UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 1, 2005
-----------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-5411
HERLEY INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE #23-2413500
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 North Pointe Boulevard, Lancaster, Pennsylvania 17601
- --------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (717) 735-8117
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
[X] Yes [ ] No
As of June 7, 2005 - 14,286,290 shares of Common Stock.
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets -
May 1, 2005 and August 1, 2004 2
Consolidated Statements of Income -
For the Thirteen and Thirty-nine weeks ended May 1, 2005
and May 2, 2004 3
Consolidated Statement of Shareholders' Equity-
For the Thirty-nine weeks ended May 1, 2005 4
Consolidated Statements of Cash Flows -
For the Thirty-nine weeks ended May 1, 2005
and May 2, 2004 5
Notes to 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 18
Item 6 - Exhibits 20
Signatures 21
Part I - Financial Information
Item 1 - Financial Statements
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
May 1, August 1,
2005 2004
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 19,987 $ 66,181
Trade accounts receivable 24,852 24,664
Costs incurred and income recognized in excess
of billings on uncompleted contracts 18,005 14,210
Other receivables 1,107 576
Inventories, net of allowance of $4,489
in fiscal 2005 and $3,412 in 2004 50,516 44,909
Deferred taxes and other 4,155 3,579
------------ ------------
Total Current Assets 118,622 154,119
Property, Plant and Equipment, net 30,329 25,968
Goodwill 80,638 35,165
Intangibles, net of accumulated amortization of $1,161
in fiscal 2005 and $752 in 2004 10,585 4,555
Other Investments 62 264
Other Assets 737 900
------------ ------------
$ 240,973 $ 220,971
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 846 $ 804
Accounts payable and accrued expenses 24,374 16,934
Billings in excess of costs incurred and
income recognized on uncompleted contracts 973 1,303
Income taxes payable 4,954 2,091
Accrual for contract losses 753 954
Accrual for warranty costs 786 580
Advance payments on contracts 1,837 1,180
------------ ------------
Total Current Liabilities 34,523 23,846
Long-term Debt 5,047 5,845
Other Long-term Liabilities 1,020 932
Deferred Income Taxes 4,850 4,848
------------ ------------
45,440 35,471
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
14,277,084 in fiscal 2005 and 14,220,508 in 2004 1,428 1,422
Additional paid-in capital 108,043 107,671
Retained earnings 84,408 75,151
Accumulated other comprehensive income 1,654 1,256
------------ ------------
Total Shareholders' Equity 195,533 185,500
------------ ------------
$ 240,973 $ 220,971
============ ============
The accompanying notes are an integral part of these financial statements.
2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share data)
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
------ ------ ------ ------
Net sales $ 41,266 $ 30,233 $ 108,610 $ 87,908
--------- --------- --------- ---------
Cost and expenses:
Cost of products sold 27,845 19,465 75,034 56,135
Selling and administrative expenses 8,865 5,418 21,541 15,396
--------- --------- --------- ---------
36,710 24,883 96,575 71,531
--------- --------- --------- ---------
Operating Income 4,556 5,350 12,035 16,377
--------- --------- --------- ---------
Other income (expense), net:
Investment income 253 153 769 516
Interest expense (74) (79) (211) (248)
Foreign exchange gain (loss) 79 18 264 (225)
--------- --------- --------- ---------
258 92 822 43
--------- --------- --------- ---------
Income before income taxes 4,814 5,442 12,857 16,420
Provision for income taxes 1,187 1,566 3,600 5,057
--------- --------- --------- ---------
Net income $ 3,627 $ 3,876 $ 9,257 $ 11,363
========= ========= ========= ==========
Earnings per common share - Basic $ .25 $ .27 $ .65 $ .81
========= ========= ========= =========
Basic weighted average shares 14,313 14,129 14,300 14,072
========= ========= ========= =========
Earnings per common share - Diluted $ .24 $ .26 $ .62 $ .76
========= ========= ========= =========
Diluted weighted average shares 14,936 14,932 14,972 14,861
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Thirty-nine weeks ended May 1, 2005
(In thousands except share data)
Accumulated
Common Stock Additional Other
------------ Paid-in Retained Treasury Comprehensive
Capital Earnings Stock Income Total
Shares Amount ------- -------- ----- ------ -----
------ ------
Balance at August 01, 2004 14,220,508 $ 1,422 107,671 75,151 - 1,256 $ 185,500
Exercise of stock options 165,799 16 1,849 (62) 1,803
Tax benefit upon exercise of stock
options 345 345
Purchase of 105,641 shares of treasury
stock (1,770) (1,770)
Retirement of treasury shares (109,223) (10) (1,822) 1,832 -
---------- ----- ------- ------ ----- ----- -------
Subtotal 14,277,084 1,428 108,043 75,151 - 1,256 185,878
---------- ----- ------- ------ ----- ----- -------
Net income 9,257 9,257
Other comprehensive income:
Unrealized gain on interest rate
swap 4 4
Foreign currency translation gain 394 394
-------
Comprehensive income 9,655
---------- ----- ------- ------ ----- ----- -------
Balance at May 1, 2005 14,277,084 $ 1,428 108,043 84,408 - 1,654 $ 195,533
========== ===== ======= ====== ===== ===== =======
The accompanying notes are an integral part of these financial statements.
