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: May 4, 2003
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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
--------------
3061 Industry Drive, Lancaster, Pennsylvania 17603
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(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 June 10, 2003 - 13,860,901 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 -
May 4, 2003 and July 28, 2002 2
Condensed Consolidated Statements of Income -
For the Thirteen and Forty weeks ended May 4, 2003
and Thirteen and Thirty-nine weeks ended April 28, 2002 3
Condensed Consolidated Statement of Shareholders' Equity-
For the Forty weeks ended May 4, 2003 4
Condensed Consolidated Statements of Cash Flows -
For the Forty weeks ended May 4, 2003
and Thirty-nine weeks ended April 28, 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
Item 4 - Controls and Procedures 22
PART II -OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 6 - Exhibits and Reports on Form 8K 23
Signatures 24
Certifications pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002 25
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
May 4, July 28,
2003 2002
--------- --------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 79,098 $ 86,210
Accounts receivable 14,624 14,486
Costs incurred and income recognized in excess
of billings on uncompleted contracts 3,263 6,882
Other receivables 558 274
Inventories, net of reserve of $2,522 in fiscal 2003
and $2,407 in fiscal 2002 39,430 33,371
Prepaid income taxes - 382
Deferred taxes and other 2,588 2,670
------- -------
Total Current Assets 139,561 144,275
Property, Plant and Equipment, net 22,572 22,231
Goodwill 27,106 21,665
Intangibles, net of accumulated amortization of $176 in fiscal
2003 and $145 in fiscal 2002 392 423
Available-For-Sale Securities 46 46
Other Investments 160 195
Other Assets 1,062 1,367
------- -------
$ 190,899 $ 190,202
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 713 $ 215
Accounts payable and accrued expenses 11,144 12,857
Income taxes payable 1,327 -
Reserve for contract losses 975 820
Advance payments on contracts 1,636 1,371
------- -------
Total Current Liabilities 15,795 15,263
Long-term Debt 6,519 5,684
Deferred Income Taxes 3,897 3,897
------- -------
26,211 24,844
------- -------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
13,993,201 at May 4, 2003 and 14,680,960 at July 28, 2002 1,399 1,468
Additional paid-in capital 105,995 116,579
Retained earnings 57,539 47,541
Accumulated other comprehensive loss (245) (230)
------- -------
Total Shareholders' Equity 164,688 165,358
------- -------
$ 190,899 $ 190,202
======= =======
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 Forty Thirty-nine
----------------------- weeks ended weeks ended
May 4, April 28, May 4, April 28,
2003 2002 2003 2002
------ ------ ------ ------
Net sales $ 26,897 $ 23,499 $ 79,202 $ 67,552
------ ------ ------ ------
Cost and expenses:
Cost of products sold 18,046 15,176 52,487 44,554
Selling and administrative expenses 3,839 3,629 11,628 10,291
Litigation costs 241 585 1,069 956
Plant closing costs - - - 406
------ ------ ------ ------
22,126 19,390 65,184 56,207
------ ------ ------ ------
Income from operations 4,771 4,109 14,018 11,345
Other income (expense), net 155 (31) 642 55
------ ------ ------ ------
Income from continuing operations
before income taxes 4,926 4,078 14,660 11,400
Provision for income taxes 1,567 1,386 4,662 3,876
------ ------ ------ ------
Income from continuing operations 3,359 2,692 9,998 7,524
Loss from discontinued operations
(including loss on net assets held for sale
of $1,166 in 2002) net of income taxes - - - (921)
------ ------ ------ ------
Income before cumulative effect of change
in accounting principle 3,359 2,692 9,998 6,603
Cumulative effect of adopting SFAS 142 - - - (4,637)
------ ------ ------ ------
Net income $ 3,359 $ 2,692 $ 9,998 $ 1,966
====== ====== ====== ======
Earnings (loss) per common share - Basic
Income from continuing operations $ .24 $ .23 $ .69 $ .67
Loss from discontinued operations - - - (.08)
Cumulative effect of adopting SFAS 142 - - - (.42)
--- --- --- ---
