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: October 30, 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 (I.R.S. Employer Identification
of incorporation or organization) 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
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act [ ] Yes [ X ] No
As of December 6, 2005 - 14,473,375 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 -
October 30, 2005 and July 31, 2005 2
Consolidated Statements of Income -
For the Thirteen weeks ended October 30, 2005
and October 31, 2004 3
Consolidated Statement of Shareholders' Equity-
For the Thirteen weeks ended October 30, 2005 4
Consolidated Statements of Cash Flows -
For the Thirteen weeks ended October 30, 2005
and October 31, 2004 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
Item 4 - Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 6 - Exhibits 18
Signatures 19
Part I - Financial Information
Item 1 - Financial Statements
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
October 30, July 31,
2005 2005
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 21,165 $ 20,331
Trade accounts receivable 27,695 27,258
Costs incurred and income recognized in excess
of billings on uncompleted contracts, including claims 17,415 16,058
Other receivables 1,300 1,414
Inventories, net of allowance of $4,687 in fiscal 2006
and $4,492 in fiscal 2005 56,181 53,668
Deferred taxes and other 3,921 3,782
---------- ----------
Total Current Assets 127,677 122,511
Property, Plant and Equipment, net 30,023 29,461
Goodwill 70,880 70,831
Intangibles, net of accumulated amortization of $2,127 in
fiscal 2006 and $1,680 in fiscal 2005 20,499 20,554
Other Assets 727 744
---------- ----------
$ 249,806 $ 244,101
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 218 $ 797
Accounts payable and accrued expenses 23,988 24,477
Billings in excess of costs incurred and
income recognized on uncompleted contracts 756 538
Income taxes payable 5,225 3,760
Reserve for contract losses 420 630
Advance payments on contracts 4,111 3,966
---------- ----------
Total Current Liabilities 34,718 34,168
Long-term Debt 4,840 5,000
Other Long-term Liabilities 1,143 1,042
Deferred Income Taxes 6,261 6,254
---------- ----------
46,962 46,464
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
14,468,875 in fiscal 2006 and 14,389,625 in fiscal 2005 1,447 1,439
Additional paid-in capital 110,302 109,118
Retained earnings 89,907 85,932
Accumulated other comprehensive income 1,188 1,148
---------- ----------
Total Shareholders' Equity 202,844 197,637
---------- ----------
$ 249,806 $ 244,101
========== ==========
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
October 30, October 31,
2005 2004
------------- -------------
Net sales $ 41,938 $ 33,590
------------- -------------
Cost and expenses:
Cost of products sold 27,813 22,784
Selling and administrative expenses 8,587 5,802
------------- -------------
36,400 28,586
------------- -------------
Income from operations 5,538 5,004
------------- -------------
Other income (expense), net
Investment income 110 224
Interest expense (83) (79)
Foreign exchange gain 113 -
------------- -------------
140 145
------------- -------------
Income before income taxes 5,678 5,149
Provision for income taxes 1,703 1,596
------------- -------------
Net income $ 3,975 $ 3,553
============= =============
Earnings per common share - Basic $ .28 $ .25
============= =============
Basic weighted average shares 14,446 14,252
============= =============
Earnings per common share - Diluted $ .26 $ .24
============= =============
Diluted weighted average shares 15,240 14,936
============= =============
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Thirteen weeks ended October 30, 2005
(In thousands except share data)
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
------------- -------- --------- --------- ---------------- ---------
Balance at July 31, 2005 14,389,625 $ 1,439 109,118 85,932 1,148 $ 197,637
Exercise of stock options 79,250 8 890 898
Stock option compensation 78 78
Tax benefit upon exercise of stock
options 216 216
------------- -------- --------- --------- ----------- ---------
Subtotal 14,468,875 1,447 110,302 85,932 1,148 198,829
------------- -------- --------- --------- ----------- ---------
Net income 3,975 3,975
Other comprehensive income, net of tax:
Unrealized gain on interest rate swap 12 12
Foreign currency translation gain 28 28
---------
Comprehensive income 4,015
------------- -------- --------- --------- ----------- ---------
Balance at October 30, 2005 14,468,875 $ 1,447 110,302 89,907 1,188 $ 202,844
============= ======== ========= ========= =========== =========
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)
Thirteen weeks ended
October 30, October 31,
2005 2004