4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Thirty-nine weeks ended
-----------------------
May 1, May 2,
2005 2004
---- ----
Cash flows from operating activities:
Net income $ 9,257 $ 11,363
------ ------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 3,825 3,048
Foreign exchange loss 31 182
Gain on sale of securities (22) -
Equity in income of limited partnership (54) -
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 4,996 (1,846)
(Increase) in costs incurred and income
recognized in excess of billings
on uncompleted contracts (3,569) (9,063)
(Increase) in other receivables (269) (22)
(Increase) in inventories (3,341) (5,737)
(Increase) in deferred taxes and other (400) (122)
Increase in accounts payable
and accrued expenses 1,677 1,904
(Decrease) increase in billings in excess of
costs incurred and income recognized
on uncompleted contracts (1,206) 478
Increase in income taxes payable 3,187 1,224
(Decrease) increase in accrual for contract losses (377) 98
(Decrease) increase in advance payments on contracts (1,410) 9
Other, net 293 539
------ ------
Total adjustments 3,361 (9,308)
------ ------
Net cash provided by operating activities 12,618 2,055
------ ------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (51,391) (14,914)
Acquisition of technology license (2,000) -
Proceeds from sale of securities 165 -
Partial distribution from limited partnership 109 50
Capital expenditures (4,948) (4,270)
------ ------
Net cash used in investing activities (58,065) (19,134)
------ ------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,803 1,825
Payments of long-term debt (780) (664)
Purchase of treasury stock (1,770) -
------ ------
Net cash (used in) provided by financing activities (747) 1,161
------ ------
Net decrease in cash and cash equivalents (46,194) (15,918)
Cash and cash equivalents at beginning of period 66,181 81,523
------ ------
Cash and cash equivalents at end of period $ 19,987 $ 65,605
====== ======
The accompanying notes are an integral part of these financial statements.
5
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
1. Interim Reporting
-----------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q and do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for interim periods are not necessarily indicative of the results of
operations that may be expected for a full year. These statements should be read
in conjunction with the consolidated financial statements and notes thereto, and
the Company's description of critical accounting policies, included in the
Company's 2004 Annual Report on Form 10-K for the fiscal year ended August 1,
2004, as filed with the Securities and Exchange Commission.
The unaudited consolidated financial statements include the accounts of Herley
Industries, Inc. and its wholly-owned subsidiaries, collectively referred to as
the "Company." All significant intercompany accounts and transactions have been
eliminated.
Certain prior period balances have been reclassified to conform to the current
period's presentation.
2. Acquisitions
------------
The Company entered into an agreement as of March 29, 2004 to acquire certain
assets and the business, subject to the assumption of certain liabilities, of
Communication Techniques, Inc. for $14,914,000 in cash. The business operates as
a wholly-owned subsidiary of the Company, Herley-CTI, Inc. ("CTI"). CTI designs,
develops and produces signal generation components and integrated assemblies for
digital radio, Satellite Communications, test and instrumentation, and datacom
applications. CTI also recently developed a fast frequency changing direct
synthesizer which, when combined with the capabilities of Herley-Israel, puts
the Company at the forefront of producing broadband microwave sources for radar,
communication, electronic warfare, and microwave test systems.
The Company entered into an agreement as of September 1, 2004 to purchase the
majority of the assets and assume the majority of the liabilities of Reliable
System Services Corporation of Melbourne, Florida for $3,725,000 in cash. The
Company operates the business as a wholly-owned subsidiary under the name
Herley-RSS, Inc. ("RSS"). RSS designs, develops and produces satellite-based
command and control systems for prime defense contractors and entities
worldwide.
The Company entered into an agreement as of February 1, 2005 to acquire all of
the capital stock of Micro Systems, Inc. ("MSI"), Fort Walton Beach, Florida for
a payment of $21,473,328 in cash and the assumption of certain liabilities. MSI
is a market leader in the design and manufacturing of command and control
systems for operation of unmanned aerial, seaborne and ground targets and
missiles.
All of the acquisitions completed by the Company are 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.
For the three acquisitions outlined above, the allocation of the aggregate
purchase price (net of cash acquired), based on a review of the fair value of
the assets acquired and liabilities assumed, is as follows (in thousands):
Acquisition CTI RSS MSI
Effective Date March 29, 2004 September 1, 2004 February 1, 2005
-------------- -------------- ----------------- ----------------
Current assets $ 2,861 $ 483 $ 1,534
Property, plant and equipment 1,492 72 2,038
Other assets - - 1
Intangible assets 3,200 - 4,400
Goodwill 8,753 3,456 15,157
Current liabilities (1,392) (258) (2,461)
------ ----- ------
Aggregate purchase price $ 14,914 $ 3,753 $ 20,669
====== ===== ======
6
Walton Beach Florida from MSI Investments, a Florida General Partnership. MSI
Investments is owned by four individuals, three of whom are currently employees
of MSI. This lease has an original term of 15 years, ending December 31, 2012.
The lease costs currently are approximately $278,000 on an annual basis,
including the tenant's obligation to pay for insurance and property taxes. The
base lease rate is adjusted every January for changes in the consumer price
index, using 1997 as the base year. The lease obligations associated with the
acquisitions of RSS and of Innovative Concepts, Inc. (see below), is included in
the Disclosure Regarding Contractual Obligations and Commitments included in the
Management Discussion and Analysis of Financial Condition and Results of
Operations included in this Form 10-Q.
The Company entered into an agreement as of April 1, 2005 to acquire all of the
capital stock of Innovative Concepts, Inc. ("ICI"), McLean, Virginia for cash
payments, including the assumption and payment of certain liabilities, of
$24,378,330. ICI has a successful history of developing and providing wireless
communications technology and real-time embedded systems, software, hardware and
high-speed processing in support of the defense industry. The Company's
consolidated financial statements reflect preliminary estimates of the fair
value of the ICI assets acquired and liabilities assumed and the related
allocations of the purchase price. The final determination of the fair value of
assets acquired and liabilities assumed and final allocation of the purchase
price is expected to be completed no later than the third quarter of fiscal
2006, and may differ from the amounts included in the accompanying consolidated
financial statements. The excess cost over the preliminary estimated fair value
of net assets acquired of approximately $26,585,000 has been recorded as
goodwill.
3. Inventories
-----------
Inventories at May 1, 2005 and August 1, 2004 are summarized as follows (in
thousands):
May 1, 2005 August 1, 2004
----------- --------------
Purchased parts and raw materials $ 27,436 $ 23,031
Work in process 25,278 22,878
Finished products 2,291 2,412
------ ------
55,005 48,321
Less reserve for excess and obsolete materials 4,489 3,412
------ ------
$ 50,516 $ 44,909
====== ======
4.Goodwill and Other Intangible Assets
------------------------------------
The Company adopted the provisions of SFAS No. 142 "Goodwill and Other
Intangible Assets" on July 30, 2001. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
are not amortized into results of operations, but instead are reviewed for
impairment and written down and charged to results of operations in the periods
in which the recorded value of goodwill and certain intangibles is more than its
fair value. The adoption of SFAS No. 142 resulted in the Company's
discontinuation of amortization of its goodwill and certain intangible assets.
