-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QiuGXXY8+80yYbfuGQJRCiePpmzZlOdsi7yicJ5bN0CRO8s6IjpmesCscEMfK7MO xvnyxfhakWT/Ef7kppASHQ== 0000047035-02-000008.txt : 20021217 0000047035-02-000008.hdr.sgml : 20021217 20021217161738 ACCESSION NUMBER: 0000047035-02-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021103 FILED AS OF DATE: 20021217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERLEY INDUSTRIES INC /NEW CENTRAL INDEX KEY: 0000047035 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 232413500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05411 FILM NUMBER: 02860374 BUSINESS ADDRESS: STREET 1: 10 INDUSTRY DR CITY: LANCASTER STATE: PA ZIP: 17603 BUSINESS PHONE: 7173972777 MAIL ADDRESS: STREET 1: 10 INDUSTRY DRIVE CITY: LANCASTER STATE: PA ZIP: 17603 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY INDUSTRIES INC DATE OF NAME CHANGE: 19831103 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 10-Q 1 filing10q110302.txt FORM 10Q FOR THE QUARTER ENDED NOVEMBER 3, 2002 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: November 3, 2002 ---------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ........ to ........ Commission File Number 0-5411 HERLEY INDUSTRIES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE #23-2413500 - ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 North Pointe Boulevard, Lancaster, Pennsylvania 17601 - --------------------------------------------------- -------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (717) 397-2777 ------------- 3061 Industry Drive, Lancaster, Pennsylvania 17603 -------------------------------------------------------------- (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 December 8, 2002 - 14,465,665 shares of Common Stock. HERLEY INDUSTRIES, INC AND SUBSIDIARIES INDEX TO FORM 10-Q PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements: Condensed Consolidated Balance Sheets - November 3, 2002 and July 28, 2002 2 Condensed Consolidated Statements of Income - For the fourteen weeks ended November 3, 2002 and thirteen weeks ended October 28, 2001 3 Condensed Consolidated Statement of Shareholders' Equity- For the fourteen weeks ended November 3, 2002 4 Condensed Consolidated Statements of Cash Flows - For the fourteen weeks ended November 3, 2002 and thirteen weeks ended October 28, 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14 Item 4 - Controls and Procedures 15 PART II -OTHER INFORMATION Item 1 - Legal Proceedings 15 Item 6 - Exhibits and Reports on Form 8K 16 Signatures 17 Certifications pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 18
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands except share data) November 3, July 28, 2002 2002 ----------- -------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 82,274 $ 86,210 Accounts receivable 18,860 14,486 Costs incurred and income recognized in excess of billings on uncompleted contracts 6,618 6,882 Other receivables 553 274 Inventories, net of allowance of $2,430 in fiscal 2003 and $2,407 in fiscal 2002 35,758 33,371 Prepaid income taxes - 382 Deferred taxes and other 2,758 2,670 ------- ------- Total Current Assets 146,821 144,275 Property, Plant and Equipment, net 22,656 22,231 Goodwill 26,338 21,665 Intangibles, net of accumulated amortization of $156 in fiscal 2003 and $145 in fiscal 2002 412 423 Available-For-Sale Securities 46 46 Other Investments 197 195 Other Assets 1,266 1,367 ------- ------- $ 197,736 $ 190,202 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 719 $ 215 Accounts payable and accrued expenses 15,776 12,857 Income taxes payable 797 - Reserve for contract losses 1,216 820 Advance payments on contracts 2,421 1,371 ------- ------- Total Current Liabilities 20,929 15,263 Long-term Debt 6,568 5,684 Deferred Income Taxes 3,897 3,897 ------- ------- 31,394 24,844 ------- ------- Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 14,534,065 at November 3, 2002 and 14,680,960 at July 28, 2002 1,453 1,468 Additional paid-in capital 114,237 116,579 Retained earnings 50,893 47,541 Accumulated other comprehensive loss (241) (230) ------- ------- Total Shareholders' Equity 166,342 165,358 ------- ------- $ 197,736 $ 190,202 ======= =======
