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 2, 2004
-----------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-5411
HERLEY INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE #23-2413500
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 North Pointe Boulevard, Lancaster, Pennsylvania 17601
- --------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (717) 735-8117
--------------
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of June 11, 2004 - 14,206,408 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 2, 2004 and August 3, 2003 2
Condensed Consolidated Statements of Income -
For the Thirteen and Thirty-nine weeks ended
May 2, 2004 and Thirteen and Forty weeks
ended May 4, 2003 3
Condensed Consolidated Statement of Shareholders' Equity-
For the Thirty-nine weeks ended May 2, 2004 4
Condensed Consolidated Statements of Cash Flows -
For the Thirty-nine weeks ended May 2, 2004
and Forty weeks ended May 4, 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 - Controls and Procedures 18
PART II -OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 6 - Exhibits and Reports on Form 8K 20
Signatures 22
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
May 2, August 3,
2004 2003
--------- ---------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 65,605 $ 81,523
Accounts receivable 19,587 16,525
Costs incurred and income recognized in excess
of billings on uncompleted contracts 16,023 6,960
Other receivables 849 827
Inventories, net of allowance of $3,640 in fiscal 2004
and $2,739 in fiscal 2003 44,677 37,545
Deferred taxes and other 3,416 3,207
--------- ---------
Total Current Assets 150,157 146,587
Property, Plant and Equipment, net 25,124 22,406
Goodwill 35,342 25,729
Intangibles, net of accumulated amortization of $624 in fiscal
2004 and $403 in fiscal 2003 4,665 1,542
Available-For-Sale Securities 75 75
Other Investments 112 162
Other Assets 947 1,063
--------- ---------
$ 216,422 $ 197,564
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 788 $ 686
Accounts payable and accrued expenses 16,836 14,026
Billings in excess of costs incurred and
income recognized on uncompleted contracts 478 -
Income taxes payable 3,332 2,670
Reserve for contract losses 1,129 736
Advance payments on contracts 865 856
--------- ---------
Total Current Liabilities 23,428 18,974
Long-term Debt 5,845 6,403
Deferred Income Taxes 4,936 4,945
--------- ---------
34,209 30,322
--------- ---------
Commitments and Contingencies (Notes 7 and 8)
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
14,164,499 at May 2, 2004 and 13,969,151 at August 3, 2003 1,416 1,397
Additional paid-in capital 106,919 104,551
Retained earnings 72,841 61,478
Accumulated other comprehensive income (loss) 1,037 (184)
--------- ---------
Total Shareholders' Equity 182,213 167,242
--------- ---------
$ 216,422 $ 197,564
========= =========
The accompanying notes are an integral part of these financial statements.
2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share data)
Thirteen weeks ended Thirty-nine Forty
-------------------- weeks ended weeks ended
May 2, May 4, May 2, May 4,
2004 2003 2004 2003
-------- -------- -------- ---------
Net sales $ 30,233 $ 26,897 $ 87,908 $ 79,202
-------- -------- -------- --------
Cost and expenses:
Cost of products sold 19,465 18,046 56,135 52,487
Selling and administrative expenses 5,418 4,080 15,396 12,697
-------- -------- -------- --------
24,883 22,126 71,531 65,184
-------- -------- -------- --------
Operating Income 5,350 4,771 16,377 14,018
-------- -------- -------- --------
Other (expense) income, net:
Investment income 153 236 516 900
Interest expense (79) (81) (248) (258)
Foreign exchange gain (loss) 18 - (225) -
-------- -------- -------- --------
92 155 43 642
-------- -------- -------- --------
Income before income taxes 5,442 4,926 16,420 14,660
Provision for income taxes 1,566 1,567 5,057 4,662
-------- -------- -------- --------
Net income $ 3,876 $ 3,359 $ 11,363 $ 9,998
======== ======== ======== ========
Earnings per common share - Basic $ .27 $ .24 $ .81 $ .69
======== ======== ======== ========
Basic weighted average shares 14,129 14,218 14,072 14,449
======== ======== ======== ========
Earnings per common share - Diluted $ .26 $ .23 $ .76 $ .66
======== ======== ======== ========
Diluted weighted average shares 14,932 14,848 14,861 15,175
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
39 weeks ended May 2, 2004
(In thousands except share data)
Accumulated
Common Stock Additional Other
------------ Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
Balance at August 03, 2003 13,969,151 $ 1,397 104,551 61,478 (184) $ 167,242
Net income 11,363 11,363
Exercise of stock options 195,348 19 1,806 1,825
Tax benefit upon exercise of stock
options 562 562
Other comprehensive income (loss):
Unrealized loss on interest rate swap (17) (17)