Net earnings $ .24 $ .23 $ .69 $ .18
=== === === ===
Basic weighted average shares 14,218 11,559 14,449 11,164
====== ====== ====== ======
Earnings (loss) per common share - Diluted
Income from continuing operations $ .23 $ .22 $ .66 .62
Loss from discontinued operations - - - (.08)
Cumulative effect of adopting SFAS 142 - - - (.38)
--- --- --- ---
Net earnings $ .23 $ .22 $ .66 $ .16
=== === === ===
Diluted weighted average shares 14,848 12,495 15,175 12,099
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Forty weeks ended May 4, 2003
(In thousands except share data)
Accumulated
Common Stock Additional Other
------------ Paid-in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Loss Total
------ ------ ------- -------- ----- ---- -----
Balance at July 28, 2002 14,680,960 $ 1,468 116,579 47,541 - (230) $ 165,358
Net income 9,998 9,998
Exercise of stock options 88,649 9 695 704
Tax benefit upon exercise of stock
options 830 830
Purchase of 776,408 shares of treasury stock (12,187) (12,187)
Retirement of treasury shares (776,408) (78) (12,109) 12,187 -
Other comprehensive loss:
Unrealized loss on interest rate swap (21) (21)
Foreign currency translation gain 6 6
---------- ----- ------- ------- ------ --- -------
Balance at May 4, 2003 13,993,201 $ 1,399 105,995 57,539 - (245) $ 164,688
========== ===== ======= ======= ====== === =======
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)
Forty Thirty-nine
weeks ended weeks ended
May 4, April 28,
2003 2002
---- ----
Cash flows from operating activities:
Income from continuing operations $ 9,998 $ 7,524
------ ------
Adjustments to reconcile income from continuing operations to net cash
provided by operations:
Depreciation and amortization 3,005 2,885
Loss on sale of fixed assets - 68
Equity in income of limited partnership (14) (52)
(Increase) in deferred tax assets - (743)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (138) 273
Decrease (increase) in costs incurred and income
recognized in excess of billings on uncompleted contracts 2,439 (6,129)
(Increase) in other receivables (111) (444)
(Increase) in inventories (5,731) (3,217)
Decrease in prepaid expenses and other 755 -
(Decrease) increase in accounts payable and accrued expenses (2,266) 1,029
(Decrease) in billings in excess of costs incurred and
income recognized on uncompleted contracts - (531)
Increase in income taxes payable 2,157 3,405
(Decrease) increase in reserve for contract losses (554) 9
Increase in advance payments on contracts 265 1,225
Other, net 241 (108)
------ ------
Total adjustments 48 (2,330)
------ ------
Net cash provided by operating activities 10,046 5,194
------ ------
Cash flows from investing activities:
Investment of unexpended industrial revenue bond proceeds - (353)
Investment in technology license - (500)
Acquisition of business, net of cash acquired (2,542) -
Payment of deferred purchase price of acquired business - (3,000)
Partial distribution from limited partnership 49 573
Capital expenditures (2,994) (4,819)
------ ------
Net cash used in investing activities (5,487) (8,099)
------ ------
Cash flows from financing activities:
Borrowings under bank line of credit - 4,300
Proceeds from industrial revenue bond financing - 3,000
Proceeds from exercise of stock options and warrants 704 3,654
Payments under lines of credit - (4,300)
Payments of long-term debt (188) (172)
Purchase of treasury stock (12,187) (3,848)
------ ------
Net cash (used in) provided by financing activities (11,671) 2,634
------ ------
Net cash provided by discontinued operations - 559
------ ------
Net (decrease) increase in cash and cash equivalents (7,112) 288
Cash and cash equivalents at beginning of period 86,210 13,041
------ ------
Cash and cash equivalents at end of period $ 79,098 $ 13,329
====== ======
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 (except for the
balance sheet presented at July 28, 2002) 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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002.
Management adopted this standard on July 29, 2002 and has determined that
the adoption did not have a significant impact on the financial position,
results of operations or cash flows of the Company.