-------------- --------------
Cash flows from operating activities:
Net income $ 3,975 $ 3,553
-------------- --------------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 1,730 1,149
Stock-based compensation expense 78 -
Increase in deferred tax assets (30) -
Foreign exchange gain (31) -
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (437) 4,126
(Increase) decrease in costs incurred and income
recognized in excess of billings on
uncompleted contracts, and claims (1,357) 175
Decrease (increase) in other receivables 114 (265)
Increase in inventories (2,513) (766)
Increase in deferred taxes and other (139) (473)
Decrease in accounts payable
and accrued expenses (489) (60)
Increase (decrease) in billings in excess of
costs incurred and income recognized
on uncompleted contracts 218 (624)
Increase in income taxes payable 1,465 1,041
Decrease in accrual for contract losses (210) (327)
Increase (decrease) in advance payments on contracts 145 (231)
Other, net 123 160
-------------- --------------
Total adjustments (1,333) 3,905
-------------- --------------
Net cash provided by operating activities 2,642 7,458
-------------- --------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired - (3,753)
Acquisition of technology license (375) -
Partial distribution from limited partnership - 10
Capital expenditures (1,820) (2,044)
-------------- --------------
Net cash used in investing activities (2,195) (5,787)
-------------- --------------
Cash flows from financing activities:
Borrowings under bank line of credit 4,000 -
Proceeds from exercise of stock options 898 559
Payments of long-term debt (727) (727)
Payments under bank line of credit (4,000) -
Income tax benefit from exercise of stock options 216 200
-------------- --------------
Net cash provided by financing activities 387 32
-------------- --------------
Net increase in cash and cash equivalents 834 1,703
Cash and cash equivalents at beginning of period 20,331 66,181
-------------- --------------
Cash and cash equivalents at end of period $ 21,165 $ 67,884
============== ==============
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 2005
Annual Report on Form 10-K/A Amendment 1 for the fiscal year ended July 31,
2005, 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 financial statement presentation.
2. Acquisitions
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, plus acquisition costs of approximately $28,000. The results of
operations of RSS are included in the consolidated financial statements
from September 1, 2004. The Company operates the business as a wholly-owned
subsidiary under the name Herley-RSS, Inc. ("RSS"). RSS was acquired by
Herley in order to capitalize on its synergies with Herley's other product
lines, particularly in "over the horizon" command and control (C2) systems
for drones and targets. 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 payments of $21,473,328 in cash, plus acquisition costs accrued
of approximately $16,000, and the assumption of certain liabilities. The
results of operation of MSI are included in the consolidated financial
statements from February 1, 2005. MSI was acquired by Herley in order to
capitalize on its synergies with Herley's legacy product lines, consolidate
operations, addition of engineers and increase its capabilities in the area
of control avionics, and target control systems. 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.
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 of $24,378,330, the assumption of certain liabilities,
and a cash advance of $3,250,000 for the repayment of debt assumed. The
results of operations of ICI are included in the consolidated financial
statements from April 1, 2005. ICI was acquired by Herley in order to
capitalize on its tactical data link technology for exchange of digital
information. 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.
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 of approximately $1,463,000), based on
a review of the fair value of the assets acquired and liabilities assumed,
is as follows (in thousands):
6
Acquisition RSS MSI ICI
Effective Date September 1, 2004 February 1, 2005 April 1, 2005
--------------- ------------------ ----------------- --------------
Current assets $ 483 $1,534 $8,759
Property, plant and equipment 72 2,038 681
Other assets - 1 -
Intangible assets - 4,400 10,200
Goodwill 3,456 15,148 17,189
Current liabilities (258) (2,436) (9,860)
-------- -------- --------
Aggregate purchase price $ 3,753 $ 20,685 $ 26,969
======== ======== ========
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 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.
Prior to the acquisition of MSI, MSI had leased one of its two buildings in
Fort 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.