Foreign currency translation gain 1,238 1,238
---------- ------- ------- ------ ----- ---------
Balance at May 2, 2004 14,164,499 $ 1,416 106,919 72,841 1,037 $ 182,213
========== ======= ======= ====== ===== =========
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)
Thirty-nine Forty
weeks ended weeks ended
May 2, May 4,
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 11,363 $ 9,998
-------- --------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 3,048 3,005
Foreign exchange loss 182 -
Equity in income of limited partnership - (14)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,846) (138)
(Increase) decrease in costs incurred and income
recognized in excess of billings on uncompleted contracts (9,063) 2,439
(Increase) in other receivables (22) (111)
(Increase) in inventories (5,737) (5,731)
(Increase) decrease in deferred taxes and other (122) 755
Increase (decrease) in accounts payable and accrued expenses 1,904 (2,266)
Increase in billings in excess of costs incurred and
income recognized on uncompleted contracts 478 -
Increase in income taxes payable 1,224 2,157
Increase (decrease) in reserve for contract losses 98 (554)
Increase in advance payments on contracts 9 265
Other, net 539 241
-------- --------
Total adjustments (9,308) 48
-------- --------
Net cash provided by operating activities 2,055 10,046
-------- --------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (14,914) (2,542)
Partial distribution from limited partnership 50 49
Capital expenditures (4,270) (2,994)
-------- --------
Net cash used in investing activities (19,134) (5,487)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,825 704
Payments of long-term debt (664) (188)
Purchase of treasury stock - (12,187)
-------- --------
Net cash provided by (used in) financing activities 1,161 (11,671)
-------- --------
Net decrease in cash and cash equivalents (15,918) (7,112)
Cash and cash equivalents at beginning of period 81,523 86,210
-------- --------
Cash and cash equivalents at end of period $ 65,605 $ 79,098
======== ========
The accompanying notes are an integral part of these financial statements.
Herley Industries, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements - (Unaudited)
1. The condensed consolidated financial statements include the accounts of
Herley Industries, Inc. and its subsidiaries, all of which are
wholly-owned. All significant inter-company accounts and transactions have
been eliminated in consolidation.
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
consolidated financial position and results of operations and cash flows
for the periods presented. These financial statements are unaudited and
have not been reported on by independent public accountants.
Results of operations for interim periods are not necessarily indicative of
the results of operations for a full year due to external factors which are
beyond the control of the Company.
In 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 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.
6
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 2004 and 2003 been determined based on the fair value at the
grant date consistent with the provisions of SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below using the statutory income tax rate of 34% (in
thousands except per share data):
Thirteen weeks ended Thirty-nine Forty
-------------------- weeks ended weeks ended
May 2, May 4, May 2, May 4,
2004 2003 2004 2003
---- ---- ---- ----
Net income - as reported $ 3,876 $ 3,359 $ 11,363 $ 9,998
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (163) (283) (468) (1,655)
------ ------ -------- -------
Net income - pro forma $ 3,713 $ 3,076 $ 10,895 $ 8,343
===== ===== ====== ======
Earnings per share - as reported
Basic $ .27 $ .24 $ .81 $ .69
Diluted .26 .23 .76 .66
Earnings per share - pro forma
Basic $ .26 $ .22 $ .77 $ .58
Diluted .25 .21 .73 .55
The effects of applying the pro forma disclosures of SFAS 123 are not
likely to be representative of the effects on reported net income for
future years due to the various vesting schedules.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." In December 2003 this Interpretation was
replaced by FASB Interpretation No. 46(R) ("FIN 46(R)"), which clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which the equity investors do
not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46(R) requires an enterprise to consolidate a variable interest entity if
that enterprise will absorb a majority of the entity's expected losses, is
entitled to receive a majority of the entity's expected residual returns,
or both. FIN 46(R) is effective for entities being evaluated under FIN
46(R) for consolidation no later than the end of the first reporting period
that ends after March 15, 2004. Adoption of FIN 46(R) did not have a
material effect on the Company's financial position, results of operations
or cash flows.
