August 1, 2004.
14
Net cash provided by operations during the twenty-six weeks ended January 30,
2005 was approximately $9,700,000 as compared to net cash used in operations of
$75,000 during the comparable period in the prior year. Significant items
contributing to the increase in cash provided by operations include the
following:
1. an increase of approximately $7.8 million in cash generated from collection
of accounts receivable during the first six months,
2. a reduction of approximately $5.9 million in the amount of cash invested in
"Costs incurred and income recognized in excess of billings on uncompleted
contracts",
3. a reduction of approximately $2.9 million in the amount of cash invested in
inventories during the six month periods,
offset by
4. a decrease of approximately $3.7 million in cash generated through accounts
payable and accrued expenses,
5. a reduction in income from operations of $1,636,000 from $9,677,000 in the
first six months of the prior year to $8,041,000 in the current fiscal year
(adjusted for depreciation, amortization, and foreign exchange losses),
6. an increase of approximately $1.6 million in income taxes,
7. a decrease of approximately $1.4 million in cash generated from "Billings in
excess of costs incurred and income recognized on uncompleted contracts" during
the course of the six month periods, and
8. other net uses of cash.
Of the changes noted in (1) and (2) above, the largest impact was from a major
contract at our Lancaster facility in connection with an upgrade for US Navy
aircraft. This program was accounted for on a percentage of completion basis,
and in last year's first quarter, we were accumulating significant costs into
this contract. The job was largely shipped during fiscal 2004 and early in
fiscal 2005, which also contributed to the increase in accounts receivable
collections in the first half of fiscal 2005.
Net cash used in investing activities includes:
1. A net payment of $3,753,000 in connection with the acquisition of RSS. (See
Note 2.)
2. A deposit payment of $1 million in connection with a proposed license
agreement for certain technology to be used in missile and millimeter wave
products. The deposit payment is secured by a note receivable which will be
cancelled upon execution of the license agreement. (See Note 4.)
3. A deposit of $1 million on the acquisition of Micro Systems, Inc. (See Note
13 which discusses the additional payment at closing of approximately $20
million in February 2005.)
4. Capital expenditures of $3,274,000, including approximately $1.7 million
related to new expanded facilities occupied by our Israel and UK operations.
These setup and capital expenditures associated with these new facilities are
now substantially completed.
Net cash provided by financing activities of $865,000 consists primarily of the
exercise of stock options for $1,599,000 and the payment of the deferred
purchase price of EWST.
In June 2002, the Company entered into a new $50,000,000 Revolving Credit Loan
Agreement with two banks on an unsecured basis which may be used for general
corporate purposes, including business acquisitions. The revolving credit
facility requires the payment of interest only on a monthly basis and payment of
the outstanding principal balance on January 31, 2007 (as amended). The Company
may elect to borrow up to a maximum of $5,000,000 with interest based on the
Federal Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of
$45,000,000 with interest based on LIBOR plus a margin of 1.35% to 1.65%. The
applicable incremental margin is based on the ratio of total liabilities to
tangible net worth, as those terms are defined in the agreement. The Federal
Funds Target Rate and the LIBOR rate was 2.25% and 2.59%, respectively, at
January 30, 2005. 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 are no borrowings under the line at January 30, 2005 and August
1, 2004. Stand-by letters of credit were outstanding in the amount of
approximately $10,032,000 under the credit facility at January 30, 2005, and
$11,389,000 at August 1, 2004.
15
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds, its existing unsecured credit facility,
and existing cash reserves. A significant portion of our revenue for fiscal 2005
will be generated from our existing backlog of sales orders. The backlog of
orders at January 30, 2005 was approximately $94 million. All orders included in
backlog are covered by signed contracts or purchase orders. Nevertheless,
contracts involving government programs may be terminated at the discretion of
the government. In the event of the cancellation of a significant amount of
government contracts included in 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. As
of January 30, 2005, the Company has approximately $39,968,000 available under
its bank credit facility, net of outstanding stand-by letters of credit of
approximately $10,032,000, and cash reserves of approximately $67,948,000.
Disclosure Regarding Contractual Obligations and Commitments
- ------------------------------------------------------------
Accounting standards require disclosure concerning the Company's obligations and
commitments to make future payments under contracts, including interest, such as
debt and lease agreements, and other contingent commitments, such as standby
letters of credit. The following table summarizes the Company's contractual
obligations and other contingent commitments at August 1, 2004 (in thousands):
Within 2-3 4-5 After 5
Obligations Total 1 Year Years Years Years
----------- ----- ------ ----- ----- -----
Mortgage Note $ 2,662 $ 116 $ 255 $ 235 $ 2,056
Industrial Revenue Bonds 4,023 219 440 442 2,922
EWST Note 1,212 606 606 - -
Operating Lease Obligations 7,752 1,649 2,785 2,462 856
Purchase Obligations 16,448 16,448 - - -
------ ------ ------ ----- -----
32,097 19,038 4,086 3,139 5,834
Standby Letters of Credit 11,389 4,881 6,310 198 -
------ ------ ------ ----- -----
Total Contractual Obligations $ 43,486 $ 23,919 $ 10,396 $ 3,337 $ 5,834
====== ====== ====== ===== =====
Other than the ordinary course fulfillment of open purchase orders and placement
of new purchase orders, there have been no other significant changes to the
Company's contractual obligations table since August 1, 2004.
New Accounting Pronouncements
- -----------------------------
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment," which is a
revision of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." SFAS 123R is effective for publicly-traded companies
for interim or annual periods beginning after June 15, 2005, supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values and will rescind the acceptance of pro forma disclosure. SFAS 123R
will be effective for the Company beginning with the first quarter of fiscal
2006. The Company has not yet completed an evaluation but expects the adoption
of SFAS 123R to have an effect on its financial statements based on the
unamortized pro forma expense related to unvested options outstanding at the
date of adoption.
