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: January 28, 1996
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)
10 Industry Drive, Lancaster, Pennsylvania 17603
- ------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (717) 397-2777
--------------
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of March 4, 1996 - 2,805,082 shares of Common Stock.
HERLEY INDUSTRIES, INC
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Consolidated Balance Sheets -
January 28, 1996 and July 30,1995 2
Consolidated Statements of Operations -
For the thirteen and twenty-six weeks ended
January 28, 1996 and January 29, 1995 3
Consolidated Statements of Cash Flows -
For the twenty-six weeks ended
January 28, 1996 and January 29, 1995 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION 8
Signatures 10
Computation of per share earnings 11
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 28, July 30,
1996 1995
----------- --------
Unaudited Audited
----------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 799,880 $ 272,755
Accounts receivable 3,828,413 4,679,917
Notes receivable-officers 1,753,148 --
Other receivables 190,812 163,402
Inventories 8,085,382 9,330,053
Prepaid expenses and other 1,277,563 1,006,503
----------- -----------
Total Current Assets 15,935,198 15,452,630
Property, Plant and Equipment, net 13,199,132 13,775,710
Intangibles, net of amortization 4,716,286 4,852,336
Available-for-sale Securities 7,055,646 4,114,614
Other Investments 1,000,000 3,727,506
Other Assets 250,428 306,486
----------- -----------
$ 42,156,690 $ 42,229,282
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 328,099 $ 357,078
Accounts payable and accrued expenses 6,637,013 7,644,148
Reserve for contract losses 551,660 496,000
Advance payments on contracts 2,571,536 1,476,640
----------- -----------
Total Current Liabilities 10,088,308 9,973,866
----------- -----------
Long-term Debt 9,425,000 10,525,000
Deferred Income Taxes 1,609,377 1,282,179
Excess of fair value of net assets of business
acquired over cost, net of amortization 1,217,083 1,460,500
----------- -----------
22,339,768 23,241,545
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
10,000,000 shares; issued
2,802,274 at January 28, 1996
and 3,015,988 at July 30, 1995 280,227 301,599
Additional paid-in capital 11,837,649 13,040,622
Retained earnings 7,673,496 5,620,516
---------- ----------
19,791,372 18,962,737
Less:
Unrealized gain on available-for-sale
securities (25,550) (25,000)
----------- -----------
Total Shareholders' Equity 19,816,922 18,987,737
----------- -----------
$ 42,156,690 $ 42,229,282
=========== ===========
The accompanying notes are an integral part of these financial
statements.
2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
January 28, January 29, January 28, January 29,
1996 1995 1996 1995
---------- ----------- ----------- -----------
Net sales $ 7,197,155 $ 5,505,361 $ 14,260,046 $ 11,803,970
---------- ----------- ----------- -----------
Cost and expenses:
Cost of products sold 5,028,481 4,325,642 9,916,902 8,967,330
Selling and administrative expenses 1,541,345 1,557,201 2,955,906 2,785,295
---------- ----------- ----------- -----------
6,569,826 5,882,843 12,872,808 11,752,625
---------- ----------- ----------- -----------
Operating income (loss) 627,329 (377,482) 1,387,238 51,345
---------- ----------- ----------- -----------
Other income (expense):
Net gain (loss) on sale of marketable
securities and other investments 1,109,443 (339,098) 1,164,997 (529,726)
Dividend and interest income 99,608 230,600 162,394 468,334
Interest expense (218,531) (236,576) (445,549) (523,426)
---------- ----------- ----------- -----------
990,520 (345,074) 881,842 (584,818)
---------- ----------- ----------- -----------
Income (loss) before income taxes 1,617,849 (722,556) 2,269,080 (533,473)
Income tax provision (benefit) 80,700 (241,000) 216,100 (236,000)