7
2. Inventories at May 2, 2004 and August 3, 2003 are summarized as follows (in
thousands):
May 2, 2004 August 3, 2003
----------- --------------
Purchased parts and raw materials $ 23,143 $ 19,690
Work in process 22,532 18,646
Finished products 2,642 1,948
------- -------
48,317 40,284
Less reserve for excess and obsolete materials 3,640 2,739
------- -------
$ 44,677 $ 37,545
====== ======
3. The Company recognizes all derivatives on the balance sheet at fair value.
On the date the derivative instrument is entered into, the Company
generally designates the derivative as either (1) a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment
("fair value hedge") or (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized
asset or liability ("cash flow hedge"). Changes in the fair value of a
derivative that is designated as, and meets all the required criteria for,
a cash flow hedge are recorded in accumulated other comprehensive income
(loss) and reclassified into earnings as the underlying hedged item affects
earnings.
In October 2001, the Company entered into an interest rate swap with a bank
pursuant to which it exchanged floating rate interest in connection with
the East Hempfield Township Industrial Development Authority Variable Rate
Demand/Fixed Rate Revenue Bonds Series 2001 (the "Bonds") on a notional
amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending
October 1, 2011. The notional amount reduces each year in tandem with the
annual installments due on the Bonds. The fixing of the interest rate for
this period offsets the Company's exposure to the uncertainty of floating
interest rates on the Bonds, and as such has been designated as a cash flow
hedge. The hedge is deemed to be highly effective and any ineffectiveness
will be recognized in interest expense in the reporting period. The fair
value of the interest rate swap was a liability of approximately $99,000 as
of May 2, 2004.
4. 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. Having a worldwide reputation for phase locked sources with
low phase noise, the acquisition of CTI is a strategic fit for the Company.
CTI 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. In addition,
CTI is complementary to our existing customer base, expands our technical
engineering team, complements the Company's core technology, and will
enable the Company to leverage the combined capabilities into new markets.
The transaction provides 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 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 CTI 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
8
be completed in the fourth quarter of fiscal 2004, and 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 $9,017,000 has been recorded as
goodwill.
The preliminary allocation of the aggregate purchase price is as follows:
Aggregate purchase price $ 14,914
======
Current assets 2,698
Furniture and equipment 1,200
Technology 2,400
Drawings 800
Goodwill 9,017
Current liabilities (1,201)
5. The Company entered into an agreement as of September 1, 2002, to acquire
all of the issued and outstanding common stock of EW Simulation Technology,
Limited ("EWST"), a British company of Aldershot, UK, which operates as a
wholly-owned subsidiary of the Company. EWST designs, develops and produces
electronic warfare simulator systems for prime defense contractors and
countries worldwide. The acquisition of EW Simulation Technology was driven
by a two part strategic initiative: a) to leverage the Company's microwave
expertise vertically into the international threat and jamming simulator
markets, and b) to increase the amount of microwave content supplied by the
Company on each simulator platform. The transaction, which closed on
September 20, 2002, provides for payment of $3,000,000 in cash and a note
for $1,500,000, including interest at 1.8% based on LIBOR at the date of
acquisition. The note has a balance of $1,183,000 at May 2, 2004 (adjusted
for foreign exchange rate fluctuations) payable in two remaining
installments annually on October 1, of $591,500. 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.
6. 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 nine months ended May
2, 2004 is as follows (in thousands):
Balance at August 3, 2003 $ 25,729
Goodwill acquired during the period (1) 9,017
Foreign currency translation adjustment 596
------
Balance at May 2, 2004 $ 35,342
======
9
Intangibles consist of the following (in thousands):
May 2, August 3, Estimated
2004 2003 useful life
---- ---- -----------
Technology (2) $ 3,421 $ 1,021 15 years
Drawings (1) 800 - 15 years
Backlog (3) 325 325 2 years
Non-compete (3) 31 31 5 years
Foreign currency translation
adjustment (3) 144 -
Patents 568 568 14 years
----- -----
5,289 1,945
Accumulated amortization 624 403
----- -----
$ 4,665 $ 1,542
===== =====
- ---------
(1) Related to the acquisition of CTI (See Note 4.)
(2) Includes $1,021 and $2,400 related to the acquisitions of EWST and CTI,
respectively (See Notes 4 and 5.)
(3) Related to the acquisition of EWST (See Note 5.)