In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets and for long- lived
assets to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", and retains the fundamental provisions of Statement 121 for
(a) recognition and measurement of the impairment of long-lived assets to
be held and used and (b) measurement of long-lived assets to be disposed of
by sale. SFAS 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for segments
of a business to be disposed of, but retains the requirement of Opinion 30
to report discontinued operations separately from continuing operations and
extends that reporting to a component of an entity that either has been
disposed of (by sale, by abandonment, or in a distribution to owners) or is
classified as held for sale. The provisions of this statement were adopted
by the Company effective on July 30, 2001.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement is effective for fiscal years beginning after
May 15, 2002. SFAS 145 requires, among other things, eliminating reporting
debt extinguishments as an extraordinary item in the income statement.
Management adopted this standard on July 29, 2002 and has determined that
the adoption did not have a significant impact on the financial position,
results of operations or cash flows of the Company.
In June 2002, the FASB issued 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. Management does not believe the adoption of this standard
will have a material impact on the Company's financial position or results
of operations.
6
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 Note 1 of the Company's condensed consolidated
interim financial statements in quarterly reports beginning with this
initial Form 10-Q for the 13 weeks ended May 4, 2003, and the addition of a
significant accounting policies Note 1 to be included in the Company's
Annual Report on Form 10K for the year ending August 3, 2003.
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"
("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 nine months of
fiscal years 2003 and 2002 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):
7
Thirteen weeks ended Forty Thirty-nine
-------------------- weeks ended weeks ended
May 4, April 28, May 4, April 28,
2003 2002 2003 2002
---- ---- ---- ----
Net income - as reported $ 3,359 $ 2,692 $ 9,998 $ 1,966
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (283) (688) (1,655) (1,293)
-------- ------ ------- -------
Net income - pro forma $ 3,076 $ 2,004 $ 8,343 $ 673
===== ===== ===== ======
Earnings per share - as reported
Basic $ .24 $ .23 $ .69 $ .18
Diluted .23 .22 .66 .16
Earnings per share - pro forma
Basic $ .22 $ .17 $ .58 $ .06
Diluted .21 .16 .55 .06
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 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. Management believes 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.
8
2. 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. 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. This strategy will expand international revenues
from new sources and increase content to existing customers. 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, payable in annual installments
of $500,000. 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. The
condensed 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 EWST data to the Company's accounting
policies. The Company has engaged an independent third party to complete a
valuation of the intangible assets of EWST as of the acquisition date. The
final valuation of intangible assets is expected to be completed in the
fourth quarter of fiscal 2003. The final determination of the fair value of
assets acquired and liabilities assumed and final allocation of the
purchase price may differ from the amounts included in the accompanying
condensed consolidated financial statements. The excess cost over the
preliminary estimated fair value of net assets acquired of approximately
$5,423,000 has been recorded as goodwill.
3. In September 2000, the Company acquired all of the issued and outstanding
common stock of Terrasat, Inc. ("Terrasat"), a California corporation, for
cash of $6,000,000, $3,000,000 of which was paid in December 2000 and
$3,000,000 of which was paid in December 2001. In addition, the agreement
provided for additional cash payments in the future up to $2,000,000, based
on gross revenues through December 31, 2001. The targeted gross revenues
under the agreement were not achieved, therefore no addition cash payments
were made.
In January 2002 the Board of Directors of the Company determined that
Terrasat would no longer be able to generate sufficient returns to justify
continued investment due to the overcapacity in the telecom industry and
deteriorating economic conditions in Terrasat's primary markets. Therefore,
the Company decided to discontinue the operations of Terrasat and to seek a
purchaser for the business. Consequently, the accompanying condensed
consolidated financial statements reflect Terrasat as discontinued
operations in accordance with SFAS No. 144. Results of operations and cash
flows of Terrasat have been classified in the January 2002 financial
statements as "Loss from discontinued operations", and "Net cash used in
discontinued operations", respectively.
The sale of certain assets and liabilities, and the business of Terrasat
was consummated on March 1, 2002, effective the close of business January
27, 2002, to certain current employees of Terrasat for cash and a note
which approximates the value of the net assets held for sale as of January
27, 2002 of $878,000.