3. Claims on Major Contracts
Claims include amounts in excess of the original contract price (as it may
be adjusted for approved change orders) that we seek to collect from our
customers for delays, errors in specifications and designs, contract
terminations, change orders in dispute or unapproved as to both scope and
price, or other causes of unanticipated additional costs and are included
in estimated revenues when recovery of the amounts is probable and the
costs can be reasonably estimated. Claims receivable in the amount of $2.2
million at October 30, 2005 are included in costs incurred and income
recognized in excess of billings on uncompleted contracts on the
accompanying Consolidated Balance Sheets.
4. Inventories
Inventories at October 30, 2005 and July 31, 2005 are summarized as follows
(in thousands):
October 30, 2005 July 31, 2005
---------------- -------------
Purchased parts and raw materials $ 24,741 $ 23,838
Work in process 33,816 32,026
Finished products 2,311 2,296
-------- --------
60,868 58,160
Less reserve for excess and obsolete materials 4,687 4,492
-------- --------
$ 56,181 $ 53,668
======== ========
5. 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 three months ended
October 30, 2005 is as follows (in thousands):
Balance at July 31, 2005 $ 70,831
Foreign currency translation adjustment 49
--------
Balance at October 30, 2005 $ 70,880
========
7
Intangible Assets consist of the following (in thousands):
October 30, July 31, Estimated
2005 2005 useful life
----------- ---------- -----------
Trademarks (acquired with MSI and ICI) $2,800 $2,800 Indefinite
Technology (acquired with EWST and MSI) 12,421 12,421 10-15 years
Drawings 800 800 15 years
Patents 568 568 14 years
Backlog 3,125 3,125 2-5 years
Non-compete 31 31 5 years
Foreign currency translation adjustment 206 189
------- -------
19,951 19,934
Accumulated amortization 2,127 1,680
------- -------
17,824 18,254
Technology license (for millimeter wave
applications; purchased from Xytrans) 2,675 2,300 (see below)
------- -------
$20,499 $20,554
======= =======
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 the fourth quarter of fiscal 2005, Xytrans had achieved certain of the
development milestones on the missile program discussed above, and the
Company made additional contingent payments totaling $300,000. In the first
quarter of fiscal 2006, additional contingent payments totaling $375,000
were made by the Company.
The investment in this licensed technology of $2,675,000 as of October 30,
2005 is included in the accompanying Consolidated Balance Sheets 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.
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.
Amortization expense for the thirteen weeks ended October 30, 2005 and
October 31, 2004 was approximately $447,000 and $95,000, respectively.
Estimated aggregate amortization expense for each of the next five fiscal
years, is as follows (in thousands):
2006 $ 1,788
2007 1,788
2008 1,782
2009 1,782
2010 1,502
8
6. 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 three months ended October 30, 2005 (in thousands):
Thirteen weeks ended
October 30, 2005 October 31, 2004
---------------- ----------------
Balance at beginning of period $ 799 $ 580
Provision for warranty obligations 141 156
Warranty costs charged to the reserve (164) (155)
------- -------
Balance at end of period $ 776 $ 581
======- =======
7. 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".
8. Comprehensive Income
The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended
October 30, October 31,
2005 2004
----------- ------------
Net income $ 3,975 $ 3,553
Unrealized gain (loss) on interest rate swap 12 (34)
Foreign currency translation gain 28 115
-------- --------
Comprehensive income $ 4,015 $ 3,634
======== ========
The components of accumulated other comprehensive income is as follows (in
thousands):
October 30, 2005 July 31, 2005
---------------- -------------
Unrealized loss on interest rate swap $ (43) $ (55)
Foreign currency translation gain 1,231 1,203
--------- ---------
Accumulated other comprehensive income $ 1,188 $ 1,148
========= =========
9. Stock-Based Compensation
The Company has various fixed stock option plans which are described in
Note M of the Company's 2005 Annual Report on Form 10-K/A Amendment 1 that
provide for the grant of stock options to eligible employees and directors.