An annual impairment test is performed in the fourth quarter of each fiscal year
and any future impairment of goodwill will be charged to operations.
The change in the carrying amount of goodwill for the nine months ended May 1,
2005 is as follows (in thousands):
Balance at August 1, 2004 $ 35,165
Goodwill acquired during the period 45,198
Foreign currency translation adjustment 247
Other adjustments 28
------
Balance at May 1, 2005 $ 80,638
======
The increase in goodwill was principally attributable to the acquisitions of RSS
($3,456,000), MSI ($15,157,000) and ICI ($26,585,000.) (See Note 2.)
7
Intangible Assets consist of the following (in thousands):
May 1, August 1, Estimated
2005 2004 useful life
----- -------
Trademarks $ 1,200 - Indefinite
Technology (acquired with EWST and MSI) 3,821 $ 3,421 10-15 years
Drawings 800 800 15 years
Patents 568 568 14 years
Backlog 3,125 325 2-5 years
Non-compete 31 31 5 years
Foreign currency translation adjustment 201 162
----- -----
9,746 5,307
Accumulated amortization 1,161 752
----- -----
8,585 4,555
Technology license (for millimeter wave applications; 2,000 - (see below)
purchased from Xytrans) ------ -----
$ 10,585 $ 4,555
====== =====
The carrying amount of intangibles is reviewed for recoverability when events or
changes in circumstances occur that indicate that the carrying value of the
assets may not be recovered.
The Company entered into a license and development agreement ("agreement") on
April 7, 2005 to license millimeter wave technology for military applications
from Xytrans, Inc. Xytrans focuses on providing high-frequency transceiver and
outdoor unit design for the wireless broadband network market. The technology
acquired includes exclusive access to a portfolio of patents and trade secrets
that improve the cost and performance of millimeter wave subsystems that are
used in weapons and radar systems.
In January 2005, the Company had made a deposit payment of $1,000,000 in
connection with this proposed transaction. The deposit payment was secured by a
note receivable, which was cancelled upon execution of the agreement. The
agreement provided for an additional payment on execution of $1,000,000, and for
certain additional contingent payments, of up to $4,500,000. These contingent
payments are subject to achievement of a series of development milestones on a
US Government missile program, and / or receipt by the Company of a single
contract award using millimeter wave technology valued at a minimum of
$6,000,000, amongst other requirements. The agreement also provides for the
payment of royalties ranging from 1% to 4% of sales of products including
relevant millimeter wave technology, starting at the earliest January 1, 2006,
and generally ending 4 years later.
In May 2005, Xytrans had achieved certain of the development milestones on the
missile program discussed above, and an additional contingent payment of
$300,000 was made by the Company.
The investment in this licensed technology of $2,000,000 as of May 1, 2005 is
included in the Consolidated Balance Sheet under the caption "Intangibles."
After further development of this technology, and / or at the commencement of
sales of products using the millimeter wave technology, the Company will begin
to amortize a portion of the costs associated with this agreement against the
related revenues, and may allocate some of the value of this technology to the
specific patents acquired. In the event that some of the value is allocated to
specific patents, then that value would be amortized over the remaining life of
the patent. At this point, the portion of this technology investment that should
be allocated to any particular patent is not estimatable.
Amortization expense for the thirteen weeks ended May 1, 2005 and May 2, 2004
was approximately $232,000 and $83,000, respectively, and for the thirty-nine
weeks ended May 1, 2005 and May 2, 2004 was approximately $410,000 and $221,000,
respectively.
8
Estimated aggregate amortization expense for each of the next five fiscal years,
including the impact of the acquisition of MSI in the Third quarter of fiscal
2005 (see Note 2), is as follows (in thousands):
2005 $ 642
2006 929
2007 928
2008 922
2009 922
ICI was also acquired in the Third quarter of fiscal 2005, however at this time
the excess cost over the preliminary estimated fair value of net assets acquired
of approximately $26,585,000 has been recorded as goodwill. (See Note 2.) The
final allocation of the purchase price is expected to be completed no later than
the Third quarter of fiscal 2006, and may result in values being ascribed to
certain intangible assets which will result in additional increases in
amortization expense.
5. Product Warranties
------------------
The Company warrants its products generally for a period of one year. Product
warranty costs are accrued based on historical claims expense. Accrued warranty
costs are reduced as warranty repair costs are incurred. The following table
presents the change in the accrual for product warranty costs for the nine
months ended May 1, 2005 (in thousands):
Thirty-nine weeks ended
-----------------------
May 1, 2005 May 2, 2004
----------- -----------
Balance at beginning of period $ 580 $ 359
Provision for warranty obligations 685 745
Warranty costs charged to the reserve (479) (527)
--- ---
Balance at end of period $ 786 $ 577
=== ===
6. Litigation
----------
The Company is involved in various legal proceedings and claims which arise in
the ordinary course of its business. While any litigation contains an element of
uncertainty, management believes that the outcome of such litigation will not
have a material adverse effect on the Company's financial position or results of
operations. See the discussion in Part II, Item 1 - "Legal Proceedings".