9
Summarized below are the results of discontinued operations (in thousands):
Thirty-nine weeks ended
April 28, 2002
Net sales $ 2,147
-----
Loss from discontinued operations (229)
Loss on net assets held for sale (1,166)
Income tax benefit (474)
-----
Net loss from discontinued operations $ (921)
=====
4. Inventories at May 4, 2003 and July 28, 2002 are summarized as follows (in
thousands):
May 4, 2003 July 28, 2002
----------- -------------
Purchased parts and raw materials $ 18,833 $ 18,680
Work in process 21,283 15,707
Finished products 1,836 1,391
------ ------
41,952 35,778
Less reserve for excess and obsolete materials 2,522 2,407
------ ------
$ 39,430 $ 33,371
====== ======
5. 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 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 fair value hedge, along with the gain or loss on the hedged asset or
liability that is attributable to the hedged risk, are recorded in current
period earnings. 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 and reclassified
into earnings as the underlying hedged item affects earnings. The portion
of the change in fair value of a derivative associated with hedge
ineffectiveness or the component of a derivative instrument excluded from
the assessment of hedge effectiveness is recorded currently in earnings.
Also, changes in the entire fair value of a derivative that is not
designated as a hedge are recorded immediately in earnings. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes relating all
derivatives that are designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions.
The Company also formally assesses, both at the inception of the hedge and
on an ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values or cash flows of the hedged item. If it
is determined that a derivative is not highly effective as a hedge or if a
derivative ceases to be a highly effective hedge, the Company will
discontinue hedge accounting prospectively.
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
10
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 $118,000, net of
income taxes, as of May 4, 2003. 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 May 4, 2003 as a result of the discontinuance of a cash flow hedge
due to the probability of the original forecasted transaction not
occurring.
6. In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets," which requires the use of a non-amortization approach to account
for purchased goodwill and certain intangibles. Under a non- amortization
approach, goodwill will not be amortized into results of operations, but
instead will be reviewed for impairments, which will be charged to results
of operations in the periods in which the recorded value of goodwill is
more than its fair value. The provisions of this statement were adopted by
the Company on July 30, 2001. The adoption of SFAS No.142 resulted in the
Company's discontinuation of amortization of its goodwill as of July 30,
2001.
In connection with the adoption of SFAS 142, the Company was required to
assess goodwill for impairment within six months of adoption, and completed
its assessment in the second quarter of fiscal 2002.
The Company operates as a single integrated business and as such has one
operating segment which is also the reportable segment as defined in SFAS
131. Within the operating segment, the Company has identified two
components as reporting units as defined under SFAS 142, defense
electronics and commercial technologies. The Company has determined the
carrying value of each reporting unit by assigning assets and liabilities,
including the existing goodwill and intangible assets, to those reporting
units as of July 30, 2001. The Company determined that an impairment of
goodwill in the commercial technologies unit had occurred, and accordingly,
a transition adjustment in the amount of $4,637,000 was recorded as of July
30, 2001 as a cumulative effect of a change in accounting principle. There
is no tax benefit associated with the adjustment since the impaired
goodwill is not deductible for income tax purposes.
The change in the carrying amount of goodwill, based upon the preliminary
estimates of the fair value of assets acquired and liabilities assumed
related to the acquisition of EWST (See Note 2), for the nine months ended
May 4, 2003 is as follows (in thousands):
Balance at July 28, 2002 $ 21,665
Goodwill acquired during period 5,441
------
Balance at May 4, 2003 $ 27,106
======
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.
Intangibles, consisting of patents having an estimated useful life of
fourteen years, are carried at an aggregate gross amount of $568,000 with
accumulated amortization at May 4, 2003 of $176,000. Amortization expense
for the thirteen weeks ended May 4, 2003 and April 28, 2002 was
approximately $10,000, and for the Forty and Thirty-nine weeks ended May 4,
2003 and April 28, 2002 was approximately $31,000. Estimated annual
amortization expense for each of the next five fiscal years is
approximately $41,000.
7. 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
11
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. litigation, as discussed in Part II, Item 1.
"Legal Proceedings", 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. No appeals have been filed by Robinson or RLI at this time,
although Herley anticipates that appeals will be filed.