Effective August 1, 2005, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standard 123R ("SFAS 123R")
using the modified prospective application method. This standard requires
the Company to measure the cost of employee services received in exchange
for equity share options granted based on the grant-date fair value of the
options. The cost is recognized as compensation expense over the vesting
period of the options. Under the modified prospective application method,
compensation cost included in operating expenses in the thirteen weeks
ended October 30, 2005 is approximately $78,000 and includes: (a)
compensation cost of stock options granted prior to but not yet vested as
of August 1, 2005 (based on grant-date fair value estimated in accordance
with the provisions of SFAS 123), and (b) compensation cost for all options
granted subsequent to July 31, 2005 (based on grant-date fair value
estimated in accordance with the new provisions of SFAS 123R). Operating
income and income before taxes were reduced by approximately $78,000 for
the quarter, while net income was reduced by approximately $55,000, or less
than $0.01 per basic and diluted share.
Income tax benefits relating to the exercise of stock options during the
thirteen weeks ended October 30, 2005 and October 31, 2004 amounting to
$216,000 and $200,000, respectively, are classified as a financing cash
9
inflow in the Company's Consolidated Statements of Cash Flows. Prior to the
adoption of SFAS 123R the Company presented all income tax benefits related
to stock-based compensation as an operating cash inflow.
As of October 30, 2005, there were 3,664,780 stock options outstanding. At
October 30, 2005, the aggregate value of unvested options, as determined
using a Black-Scholes option valuation model was approximately $752,000
(net of estimated forfeitures). During the quarter ended October 30, 2005,
the Company granted 10,500 non-qualified stock options, with a fair value
of approximately $72,000 (net of estimated forfeitures), and 2,000 options
were forfeited. New option grants made after July 31, 2005, as well as
option grants issued prior to that date have been valued using a
Black-Scholes option valuation model.
Prior to adopting SFAS 123R on August 1, 2005, the Company's equity based
employee compensation expense under the various stock option plans was
accounted for under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Under the modified prospective application method, results
for prior periods have not been restated to reflect the effects on
implementing SFAS 123R. Therefore, for the thirteen weeks ended October 31,
2004, no option based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price
equal to the underlying common stock price on the date of grant. The
following table which is presented for comparative purposes, provides the
pro forma information as required by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123," and illustrates the effect on net income and earnings
per common share for the period presented as if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, "Accounting
for Stock-Based Compensation", to stock based employee compensation prior
to August 1, 2005:
Thirteen weeks ended
October 31, 2004
----------------
Net income - as reported $ 3,553
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (180)
-----------
Net income - pro forma $ 3,373
===========
Earnings per share - as reported
Basic $ .25
Diluted .24
Earnings per share - pro forma
Basic $ .24
Diluted .23
The weighted average fair value of stock options on the date of grant, and
the assumptions used to estimate the fair value of stock options issued
during the quarter ended October 30, 2005 using the Black-Scholes option
valuation model are as follows:
Thirteen weeks ended
October 30, October 31,
2005 2004
---------- ----------
Weighted average fair value of options granted $ 6.86 $ 4.00
Expected life (years) 3.66 3.69
Expected volatility .44 .44
Risk-free interest rate 4.28% 3.80%
Expected dividend yield zero zero
The expected life of options granted in the thirteen weeks ended October
30, 2005 and October 31, 2004 was based on the Company's historical share
option exercise experience using the historical expected term from vest
date. The expected volatility of the options granted is determined using
historical volatilities based on historical stock prices. The risk-free
interest rate is determined using the yield available for zero-coupon U.S.
government issues with a remaining term equal to the expected life of the
options. The Company has never paid a dividend, and as such the dividend
yield is zero.
10
The following table summarizes the non-qualified stock option activity
during the thirteen weeks ended October 30, 2005:
Weighted Aggregate
Average Intrinsic
Number Price Range Exercise Value (1)
of shares per share Price (in thousands)
--------- ------------ ---------- --------------
Outstanding July 31, 2005 3,735,530 $4.06 - 20.45 $ 14.41
Granted 10,500 18.57 18.57
Exercised (79,250) 4.31 - 19.83 11.33 $ 683
Cancelled (2,000) 19.83 19.83 40
-------------- ------------------- -------------
Outstanding October 30, 2005 3,664,780 $4.06 - 20.45 $ 14.49 11,394
Exercisable October 30, 2005 3,481,280 $ 11,394
(1) Excludes 1,578,000 vested options with an exercise price greater than the
closing stock price of $16.55 as of October 30, 2005.