7. Comprehensive Income
--------------------
The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ------------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
---- ---- ---- ----
Net income $ 3,627 $ 3,876 $ 9,257 $ 11,363
Unrealized gain (loss) on interest rate swap 17 37 4 (17)
Foreign currency translation gain (loss) 115 (388) 394 1,238
----- ----- ----- ------
Comprehensive income $ 3,759 $ 3,525 $ 9,655 $ 12,584
===== ===== ===== ======
The components of accumulated other comprehensive income is as follows (in
thousands):
May 1, 2005 August 1, 2004
----------- --------------
Unrealized (loss) on interest rate swap $ (69) $ (73)
Foreign currency translation gain 1,723 1,329
----- -----
Accumulated other comprehensive income $ 1,654 $ 1,256
===== =====
9
8. Stock-Based Compensation
------------------------
The Company has various fixed stock option plans which reserve shares of common
stock for issuance to executives, key employees and directors.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." The new statement was effective, with respect to the transition
provisions, for fiscal years ending after December 15, 2002. SFAS No. 148
provides transition alternatives for companies adopting the fair value
recognition provisions of FASB Statement No. 123 for stock-based employee
compensation; and requires the pro-forma disclosures of SFAS No. 123 for
companies continuing to rely on APB Opinion No. 25 as if the provisions of SFAS
No. 123 had been adopted. The statement also requires that the pro-forma
disclosures of the impact on earnings and earnings-per-share be provided in a
tabular format and included in the Summary of Significant Accounting Policies or
equivalent.
The Company has adopted the disclosure-only provisions of SFAS 123 and SFAS 148.
Pro-forma information regarding net income and earnings per share as required by
Statements 123 and 148 has been determined as if the Company had accounted for
its employee stock options under the fair value method of Statement 123.
The fair value for options granted is estimated at the date of grant using the
Black-Scholes option pricing model which requires the input of highly subjective
assumptions including the expected stock price volatility. For purposes of
computing pro-forma (unaudited) consolidated net earnings, the following
assumptions were used to determine the fair value of each option granted during
the periods presented:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ------------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
---- ---- ---- ----
Expected life (years) .75 1.51 .75 1.51
Volatility .90 .68 .90 .68
Risk-free interest rate 2.89% 2.80% 2.89% 2.80%
Dividend yield zero zero zero zero
10
If the Company had elected to recognize compensation expense based upon the fair
value at the date of grant for stock options issued under the plans, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands except per share data):
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
---- ---- ---- ----
Net income - as reported $ 3,627 $ 3,876 $ 9,257 $ 11,363
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (207) (163) (985) (468)
----- ----- ----- ------
Net income - pro forma $ 3,420 $ 3,713 $ 8,272 $ 10,895
===== ===== ===== ======
Earnings per share - as reported
Basic $ .25 $ .27 $ .65 $ .81
Diluted .24 .26 .62 .76
Earnings per share - pro forma
Basic $ .24 $ .26 $ .58 $ .77
Diluted .23 .25 .55 .73
As discussed in Note 12, "New Accounting Pronouncements", the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123(R) ("SFAS 123R") which will require the Company to measure all employee
stock-based compensation awards using a fair value method and record such
expense in its financial statements. Until the Company adopts SFAS 123(R) in
fiscal 2006, the Company will continue to account for stock compensation in
accordance with APB 25, SFAS 123 and SFAS 148.
9. Earnings Per Share
------------------
The following tables show the calculation of basic and diluted weighted-average
shares outstanding (in thousands):
Thirteen weeks ended
--------------------
May 1, 2005 May 2, 2004
----------- -----------
Basic weighted-average shares 14,313 14,129
Effect of dilutive securities:
Employee stock options and warrants 623 803
------ ------
Diluted weighted-average shares 14,936 14,932
====== ======
Options to purchase 875,236 weighted shares of common stock, with exercise
prices ranging from $18.39 to $20.45, were outstanding during the third quarter
of fiscal 2005, but were not included in the computation of diluted EPS because
the exercise price is greater than the average market price of the common stock.
The options, which expire at various dates through February 2015, were still
outstanding at May 1, 2005. There were no anti-dilutive options outstanding
during the quarter ended May 2, 2004.
Thirty-nine weeks ended
------------------------
May 1, 2005 May 2, 2004
----------- -----------
Basic weighted-average shares 14,300 14,072
Effect of dilutive securities:
Employee stock options and warrants 672 789
------ ------
Diluted weighted-average shares 14,972 14,861
====== ======
Options to purchase 787,147 weighted shares of common stock, with exercise
prices ranging from $18.85 to $20.45, were outstanding during the nine months of
fiscal 2005, but were not included in the computation of diluted EPS because the
exercise price is greater than the average market price of the common stock. The
options, which expire at various dates through February 2015, were still
outstanding as of May 1, 2005. There were no anti-dilutive options outstanding
during the nine months ended May 2, 2004.
11
10. Geographic Information
----------------------
The Company operates as a single integrated business and as such has one
operating segment. Geographic net sales for the third quarter, based on place of
contract performance, were as follows (in thousands):
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ------------------------
May 1, May 2, May 1, May 2,
2005 2004 2005 2004
---- ---- ---- ----
United States $ 35,378 $ 25,282 $ 92,353 $ 70,848
Israel 3,350 2,982 9,534 9,010
England 2,538 1,969 6,723 8,050
------ ------ ------- ------
$ 41,266 $ 30,233 $ 108,610 $ 87,908
====== ====== ======= ======
Net property, plant and equipment by geographic area was as follows (in
thousands):
May 1, 2005 August 1, 2004
----------- --------------
United States $ 24,536 $ 21,544
Israel 4,871 3,499
England 922 925
------ ------
$ 30,329 $ 25,968
====== ======
11. Supplemental cash flow information is as follows (in thousands):
----------------------------------------------------------------
Thirty-nine weeks ended
-----------------------
May 1, 2005 May 2, 2004
----------- -----------
Net cash paid during the period for:
Interest $ 229 $ 237
Income taxes 296 3,841
Tax benefit related to stock options 345 562
12. New Accounting Pronouncements
-----------------------------
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment," which is a
revision of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." SFAS 123R is effective for publicly-traded companies
for interim or annual periods beginning after June 15, 2005, supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values and will rescind the acceptance of pro forma disclosure. SFAS 123R
will be effective for the Company beginning with the first quarter of fiscal
2006. The Company has not yet completed an evaluation but expects the adoption
of SFAS 123R to have an effect on its financial statements based on the
unamortized pro forma expense related to unvested options outstanding at the
date of adoption.
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.
Business Overview
- -----------------
We are a leading supplier of microwave products and systems to defense and
aerospace entities worldwide. Our primary customers include large defense prime
contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing),
the U.S. Government (including the Department of Defense, NASA and other U.S.