8. The following tables show the calculation of basic and diluted
weighted-average shares outstanding (in thousands):
Thirteen weeks ended
-----------------------------
May 4, 2003 April 28, 2002
Basic weighted-average shares 14,218 11,559
Effect of dilutive securities:
Employee stock options and warrants 630 936
------ ------
Diluted weighted-average shares 14,848 12,495
====== ======
Options to purchase 707,000 weighted shares of common stock, with exercise
prices ranging from $15.90 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. The options, which expire through May 21, 2012, were
still outstanding as of May 4, 2003. There were no anti- dilutive options
outstanding during the third quarter of fiscal 2002.
Forty Thirty-nine
weeks ended weeks ended
May 4, 2003 April 28, 2002
----------- --------------
Basic weighted-average shares 14,449 11,164
Effect of dilutive securities:
Employee stock options and warrants 726 935
------ ------
Diluted weighted-average shares 15,175 12,099
====== ======
Options to purchase 697,911 weighted shares of common stock, with exercise
prices ranging from $16.80 to $19.52, were outstanding during the first
nine 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. The options, which expire through May 21, 2012,
were still outstanding as of May 4, 2003. Options to purchase 3,077
weighted shares of common stock, with an exercise prices of $17.42, were
outstanding during the first nine months of fiscal 2002, 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.
9. In March 2003, the Board of Directors approved the 2003 Stock Option Plan
which covers 1,000,000 shares of the Company's common stock. Options
granted under the plan are non-qualified stock options. Under the terms of
the plan, the exercise price for options granted under the plan will be the
fair market value at the date of grant. The nature and terms of the options
to be granted are determined at the time of grant by the compensation
committee or the board of directors. The options expire no later than ten
years from the date of grant, subject to certain restrictions. No options
have been granted under the plan.
12
10. The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended Forty Thirty-nine
-------------------- weeks ended weeks ended
May 4, April 28, May 4, April 28,
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 3,359 $ 2,692 $ 9,998 $ 1,966
Unrealized loss on interest rate swap (9) - (21) -
Foreign currency translation gain 47 - 6 -
----- ----- ----- -----
Comprehensive income $ 3,397 $ 2,692 $ 9,983 $ 1,966
===== ===== ===== =====
The components of accumulated other comprehensive loss is as follows (in
thousands):
May 4, 2003
-----------
Unrealized loss from available-for-sale
securities $ 66
Unrealized loss on interest rate swap 118
Foreign currency translation loss 61
----
Accumulated other comprehensive loss $ 245
===
11. Supplemental cash flow information is as follows (in thousands):
Forty Thirty-nine
weeks ended weeks ended
May 4, 2003 April 28, 2002
----------- --------------
Cash paid during the period for:
Interest $ 260 $ 232
Income taxes 4,296 475
Cashless exercise of stock options - 8,026
Tax benefit related to stock options 830 6,710
Note issued for business acquired 1,500 -
13
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.
Results of Operations
Thirteen weeks ended May 4, 2003 and April 28, 2002
Net sales from continuing operations for the thirteen weeks ended May 4, 2003
were approximately $26,897,000 compared to $23,499,000 in the thirteen weeks
ended April 28, 2002, an increase of $3,398,000 (14.5%). Excluding the sales of
$4,265,000 attributable to the acquisition of EWST, revenue in defense
electronics microwave systems and components increased by $210,000. This was
offset by a decrease of $1,077,000 in commercial technologies.
The gross profit margin of 32.9% in the thirteen weeks ended May 4, 2003 is
lower than the margin of 35.4% in the third quarter of the prior year. The net
decrease in gross margin is attributable to a combination of greater production
efficiencies, including automation, and a change in product mix; offset by the
investment in product design and development related to certain new programs, as
well as lower margins than the Company's historical margins from the EWST
revenues.
Selling and administrative expenses for the thirteen weeks ended May 4, 2003
were 14.3% of net sales as compared to 15.4% in the third quarter of fiscal
2002. The net increase in expenses of $210,000 includes expenses of EWST of
$278,000, an increase in incentive compensation under employment contracts of
$192,000, and a decrease in commissions of $210,000. Various other line item
expenses decreased $50,000 in the quarter on a net basis.