Options outstanding and exercisable by price range as of October 30, 2005,
with expiration dates ranging from April 12, 2006 to May 2, 2015 are as
follows:
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------------
Weighted
Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------ ----------- ---------------- -------------- ----------- --------------
$ 4.06 - 9.30 761,580 3.8 $ 8.41 761,580 $ 8.41
9.54 - 13.10 1,115,500 5.0 11.93 1,115,500 11.93
14.25 - 17.42 46,200 4.6 16.01 46,200 16.01
17.98 - 17.98 873,000 6.8 17.98 700,000 17.98
18.39 - 20.45 868,500 5.4 19.52 858,000 19.53
--------- ---- --------- --------- ---------
$ 4.06 - 20.45 3,664,780 5.3 $ 14.49 3,481,280 $ 14.30
========= =========
As of October 30, 2005, the total future compensation cost related to
nonvested options not yet recognized in the consolidated statement of
income was approximately $977,000 ($752,000 net of estimated forfeitures)
and the weighted average period over which these options are expected to be
recognized was 2.5 years.
11
10. Earnings Per Share ("EPS")
The following table shows the components used in the calculation of basic
earnings per share and earnings per share assuming dilution (in thousands):
Thirteen weeks ended
October 30, October 31,
2005 2004
----------- -----------
Numerator:
Net Income $ 3,975 $ 3,553
========= =========
Denominator:
Basic weighted-average shares 14,446 14,252
Effect of dilutive securities:
Employee stock options 794 684
--------- ---------
Diluted weighted-average shares 15,240 14,936
========= =========
Stock options not included in computation 969 737
========= =========
The number of stock options not included in the computation of diluted EPS
relates to stock options having exercise prices ranging from $17.98 to
$20.45 which are greater than the average market price of the common shares
during the period, and therefore, are anti- dilutive. The options, which
were outstanding as of October 30, 2005, expire at various dates through
February 4, 2015.
11. Geographic Information
The Company operates as a single integrated business and as such has one
operating segment. Geographic net sales for the first quarter, based on
place of contract performance, were as follows (in thousands):
Thirteen weeks ended
October 30, October 31,
2005 2004
------------ -----------
United States $ 37,776 $ 28,696
Israel 3,111 3,034
England 1,051 1,860
-------- ---------
$ 41,938 $ 33,590
======== =========
Net property, plant and equipment by geographic area was as follows (in
thousands):
October 30, 2005 July 31, 2005
---------------- -------------
United States $ 24,711 $ 24,318
Israel 4,617 4,376
England 695 767
-------- --------
$ 30,023 $ 29,461
======== ========
12
12. Supplemental cash flow information is as follows (in thousands):
Thirteen weeks ended
October 30, 2005 October 31, 2004
---------------- ----------------
Net cash paid during the period for:
Interest $ 75 $ 79
Income taxes (112) 98
13. New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151 "Inventory Costs, an
amendment of APB No. 43, Chapter 4" ("SFAS 151.") SFAS 151 clarifies that
abnormal inventory costs such as costs of idle facilities, excess freight
and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS 151 are
effective for fiscal years beginning after June 15, 2005. Management
adopted this standard on August 1, 2005, and has determined that the
adoption of SFAS 151 did not have a material impact on the consolidated
financial position, result of operations or cash flows of the Company.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29". SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for the fiscal periods beginning after
June 15, 2005. Management adopted this standard on August 1, 2005, and has
determined that the adoption of SFAS 153 did not have a material impact on
the consolidated financial position, result of operations or cash flows of
the Company.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment," which is a revision of SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123R.") 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 SFAS
No. 95, "Statement of Cash Flows." Management adopted this standard on
August 1, 2005. See Note 9 for a discussion of the impact on the
consolidated financial position, result of operations and cash flows of the
Company upon adoption of SFAS 123R.