Government agencies) and international customers (including the German,
Japanese, Turkish, British, Norwegian and South Korean militaries, and suppliers
to international militaries). We are a leading provider of microwave and
selected millimeter wave technologies for use in command and control systems,
flight instrumentation, weapons sensors, high power amplifiers, electronic
warfare systems, mobile datacom systems, and radar threat and electronic
countermeasure simulation systems. We have served the defense industry since
1965 by designing and manufacturing microwave devices and systems for use in
high technology defense electronics applications. Our products and systems are
currently deployed on a wide range of high profile military platforms, including
the F-16 Falcon, the F/A-18E/F Super Hornet, the EA-6B Prowler, the EA-18
Growler, the AH-64D Apache Longbow, AEGIS class destroyers, the AMRAAM missile,
unmanned aerial vehicles (UAVs), as well as high priority national security
programs such as National Missile Defense and the Trident II D-5 missile.
Results of Operations
- ---------------------
Thirteen weeks ended May 1, 2005 and May 2, 2004
- ------------------------------------------------
Net sales for the thirteen weeks ended May 1, 2005 were approximately
$41,266,000, as compared to $30,233,000 in the thirteen weeks ended May 2, 2004,
an increase of $11.0 million (36.5%). Net sales from our three acquisitions
completed in fiscal 2005 (RSS, MSI and ICI), accounted for an increase of
approximately $9.1 million, or 82% of the increase for the quarter ended May 1,
2005. We also experienced an approximate $1.9 million net increase in sales at
our other operations. Some of the larger changes included the following:
o An increase in sales of signal generation components and direct sources,
principally due to the fact that the prior year's third quarter only included
one month of results for CTI, which was acquired effective as of March 29, 2004;
o An increase in sales at our UK subsidiary attributable to progress on certain
larger contracts being completed for customers at that business;
offset by
o A decline in the sales of certain microwave components, due to the completion
of a large contact that accounted for substantial sales in the prior year's
third quarter.
The gross profit margin in the thirteen weeks ended May 1, 2005 was 32.5%
compared to 35.6% in the third quarter of fiscal 2004, a decline of 3.1%.
Excluding the impact of our three acquisitions completed in fiscal 2005 (RSS,
MSI and ICI), the decline in gross profit margins would have been larger. Some
of the larger contributors to the decline in gross margins during the quarter
included the following:
o The transition of several new programs from engineering development to the
early stage of production, with higher engineering costs;
o A decline of gross margins at one of our US operations due to lower overall
shipments at that facility and engineering development costs attributable to the
13
development and start up of a new product line;
offset by
o Higher margins contributed by signal generation components and direct sources,
principally due to the fact that the prior year's third quarter only included
one month of results for CTI, which was acquired effective as of March 29, 2004.
Selling and administrative expenses for the thirteen weeks ended May 1, 2005
were 21.5% of net sales as compared to 17.9% in the third quarter of fiscal
2004, or an increase of approximately $3,447,000. Large increases during the
period included:
o Increases of approximately $1.9 million attributable to our three acquisitions
completed in fiscal 2005 (RSS, MSI and ICI) and due to the fact that the prior
year's third quarter only included one month of results for CTI, which was
acquired effective as of March 29, 2004;
o An increase of approximately $1.2 million in legal costs due to continuing
actions associated with the Robinson Labs litigation and other matters. (See
Part II, Item 1. "Legal Proceedings.")
Operating income for the quarter was $4,556,000 or 11.0% of net sales, as
compared to $5,350,000 or 17.7% of net sales in 2004. The decrease in operating
income is primarily attributable to the decline in gross margin percentage (for
the reasons outlined above) and the 3.6% increase in selling and administrative
costs as a percentage of sales, offset by the beneficial impact of the $11.0
million increase in revenue for the quarter. Our foreign operations contributed
$561,000 in operating income for the quarter as compared to $786,000 in fiscal
2004. The decline in operating income occurred at the Company's U.K. subsidiary.
Investment income increased by $100,000 in the third quarter of fiscal 2005
because of a 105% increase in the rate of interest earned on the investment of
excess cash reserves during the quarter as compared to interest rates in the
prior year, offset by a decline on average of approximately $33 million in funds
invested. The reduction in the average balance of funds invested in the third
quarter of fiscal 2005 versus the prior year is attributable to investing
activities including capital expenditures, including recent acquisitions and
investing in a technology license, all financed out of our investment funds.
Provision for income taxes for the third quarter of fiscal 2005 was $1,187,000,
representing an effective tax rate of approximately 25% (and an effective tax
rate for the three quarters ended May 1, 2005 of 28%), as compared to an
effective tax rate of 29% in the prior year's third quarter (and an effective
rate of 31% for the whole of fiscal year 2004.) The decline in the effective tax
rate in the quarter ended May 1, 2005 included the recognition of certain tax
benefits for Research & Development tax credits which have now been realized.
Thirty-nine weeks ended May 1, 2005 and May 2, 2004
- ---------------------------------------------------
Net sales for the thirty-nine weeks ended May 1, 2005 were approximately
$108,610,000 compared to $87,908,000 in the nine months of fiscal 2004, an
increase of $20.7 million (23.6%). Net sales at our three acquisitions completed
in fiscal 2005 (RSS, MSI and ICI), accounted for an increase of approximately
$10.6 million, or 51% of the increase for the thirty-nine weeks ended May 1,
2005. We also experienced an approximate $10.1 million increase in sales at our
other operations, attributable principally to the increase in sales of signal
generation components and direct sources, due to the fact that the prior year's
first three quarters only included one month of results for CTI, which was
acquired effective as of March 29, 2004.
The gross profit margin in the thirty-nine weeks ended May 1, 2005 was 30.9%
compared to 36.1% in the three quarters of fiscal 2004, a decline of 5.2%.