Litigation costs related to the Robinson Labs litigation were $241,000 in the
third quarter of fiscal 2003, as compared to $585,000 in the third quarter of
fiscal 2002. (See Part II, Item 1. "Legal Proceedings").
Other income increased on a net basis approximately $186,000 from the prior year
third quarter primarily due to interest earned during the quarter ended May 4,
2003 on the investment of cash reserves including the proceeds of approximately
$64,812,000 received from the sale of common stock to the public at the end of
April 2002.
14
Forty weeks ended May 4, 2003 and Thirty-nine weeks ended April 28, 2002
Net sales from continuing operations for the forty weeks ended May 4, 2003 were
approximately $79,202,000 compared to $67,552,000 in the first nine months of
fiscal 2002. The sales increase of $11,650,000 (17.2%) is attributable to
increased revenue in defense electronics of $16,365,000 (including $6,930,000
attributable to the acquisition of EWST); offset by a decrease in revenue of
$4,715,000 in commercial technologies.
The gross profit margin of 33.7% in the forty weeks ended May 4, 2003 is lower
than the margin of 34.0% in fiscal 2002 primarily due to the combination of
greater production efficiencies, including automation, and a change in product
mix; offset by the investment in product design and development related to
certain new programs, as well as lower margins then the Company's historical
margins from the EWST revenues.
Selling and administrative expenses for the forty weeks ended May 4, 2003 were
14.7% of net sales as compared to 15.2% in the thirty-nine weeks of fiscal 2002.
There was a net increase in expenses of $1,337,000 which includes expenses of
EWST of $699,000, an increase in incentive compensation under employment
contracts of $749,000, and a decrease in commissions of $135,000. Various other
line item expenses increased during the forty weeks ended May 4, 2003 by $24,000
on a net basis.
Litigation costs related to the Robinson Labs litigation were $1,069,000 in the
nine months ended May 4, 2003, as compared to $956,000 in fiscal 2002. (See Part
II, Item 1. "Legal Proceedings").
Plant closing costs in connection with the facilities in Nashua, NH and Anaheim,
CA were accrued in October 2001 in the amount of $406,000 of which $379,000 was
paid as of May 4, 2003.
Other income increased on a net basis approximately $697,000 from the prior year
primarily due to interest earned on the investment of cash reserves including
the proceeds of approximately $64,812,000 received from the sale of common stock
to the public at the end of April 2002.
Discontinued operations
In January 2002 the Board of Directors of the Company decided to discontinue the
operations of the Company's telecommunications subsidiary, Terrasat, Inc. and to
seek a buyer for the business. The Company believed that Terrasat would not be
able to generate sufficient returns to justify continued investment due to the
overcapacity in the telecom industry and deteriorating economic conditions in
Terrasat's primary markets. The sale of the assets and liabilities, and the
business of Terrasat was consummated on March 1, 2002 to certain employees of
Terrasat for cash and a note which approximates the value of the net assets held
for sale as of January 27, 2002.
Net sales of Terrasat were approximately $2,147,000 for the thirty-nine weeks
ended April 28, 2002. The net loss from discontinued operations was $921,000 in
2002. The results for 2002 includes an impairment of assets adjustment of
$1,166,000 and a tax benefit of $474,000.
Change in accounting principle
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 intangibles as
15
of July 30, 2001.
In connection with the adoption of SFAS 142, the Company was required to assess
goodwill for impairment within six months of adoption and completed its
assessment in the second quarter of fiscal 2002.
The Company operates as a single integrated business and as such has one
operating segment which is also the reportable segment as defined in SFAS 131.
Within the operating segment, the Company has identified two components as
reporting units as defined under SFAS 142, defense electronics and commercial
technologies. The Company determined the carrying value of each reporting unit
by assigning assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of July 30, 2001. The Company
determined that an impairment of goodwill in the commercial technologies unit
had occurred due to the overcapacity in the telecom industry and deterioration
economic conditions. Accordingly, a transition adjustment in the amount of
$4,637,000 was recorded as of July 30, 2001 as a cumulative effect of a change
in accounting principle. There is no tax benefit associated with the adjustment
since the impaired goodwill is not deductible for income tax purposes.
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.