16
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company's exposures to market risk have not changed significantly since
August 1, 2004.
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 January 30, 2005.
(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
January 30, 2005 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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 tortuous interference
with actual and prospective contractual relationships.
On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August
21, 2002 in which the jury determined, among other things, that (i) Herley was
not required to pay any additional stock; (ii) Herley breached the Employment
Agreement with Robinson and awarded Robinson $1.5 million in damages; (iii)
Herley breached the Lease Agreement with Robinson and awarded Robinson
approximately $552,000 in compensatory damages; (iv) Robinson breached fiduciary
duties to Herley and awarded Herley $400,000 in compensatory damages; (v)
Robinson and RLI breached indemnity obligations and awarded Herley $100,000 in
damages; (vi) RLI breached representations and warranties given to Herley and
awarded Herley $320,000 in damages.
On October 18, 2002, the Court entered a final judgment consistent with the
above, and both parties filed post-trial motions. Additionally, as the
prevailing party in connection with the claims asserted by RLI relating to the
earn-out stock, as well as claims advanced relating to the various breaches of
the Asset Purchase Agreement, Herley filed a petition for fees and costs against
both RLI and Robinson on November 27, 2002 for approximately $2,000,000. RLI and
Robinson also filed petitions to recover attorney's fees of approximately
$240,000 for certain claims in which they contend that they were the prevailing
party. On February 5, 2003, the Court denied the post-trial motions filed by the
parties, thus leaving the jury verdict undisturbed.
17
At a proceeding on April 28, 2003, the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order dated May 6, 2003, the Court denied without prejudice all of the
parties' petitions. On May 12, 2003, Herley filed its appeal to the United
States Court of Appeals for the Second Circuit. On May 28, 2003, RLI filed a
notice of cross-appeal. Robinson did not appeal. Herley filed its brief in
support of its appeal before the Second Circuit on August 22, 2003. RLI timely
filed its brief in response to Herley's appeal and in support of RLI's
cross-appeal. Herley timely filed a response to RLI's brief and thereafter RLI
timely filed a response to Herley's brief. Oral argument was held on December
18, 2003.
By Summary Order on January 26, 2004, the Second Circuit affirmed the trial
court judgment in its entirety. On February 4, 2004, RLI submitted a letter
request to the trial court for relief from the judgment on RLI's claim for the
earn-out stock under Federal Rule of Civil Procedure 60. RLI contended that it
had "newly discovered evidence," first learned in August 2003, to justify its
requested relief. Herley submitted its response in opposition by letter dated
February 10, 2004. On February 26, 2004, the parties appeared before the Court
concerning the various applications and were directed to submit legal briefs on
various legal issues. By Order dated May 28, 2004 the trial court denied RLI's
Motion for a New Trial. The Court also denied Herley's request that it exercise
its general equitable power to hold Ben Robinson personally liable for any fees
Herley might recover against RLI.
On June 28, 2004, Herley filed suit against Ben Robinson and Frank Holt in the
Superior Court of Hillsborough County, New Hampshire, asserting claims for
fraudulent conveyance and piercing the corporate veil to hold Robinson
personally liable for the fees incurred by Herley in defending RLI's claims
discussed above. In response, Robinson took steps to collect damages awarded to
him under the jury verdict. On July 21, 2004, Herley brought an Emergency Motion
for Injunctive Relief and moved for an immediate order from the New Hampshire
court allowing Herley to escrow the judgment owed to Robinson to be offset
against any award of fees to Herley. The court entered an order denying the
requested relief. On July 27, 2004, Herley paid $1,594,621 (including interest)
to Ben Robinson, an amount calculated by deducting Herley's award against
Robinson from the amounts awarded to Robinson on his claims under the Employment
Agreement and the Lease Agreement. On July 28, 2004, the parties filed a Notice
of Partial Satisfaction of Judgment.
By Order dated February 8, 2005, the Superior court of Hillsborough County, New
Hampshire, granted Ben Robinson's and Frank Holt's Motion for Summary Judgment
in the New Hampshire action. By Order Dated February 17, 2005, the Court ruled
upon the parties' cross-petitions for attorneys' fees, granting all petitions in
their entirety. Herley was awarded $2,146,882 against RLI under the Asset
Purchase Agreement. RLI was awarded $54,426 against Herley for its successful
defense of an indemnity by Herley. Ben Robinson was awarded $259,295 against
Herley under the Lease Agreement. The Company expects to take certain actions to
stay the enforcement of the award of $259,295 against it under the Lease
Agreement, and is now pursuing measures to reach resolution of these competing
claims. Due to these expected developments, and the competing claims for payment
in favor of Herley, the Company has not recorded any liability or any assets in
connection with these recent Court Orders, due to the fact that the amounts
involved are not readily estimatable.
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.
18
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 20, 2005.
(2) Two directors were elected at the Annual Meeting of Stockholders as follows:
Class II - To serve until the Annual Meeting of Stockholders in 2007 or until
their successors are chosen and qualified:
Name Votes For Votes Withheld
---- -------- --------------
Myron Levy 8,779,114 3,794,278
Dr. Edward A. Bogucz 10,975,662 1,597,730
Item 5 - Other Information:
None
Item 6 - Exhibits
31 - Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 - Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
19
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/ Thomas V. Gilboy
---------------------------------------------
Thomas V. Gilboy, Principal Financial Officer
DATE: March 11, 2005
20