Excluding the impact of our three acquisitions completed in fiscal 2005 (RSS,
MSI and ICI), the decline in gross profit margins would have been larger. The
decrease in gross profit margins is primarily attributable to:
o The transition of several new programs from engineering development to the
early stage of production, with higher engineering costs not yet offset by
production revenues.
o Decreases of gross margins at EWST, principally due to changes in contract
cost estimates at that operation versus contract cost estimates in the first
three quarters of fiscal 2004 for the same projects. (The changes in contract
cost estimates were principally due to unanticipated delays in meeting technical
requirements and delivery dates on certain EWST contracts.)
o A decline of gross margins at one of our US operations due to lower overall
shipments at that facility and engineering development costs attributable to the
development and start up of a major electronic warfare upgrade program for the
14
US Navy;
offset by
o Higher margins contributed by signal generation components and direct sources,
principally due to the fact that the prior year's first three quarters only
included one month of results for CTI, which was acquired effective as of March
29, 2004.
Selling and administrative expenses for the thirty-nine weeks ended May 1, 2005
were 19.8% of net sales as compared to 17.5% in the first three quarters of
fiscal 2004, or an increase of approximately $6,145,000. Large increases during
the period included:
o An increase of approximately $2.0 million due to the fact that the prior
year's first three quarters only included one month of results for CTI, which
was acquired effective as of March 29, 2004;
o Increases of approximately $1.7 million attributable to our three acquisitions
completed in fiscal 2005 (RSS, MSI and ICI); and
o An increase of approximately $1.7 million in legal costs due to continuing
actions associated with the Robinson Labs litigation and other matters. (See
Part II, Item 1. "Legal Proceedings".)
Operating income for the nine months was $12,035,000 or 11.1% of net sales, as
compared to $16,377,000 or 18.6% of net sales in 2004. The decrease in operating
income is primarily attributable to the decline in gross margins for the period
(for the reasons outlined above) and the increase in legal costs. Our foreign
operations contributed approximately $1.8 million in operating income for the
nine months as compared to $3.2 million in fiscal 2004. The decline in operating
income occurred at the Company's UK subsidiary, as discussed above.
Investment income increased by $253,000 in the first three quarters of fiscal
2005 because of an approximate 68% increase in the rate of interest earned on
the investment of excess cash reserves during the period as compared to interest
rates in the prior year, offset by a decline on average of approximately $21
million in funds invested. The reduction in the average balance of funds
invested in the three quarters of fiscal 2005 versus the prior year was caused
by the investments and capital expenditures financed out of our investment
funds, including recent acquisitions.
The Company recognized a net foreign exchange gain of $264,000 through the third
quarter of fiscal 2005, versus a $225,000 net foreign exchange loss in last
year's first three quarters. In fiscal 2005, foreign exchange losses in the US
that are attributable principally to Pound Sterling denominated liabilities were
more than offset by foreign exchange gains recognized in our UK and Israeli
subsidiaries. The foreign exchange gains at our UK subsidiary were recognized in
connection with temporary advances we have made to our UK subsidiary. In last
year's first three quarters, we deferred any recognition of these foreign
exchange gains. As a result, in fiscal 2004's first three quarters, the foreign
exchange losses recognized in the income statement for our US operations were
not offset by gains recognized in the income statement of our UK operations.
This factor, in addition to the increase in our advances to our UK subsidiary
and the change in average exchange rates, accounts for the approximately
$489,000 year on year increase in net foreign exchange gains.
Liquidity and Capital Resources
- -------------------------------
As of May 1, 2005 and August 1, 2004, working capital was $84,099,000 and
$130,273,000, respectively, and the ratio of current assets to current
liabilities was 3.4 to 1 and 6.5 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
customer deposits and progress payments. The un-liquidated balance of these
deposits and payments was approximately $1,837,000 at May 1, 2005, and
$1,180,000 at August 1, 2004.
Net cash provided by operations during the thirty-nine weeks ended May 1, 2005
was approximately $12,618,000 as compared to $2,055,000 during the comparable
period in the prior year. Income from operations (adjusted for depreciation,
amortization, and foreign exchange losses) was $13,113,000 in the first nine
months of the current fiscal year versus $14,593,000 in the similar period in
the prior year, a decrease of approximately $1.5 million. Significant items
contributing to the overall increase in cash provided by operations include the
following:
1. an increase in net cash generated by operations of approximately $2.0 million
attributable to the increase in income taxes payable,
2. an increase of approximately $6.8 million in cash generated from collection
of accounts receivable during the first nine months of fiscal 2005 versus fiscal
2004,
3. a reduction of approximately $5.5 million in the amount of cash invested in
"Costs incurred and income recognized in excess of billings on uncompleted
contracts", and
15
4. a reduction of approximately $2.4 million in the amount of cash invested in
inventories during the nine month periods,
offset by
5. a decrease of approximately $1.7 million in cash generated from "Billings in
excess of costs incurred and income recognized on uncompleted contracts" during
the course of the nine month periods,
6. a decrease of approximately $1.4 million in cash generated through advance
payments from customers on contracts, and
7. other net uses of cash.
Of the changes noted in (2) and (3) above, the largest impact was from a major
contract at our Lancaster facility in connection with an upgrade for US Navy
aircraft. This program was accounted for on a percentage of completion basis,
and in last year's first quarter, we were accumulating significant costs into
this contract. The job was largely shipped during fiscal 2004 and early in
fiscal 2005, which also contributed to the increase in accounts receivable
collections in the first three quarters of fiscal 2005.
Net cash used in investing activities includes:
1. A net payment of $51.4 million in connection with the three acquisitions
completed in fiscal 2005 (RSS $3.7 million, MSI $20.7 million and ICI $27
million.) (See Note 2.)
2. A payment of $2 million in connection with the acquisition from Xytrans of
certain technology to be used in missile and millimeter wave products. (See Note
4.)
3. Capital expenditures of $4,948,000 including approximately $2.1 million
related to new expanded facilities occupied by our Israel and UK operations. The
setup costs and capital expenditures associated with these new facilities are
now substantially completed. We also invested in our engineering and test
facilities throughout our U.S. operations, and expanded certain production
facilities at our Lancaster plant.
