UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended: May 4, 1997
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 June 3, 1997 - 3,019,225 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 -
May 4, 1997 and July 28, 1996 2
Consolidated Statements of Operations -
For the thirteen and forty weeks ended
May 4, 1997, and the thirteen and
thirty-nine weeks ended April 28, 1996 3
Consolidated Statements of Cash Flows -
For the thirteen and forty weeks ended
May 4, 1997, and the thirteen and
thirty-nine weeks ended April 28, 1996 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
May 4, July 28,
1997 1996
----------- -----------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 627,276 $ 1,104,445
Accounts receivable 5,734,080 3,249,225
Notes receivable-officers 2,066,009 2,083,543
Other receivables 133,882 124,992
Inventories 9,107,668 8,010,687
Deferred taxes and other 1,949,436 1,689,988
---------- -----------
Total Current Assets 19,618,351 16,262,880
Property, Plant and Equipment, net 11,813,751 12,579,044
Intangibles, net of amortization 4,376,161 4,580,236
Available-for-sale Securities - 4,912,387
Other Investments 1,000,000 3,000,000
Other Assets 1,509,993 1,174,395
========== ===========
$ 38,318,256 $ 42,508,942
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,146,000 $ 300,000
Accounts payable and accrued expenses 4,413,044 5,123,868
Billings in excess of costs and earnings
on contracts in process 108,865 -
Income taxes payable 229,226 166,295
Reserve for contract losses 268,350 489,110
Advance payments on contracts 2,559,059 1,480,033
---------- ----------
Total Current Liabilities 8,724,544 7,559,306
---------- ----------
Long-term Debt 3,225,000 11,021,000
Deferred Income Taxes 2,090,975 1,923,058
Excess of fair value of net assets of business
acquired over cost, net of amortization 608,542 973,667
---------- ----------
14,649,061 21,477,031
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value;
authorized 10,000,000 shares;
issued 3,102,878 at May 4, 1997
and 2,936,122 at July 28, 1996 310,288 293,612
Additional paid-in capital 10,967,561 11,448,827
Retained earnings 12,391,346 9,289,472
---------- ----------
Total Shareholders' Equity 23,669,195 21,031,911
========== ==========
$ 38,318,256 $ 42,508,942
========== ==========
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
-------------------- 40 weeks ended 39 weeks ended
May 4, April 28, May 4, April 28,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net sales $ 8,426,047 $ 7,236,163 $ 23,080,159 $ 21,496,209
------------ ------------ ------------ ------------
Cost and expenses:
Cost of products sold 5,278,289 4,929,063 15,365,629 14,845,965
Selling and administrative expenses 1,531,622 1,356,834 4,282,832 4,312,740
------------ ------------ ------------ ------------
6,809,911 6,285,897 19,648,461 19,158,705
------------ ------------ ------------ ------------
Operating income 1,616,136 950,266 3,431,698 2,337,504
------------ ------------ ------------ ------------
Other income (expense):
Gain (loss) on sale of available-for-sale
securities and other investments 80,630 (131,211 95,897 1,033,786
Dividend and interest income 62,156 126,322 200,041 288,716
Interest expense (125,955) (167,900 (443,362) (613,449
------------ ------------ ------------ ------------
16,831 (172,789 (147,424) 709,053
------------ ------------ ------------ ------------
Income before income taxes 1,632,967 777,477 3,284,274 3,046,557
Provision for income taxes 182,400 -- 182,400 216,100
------------ ------------ ------------ ------------
Net income $ 1,450,567 $ 777,477 $ 3,101,874 $ 2,830,457
============ ============ ============ ============
Earnings per common and common
equivalent share $ .41 $ .26 $ .88 $ .86
============ ============ ============ ============
Earnings per common share -
assuming full dilution $ .41 $ .25 $ .88 $ .83
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 3,513,084 3,019,108 3,535,588 3,367,704
============ ============ ============ ============
Weighted average number of common shares
outstanding - assuming full dilution 3,513,084 3,156,902 3,535,588 3,421,271
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
40 weeks ended 39 weeks ended
May 4, April 28,
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 3,101,874 $ 2,830,457
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,159,504 1,165,013
Gain on sale of available-for-sale
securities and other investments (96,070) (1,033,786)
Decrease in deferred tax assets -- 123,555
Increase in deferred tax liabilities 167,917 130,855
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (2,484,855) 326,197
Decrease (increase) in notes receivable-officers 17,534 (2,052,284)