In March of 2005, the SEC issued Staff Accounting Bulletin No. 107
"Share-Based Payment," ("SAB 107"), which provides interpretive guidance
related to the interaction between SFAS 123R and certain SEC rules and
regulations, as well as provides the SEC staff's views regarding the
valuation of share-based payment arrangements. The Company has incorporated
SAB 107 in the implementation and adoption of SFAS 123R.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - An Interpretation of SFAS No.
143." This Interpretation provides additional guidance as to when companies
should record the fair value of a liability for a conditional asset
retirement obligation when there is uncertainty about the timing and (or)
method of settlement of the obligation. This Interpretation is effective no
later than the end of fiscal years ending after December 15, 2005. The
Company does not expect the adoption of FASB Interpretation No. 47 to have
a material impact on its consolidated financial position, results of
operations or cash flows.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections" ("SFAS 154.") SFAS 154
replaces APB Opinion No. 20 "Accounting Changes" and FASB Statement No. 3
"Reporting Accounting Changes in Interim Financial Statements." SFAS 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the
new accounting principle, unless it is impracticable to do so. SFAS 154
also provides that a correction of errors in previously issued financial
statements should be termed a "restatement." The new standard is effective
for accounting changes and correction of errors for fiscal years beginning
after December 15, 2005. The Company does not expect that the adoption of
SFAS 154 will have a material impact on its consolidated financial
position, results of operations or cash flows.
13
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this report are "forward-looking statements"
that involve various important assumptions, risks, uncertainties and other
factors which could cause the Company's actual results to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
can be identified by terminology such as "may", "will", "should" , "expects",
"intends", "anticipates", "believes", "estimates", "predicts", "continue", or
the negative of these terms or other comparable terminology. These important
factors include, without limitation, a large percentage of sales are under
government contracts, cost overruns under fixed price contracts, doing business
in foreign markets, customer concentration, competitive factors and pricing
pressures, effective integration of acquired businesses, management of future
growth, recruiting and retaining qualified technical personnel, general economic
conditions, as well as other risks previously disclosed in the Company's
securities filings and press releases. Although the Company believes that the
expectations reflected in the forward-looking statements are reasonable, it
cannot guarantee future results, performance or achievements. Further, the
Company is under no duty to update any of the forward-looking statements after
the date of this quarterly report to conform such statements to actual results.
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 October 30, 2005 and October 31, 2004
- ----------------------------------------------------------
Net sales for the thirteen weeks ended October 30, 2005 were approximately
$41,938,000, as compared to $33,590,000 in the thirteen weeks ended October 31,
2004, an increase of $8.3 million (24.9%). Our two acquisitions completed in the
third quarter of fiscal 2005, MSI and ICI, accounted for approximately $9.2
million of net sales for the quarter ended October 30, 2005. We experienced an
approximate $900,000 net decrease in net sales at our other operations. Some of
the larger changes contributing to this net decrease in Net sales included the
following:
- -- A decline of $2.2 million at our two US microwave component businesses,
principally due to (i) lower shipments at one operation attributable to
that facilities' resources being committed to a major electronic warfare
upgrade program for the US Navy, and (ii) at the second operation the
absence this year of a large contract that accounted for substantial sales
in the prior year's first quarter;
- -- A decrease of approximately $800,000 in revenues recognized by EWST, our UK
subsidiary. During the first quarter of fiscal 2005, EWST had a number of
contracts that were at a stage where comparatively higher direct costs were
being incurred. As EWST uses the percentage of completion method for
revenue recognition, these comparatively higher value/ higher direct cost
contracts last year, and the reduced direct costs in the first quarter of
fiscal 2006, accounted for the reduction in revenue recognized in the first
quarter of fiscal 2006.
offset by
- -- An increase in sales at CTI of approximately $1.2 million, most of which
was attributable to commercial telecom components; and
- -- An increase in sales at our Lancaster operation of $1.1 million, which
includes $2.2 million in revenue in connection with a claim due to customer
delays and changes in specifications and designs under a major program
offset by decreases in overall sales volume.