Net cash used in financing activities of $747,000 consists primarily of the
purchase of treasury stock for approximately $1.8 million, offset by the
proceeds of from the exercise of stock options for $1.8 million and the payment
of the deferred purchase price of EWST.
In June 2002, the Company entered into a new $50,000,000 Revolving Credit Loan
Agreement with two banks on an unsecured basis which may be used for general
corporate purposes, including business acquisitions. The revolving credit
facility requires the payment of interest only on a monthly basis and payment of
the outstanding principal balance on January 31, 2007 (as amended). The Company
may elect to borrow up to a maximum of $5,000,000 with interest based on the
Federal Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of
$45,000,000 with interest based on LIBOR plus a margin of 1.35% to 1.65%. The
applicable incremental margin is based on the ratio of total liabilities to
tangible net worth, as those terms are defined in the agreement. The Federal
Funds Target Rate and the LIBOR rate was 2.75% and 3.09%, respectively, at May
1, 2005. There is a fee of 15 basis points per annum on the unused portion of
the $45,000,000 LIBOR based portion of the credit facility payable quarterly.
There are no borrowings under the line at May 1, 2005 and August 1, 2004.
Stand-by letters of credit were outstanding in the amount of approximately
$11,198,000 under the credit facility at May 1, 2005, and $11,389,000 at August
1, 2004.
The agreement contains various financial covenants, including, among other
matters, minimum tangible net worth, total liabilities to tangible net worth,
debt services coverage, and restrictions on other borrowings. The company is in
compliance with all covenants at May 1, 2005.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds, its existing unsecured credit facility,
and existing cash reserves. A significant portion of our revenue for fiscal 2005
will be generated from our existing backlog of sales orders. The backlog of
orders at May 1, 2005 was approximately $131 million. All orders included in
backlog are covered by signed contracts or purchase orders. Nevertheless,
contracts involving government programs may be terminated at the discretion of
the government. In the event of the cancellation of a significant amount of
government contracts included in the Company's backlog, the Company will be
required to rely more heavily on cash reserves and its existing credit facility
to fund its operations. The Company is not aware of any events which are
reasonably likely to result in any cancellation of its government contracts. As
of May 1, 2005, the Company has approximately $38,802,000 available under its
bank credit facility, net of outstanding stand-by letters of credit of
approximately $11,198,000, and cash reserves of approximately $19,987,000.
16
Disclosure Regarding Contractual Obligations and Commitments
Accounting standards require disclosure concerning the Company's obligations and
commitments to make future payments under contracts, including interest, such as
debt and lease agreements, and other contingent commitments, such as standby
letters of credit. The following table summarizes the Company's contractual
obligations and other contingent commitments at August 1, 2004 (in thousands):
Within 2-3 4-5 After 5
Obligations Total 1 Year Years Years Years
----------- ----- ------ ----- ----- -----
Mortgage Note $ 2,662 $ 116 $ 255 $ 235 $ 2,056
Industrial Revenue Bonds 4,023 219 440 442 2,922
EWST Note 1,212 606 606 - -
Operating Lease Obligations 7,752 1,649 2,785 2,462 856
Purchase Obligations 16,448 16,448 - - -
------ ------ ------ ----- -----
32,097 19,038 4,086 3,139 5,834
Standby Letters of Credit 11,389 4,881 6,310 198 -
------ ------ ------ ----- -----
Total Contractual Obligations $ 43,486 $ 23,919 $ 10,396 $ 3,337 $ 5,834
====== ====== ====== ===== =====
Other than the ordinary course fulfillment of open purchase orders and placement
of new purchase orders, there have been no other significant changes to the
Company's contractual obligations associated with its businesses since August 1,
2004. However, the acquisitions of RSS, MSI and ICI during Fiscal year 2005 (see
Note 2) has resulted in an increase in the Company's Operating Lease
Obligations, as summarized below:
Fiscal Fiscal Fiscal After
Obligations Total 2005 2006-07 2008-09 Fiscal 2009
----------- ----- ---- ------- ------- -----------
Operating Lease Obligations $ 11,102 $ 571 $ 2,633 $ 3,381 $ 4,517
New Accounting Pronouncements
- -----------------------------
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment," which is a
revision of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." SFAS 123R is effective for publicly-traded companies
for interim or annual periods beginning after June 15, 2005, supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values and will rescind the acceptance of pro forma disclosure. SFAS 123R
will be effective for the Company beginning with the first quarter of fiscal
2006. The Company has not yet completed an evaluation but expects the adoption
of SFAS 123R to have an effect on its financial statements based on the
unamortized pro forma expense related to unvested options outstanding at the
date of adoption.
17
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company's exposures to market risk have not changed significantly since
August 1, 2004.
Item 4: Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The term "disclosure
controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934 as amended (the "Exchange Act"). These rules
refer to the controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within the required time periods. The Company's management, with
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the design, operation and effectiveness of the Company's
disclosure controls and procedures and have concluded, based on such evaluation,
that such controls and procedures were effective at providing reasonable
assurance that required information will be disclosed in the Company's reports
filed under the Exchange Act as of May 1, 2005.
(b) Changes in internal controls. There were no changes in the Company's
internal controls over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended
May 1, 2005 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson
("Robinson") filed an Amended Complaint against Herley Industries, Inc.
("Herley"). Although the Amended Complaint sets forth fifteen counts, the core
allegations are (i) that Herley failed to issue 97,841 shares of common stock in
connection with certain earn out requirements contained in an Asset Purchase
Agreement dated February 1, 2000; (ii) that Herley breached an Employment
Agreement with Robinson by terminating his employment on August 5, 2001; and
(iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with
Robinson. RLI and Robinson asserted (i) violations of state and federal
securities laws; (ii) fraud claims; (iii) breach of contract claims; and (iv)
other equitable claims arising from the above core factual allegations.