The accompanying notes are an integral part of these financial statements. 2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands except per share data) 14 weeks ended 13 weeks ended November 3, October 28, 2002 2001 -------------- -------------- Net sales $ 27,290 $ 22,213 ------ ------ Cost and expenses: Cost of products sold 18,099 14,574 Selling and administrative expenses 3,735 3,407 Litigation costs 650 156 Plant closing costs - 406 ------ ------ 22,484 18,543 ------ ------ Income from operations 4,806 3,670 Other income (expense), net 273 79 ------ ------ Income from continuing operations before income taxes 5,079 3,749 Provision for income taxes 1,727 1,310 ------ ------ Income from continuing operations 3,352 2,439 Loss from discontinued operations - (144) ------ ------ Income before cumulative effect of change in accounting principle 3,352 2,295 Cumulative effect of adopting SFAS 142 - (4,637) ------ ------ Net income $ 3,352 $ (2,342) ====== ====== Earnings (loss) per common share - Basic Income from continuing operations $ .23 $ .23 Loss from discontinued operations - (.01) Cumulative effect of adopting SFAS 142 - (.43) --- --- Net earnings $ .23 $(.22) === === Basic weighted average shares 14,668 10,695 ====== ====== Earnings (loss) per common share - Diluted Income from continuing operations $ .22 $ .21 Loss from discontinued operations - (.01) Cumulative effect of adopting SFAS 142 - (.40) --- --- Net earnings $ .22 $(.20) === === Diluted weighted average shares 15,506 11,695 ====== ======
The accompanying notes are an integral part of these financial statements. 3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY 14 weeks ended November 3, 2002 (In thousands except share data) Accumulated Additional Other Common Stock Paid-in Retained Treasury Comprehensive Shares Amount Capital Earnings Stock Loss Total ---------- ------ ------- -------- -------- ------------- ------- Balance at July 28, 2002 14,680,960 $ 1,468 116,579 47,541 - (230) $ 165,358 Net income 3,352 3,352 Exercise of stock options 43,149 4 331 335 Tax benefit upon exercise of stock options 464 464 Purchase of 190,044 shares of treasury stock (3,156) (3,156) Retirement of treasury shares (190,044) (19) (3,137) 3,156 - Other comprehensive loss: Unrealized loss on interest rate swap (12) (12) Foreign currency translation loss 1 1 ---------- ------ ------- ------ ------- --- ------- Balance at November 3, 2002 14,534,065 $ 1,453 114,237 50,893 - (241) $ 166,342 ========== ====== ======= ====== ======= === =======
The accompanying notes are an integral part of these financial statements. 4
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) 14 weeks ended 13 weeks ended November 3, October 28, 2002 2001 -------------- -------------- Cash flows from operating activities: Income from continuing operations $ 3,352 $ 2,439 ------ ------ Adjustments to reconcile income from continuing operations to net cash provided by operations: Depreciation and amortization 968 952 Equity income of limited partnership (2) (13) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (4,374) 2,921 Decrease (increase) in costs incurred and income recognized in excess of billings on uncompleted contracts 832 (1,697) (Increase) decrease in other receivables (106) 10 (Increase) in inventories (2,035) (1,052) Decrease in prepaid income taxes 382 - (Increase) in prepaid expenses and other (31) (82) Increase (decrease) in accounts payable and accrued expenses 1,812 (306) (Decrease) in billings in excess of costs incurred and income recognized on uncompleted contracts - (52) Increase in income taxes payable 1,261 890 Increase (decrease) in reserve for contract losses 9 (20) Increase in advance payments on contracts 354 1,151 Other, net 77 (614) ------ ------- Total adjustments (853) 2,088 ------ ------ Net cash provided by continuing operations 2,499 4,527 ------ ------ Cash flows from investing activities: Investment of unexpended industrial revenue bond proceeds - (1,910) Acquisition of businesses, net of cash acquired (2,384) - Capital expenditures (1,106) (725) ------ ------ Net cash used in investing activities (3,490) (2,635) ------ ------ Cash flows from financing activities: Proceeds from industrial revenue bond financing - 3,000 Proceeds from exercise of stock options and warrants, net 335 1,600 Payments of long-term debt (124) (63) Purchase of treasury stock (3,156) - ------ ------ Net cash (used in) provided by financing activities (2,945) 4,537 ------ ------ Net cash used in discontinued operations - (855) ------ ------ Net (decrease) increase in cash and cash equivalents (3,936) 5,574 Cash and cash equivalents at beginning of period 86,210 13,041 ------ ------ Cash and cash equivalents at end of period $ 82,274 $ 18,615 ====== ======