14
The gross profit margin in the thirteen weeks ended October 30, 2005 was 33.7%
compared to 32.2% in the first quarter of fiscal 2005, an increase of 1.5%.
Excluding the impact of our two acquisitions completed in the third quarter of
fiscal 2005 (MSI and ICI), the increase in gross profit margins would have been
less. All of the improvement in gross margin in the first quarter of fiscal 2006
is attributable to the favorable impact at our Lancaster operation of the $2.2
million of estimated costs incurred and income recognized in connection with a
claim due to customer delays and changes in specification and designs under a
major program.
Selling and administrative expenses for the thirteen weeks ended October 30,
2005 were 20.5% of net sales as compared to 17.3% in the first quarter of fiscal
2005, an increase approximately $2.8 million. Large increases during the period
included:
- -- Increases of approximately $2.3 million attributable to our two
acquisitions completed in the third quarter of fiscal 2005 (MSI and ICI);
- -- An increase of approximately $500,000 attributable to legal costs primarily
associated with a continuing investigation by the U.S. Attorneys' office in
Pennsylvania which, inter alia, involves pricing under two contracts with
the U.S. Department of Defense relating to voltage control oscillators and
a contract relating to powerheads.
Operating income for the first quarter of fiscal 2006 was $5.5 million or 13.2%
of net sales, as compared to $5.0 million or 14.9% of net sales in the prior
year. The decrease in operating income as a percentage of net sales is primarily
attributable to the 3.2% increase in selling and administrative costs as a
percentage of net sales, offset by the 1.5% improvement in gross margin
percentage (for the reasons outlined above) and by the beneficial impact of the
$8.3 million increase in revenue for the quarter. Our foreign operations
contributed $215,000 in operating income for the quarter as compared to $562,000
in the first quarter of fiscal 2005. The decline in operating income occurred at
the Company's U.K. subsidiary.
Provision for income taxes for the first quarter of fiscal 2006 was $1,703,000,
representing an effective tax rate of approximately 30%, as compared to an
effective tax rate of 31% in the prior year's first quarter (and an effective
rate of 28% for the whole of fiscal year 2005.) The comparatively lower
effective tax rate for fiscal year 2005 included the recognition of certain tax
benefits for Research & Development tax credits which were realized in fiscal
2005.
Liquidity and Capital Resources
- -------------------------------
As of October 30, 2005 and July 31, 2005, working capital was $92,959,000 and
$88,343,000, respectively, and the ratio of current assets to current
liabilities was 3.7 to 1 and 3.6 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 $4,111,000 at October 30, 2005, and
$3,966,000 at July 31, 2005.
Net cash provided by operations during the thirteen weeks ended October 30, 2005
was approximately $2,642,000 as compared to $7,458,000 during the comparable
period in the prior year. Income from operations (adjusted for depreciation,
amortization, and foreign exchange losses) was $5,674,000 in the first three
months of the current fiscal year versus $4,702,000 in the similar period in the
prior year, an increase of approximately $972,000. Significant items
contributing to the overall decrease in cash provided by operations include the
following:
1. a decrease of approximately $4.6 million in cash generated from collection
of accounts receivable during the first three months of fiscal 2006 versus
fiscal 2005. The largest impact was from a major contract at our Lancaster
facility in connection with an upgrade for US Navy aircraft. The job was
largely shipped during fiscal 2004 and early in fiscal 2005, which resulted
in increased collections of accounts receivable in the first quarter of
fiscal 2005;
2. an increase of approximately $2.5 million in the amount of cash invested in
inventories during the first quarter of fiscal 2006 attributable to the
ramping up of production on several programs transitioning from engineering
development to manufacturing, and the purchase of long lead materials as
well as quantity buys for several new contracts;
3. an increase of approximately $1.5 million in the amount of cash invested in
costs incurred and income recognized in excess of billings on uncompleted
contracts, including $2.2 million of estimated costs incurred and income
recognized in connection with a claim due to customer delays and changes in
specification and designs under a major program;
offset primarily by
an increase of approximately $800,000 in cash generated from billings in excess
of costs incurred and income recognized on uncompleted contracts during the
course of the three month period; and
15
Net cash used in investing activities includes capital expenditures of
$1,820,000 including $584,000 at the Company's CTI facility for the purchase of
equipment used for the production of millimeter wave products relating to the
Xytrans license agreement.