On September 17, 2001, Herley filed an Answer, Affirmative Defenses and
Counterclaims in this matter. In the Answer and Affirmative Defenses, Herley
denied the material allegations of the Amended Complaint. Herley also filed
Counterclaims against both RLI and Robinson. In these counterclaims, Herley's
core allegations concern Robinson's misconduct (i) in connection with the manner
he attempted to satisfy RLI's earn out requirements; (ii) misrepresentations
made in connection with the Asset Purchase Agreement; (iii) wrongdoing as a
Herley employee leading to his termination and (iv) post-Herley employment
wrongdoing in connection with a new company known as RH Laboratories. In
addition to seeking a Declaratory Judgment pursuant to 28 U.S.C. ss. 2201 et.
seq., Herley also asserted claims for, among other things, fraud, breach of
contract, breach of fiduciary duty, unfair competition and tortuous interference
with actual and prospective contractual relationships.
On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August
21, 2002 in which the jury determined, among other things, that (i) Herley was
not required to pay any additional stock; (ii) Herley breached the Employment
Agreement with Robinson and awarded Robinson $1.5 million in damages; (iii)
Herley breached the Lease Agreement with Robinson and awarded Robinson
approximately $552,000 in compensatory damages; (iv) Robinson breached fiduciary
duties to Herley and awarded Herley $400,000 in compensatory damages; (v)
Robinson and RLI breached indemnity obligations and awarded Herley $100,000 in
damages; (vi) RLI breached representations and warranties given to Herley and
awarded Herley $320,000 in damages.
On October 18, 2002, the Court entered a final judgment consistent with the
above, and both parties filed post-trial motions. Additionally, as the
prevailing party in connection with the claims asserted by RLI relating to the
earn-out stock, as well as claims advanced relating to the various breaches of
the Asset Purchase Agreement, Herley filed a petition for fees and costs against
both RLI and Robinson on November 27, 2002 for approximately $2,000,000. RLI and
Robinson also filed petitions to recover attorney's fees of approximately
$240,000 for certain claims in which they contend that they were the prevailing
party. On February 5, 2003, the Court denied the post-trial motions filed by the
parties, thus leaving the jury verdict undisturbed.
18
At a proceeding on April 28, 2003, the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order dated May 6, 2003, the Court denied without prejudice all of the
parties' petitions. On May 12, 2003, Herley filed its appeal to the United
States Court of Appeals for the Second Circuit. On May 28, 2003, RLI filed a
notice of cross-appeal. Robinson did not appeal. Herley filed its brief in
support of its appeal before the Second Circuit on August 22, 2003. RLI timely
filed its brief in response to Herley's appeal and in support of RLI's
cross-appeal. Herley timely filed a response to RLI's brief and thereafter RLI
timely filed a response to Herley's brief. Oral argument was held on December
18, 2003.
By Summary Order on January 26, 2004, the Second Circuit affirmed the trial
court judgment in its entirety. On February 4, 2004, RLI submitted a letter
request to the trial court for relief from the judgment on RLI's claim for the
earn-out stock under Federal Rule of Civil Procedure 60. RLI contended that it
had "newly discovered evidence," first learned in August 2003, to justify its
requested relief. Herley submitted its response in opposition by letter dated
February 10, 2004. On February 26, 2004, the parties appeared before the Court
concerning the various applications and were directed to submit legal briefs on
various legal issues. By Order dated May 28, 2004 the trial court denied RLI's
Motion for a New Trial. The Court also denied Herley's request that it exercise
its general equitable power to hold Ben Robinson personally liable for any fees
Herley might recover against RLI.
On June 28, 2004, Herley filed suit against Ben Robinson and Frank Holt in the
Superior Court of Hillsborough County, New Hampshire, asserting claims for
fraudulent conveyance and piercing the corporate veil to hold Robinson
personally liable for the fees incurred by Herley in defending RLI's claims
discussed above. In response, Robinson took steps to collect damages awarded to
him under the jury verdict. On July 21, 2004, Herley brought an Emergency Motion
for Injunctive Relief and moved for an immediate order from the New Hampshire
court allowing Herley to escrow the judgment owed to Robinson to be offset
against any award of fees to Herley. The court entered an order denying the
requested relief. On July 27, 2004, Herley paid $1,594,621 (including interest)
to Ben Robinson, an amount calculated by deducting Herley's award against
Robinson from the amounts awarded to Robinson on his claims under the Employment
Agreement and the Lease Agreement. On July 28, 2004, the parties filed a Notice
of Partial Satisfaction of Judgment.
By Order dated February 8, 2005, the Superior court of Hillsborough County, New
Hampshire, granted Ben Robinson's and Frank Holt's Motion for Summary Judgment
in the New Hampshire action. By Order Dated February 17, 2005, the Court ruled
upon the parties' cross-petitions for attorneys' fees, granting all petitions in
their entirety. Herley was awarded $2,146,882 against RLI under the Asset
Purchase Agreement. RLI was awarded $54,426 against Herley for its successful
defense of an indemnity by Herley. Ben Robinson was awarded $259,295 against
Herley under the Lease Agreement.
On June 3, 2005, Herley reached an agreement in principle with Robinson, RLI and
Holt under which Herley agreed to pay Robinson $260,000 for the attorneys fees
awarded to him by the New York Court. Further, all claims, counterclaims and
appeals in the New York and New Hampshire actions, as well as all claims and
counterclaims in a separate proceeding docketed as Herley Industries, Inc. v. RH
Laboratories, Inc., Stephen Robinson and Michael Gravelese, No. 02-11140 (D.
Mass), would be dismissed with prejudice pursuant to this agreement in
principle. The documentation on this agreement is not completed, but based upon
this agreement in principle the Company recorded a provision in the third
quarter of fiscal 2005 to account for this settlement.
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.
19
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
10.1 Fourth Amendment (dated June 9, 2005) to Loan Agreement dated June 19,
2002 among the Registrant, Manufacturers and Traders Trust Company,
successor in interest to Allfirst Bank, and Fulton Bank.
31 Certifications pursuant to Rules 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
20
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERLEY INDUSTRIES, INC.
-----------------------
Registrant
BY: /S/ Myron Levy
-----------------------------------
Myron Levy, Chief Executive Officer
BY: /S/ Thomas V. Gilboy
---------------------------------------------
Thomas V. Gilboy, Principal Financial Officer
DATE: June 10, 2005
21