The accompanying notes are an integral part of these financial statements. 5 Herley Industries, Inc. and Subsidiaries Notes to Condensed 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 inter-company accounts and transactions have been eliminated in consolidation. In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position and results of operations and cash flows for the periods presented. These financial statements (except for the balance sheet presented at July 28, 2002) are unaudited and have not been reported on by independent public accountants. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year due to external factors which are beyond the control of the Company. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management adopted this standard on July 29, 2002 and has determined that the adoption did not have a significant impact on the financial position, results of operations or cash flows of the Company. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement is effective for fiscal years beginning after May 15, 2002. SFAS 145 requires, among other things, eliminating reporting debt extinguishments as an extraordinary item in the income statement. Management adopted this standard on July 29, 2002 and has determined that the adoption did not have a significant impact on the financial position, results of operations or cash flows of the Company. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement is effective for fiscal years beginning after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Management does not believe the adoption of this standard will have a material impact on the Company's financial position or results of operations. 2. The Company entered into an agreement as of September 1, 2002, to acquire all of the issued and outstanding common stock of EW Simulation Technology, Limited ("EWST"), a British company of Aldershot, UK, which operates as a wholly-owned subsidiary. EWST designs, develops and produces electronic warfare simulator systems for prime defense contractors and countries worldwide. The acquisition of EW Simulation Technology was driven by a two part strategic initiative: a) to leverage the Company's microwave expertise vertically into the international threat and jamming simulator markets, and b) to increase the amount of microwave content supplied by the Company on each simulator platform. This strategy will expand international revenues from new sources and increase content to existing customers. The transaction, which closed on September 20, 2002, provides for payment of $3,000,000 in cash and a note for $1,500,000, including interest at 1.8%, payable in annual installments of $500,000. The transaction has been accounted for in accordance with the provisions of SFAS No. 141, "Business Combinations", which requires that all business combinations be accounted for using the purchase method. The consolidated financial statements reflect preliminary estimates of the fair value of the assets acquired and liabilities assumed and the related allocations of the purchase price, and preliminary 6 estimates of adjustments necessary to conform EWST data to the Company's accounting policies. The Company is currently reviewing the preliminary estimates, and the final determination of the fair value of assets acquired and liabilities assumed and final allocation of the purchase price may differ from the amounts included in the accompanying consolidated financial statements. The excess cost over the preliminary estimated fair value of net assets acquired of approximately $4,673,000 has been recorded as goodwill. 3. In September 2000, the Company acquired all of the issued and outstanding common stock of Terrasat, Inc. ("Terrasat"), a California corporation, for cash of $6,000,000, $3,000,000 of which was paid in December 2000 and $3,000,000 of which was paid in December 2001. In addition, the agreement provided for additional cash payments in the future up to $2,000,000, based on gross revenues through December 31, 2001. The targeted gross revenues under the agreement were not achieved, therefore no addition cash payments were made. In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment of long-lived assets and for long- lived assets to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for segments of a business to be disposed of, but retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. The provisions of this statement were adopted by the Company effective on July 30, 2001. In January 2002 the Board of Directors of the Company determined that Terrasat would no longer be able to generate sufficient returns to justify continued investment due to the overcapacity in the telecom industry and deteriorating economic conditions in Terrasat's primary markets. Therefore, the Company decided to discontinue the operations of Terrasat and to seek a purchaser for the business. Consequently, the accompanying consolidated financial statements reflect Terrasat as discontinued operations in accordance with SFAS No. 144. Results of operations and cash flows of Terrasat have been classified in the October 2001 financial statements as "Loss from discontinued operations", and "Net cash provided by discontinued operations", respectively. The sale of certain assets and liabilities, and the business of Terrasat was consummated on March 1, 2002, effective the close of business January 27, 2002, to certain current employees of Terrasat for cash and a note which approximates the value of the