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 3.75% and 4.09%, respectively, at
October 30, 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 October 30, 2005 and July
31, 2005. Stand-by letters of credit were outstanding in the amount of
approximately $11,103,000 under the credit facility at October 30, 2005, and
$10,703,000 at July 31, 2005.
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 October 30, 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 2006
will be generated from our existing backlog of sales orders. The backlog of
orders at October 30, 2005 was approximately $132 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 October 30, 2005, the Company has approximately $38,897,000 available under
its bank credit facility, net of outstanding stand-by letters of credit of
approximately $11,103,000, and cash reserves of approximately $21,165,000.
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, including interest, at July 31,
2005 (in thousands):
Within 2-3 4-5 After 5
Obligations Total 1 Year Years Years Years
------------ ----- ------- ----- ----- -----
Mortgage Note $ 2,571 $ 124 $ 270 $ 308 $ 1,869
Industrial Revenue Bonds 3,811 220 442 442 2,707
EWST Note 606 606 - - -
Operating Lease Obligations 17,095 2,876 5,629 3,655 4,935
Purchase Obligations 22,038 17,739 3,106 1,063 130
------- ------- ------- ------- -------
46,121 21,565 9,447 5,468 9,641
Standby Letters of Credit 10,703 2,327 7,989 325 62
------- ------- ------- ------- -------
Total Contractual Obligations $56,824 $23,892 $17,436 $ 5,793 $ 9,703
======= ======= ======= ======= =======
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 table since July 31, 2005.
New Accounting Pronouncements
- -----------------------------
See Note 13 of Notes to Consolidated Financial Statements - (Unaudited) for the
discussion on recent accounting pronouncements.
16
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company's exposures to market risk have not changed significantly since July
31, 2005.
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
October 30, 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 October 30, 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 were that Herley (i) 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) breached an Employment Agreement with
Robinson by terminating his employment on August 5, 2001; and (iii) breached a
Stock Option Agreement dated January 31, 2000. On September 17, 2001, Herley
filed an Answer, Affirmative Defenses and Counterclaims in this matter and also
filed Counterclaims against both RLI and Robinson.
On August 5, 2002, a jury trial commenced. The original jury verdict in 2002 and
various subsequent court actions in the State of New York awarded various
damages to both parties, although these findings were subject to appeal.
On June 28, 2004, Herley filed suit against Ben Robinson and Frank Holt in New
Hampshire asserting claims for fraudulent conveyance and piercing the corporate
veil, so as to hold Robinson personally liable for the legal fees incurred by
Herley in defending RLI's claims discussed above. In response, Robinson took
steps to collect damages awarded to him under the 2002 jury verdict. On July 27,
2004, Herley paid $1,594,621 (including interest) to Ben Robinson, and this
charge was reflected in Herley's Statement of Operating Income for the period
ended July 31, 2004.
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 in one of the previous actions. 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, would be dismissed with prejudice pursuant to this agreement in
principle. Based upon this agreement in principle, the Company recorded a
provision in the third quarter of fiscal 2005 to account for this settlement,
and the settlement was paid in the fourth quarter of fiscal 2005.
The Company is involved in various other legal proceedings and claims which
arise in the ordinary course of its business. While any litigation contains an
element of uncertainty, management believes that the outcome of such litigation
will not have a material adverse effect on the Company's financial position or
results of operations.
Item 2 - Changes In Securities:
None
17
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
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.
18
FORM 10-Q
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERLEY INDUSTRIES, INC.
Registrant
By: /s/ Myron Levy
----------------------------------------------
Myron Levy, Chief Executive Officer
By: /s/ Anello C. Garefino
----------------------------------------------
Anello C. Garefino, Acting Chief Financial Officer
DATE: December 13, 2005
19