Amortization expense for the thirteen weeks ended May 2, 2004 and May 4,
2003 was approximately $83,000 and $10,000, respectively , and for the
thirty-nine weeks ended May 2, 2004 and forty weeks ended May 4, 2003 was
approximately $221,000 and $31,000, respectively.
Estimated aggregate amortization expense for each of the next five fiscal
years is as follows (in thousands):
2004 $ 330
2005 289
2006 276
2007 275
2008 269
The carrying amount of intangibles is evaluated on an annual basis.
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 such
litigation will not have a material adverse effect on the Company's
financial position or results of operations. In connection with the
Robinson Laboratories, Inc. ("RLI") litigation, as discussed in Part II,
Item 1. "Legal Proceedings", at a proceeding in April 2003 the Court
decided to delay ruling on all of the petitions for fees and costs until
after appeals are exhausted. In January 2004, the Second Circuit affirmed
the trial court judgment in its entirety, however, RLI submitted a letter
request to the trial court for relief from the judgment on RLI's claim for
the earn-out stock. Herley submitted its response in opposition and on
February 26, 2004, the parties appeared before the Court concerning the
various applications and were directed to submit legal briefs on various
legal issues. By Order dated May 28, 2004 the trial court denied RLI's
Motion for a New Trial. Cross petitions for attorney's fees are still
pending.
8. The Company has outstanding an aggregate of approximately $17,900,000 in
open purchase orders as of May 2, 2004. These open purchase orders
represent executory contracts for the purchase of goods and services which
will be substantially fulfilled in the next six months.
10
9. The following tables show the calculation of basic and diluted
weighted-average shares outstanding (in thousands):
Thirteen weeks ended
--------------------
May 2, 2004 May 4, 2003
----------- -----------
Basic weighted-average shares 14,129 14,218
Effect of dilutive securities:
Employee stock options and warrants 803 630
------ ------
Diluted weighted-average shares 14,932 14,848
====== ======
There were no anti-dilutive options outstanding for the quarter ended May
2, 2004. Options to purchase 707,000 weighted shares of common stock, with
exercise prices ranging from $15.90 to $19.52, were outstanding during the
third 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.
Thirty-nine Forty
weeks ended weeks ended
May 2, 2004 May 4, 2003
----------- -----------
Basic weighted-average shares 14,072 14,449
Effect of dilutive securities:
Employee stock options and warrants 789 726
------ ------
Diluted weighted-average shares 14,861 15,175
====== ======
There were no anti-dilutive options outstanding for the nine months ended
May 2, 2004. 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.
10. The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended Thirty-nine Forty
-------------------- weeks ended weeks ended
May 2, May 4, May 2, May 4,
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 3,876 $ 3,359 $ 11,363 $ 9,998
Unrealized gain (loss) on interest rate swap 37 (9) (17) (21)
Foreign currency translation gain (loss) (388) 47 1,238 6
----- ----- ------ -----
Comprehensive income $ 3,525 $ 3,397 $ 12,584 $ 9,983
===== ===== ====== =====
The components of accumulated other comprehensive income (loss) is as
follows (in thousands):
May 2, 2004 August 3, 2003
----------- --------------
Unrealized (loss) from available-for-sale
securities $ (48) $ (48)
Unrealized (loss) on interest rate swap (67) (50)
Foreign currency translation gain (loss) 1,152 (86)
----- ---
Accumulated other comprehensive income (loss) $ 1,037 $ (184)
===== ===
11
11. Geographic net sales for the third quarter, based on place of contract
performance, were as follows (in thousands):
Thirteen weeks ended Thirteen weeks ended
May 2, 2004 May 4, 2003
----------- -----------
United States $ 25,282 $ 20,020
Israel 2,982 2,612
England 1,969 4,265
------ ------
$ 30,233 $ 26,897
====== ======
Geographic net sales for the nine months, based on place of contract
performance, were as follows (in thousands):
Thirty-nine Forty
weeks ended weeks ended
May 2, 2004 May 4, 2003
----------- -----------
United States $ 70,848 $ 63,824
Israel 9,010 8,448
England 8,050 6,930
------ ------
$ 87,908 $ 79,202
====== ======
Net property, plant and equipment by geographic area was as follows (in
thousands):
May 2, August 3,
2004 2003
---- ----
United States $ 21,005 $ 18,945
Israel 3,163 3,071
England 956 390
------ ------
$ 25,124 $ 22,406
====== ======
12. Supplemental cash flow information is as follows (in thousands):
Thirty-nine Forty
weeks ended weeks ended
May 2, 2004 May 4, 2003
----------- -----------
Cash paid during the period for:
Interest $ 237 $ 260
Income taxes 3,841 4,296
Tax benefit related to stock options 562 830
Deferred purchase price of business acquired - 1,500
12
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 2, 2004 and May 4, 2003
Net sales for the thirteen weeks ended May 2, 2004 were approximately
$30,233,000 compared to $26,897,000 in the thirteen weeks ended May 4, 2003, an
increase of $3,336,000 (12.4%). Net sales at CTI accounted for $1,117,000 of the
increase. Defense electronics microwave systems and components increased by
$1,766,000. This increase includes revenue from products shipped under certain
new programs and price increases on legacy products and programs. Revenue in
medical and scientific products increased by $453,000 over the comparable
quarter in fiscal 2003.