net assets held for sale as of January 27, 2002 of $878,000. Summarized below are the results of discontinued operations: Thirteen weeks ended October 28, 2001 ---------------- Net sales $ 824 --- Loss from discontinued operations (218) Income tax (benefit) (74) --- Net loss from discontinued operations $ (144) === 7 4. Inventories at November 3, 2002 and July 28, 2002 are summarized as follows (in thousands): November 3, 2002 July 28, 2002 ---------------- ------------- Purchased parts and raw materials $ 17,999 $ 18,680 Work in process 18,911 15,707 Finished products 1,278 1,391 ------ ------ 38,188 35,778 Less reserve 2,430 2,407 ------ ------ $ 35,758 $ 33,371 ====== ====== 5. The Company recognizes all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge") or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"). Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively. In October 2001, the Company entered into an interest rate swap with a bank pursuant to which it exchanged floating rate interest in connection with the East Hempfield Township Industrial Development Authority Variable Rate Demand/Fixed Rate Revenue Bonds Series 2001(the "Bonds") on a notional amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending October 1, 2011. The notional amount reduces each year in tandem with the annual installments due on the Bonds. The fixing of the interest rate for this period offsets the Company's exposure to the uncertainty of floating interest rates on the Bonds, and as such has been designated as a cash flow hedge. The hedge is deemed to be highly effective and any ineffectiveness will be recognized in interest expense in the reporting period. The fair value of the interest rate swap was a liability of $159,515 as of November 3, 2002. There was no material hedge ineffectiveness related to cash flow hedges during the period to be recognized in earnings. There was no gain or loss reclassified from accumulated other comprehensive income into earnings during the quarter ended November 3, 2002 as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. 6. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142 "Goodwill and Other Intangible Assets," which requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill will not be amortized into results of 8 operations, but instead will be reviewed for impairments, which will be charged to results of operations in the periods in which the recorded value of goodwill is more than its fair value. The provisions of this statement were adopted by the Company on July 30, 2001. The adoption of SFAS No.142 resulted in the Company's discontinuation of amortization of its goodwill as of July 30, 2001. In connection with the adoption of SFAS 142, the Company was required to assess goodwill for impairment within six months of adoption, and completed its assessment in the second quarter of fiscal 2002. The Company operates as a single integrated business and as such has one operating segment which is also the reportable segment as defined in SFAS 131. Within the operating segment, the Company has identified two components as reporting units as defined under SFAS 142, defense electronics and commercial technologies. The Company has determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of July 30, 2001. The Company determined that an impairment of goodwill in the commercial technologies unit had occurred, and accordingly, a transition adjustment in the amount of $4,637,000 was recorded as of July 30, 2001 as a cumulative effect of a change in accounting principle. There is no tax benefit associated with the adjustment since the impaired goodwill is not deductible for income tax purposes. The change in the carrying amount of goodwill for the quarter ended November 3, 2002 is as follows: Balance at July 28, 2002 $ 21,665 Goodwill acquired during period 4,673 ------- Balance at November 3, 2002 $ 26,338 ====== 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. Intangibles, consisting of patents having an estimated useful life of fourteen years, are carried at an aggregate gross amount of $568,000 with accumulated amortization at November 3, 2002 of $156,000. Amortization expense for the fourteen weeks ended November 3, 2002, and the thirteen weeks ended October 28, 2001 was approximately $11,000. Estimated annual amortization expense for each of the next five fiscal years is approximately $41,000. 7. The Company is involved in various legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. See Part II, Item 1. "Legal Proceedings". 