---------- ----------- ----------- -----------
Net income (loss) $ 1,537,149 $ (481,556) $ 2,052,980 $ (297,473)
========== =========== =========== ===========
Earnings (loss) per common and common
equivalent share $ .49 $(.12) $ .70 $(.07)
==== ===== ==== =====
Weighted average number of common and
common equivalent shares outstanding 3,131,001 3,886,040 2,944,782 4,030,864
========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Twenty-six weeks ended
----------------------
January 28, January 29,
1996 1995
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 2,052,980 $ (297,473)
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 773,071 1,050,418
(Gain) loss on sale of marketable securities (1,164,997) 601,448
Decrease (increase) in deferred tax assets 214,380 (348,880)
Increase in deferred tax liabilities 112,818 93,833
Recovery of unrealized loss on securities 550 122,589
Changes in operating assets and liabilities:
Decrease in accounts receivable 851,504 1,749,912
Decrease (increase) in notes receivable (1,723,148) 1,000,000
Decrease (increase) in other receivables (57,410) 144,455
Decrease in inventories 1,244,671 1,027,628
(Increase) in prepaid expenses and other (271,060) (111,194)
(Decrease) in accounts payable and accrued expenses (1,211,505) (1,679,042)
Increase (decrease) in reserve for contract losses 55,660 (175,000)
Increase (decrease) in advance payments on contracts 1,094,896 (996,104)
Increase (decrease) in income taxes payable 204,370 (98,756)
Other, net 40,001 3,385
---------- ----------
Total adjustments 163,801 2,384,692
---------- ----------
Net cash provided by operating activities 2,216,781 2,087,219
---------- ----------
Cash flows from investing activities:
Purchase of available-for-sale securities (6,617,407) (17,502,419)
Proceeds from sale of available-for-sale securities 3,745,645 23,212,297
Proceeds from sale of other investments 3,823,233 --
Capital expenditures (287,803) (55,601)
---------- ----------
Net cash provided by investing activities 663,668 5,654,277
---------- ----------
Cash flows from financing activities:
Borrowings under bank line of credit 7,875,000 1,800,000
Payments under lines of credit (8,975,000) (7,150,000)
Payments of long-term debt (28,979) (151,281)
Purchase of treasury stock (1,224,345) (2,410,998)
---------- ----------
Net cash (used in) financing activities (2,353,324) (7,912,279)
---------- ----------
Net increase (decrease) in cash and cash equivalents 527,125 (170,783)
Cash and cash equivalents at beginning of period 272,755 539,729
---------- ----------
Cash and cash equivalents at end of period $ 799,880 $ 368,946
========== ==========
The accompanying notes are an integral part of these financial statements.
4
Herley Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Unaudited)
1. The consolidated financial statements include the accounts of Herley
Industries, Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of the Company, the accompanying consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations and cash
flows for the periods presented. These financial statements (except for the
balance sheet presented at July 30,1995) 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.
2. In November 1995 the Company lent $1,700,000 to certain officers, as
authorized by the Board of Directors, pursuant to the terms of
nonnegotiable promissory notes. The loans are secured by 395,774 shares of
common stock of the Company. The loans are due November 1996 and may be
renewed by the Company for up to four additional one-year periods. Interest
is payable at maturity at the average rate of interest paid by the Company
on borrowed funds during the fiscal year. The pledge agreement also
provides for the purchase of the pledged securities, based on a formula as
defined, in the event of the death or disability of the officer equal to
the principal amount plus accrued interest outstanding under the note.