The gross profit margin in the thirteen weeks ended May 2, 2004 was 35.6%
compared to 32.9% in the third quarter of fiscal 2003. The increase in gross
profit of $1,917,000 is primarily attributable to the increase in volume for the
quarter and product mix. The gross profit margin also benefitted from production
efficiencies primarily through automation. Tempering these increases was
approximately $2,000,000 in engineering billings, with lower margins, on
programs essential for long-term technology development.
Selling and administrative expenses for the thirteen weeks ended May 2, 2004
were 17.9% of net sales as compared to 15.2% in the third quarter of fiscal
2003. Major components of the net increase in expenses of $1,338,000 includes
expenses attributable to the acquisition of CTI of $230,000 (including
amortization of acquired intangibles); an increase in incentive compensation
under employment contracts and discretionary bonuses of $118,000; and additional
personnel and related costs including fringe benefits and travel, primarily in
domestic and international marketing, of $499,000. Sales representative fees and
commissions increased $330,000 over the prior year third quarter. The Company
incurred approximately $190,000 in consulting fees in connection with the
Sarbanes-Oxley internal controls evaluation project. Litigation costs related to
the Robinson Labs litigation were $39,000 in the third quarter of fiscal 2004,
as compared to $241,000 in the third quarter of fiscal 2003. (See Part II, Item
1. "Legal Proceedings").
Operating income for the quarter was $5,350,000 or 17.7% of net sales, as
compared to $4,771,000 or 17.7% of net sales in 2003. The increase in operating
income is primarily attributable to the overall increase in revenue for the
quarter. Our foreign operations contributed $785,000 in operating income for the
quarter as compared to $1,758,000
13
in fiscal 2003. The decline in operating income, resulting from revisions in
total estimated costs on certain long-term contracts, occurred at the Company's
U.K. subsidiary. The offsetting effects of the improvement in gross profit
margin and the increases in selling and administrative expenses on operating
income are discussed above.
Investment income decreased by $83,000 in fiscal 2004 as a result of a 22%
decline in the rate of interest earned on the investment of excess cash reserves
during the quarter as compared to interest rates in fiscal 2003, and a decrease
on average of approximately $9,062,000 in funds invested.
The net foreign exchange gain in the third quarter of fiscal 2004 of $18,000 is
attributable to the modest recovery of the U. S. dollar during the current
quarter causing the Company's foreign denominated liabilities to decrease in
value resulting in an unrealized foreign exchange gain of $31,000. The Company
realized a net foreign exchange loss in the United Kingdom of $13,000.
Thirty-nine weeks ended May 2, 2004 and Forty weeks ended May 4, 2003
Net sales for the thirty-nine weeks ended May 2, 2004 were approximately
$87,908,000 compared to $79,202,000 in the first nine months of fiscal 2003. The
sales increase of $8,706,000 (11.0%) is attributable to increased revenue in
defense electronics microwave systems and components of $8,641,000 (including
$1,120,000 incremental volume of EWST), and $1,117,000 attributable to the
acquisition of CTI. This increase also includes revenue from products shipped
under certain new programs and price increases on legacy products and programs.
This was offset by decreased revenue of $1,052,000 in medical and scientific
products which has experienced a decrease in new orders. The Company expects
revenues in defense electronics to continue at a level above the prior fiscal
year, and revenues from medical products to remain relatively flat for the
balance of fiscal 2004.
The gross profit margin of 36.1% in the thirty-nine weeks ended May 2, 2004 was
higher than the margin of 33.7% in fiscal 2003. Gross profit increased
$5,058,000 primarily as a result of increased volume over fiscal 2003, including
revenue of $1,117,000 through the acquisition of CTI, as well as product mix.