(Increase) in other receivables (8,890) (9,173)
Decrease (increase) in inventories (1,096,981) 1,045,484
(Increase) in deferred taxes and other (259,448) (314,782)
(Decrease) in accounts payable and accrued expenses (710,824) (540,959)
Increase in billings in excess of costs and earnings
on contracts in process 108,865 --
Increase in income taxes payable 62,931 268,127
Increase (decrease) in reserve for contract losses (220,760) 4,210
Increase in advance payments on contracts 1,079,026 771,244
Other, net (356,365) (53,999)
----------- -----------
Total adjustments (2,638,416) (170,298)
----------- -----------
Net cash provided by operating activities 463,458 2,660,159
----------- -----------
Cash flows from investing activities:
Purchase of available-for-sale securities (159,364) (8,500,471)
Purchase of other investment -- (2,000,000)
Proceeds from sale of available-for-sale securities 5,083,908 7,536,619
Proceeds from sale of other investments 2,080,630 3,823,233
Proceeds from sale of fixed assets 9,392 --
Capital expenditures (540,603) (415,334)
----------- -----------
Net cash provided by investing activities 6,473,963 444,047
----------- -----------
Cash flows from financing activities:
Borrowings under bank line of credit 2,325,000 7,875,000
Proceeds from exercise of stock options 214,063 77,070
Payments under lines of credit (9,275,000) (9,225,000)
Payments of long-term debt -- (35,264)
Purchase of treasury stock (678,653) (1,490,861)
----------- -----------
Net cash (used in) financing activities (7,414,590) (2,799,055)
----------- -----------
Net increase (decrease) in cash and cash equivalents (477,169) 305,151
Cash and cash equivalents at beginning of period 1,104,445 272,755
----------- -----------
Cash and cash equivalents at end of period $ 627,276 $ 577,906
=========== ===========
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 28, 1996) 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. Inventories at May 4, 1997 and July 28,1996 are summarized as follows:
May 4, 1997 July 28,1996
----------- ------------
Purchased parts and raw materials $ 4,258,122 $ 3,358,256
Work in process 4,707,589 4,580,538
Finished products 141,957 71,893
---------- -----------
$ 9,107,668 $ 8,010,687
========= =========
3. The following is a summary of available-for-sale securities at July 28,
1996:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ---------- -----------
Government bonds $ 3,783,402 $ - $ - $ 3,783,402
Other 1,125,700 - - 1,125,700
--------- ---------- --------- ---------
Total debt
securities 4,909,102 - - 4,909,102
Equity securities 3,285 - - 3,285
---------- ---------- --------- ---------
$ 4,912,387 $ - $ - $ 4,912,387
========= ========== ========= =========
The Company liquidated all of its available-for-sale securities during the
first quarter and used the proceeds to pay down its bank debt.
4. In January 1997, the Company renewed its revolving credit agreement with a
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, 1999. Interest is at 1% over the FOMC Target Rate
applied to outstanding balances up to 80% of the net equity value of
available-for-sale securities, and at the bank's Base Rate for outstanding
balances in excess of this limit. Their were no borrowings outstanding at
May 4, 1997. The premium rate portion of the facility would be secured by
any available-for-sale 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 May 4, 1997, stand-by
letters of credit aggregating $2,904,492 were outstanding.
5
The agreement contains various financial covenants, including, among other
matters, the maintenance of working capital, tangible net worth, and
restrictions on cash dividends.
5. The 1997 income tax provision reflects the utilization of prior year net
operating loss carryforwards and elimination of the valuation allowance for
net operating loss carryforwards expected to be realized.
6. Supplemental cash flow information is as follows:
40 weeks ended 39 weeks ended
May 4, April 28,
1997 1996
------------ ------------
Cash paid during the period for:
Interest $ 382,225 $ 562,048
Income Taxes 156,027 16,931
Cashless exercise of stock options $ 1,884,708 $ -
6
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
As of May 4, 1997 and July 28, 1996, working capital was approximately
$10,894,000 and $8,704,000, respectively, and the ratio of current assets to
current liabilities was 2.25 to 1 and 2.15 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
progress payments. The unliquidated balance of these advanced payments was
approximately $2,559,000 at May 4, 1997, and $1,480,000 at July 28, 1996, an
increase of $1,079,000 during the period.
Net cash provided by operations during the quarter was approximately $463,000.