8. The following table shows the calculation of basic and diluted weighted-average shares outstanding (in thousands except per share data): Fourteen weeks Thirteen weeks ended ended November 3, October 28, 2002 2001 -------------- -------------- Basic weighted-average shares 14,668 10,695 Effect of dilutive securities: Employee stock options and warrants 838 1,000 ------ ------ Diluted weighted-average shares 15,506 11,695 ====== ====== 9 Options to purchase 675,541 weighted shares of common stock, with exercise prices ranging from $19.03 to $19.52, were outstanding during the first quarter of fiscal 2003, but were not included in the computation of diluted EPS because the exercise price is greater than the average market price of the common stock. The options, which expire through May 21, 2012, were still outstanding as of November 3, 2002. There were no anti-dilutive options outstanding during the first quarter of fiscal 2002. 9. The components of comprehensive income for the first quarter of fiscal 2003 and 2002 are as follows: Fourteen weeks Thirteen weeks ended ended November 3, October 28, 2002 2001 -------------- -------------- Net income $ 3,352 $ (2,342) Unrealized loss on interest rate swap (12) - Foreign currency translation gain 1 - ----- ----- Comprehensive income (loss) $ 3,341 $ (2,342) ===== ===== The components of accumulated other comprehensive loss at November 3, 2002 is as follows: November 3, 2002 ---------------- Unrealized loss from available-for-sale securities $ 66 Unrealized loss on interest rate swap 109 Foreign currency translation gain 66 ---- Accumulated other comprehensive loss $ 241 === 10. Supplemental cash flow information is as follows (in thousands): Fourteen weeks Thirteen weeks ended ended November 3, October 28, 2002 2001 -------------- -------------- Cash paid during the period for: Interest $ 99 $ 61 Income taxes 65 202 Cashless exercise of stock options - 7,798 Tax benefit related to stock options 464 4,837 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Certain statements contained in this report are "forward-looking statements" that involve various important assumptions, risks, uncertainties and other factors which could cause the Company's actual results to differ materially from those expressed in such forward-looking statements. Forward-looking statements can be identified by terminology such as "may", "will", "should", "expects", "intends","anticipates","believes","estimates","predicts", "continue", or the negative of these terms or other comparable terminology. These important factors include, without limitation, a large percentage of sales are under government contracts, cost overruns under fixed price contracts, doing business in foreign markets, customer concentration, competitive factors and pricing pressures, effective integration of acquired businesses, management of future growth, recruiting and retaining qualified technical personnel, general economic conditions, as well as other risks previously disclosed in the Company's securities filings and press releases. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, performance or achievements. Further, the Company is under no duty to update any of the forward-looking statements after the date of this quarterly report to conform such statements to actual results. Results of Operations Fourteen weeks ended November 3, 2002 and thirteen weeks ended October 28, 2001 Net sales from continuing operations for the fourteen weeks ended November 3, 2002 were approximately $27,290,000 compared to $22,213,000 in the thirteen weeks ended October 28, 2002. Of the sales increase of $5,077,000 (22.9%), $1,322,000 is attributable to the acquisition of EWST. The balance relates to increased revenue in defense electronics microwave components. In addition, the first quarter of fiscal 2003 consisted of fourteen weeks as compared to thirteen in fiscal 2002. The gross profit margin of 33.7% in the fourteen weeks ended October 28, 2002 is lower than the margin of 34.4% in the first quarter of the prior year. The growth in revenue is primarily from microwave components having lower gross margins than microwave systems resulting in an overall lower margin than in fiscal 2002. The continuing investment in product development related to commercial applications also had an impact on the gross margin for the quarter. Selling and administrative expenses for the fourteen weeks ended November 3, 2002 were 13.7% of net sales as compared to 15.3% in the first quarter of fiscal 2002. The increase in expenses of $328,000 includes expenses of EWST of $147,000, an increase in incentive compensation under employment contracts of $110,000, and net increases in payroll and related costs of $50,000. Litigation costs of $650,000 in the quarter relate to the Robinson Labs trial in August 2002. (See Part II, Item 1. "Legal Proceedings"). Plant closing costs in the amount of $406,000 were accrued in the first quarter of fiscal 2002 in connection with the facilities in Nashua, NH and Anaheim, CA. As of November 3, 2002, $359,000 of costs have been paid. Investment income