3. Inventories at January 28, 1996 and July 30,1995 are summarized as follows:
January 28, 1996 July 30,1995
---------------- ------------
Purchased parts and raw materials $3,470,757 $ 5,749,455
Work in process 4,535,470 3,478,268
Finished products 79,155 102,330
--------- ---------
$ 8,085,382 $ 9,330,053
========= =========
4. The following is a summary of available-for-sale securities:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ------- ------- ----------
January 28, 1996
Government bonds $ 5,228,380 $ 73,799 $ 31,249 $ 5,270,930
Other 1,780,624 - - 1,780,624
--------- ------- ------ ---------
Total debt
securities 7,009,004 73,799 31,249 7,051,554
Equity securities 4,092 - - 4,092
--------- ------ ------ ---------
$ 7,013,096 $ 73,799 $ 31,249 $ 7,055,646
========= ====== ====== =========
July 30, 1995
Government bonds $ 3,878,937 $ 72,968 $ 31,302 $ 3,920,603
Other 189,919 - - 189,919
--------- ------ ------ ---------
Total debt
securities 4,068,856 72,968 31,302 4,110,522
Equity securities 4,092 - - 4,092
--------- ------ ------ ---------
$ 4,072,948 $ 72,968 $ 31,302 $ 4,114,614
========= ====== ====== =========
5
As of December 31, 1995, the Company sold its investment and terminated
its partnership interest in M.D. SASS RE/ENTERPRISE PARTNERS, L.P., a
Delaware limited partnership for $3,823,233 realizing a gain of
$1,095,727. The proceeds from the sale have been invested in marketable
securities and included in the balance sheet as available-for-sale
securities.
During the quarter ended October 29, 1995, the Company liquidated
$1,100,000 of its available-for-sale securities and used the proceeds to
purchase shares of its common stock in the open market. The Company
purchased a total of 213,714 shares of its common stock during the
quarter, all of which have been retired.
5. In January 1996, the Company entered into a revolving credit agreement
with a new bank that provides for the extension of credit in the
aggregate principal amount of $11,000,000 and may be used for general
corporate purposes, including business acquisitions. The facility
requires the payment of interest only on a monthly basis and payment of
the outstanding principal balance on January 31, 1998. Interest is set
biweekly at 1% over the bank's Federal Funds Rate (5.50% at January 28,
1996) applied to outstanding balances up to 80% of the net equity value
of certain investments, and at .5% over the bank's Base Rate (8.50% at
January 28, 1996) for outstanding balances in excess of this limit. The
premium rate portion of the facility is secured by the marketable
securities. The credit facility also provides for the issuance of
stand-by letters of credit with a fee of 1.0% per annum of the amounts
outstanding under the facility. At January 28, 1996, stand-by letters of
credit aggregating $3,207,210 were outstanding.
The agreement contains various financial covenants, including, among
other matters, the maintenance of working capital, tangible net worth,
and restrictions on cash dividends.
6. Supplemental cash flow information is as follows:
January 28, 1996 January 29, 1995
---------------- ----------------
Cash paid during the period for:
Interest $ 483,488 $ 599,533
Income Taxes 5,488 103,482
6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
As of January 28, 1996 and July 30, 1995, working capital was approximately
$5,847,000 and $5,479,000, respectively, and the ratio of current assets to
current liabilities was 1.58 to 1 and 1.55 to 1, respectively.
In January 1996, the Company entered into a revolving credit agreement with
anew bank that provides for the extension of credit in the aggregate principal
amount of $11,000,000 and may be used for general corporate purposes, including
business acquisitions. The facility expires January 31, 1998. As of January 28,
1996 and July 30, 1995, the Company had borrowings outstanding of $5,900,000 and
$7,000,000, respectively.
At January 28, 1996, the Company owned high grade investment securities
having a market value of approximately $7,056,000, and cash and cash equivalents
of approximately $800,000.
The Company believes that presently anticipated future cash requirements
will be provided by internally generated funds, and existing credit facilities.
Results of Operations
Thirteen weeks ended January 28, 1996 and January 29, 1995
Net sales for the thirteen weeks ended January 28, 1996 increased by
approximately $1,692,000 or 31% over the comparable period of the prior year due
to an increase in flight instrumentation products net sales of approximately
$2,041,000 of which the acquisition of Stewart Warner Electronics Co.
contributed approximately $908,000; offset by a decrease in net sales of
microwave components of approximately $349,000.