Net cash provided from investing activities of approximately $6,474,000 during
the period results primarily from the liquidation of all of the
available-for-sale securities and the sale of the Company's limited partnership
interest in M.D. SASS RE/ENTERPRISE II, L.P. The Company used the proceeds to
pay off its long term bank debt.
The Company maintains a revolving credit facility with a bank for an aggregate
of $11,000,000 which expires January 31, 1999. As of July 28, 1996, the Company
had borrowings outstanding of $6,950,000. There were no amounts outstanding at
May 4, 1997.
At May 4, 1997, the Company had cash and cash equivalents of approximately
$627,000.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds, and existing credit facilities.
The Board of Directors has authorized the purchase of up to an aggregate of
300,000 shares of the Company's common stock from time to time, at prevailing
market prices, in the open market or in private transactions. The Company
purchased 68,900 shares during the quarter ended May 4, 1997 at an aggregate
cost of $678,653.
Results of Operations
Thirteen weeks ended May 4, 1997 and April 28, 1996
Net sales for the thirteen weeks ended May 4, 1997 were $8,426,000 as
compared to $7,236,000 (an increase of 16%) in the comparable period of the
prior year.
Cost of products sold for the thirteen weeks ended May 4, 1997 decreased as
a percentage of net sales from 68% in 1996 to 63% in 1997. This decrease is
attributable to more aggressive pricing and higher absorption of overhead due to
the higher sales volume, as well as control of variable costs.
Selling and administrative expenses for the thirteen weeks ended May 4,
1997 increased by $175,000 as compared to the prior year third quarter. The
increase is attributable primarily to a provision for settlement costs,
including legal fees, of approximately $150,000 in connection with a legal
action.
Other income for the thirteen weeks ended May 4, 1997 increased $190,000
over the prior year due to net gains on the sale of a partnership interest in M.
D. SASS RE/ENTERPRISE II, L.P., and a decrease in interest expense of $42,000;
offset by a reduction in investment income of $64,000.
The 1997 income tax provision recorded in the thirteen weeks ended May 4,
1997 reflects the utilization
7
of prior year net operating loss carryforwards and elimination of the valuation
allowance for net operating loss carryforwards expected to be realized.
Forty weeks ended May 4, 1997 and thirty-nine weeks ended April 28, 1996
Net sales for the forty weeks ended May 4, 1997 increased by approximately
$1,584,000 or 7%.
Cost of products sold for the forty weeks ended May 4, 1997 decreased as a
percentage of net sales from 69% in 1996 to 67% in 1997. This decrease is
attributable to higher margins due to more aggressive pricing, and higher
absorption of overhead due to the sales volume, as well as control of variable
costs.
Selling and administrative expenses for the forty weeks ended May 4, 1997
decreased approximately $30,000 as compared to the prior year. The net decrease
is attributable to the reduction in representation fees and commissions of
approximately $400,000; offset by a provision for settlement costs, including
legal fees, of approximately $260,000 in connection with a legal action, and
increased consulting services of approximately $80,000.
Other (expense) for the forty weeks ended May 4, 1997 increased
approximately $856,000 from the 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 in 1996 and an $89,000
decrease in investment income in 1997; offset by a decrease in interest expense
of $170,000, and a gain of $81,000 from the sale of a partnership interest in
M.D. SASS RE/ENTERPRISE II, L.P. in the third quarter of 1997.
PART I I - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
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. In January, 1997 the parties negotiated a settlement of all claims in
consideration for a payment of $170,000. On April 8 the Court entered an Order
with Respect to Proposed Settlement of Class Action preliminarily approving the
settlement and proposed notice and setting times for objections. A hearing is
scheduled for July 2, 1997 to determine whether the proposed settlement should
be approved and to award counsel fees and costs.
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
8
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS
10.1 1997 Stock Option Plan.
10.2 Employment Agreement between Herley Industries, Inc.
and Lee N. Blatt dated as of January 1, 1997.
10.3 Employment Agreement between Herley Industries, Inc.
and Myron Levy dated as of January 1, 1997.
10.4 Revised Non-Negotiable Promissory Note of
Lee N. Blatt dated June 2, 1997.
10.5 Revised Non-Negotiable Promissory Note of
Gerald I. Klein dated June 2, 1997.
10.6 Revised Non-Negotiable Promissory Note of
Myron Levy dated June 2, 1997.
11 Computation of per share earnings.
27 Financial Data Schedule (for electronic filing only).
(b) During the quarter for which this report is filed, the
Registrant filed the following reports under Form 8-K:
None
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: June 10, 1997
10