increased approximately $225,000 from the prior year first quarter primarily due to interest earned on the investment of cash reserves including the proceeds of approximately $64,812,000 from the sale of common stock to the public in the second quarter of fiscal 2002 , as well as proceeds from the partial liquidation of the limited partnership investment. Interest expense increased approximately $31,000 as compared to the first 11 quarter of fiscal 2002 primarily due to the $3,000,000 financing of the expansion of the Lancaster facility through industrial revenue bonds at the end of the first quarter of fiscal 2002. Liquidity and Capital Resources As of November 3, 2002 and July 28, 2002, working capital was $125,892,000 and $129,012,000, respectively, and the ratio of current assets to current liabilities was 7.0 to 1 and 9.5 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 $2,421,000 at November 3, 2002, and $1,371,000 at October 28, 2001. Net cash provided by continuing operations during the fourteen weeks ended November 3, 2002 was approximately $2,499,000 as compared to $4,527,000 during the comparable period in the prior year. Significant items contributing to the sources of funds include income from continuing operations of $4,320,000 (adjusted for depreciation and amortization), increases in accounts payable and accrued expenses of $1,812,000, and income taxes of $1,261,000. Offsetting these increases are an increase in accounts receivable of $4,374,000, and an increase in inventory of $2,035,000. Net cash used in investing activities consists of net cash paid for the acquisition of EWST of $2,384,000, and $1,106,000 for capital expenditures. Net cash used in financing activities of $2,945,000 consists primarily of the acquisition of approximately 190,000 shares of treasury stock, which has been retired, for $3,156,000 under a stock buyback program approved by the Board of Directors in October 2002 for the purchase of up to 1,000,000 shares of common stock. In June 2002, the Company entered into a new $50,000,000 Revolving Credit Loan Syndication 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, 2004. The Company may elect to borrow up to a maximum of $5,000,000 with interest based on the FOMC 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, ranging from less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal Funds Target Rate and the LIBOR rate was 1.75% and 1.74%, respectively, at November 3, 2002. There is a fee of 15 basis points per annum on the unused portion of the $45,000,000 LIBOR based portion of the credit facility payable quarterly. There were no borrowings outstanding as of November 3, 2002 and July 28, 2002. Stand-by letters of credit were outstanding in the amount of $4,857,000 under the credit facility at November 3, 2002. The Company believes that presently anticipated future cash requirements will be provided by internally generated funds, its existing unsecured credit facility, and cash balances of approximately $82,000,000. A significant portion of the Company's revenue for fiscal 2003 will be generated from its existing backlog of sales orders. The backlog of orders at November 3, 2002 was in excess of $105,000,000. All orders included in backlog are covered by signed contracts or purchase orders. Nevertheless, contracts involving government programs may be terminated at the discretion of the government. In the event of the cancellation of a significant amount of government contracts included in the Company's backlog, the Company will be required to rely more heavily on cash reserves and its existing credit facility to fund its operations. The Company is not aware of any events which are reasonably likely to result in any cancellation of its government contracts. The Company has $45,143,000 available under its bank credit facility, net of outstanding stand-by letters of credit of $4,857,000. 12 Future payments required on long-term debt are as follows (in thousands): Twelve months Industrial ended Mortgage revenue Other October Total note bonds obligations ------- ----- ---- ----- ----------- 2003 $ 719 $ 82 $ 100 $ 537 2004 707 88 105 514 2005 705 95 110 500 2006 218 103 115 - 2007 230 110 120 - Future 4,708 2,194 2,355 159 ----- ----- ----- ----- $ 7,287 $ 2,672 $ 2,905 $ 1,710 ===== ===== ===== ===== Stand-by letters of credit expire as follows: During fiscal year Amount ---- ------ 2003 $ 1,299 2004 3,168 2005 115 2006 275 ----- $ 4,857 ===== Minimum annual rentals under noncancellable operating leases are as follows (in thousands): During fiscal year Amount ---- ------ 2003 $ 1,024 2004 1,106 2005 954 2006 969 2007 948 Future 2,049 ----- $ 7,050 ===== Critical Accounting Policies Revenue under certain long-term, fixed price contracts is recognized using the percentage of completion method of accounting. Revenue recognized on these contracts is based on estimated completion to date (the total contract amount multiplied by percent of performance, based on total costs incurred in relation to total estimated cost at completion). Prospective losses on long-term contracts are based upon the anticipated excess of inventoriable manufacturing costs over the selling price of the remaining units to be delivered and are recorded when first reasonably determinable. Contract costs include all direct material and labor costs and those indirect costs related 13 to contract performance. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs. Risks and uncertainties inherent in the estimation process could affect the amounts reported in our financial statements. The key assumptions used in the estimate of costs to complete relate to labor costs and indirect costs required to complete the contract. The estimate of rates and hours as well as the application of overhead costs is reviewed on a regular basis. If our business conditions were different, or if we used different assumptions in the application of this and other accounting policies, it is likely that materially different amounts would be reported on our financial statements. New Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management adopted this standard on July 29, 2002 and has determined that the adoption did not have a significant impact on the financial position, results of operations or cash flows of the Company. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement is effective for fiscal years beginning after May 15, 2002. SFAS 145 requires, among other things, eliminating reporting debt extinguishments as an extraordinary item in the income statement. Management adopted this standard on July 29, 2002 and has determined that the adoption did not have a significant impact on the financial position, results of operations or cash flows of the Company. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement is effective for fiscal years beginning after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Management does not believe the adoption of this standard will have a material impact on the Company's financial position or results of operations. Item 3: Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with changes in interest rates. In October 2001, the Company entered into an interest rate swap with a bank pursuant to which it exchanged floating rate interest in connection with the Bonds discussed in Note 4 on a notional amount of $3,000,000 for a fixed rate of 4.07% for a 10 year period ending October 1, 2011. The notional amount reduces each year in tandem with the annual installments due on the Bonds. The fixing of the interest rate for this period offsets the Company's exposure to the uncertainty of floating interest rates on the Bonds, and as such has been designated as a cash flow hedge. The hedge is deemed to be highly effective and any ineffectiveness will be recognized in interest expense in the reporting period. The market value of the interest rate swap was immaterial to the consolidated financial statements as of April 28, 2002. There was no material hedge ineffectiveness related to cash flow hedges during the period to be recognized in earnings. There was no gain or loss reclassified from accumulated other comprehensive income into earnings during the quarter ended April 28, 2002, as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. The Company has not entered into any market risk sensitive instruments for trading purposes. 14 Item 4: Controls and Procedures Within the 90 days prior to the date of this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II - OTHER INFORMATION Item 1 - Legal Proceedings: On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson ("Robinson") filed an Amended Complaint against Herley Industries, Inc. ("Herley"). Although the Amended Complaint sets forth fifteen counts, the core allegations are (i) that Herley failed to issue 97,841 shares of common stock in connection with certain earn out requirements contained in an Asset Purchase Agreement dated February 1, 2000; (ii) that Herley breached an Employment Agreement with Robinson by terminating his employment on August 5, 2001; and (iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with Robinson. RLI and Robinson asserted (i) violations of state and federal securities laws; (ii) fraud claims; (iii) breach of contract claims; and (iv) other equitable claims arising from the above core factual allegations. On September 17, 2001, Herley filed an Answer, Affirmative Defenses and Counterclaims in this matter. In the Answer and Affirmative Defenses, Herley denied the material allegations of the Amended Complaint. Herley also filed Counterclaims against both RLI and Robinson. In these counterclaims, Herley's