Margins also improved in microwave components due to production efficiencies,
including the automation of certain processes. Billings of approximately
$5,000,000 relating to engineering programs with lower margins, and essential
for long-term technology development, offset these increases.
Selling and administrative expenses for the thirty-nine weeks ended May 2, 2004
were 17.5% of net sales as compared to 16.0% in the first nine months of fiscal
2003. There was a net increase in expenses of $2,699,000 which includes expenses
of CTI of $230,000, and increased expenses at EWST of $335,000, an increase in
incentive compensation under employment contracts and discretionary bonuses of
$804,000; and additional personnel and related costs including fringe benefits
and travel, primarily in domestic and international marketing, of $1,337,000.
Other increases include amortization of acquired intangibles of $190,000, sales
representative fees and commissions of $261,000, and $236,000 in consulting fees
in connection with the Sarbanes-Oxley internal controls evaluation project.
Litigation costs of $137,000 were incurred in the nine months ended May 2, 2004,
as compared to $1,069,000 in fiscal 2003, in connection with the Robinson Labs
litigation. (See Part II, Item 1. "Legal Proceedings").
Operating income for the nine months was $16,377,000 or 18.6% of net sales, as
compared to $14,018,000 or 17.7% of net sales in 2003. The increase in operating
income is primarily attributable to the overall increase in revenue for the
period. Our foreign operations contributed $3,185,000 in operating income for
the nine months as compared to $2,999,000 in fiscal 2003. Although revenues from
the Company's foreign operations increased by $2,072,000 over fiscal 2003,
operating margins at EWST were adversely affected by changes in the total cost
estimates during the third quarter on certain long-term contracts. The
offsetting effects of the improvement in gross profit margin and the increases
in selling and administrative expenses on operating income are discussed above.
14
Investment income decreased by $384,000 in fiscal 2004 as a result of a 34%
decline in the rate of interest earned on the investment of excess cash reserves
during the nine months as compared to interest rates in fiscal 2003, and a
decrease on average of approximately $4,952,000 in funds invested.
The foreign exchange loss of $225,000 in the nine months ended May 2, 2004 is
attributable to the weaker U. S. dollar during the period causing the Company's
foreign denominated liabilities to increase in value resulting in an unrealized
foreign exchange loss of $183,000, and a net foreign exchange loss realized of
$42,000, net of foreign exchange gains in the United Kingdom of $14,000.
Liquidity and Capital Resources
As of May 2, 2004 and August 3, 2003, working capital was $126,729,000 and
$127,613,000, respectively, and the ratio of current assets to current
liabilities was 6.4 to 1 and 7.7 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
customer deposits and progress payments. The unliquidated balance of these
deposits and payments was approximately $865,000 at May 2, 2004, and $856,000 at
August 3, 2003.
Net cash provided by operations during the thirteen weeks ended May 2, 2004 was
approximately $2,055,000 as compared to $10,046,000 during the comparable period
in the prior year. Significant items contributing to the sources of funds
include income from operations of $14,593,000 (adjusted for depreciation,
amortization, and foreign exchange losses), and an aggregate increase in
liabilities of $3,713,000 (including accounts payable and accrued expenses of
$1,904,000 and income taxes of $1,224,000.) Offsetting these sources of funds
are increases in costs incurred and income recognized on uncompleted contracts
of $9,063,000, accounts receivable of $1,846,000, and inventory of $5,737,000.
Of the increase in costs incurred and income recognized on uncompleted
contracts, $4,961,000 relates to a contract at the Company's Lancaster location
under which delivery will commence in the fourth quarter of fiscal 2004 in
accordance with the Government's delivery requirements. The balance relates to
EWST contracts, which were included in the backlog of EWST at the date of
acquisition, and which provided for minimal advanced payments and milestone
payments. In accordance with Company policy on long term contracts, new
contracts entered into by EWST now include provisions for advanced payments and
milestone payments.
The Company expects to bill approximately $5,000,000 of the balance of costs
incurred and income recognized on uncompleted contracts at May 2, 2004 by the
end of its current fiscal year, and the balance in fiscal year 2005. However,
the Company will continue to recognize revenue under the percentage of
completion method of accounting for certain long term contracts, which will
result in additional costs incurred and income recognized in excess of billings.