Cost of products sold for the thirteen weeks ended January 28, 1996
decreased as a percentage of net sales from 79% in 1995 to 70% in 1996. This
decrease is attributable to higher margins on foreign sales, which were
approximately $2,143,000 in the quarter as compared to $561,000 in 1995, and
increased absorption of fixed costs due to the increase in sales volume.
There is no significant change in total selling and administrative expenses
for the thirteen weeks ended January 28, 1996. Among the components of selling
and administrative expenses, however, representative fees increased $101,000 in
line with higher foreign sales; personnel and related costs increased $92,000;
legal fees were $293,000 lower than 1995; and other costs decreased $59,000. The
acquisition of Stewart Warner added $143,000 in selling and administrative
expenses.
Other income (expense) for the thirteen weeks ended January 28, 1996
increased $1,335,000 from the comparable prior year period due to net gains on
the sale of a partnership interest in M. D. SASS RE/ENTERPRISE PARTNERS, L.P.
and other marketable securities of approximately $1,109,000 as compared to a
loss in 1995 of $339,000, and a decrease in interest expense of $18,000; offset
by a reduction in investment income of $131,000.
No income tax provision has been recorded in the thirteen weeks ended
January 28, 1996 due to the anticipated utilization of net operating losses.
Twenty-six weeks ended January 28, 1996 and January 29, 1995
Net sales for the twenty-six weeks ended January 28, 1996 increased by
approximately $2,456,000 or 21% over the comparable period of the prior year due
to an increases in flight instrumentation products net sales of approximately
$3,318,000 of which the acquisition of Stewart Warner Electronics Co.
contributed approximately $2,100,000; offset by a decreases in net sales of
microwave components of approximately $862,000.
7
Cost of products sold for the twenty-six weeks ended January 28, 1996
decreased as a percentage of net sales from 76% in 1995 to 70% in 1996. This
decrease is attributable to higher margins on foreign sales, which were
approximately $3,553,000 in the period as compared to $1,175,000 in 1995, and
increased absorption of fixed costs due to the higher sales volume.
Selling and administrative expenses for the twenty-six weeks ended January
28, 1996 increased approximately $171,000 over the comparable period of the
prior year, of which $249,000 is attributable to increased representative fees
on foreign sales, and $205,000 to an increase in personnel and related expenses:
offset by a reduction in legal fees of $517,000 and a decrease in other expenses
of $21,000. The acquisition of Stewart Warner added $255,000 in selling and
administrative expenses.
Other income (expense) for the twenty-six weeks ended January 28, 1996
increased $1,467,000 from the comparable prior year period due to net gains on
the sale of a partnership interest in M. D. SASS RE/ENTERPRISE PARTNERS, L.P.
and other marketable securities of approximately $1,165,000 as compared to a
loss in 1995 of $530,000, and a decrease in interest expense of $78,000; offset
by a reduction in investment income of $306,000.
PART I I - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
In April 1992, Litton Systems, Inc. Electron Devices Division ("Litton")
commenced an action in the Essex Superior Court of Massachusetts against the
Company (the "Litton Action") alleging, among other claims for relief, theft of
trade secrets, unfair trade practices and related common law claims in
connection with the defendants' alleged misappropriation of Litton's beacon
magnetron drawings. In a jury trial which ended April 3, 1995, a verdict on
liability was rendered against the Company and the other defendants. Prior to a
separate, subsequent trial to determine damages, the Company settled the action
on April 12, 1995 for the sum of $4,000,000, and agreed to the entry of an
injunction precluding the use by the Company of the alleged misappropriated
drawings in connection with the manufacture of beacon magnetrons. The settlement
provides for two equal payments of $2,000,000 each without interest, the first
of which was paid, and the second is due in July, 1996.