Liquidity and Capital Resources
As of May 4, 2003 and July 28, 2002, working capital was $123,766,000 and
$129,012,000, respectively, and the ratio of current assets to current
liabilities was 8.8 to 1 and 9.5 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 $1,636,000 at May 4, 2003, and
$1,371,000 at July 28, 2002. The increase is primarily attributable to contract
awards at EWST.
Net cash provided by continuing operations during the forty weeks ended May 4,
2003 was approximately $10,046,000 as compared to $5,194,000 during the
comparable period in the prior year. Significant items contributing to the
sources of funds include income from continuing operations of $13,003,000
(adjusted for depreciation and amortization), and a decrease in costs incurred
and income recognized on uncompleted contracts of $2,439,000 primarily as a
result of the application of advance payments, and an increase in income taxes
payable of $2,157,000. Offsetting these sources of funds are a decrease in
accounts payable and accrued expenses of $2,266,000, and an increase in
inventory of $5,731,000.
Net cash used in investing activities consists of net cash paid for the
acquisition of EWST of $2,542,000, and $2,994,000 for capital expenditures. The
Company has a future commitment for $1,500,000, including interest at 1.8%, in
connection with the acquisition of EWST payable in annual installments of
$500,000.
Net cash used in financing activities of $11,671,000 consists primarily of the
acquisition of approximately 776,000 shares of treasury stock, which has been
retired, for $12,187,000 under a stock buyback program approved by the Board of
Directors in October 2002 for the purchase of up to 1,000,000 shares of common
stock. In May 2003 the Board expanded the program by an additional 1,000,000
shares.
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
FOMC Federal Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a
maximum of
16
$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 1.25% and 1.31%, respectively, at May 4, 2003. 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 May 4, 2003 and July 28, 2002. Stand-by letters of
credit were outstanding in the amount of approximately $12,321,000 under the
credit facility at May 4, 2003.
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 2003 will be generated from its existing backlog of
sales orders. The backlog of orders at May 4, 2003 was approximately
$96,000,000. All orders included in backlog are covered by signed contracts or
purchase orders. Nevertheless, contracts involving government programs may be
terminated at the 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 $37,679,000 available under its bank
credit facility, net of outstanding stand-by letters of credit of approximately
$12,321,000.
Future payments required on long-term debt are as follows (in thousands):
Twelve months Industrial
ended Mortgage revenue Other
April Total note bonds obligations
----- ----- ---- ----- -----------
2004 $ 713 $ 84 $ 100 $ 529
2005 697 92 105 500
2006 709 99 110 500
2007 221 106 115 -
2008 234 114 120 -
Thereafter 4,658 2,135 2,355 168
----- ----- ----- -----
$ 7,232 $ 2,630 $ 2,905 $ 1,697
===== ===== ===== =====
Stand-by letters of credit expire as follows (in thousands):
During
fiscal
year Amount
2004 $ 7,419
2005 115
2006 1,839
2007 2,948
------
$ 12,321
======
17
Minimum annual rentals under noncancellable operating leases are as follows (in
thousands):
During
fiscal
year Amount
---- ------
2003 $ 299
2004 1,106
2005 954
2006 969
2007 948
Thereafter 2,049
-----
$ 6,325
=====
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). Prospective losses on long-term
contracts are based upon the anticipated excess of inventoriable manufacturing
costs over the selling price of the remaining units to be delivered and are
recorded when first reasonably determinable. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance. Actual losses could differ from those estimated due to changes in
the ultimate manufacturing costs. 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.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Management adopted this standard on July 29, 2002
and has determined that the adoption did not have a significant impact on the
financial position, results of operations or cash flows of the Company.
In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and retains the fundamental provisions of Statement 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale. SFAS 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for segments of a business to be disposed of, but
retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. The provisions of
this statement were adopted by the Company effective on July 30, 2001.
18
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement is effective for fiscal years beginning after May 15, 2002. SFAS
145 requires, among other things, eliminating reporting debt extinguishments as
an extraordinary item in the income statement. Management adopted this standard
on July 29, 2002 and has determined that the adoption did not have a significant
impact on the financial position, results of operations or cash flows of the
Company.