Net cash used in investing activities includes a net payment of $14,914,000 in
connection with the acquisition of CTI (See Note 4), and capital expenditures of
$4,270,000.
Net cash generated from financing activities of $1,161,000 consists of the
exercise of stock options for $1,825,000, offset by the payment of the deferred
purchase price of $500,000 related to the acquisition of EWST, a payment of
$64,000 on the Mortgage note, and a payment of $100,000 on the Industrial
Revenue Bonds. The Company has a future commitment for $1,183,000 (adjusted for
foreign exchange rate fluctuations), including interest at 1.8%, in connection
with the acquisition of EWST payable in annual installments of $591,500.
In June 2002, the Company entered into a new $50,000,000 revolving credit loan
syndication agreement with two
15
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, 2006, 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, as established by the Federal Open Market Committee ("FOMC") of the
Federal Reserve Board, plus a margin of 1.50% to 1.80%, or up to a maximum of
$45,000,000 with interest based on LIBOR plus a margin of 1.35% to 1.65%. The
applicable incremental margin is based on the ratio of total liabilities to
tangible net worth, as those terms are defined in the agreement, ranging from
less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal Funds Target
Rate and the LIBOR rate was 1.00% and 1.10%, respectively, at May 2, 2004. There
is a fee of 15 basis points per annum on the unused portion of the $45,000,000
LIBOR based portion of the credit facility payable quarterly. There were no
borrowings outstanding as of May 2, 2004 and August 3, 2003. Stand-by letters of
credit were outstanding in the amount of approximately $12,615,000 under the
credit facility at May 2, 2004.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds, its existing unsecured credit facility,
and cash balances of approximately $65,605,000. A significant portion of the
Company's revenue for fiscal 2004 will be generated from its existing backlog of
sales orders. The backlog of orders at May 2, 2004 was approximately
$111,000,000. 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 $37,385,000 available under its bank
credit facility, net of outstanding stand-by letters of credit of approximately
$12,615,000.
Future payments required on long-term debt are as follows (in thousands):
Twelve months Industrial
ended Mortgage revenue Other
April Total note bonds obligations
----- ----- ---- ----- -----------
2005 $ 788 $ 92 $ 105 $ 591
2006 801 99 110 592
2007 221 106 115 -
2008 234 114 120 -
2009 227 102 125 -
Thereafter 4,362 2,033 2,230 99
----- ----- ----- -----
$ 6,633 $ 2,546 $ 2,805 $ 1,282
===== ===== ===== =====
Other obligations include the remaining installments due in connection with the
acquisition of EWST (as adjusted for foreign exchange fluctuations) of
(pound)500,000 payable October 1, 2004 and 2005. The $99,000 represents the fair
value of the interest rate swap as of May 2, 2004, which matures October 1, 2011
(discussed in Note 3).
The Company has outstanding an aggregate of approximately $17,900,000 in open
purchase orders as of May 2, 2004. These open purchase orders represent
executory contracts for the purchase of goods and services which will be
substantially fulfilled in the next six months.
16
Stand-by letters of credit expire as follows (in thousands):
During fiscal
year Amount
---- ------
2004 $ 1,992
2005 4,121
2006 2,431
2007 3,873
2008 30
2009 168
------
$12,615
======
Minimum annual rentals under noncancellable operating leases as of May 2, 2004
are as follows (in thousands):
During
fiscal
year Amount
---- ------
2004 $ 470
2005 1,196
2006 1,095
2007 1,036
2008 966
Thereafter 1,180
-----
$ 5,943
=====
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 based on total costs incurred
in relation to total estimated cost at completion. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance. Risks and uncertainties inherent in the estimation process could
affect the amounts reported in our financial statements. The key assumptions
used in the estimate of costs to complete relate to labor costs and indirect
costs required to complete the contract. The estimate of rates and hours as well
as the application of overhead costs is reviewed on a regular basis. If our
business conditions were different, or if we used different assumptions in the
application of this and other accounting policies, it is likely that materially
different amounts would be reported on our financial statements.
Prospective losses on contracts are based upon the anticipated excess of
manufacturing costs over the selling price of the units to be delivered under
the contract and are recorded when first reasonably determinable. Actual losses
could differ from those estimated due to changes in the ultimate manufacturing
costs.
Inventories are stated at lower of cost (principally first-in, first-out) or
market. A valuation allowance for obsolete and slow-moving inventory is
established based upon an aging of raw material components. Current requirements
for raw materials are evaluated based on current backlog of orders for products
in which the components are used and anticipated future orders.