In May and June 1994, the Company was served with two class action
complaints against the Company and certain of its officers and directors in the
United States District Court for the Eastern District of Pennsylvania. The
claims were made under Section 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. One of the claims is also based upon alleged
negligence. The claims relate to the Company's acquisition of Carlton
Industries, Inc. and its subsidiary, Vega Precision Laboratories, Inc. The
claims were combined into one matter and a consolidated Complaint. In April,
1995, the Court certified that the claims based on the Securities Exchange Act
may proceed as a Class Action pursuant to Rule 23(b) (3), but without prejudice
to the rights of the parties thereafter to seek modification of the Class or
revocation of leave to proceed. The Court refused to certify the negligence
claim as a Class Action. In May, 1995, the parties negotiated a tentative
settlement of all claims in consideration for a payment of $450,000 subject to
the negotiation and execution of a satisfactory Settlement Agreement and Court
approval after notice to Class Members. The parties are negotiating the terms of
the Settlement Agreement for submission to the Court.
In May, 1995, the Company was served with a Class Action Complaint against
the Company and its Chief Executive Officer in the United States District Court
for the Eastern District of Pennsylvania. The claim was made under Section 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5 thereunder.
The claim relates to the Company's settlement of the Litton Action in the Essex
Superior Court of Massachusetts and alleges, inter alia, that there was
insufficient disclosure by the Company of its true potential exposure in that
claim. The Company believes it has a meritorious defense and intends to
vigorously defend against the action.
In or about March, 1994, the principal selling shareholders of Carlton
Industries, Inc. ("Carlton") and its subsidiary, Vega Precision Laboratories,
Inc. ("Vega"), as claimants, commenced an arbitration proceeding before the
American Arbitration Association in New York City pursuant to the terms of the
Stock Purchase Agreement ("Agreement") by which the Company acquired the stock
of Carlton and Vega. The claimants principally are seeking to recover damages
for the
8
Company's alleged failure to register timely the claimants' shares of the
Company's common stock in accordance with the provisions of the Agreement and
other breaches of the Agreement. The Company has denied and has contested
vigorously the legitimacy of the claimants' claims and has interposed several
counterclaims seeking indemnification under the Agreement against the principal
selling shareholders, for damages suffered by the Company in an aggregate amount
exceeding $1 million as a result of breaches of contractual representations.
Hearings have been closed and final briefs were submitted. The matter has yet to
be determined by the Arbitrators.
There is no certainty as to the outcome of the above unresolved matters.
However, in the opinion of management, the ultimate liability on these matters,
if any, will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
ITEM 2 - CHANGES IN SECURITIES:
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a) The Registrant held its Annual Meeting of Stockholders on December 13,
1995.
(b) Six directors were elected at the Annual Meeting of Stockholders as
follows:
Class I - To serve until the Annual Meeting of Stockholders in 1996 or
until their successors are chosen and qualified:
Name Votes For Votes Withheld
---- --------- --------------
Gerald Klein 2,301,493 60,841
David H. Lieberman 2,301,493 60,841
Class II - To serve until the Annual Meeting of Stockholders in 1997
or until their successors are chosen and qualified:
Name Votes For Votes Withheld
---- --------- --------------
Myron Levy 2,301,493 60,841
Adm. Thomas J. Allshouse 2,301,493 60,841
Class III - To serve until the Annual Meeting of Stockholders in 1998
or until their successors are chosen and qualified:
Name Votes For Votes Withheld
---- --------- --------------
Lee N. Blatt 2,301,493 60,841
John A. Thonet 2,301,493 60,841
(c) A proposal to adopt a 1996 Stock Option Plan was approved at the
Annual Meeting. Votes cast at this meeting were 1,493,175 for, 266,903
shares against, and 2,831 shares abstaining.
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 11: Computation of per share earnings.
Exhibit 27: Financial Data Schedule (for electronic submission only).
(b) During the quarter for which this report is filed, the Registrant
filed the following reports under Form 8-K:
Current report on Form 8-K dated October 17, 1995 covering Item 5 -
Other Events and Item 7 - Exhibits.
9
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, President
BY: /S/ Anello C. Garefino
---------------------------
Anello C. Garefino,
Principal Financial Officer
DATE: March 4, 1996
10