core allegations concern Robinson's misconduct (i) in connection with the manner he attempted to satisfy RLI's earn out requirements; (ii) misrepresentations made in connection with the Asset Purchase Agreement; (iii) wrongdoing as a Herley employee leading to his termination and (iv) post-Herley employment wrongdoing in connection with a new company known as RH Laboratories. In addition to seeking a Declaratory Judgment pursuant to 28 U.S.C. ss. 2201 et. seq., Herley also asserted claims for, among other things, fraud, breach of contract, breach of fiduciary duty, unfair competition and tortious interference with actual and prospective contractual relationships. On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August 21, 2002 in which the jury determined, among other things, that (i) Herley was not required to pay any additional stock; (ii) Herley breached the Employment Agreement with Robinson and awarded Robinson $1.5 million in damages; (iii) Herley breached the Lease Agreement with Robinson and awarded Robinson approximately $552,000 in compensatory damages; (iv) Robinson breached fiduciary duties to Herley and awarded Herley $400,000 in compensatory damages; (v) Robinson and RLI breached indemnity obligations and awarded Herley $100,000 in damages; (vi) RLI breached representations and warranties given to Herley and awarded Herley $320,000 in damages. On October 18, 2002, the Court entered a final judgment consistent with the above, and both parties filed post-trial motions. Additionally, as the prevailing party in connection with the claims asserted by RLI relating to the earn-out stock, as well as claims advanced relating to the various breaches of the Asset Purchase Agreement, Herley filed a petition for fees and costs against both RLI and Robinson on November 27, 2002 for approximately $2,000,000. RLI and Robinson also filed petitions to recover attorneys fees of approximately $240,000 for certain claims in which they contend that they were the prevailing party. Post-trial motions and petitions to recover attorneys fees are now pending with the Court. 15 The Company is involved in various other legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. Item 2 - Changes In Securities: None Item 3 - Defaults Upon Senior Securities: None Item 4 - Submission Of Matters To A Vote Of Security Holders: None Item 5 - Other Information: None Item 6 - Exhibits And Reports On Form 8-K: (a) Exhibits 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer (b) Reports on Form 8-K No reports on Form 8-K were filed during the first quarter of fiscal 2003. 16 FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HERLEY INDUSTRIES, INC. ----------------------- Registrant BY: /S/ Myron Levy ------------------------------------ Myron Levy, Chief Executive Officer BY: /S/ Anello C. Garefino ------------------------------------ Anello C. Garefino Principal Financial Officer DATE: December 17, 2002 17 CERTIFICATIONS PURSUANT TO RULE 13-A-14 OF THE SECURITIES ACT OF 1934 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION I, Myron Levy, Chief Executive Officer of Herley Industries, Inc., hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of Herley Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 17, 2002 By: /S/ Myron Levy ----------------------- Myron Levy Chief Executive Officer 18 CERTIFICATION I, Anello C. Garefino, Vice President Finance and Chief Financial Officer of Herley Industries, Inc., do hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of Herley Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 17, 2002 By: /S/ Anello C. Garefino --------------------------- Anello C. Garefino Vice President Finance and Chief Financial Officer 19 EXHIBIT 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of Herley Industries, Inc. and subsidiaries (the "Company") for the quarterly period ended November 3, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Myron Levy, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /S/ Myron Levy -------------------------- Myron Levy Chief Executive Officer Dated: December 17, 2002 This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss. 18 of the Securities Exchange Act of 1934, as amended. 20 EXHIBIT 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of Herley Industries, Inc. and subsidiaries (the "Company") for the quarterly period ended November 3, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Anello C. Garefino, Vice President Finance, and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /S/ Anello C. Garefino --------------------------- Anello C. Garefino Vice President Finance and Chief Financial Officer Dated: December 17, 2002 This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss. 18 of the Securities Exchange Act of 1934, as amended. 21 -----END PRIVACY-ENHANCED MESSAGE-----