Under the non-amortization approach in accounting for goodwill under SFAS No.
142, goodwill is not amortized into results of operations but instead is
reviewed for impairment and written down and charged to results of operations in
the period in which the recorded value of goodwill is more than its fair value.
An annual impairment
17
test is performed in the fourth quarter of each fiscal year and any impairment
of goodwill is charged to operations.
Provisions for federal, foreign, state and local income taxes are calculated on
reported financial statement pretax income based on current tax law and also
include the cumulative effect of any changes in tax rates from those used
previously in determining deferred tax assets and liabilities. Such provisions
differ from the amounts currently payable because certain items of income and
expense are recognized in different time periods for financial reporting
purposes than for income tax purposes.
New Accounting Pronouncements
In 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.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." In
December 2003 this Interpretation was replaced by FASB Interpretation No. 46(R)
("FIN 46(R)"), which clarifies the application of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements," to certain entities in which the
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46(R) requires an enterprise to consolidate a variable interest entity if
that enterprise will absorb a majority of the entity's expected losses, is
entitled to receive a majority of the entity's expected residual returns, or
both. FIN 46(R) is effective for entities being evaluated under FIN 46(R) for
consolidation no later than the end of the first reporting period that ends
after March 15, 2004. Adoption of FIN 46(R) did not have a material effect on
the Company's financial position, results of operations or cash flows.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in interest rates,
and foreign currency exchange. The Company has not entered into any market risk
sensitive instruments for trading purposes. In October 2001, the Company entered
into an interest rate swap with a bank pursuant to which it exchanged floating
rate interest in connection with the Bonds discussed in Note 3 on a notional
amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending
October 1, 2011. The notional amount reduces each year in tandem with the annual
installments due on the Bonds. The fixing of the interest rate for this period
offsets the Company's exposure to the uncertainty of floating interest rates on
the Bonds, and as such has been designated as a cash flow hedge. The hedge is
deemed to be highly effective and any ineffectiveness will be recognized in
interest expense in the reporting period. The fair value of the interest rate
swap was a liability of approximately $99,000 as of May 2, 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
18
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 May 2, 2004.
(b) Changes in internal controls. There were no changes in the Company's
internal controls over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended
May 2, 2004 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 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
19
they contend that they were the prevailing party. On February 5, 2003, the Court
denied the post-trial motions filed by the parties, thus leaving the jury
verdict undisturbed.
At a proceeding on April 28, 2003, the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order dated May 6, 2003, the Court denied without prejudice all of the
parties' petitions. On May 12, 2003, Herley filed its appeal to the United
States Court of Appeals for the Second Circuit. On May 28, 2003, RLI filed a
notice of cross-appeal. Robinson did not appeal. Herley filed its brief in
support of its appeal before the Second Circuit on August 22, 2003. RLI timely
filed its brief in response to Herley's appeal and in support of RLI's
cross-appeal. Herley timely filed a response to RLI's brief and thereafter RLI
timely filed a response to Herley's brief. Oral argument was held on December
18, 2003.
By Summary Order on January 26, 2004, the Second Circuit affirmed the trial
court judgment in its entirety. On February 4, 2004, RLI submitted a letter
request to the trial court for relief from the judgment on RLI's claim for the
earn-out stock under Federal Rule of Civil Procedure 60. RLI contends that it
has "newly discovered evidence," first learned in August 2003, to justify its
requested relief. Herley submitted its response in opposition by letter dated
February 10, 2004. On February 26, 2004, the parties appeared before the Court
concerning the various applications and were directed to submit legal briefs on
various legal issues. By Order dated May 28, 2004 the trial court denied RLI's
Motion for a New Trial. Cross petitions for attorney's fees are still pending.
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
31.1 Certification of Myron Levy pursuant to Rule 13a-14(a).
31.2 Certification of Anello C. Garefino pursuant to Rule 13a-14(a).
32.1 Certification of Myron Levy pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Anello C. Garefino pursuant to 18 U.S.C.
Section 1350.
20
(b) Reports on Form 8-K
During the third quarter of fiscal 2004, the Registrant filed the
following report on Form 8-K:
The Company filed a report on March 15, 2004 in connection with the
release of its financial results for the second quarter of fiscal year
2004 for the quarter ended February 1, 2004.
21
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 16, 2004
22