In June 2002, the FASB issued 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. Management does
not believe the adoption of this standard will have a material impact on the
Company's financial position or results of operations.
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 Note 1 of the Company's condensed consolidated interim financial
statements in quarterly reports beginning with this initial Form 10-Q for the 13
weeks ended May 4, 2003, and the addition of a significant accounting policies
Note 1 to be included in the Company's Annual Report on Form 10K for the year
ending August 3, 2003.
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 APB Opinion No. 25 and related
Interpretations in accounting for these plans. Statement of Financial Accounting
Standards No.123, "Accounting for Stock-Based Compensation" ("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.
19
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 nine months of
fiscal years 2003 and 2002 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 Forty Thirty-nine
-------------------- weeks ended weeks ended
May 4, April 28, May 4, April 28,
2003 2002 2003 2002
---- ---- ---- ----
Net income - as reported $ 3,359 $ 2,692 $ 9,998 $ 1,966
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (283) (688) (1,655) (1,293)
----- ------ ----- -----
Net income - pro forma $ 3,076 $ 2,004 $ 8,343 $ 673
===== ===== ===== =====
Earnings per share - as reported
Basic $ .24 $ .23 $ .69 $ .18
Diluted .23 .22 .66 .16
Earnings per share - pro forma
Basic $ .22 $ .17 $ .58 $ .06
Diluted .21 .16 .55 .06
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 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.
20
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. Management believes 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.
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 4 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 $118,000, net of income taxes, as of May
4, 2003. 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 May 4, 2003, as a result of the discontinuance of a cash flow
hedge due to the probability of the original forecasted transaction not
occurring.
21
Item 4: Controls and Procedures
Within the 90 days prior to the date of this Report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's chief executive officer and chief financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 adopted under the
Securities Exchange Act of 1934. Based upon that evaluation, the chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
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
22
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. No appeals have been filed by Robinson or RLI at this
time, although Herley anticipates that appeals will be filed.
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:
None
Item 5 - Other Information:
None
Item 6 - Exhibits And Reports On Form 8-K:
(a) Exhibits
10.1 2003 Stock Option Plan
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of fiscal
2003.
23
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
-------------------------------------
Anello C. Garefino
Principal Financial Officer
DATE: June 11, 2003
24
CERTIFICATIONS PURSUANT TO RULE 13-A-14 OF THE SECURITIES ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Myron Levy, Chief Executive Officer of Herley Industries, Inc., hereby
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Herley Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; 3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; 4.
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared; (b) evaluated the effectiveness
of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report
(the "Evaluation Date"); and (c) presented in this quarterly report
our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and (b) any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 11, 2003
By: /S/ Myron Levy
-----------------------
Myron Levy
Chief Executive Officer
25
CERTIFICATION
I, Anello C. Garefino, Vice President Finance and Chief Financial Officer of
Herley Industries, Inc., do hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Herley Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; 3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; 4.
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared; (b) evaluated the effectiveness
of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report
(the "Evaluation Date"); and (c) presented in this quarterly report
our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and (b) any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 11, 2003
By: /S/ Anello C. Garefino
---------------------------
Anello C. Garefino
Vice President Finance and
Chief Financial Officer
26
EXHIBIT 99.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report on Form 10-Q of Herley Industries, Inc.
and subsidiaries (the "Company") for the quarterly period ended May 4, 2003as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I Myron Levy, Chief Executive Officer of the Company, hereby certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /S/ Myron Levy
-----------------------
Myron Levy
Chief Executive Officer
Dated: June 11, 2003
This certification accompanies the Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.
18 of the Securities Exchange Act of 1934, as amended.
27
EXHIBIT 99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report on Form 10-Q of Herley Industries, Inc.
and subsidiaries (the "Company") for the quarterly period ended May 4, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I Anello C. Garefino, Vice President Finance, and Chief Financial
Officer of the Company, hereby certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /S/ Anello C. Garefino
---------------------------
Anello C. Garefino
Vice President Finance and
Chief Financial Officer
Dated: June 11, 2003
This certification accompanies the Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.
18 of the Securities Exchange Act of 1934, as amended.
28