-----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, WWaWdSL/ZeR8knZE840n2RZ1/60ewSKytmgWybcVvE5x24+SK+RuPflO5vjbhIfk Q6eKg+gtYgA+ojw/leCmFw== 0000047035-04-000004.txt : 20040317 0000047035-04-000004.hdr.sgml : 20040317 20040317140953 ACCESSION NUMBER: 0000047035-04-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040201 FILED AS OF DATE: 20040317 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: 04675035 BUSINESS ADDRESS: STREET 1: 101 NORTH POINTE BOULEVARD CITY: LANCASTER STATE: PA ZIP: 17601-4133 BUSINESS PHONE: 7177358117 MAIL ADDRESS: STREET 1: 101 NORTH POINTE BOULEVARD CITY: LANCASTER STATE: PA ZIP: 17601-4133 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY INDUSTRIES INC DATE OF NAME CHANGE: 19831103 10-Q 1 filing10q020104.txt 10-Q FOR QUARTER ENDED FEBRUARY 1, 2004 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: February 1, 2004 ---------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-5411 HERLEY INDUSTRIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE #23-2413500 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 North Pointe Boulevard, Lancaster, Pennsylvania 17601 - --------------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (717) 735-8117 -------------- ------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of March 11, 2004 -14,112,749 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 - February 1, 2004 and August 3, 2003 2 Condensed Consolidated Statements of Income - For the Thirteen and Twenty-six weeks ended February 1, 2004 and Thirteen and Twenty-seven weeks ended February 2, 2003 3 Condensed Consolidated Statement of Shareholders' Equity- For the Twenty-six weeks ended February 1, 2004 4 Condensed Consolidated Statements of Cash Flows - For the Twenty-six weeks ended February 1, 2004 and Twenty-seven weeks ended February 2, 2003 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19 Item 4 - Controls and Procedures 19 PART II -OTHER INFORMATION Item 1 - Legal Proceedings 20 Item 4 - Submission of Matters to a Vote of Security Holders 21 Item 6 - Exhibits and Reports on Form 8K 22 Signatures 23
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands except share data) February 1, August 3, 2004 2003 ----------- --------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 78,998 $ 81,523 Accounts receivable 17,709 16,525 Costs incurred and income recognized in excess of billings on uncompleted contracts 15,479 6,960 Other receivables 1,166 827 Inventories, net of allowance of $2,789 in fiscal 2004 and $2,739 in fiscal 2003 40,008 37,545 Deferred taxes and other 3,384 3,207 -------- -------- Total Current Assets 156,744 146,587 Property, Plant and Equipment, net 23,742 22,406 Goodwill 26,448 25,729 Intangibles, net of accumulated amortization of $541 in fiscal 2004 and $403 in fiscal 2003 1,589 1,542 Available-For-Sale Securities 75 75 Other Investments 129 162 Other Assets 945 1,063 -------- -------- $ 209,672 $ 197,564 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 801 $ 686 Accounts payable and accrued expenses 14,600 14,026 Billings in excess of costs incurred and income recognized on uncompleted contracts 423 0 Income taxes payable 2,657 2,670 Reserve for contract losses 940 736 Advance payments on contracts 1,405 856 -------- -------- Total Current Liabilities 20,826 18,974 Long-term Debt 5,940 6,403 Deferred Income Taxes 4,919 4,945 -------- -------- 31,685 30,322 -------- -------- Commitments and Contingencies (Notes 5 and 6) Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 14,110,449 at February 1, 2004 and 13,969,151 at August 3, 2003 1,411 1,397 Additional paid-in capital 106,223 104,551 Retained earnings 68,965 61,478 Accumulated other comprehensive income (loss) 1,388 (184) -------- -------- Total Shareholders' Equity 177,987 167,242 -------- -------- $ 209,672 $ 197,564 ======== ========
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) Thirteen weeks ended Twenty-six Twenty-seven -------------------- weeks ended weeks ended February 1, February 2, February 1, February 2, 2004 2003 2004 2003 -------- -------- -------- -------- Net sales $ 29,408 $ 25,015 $ 57,675 $ 52,305 -------- -------- -------- -------- Cost and expenses: Cost of products sold 19,045 16,342 36,670 34,441 Selling and administrative expenses 5,198 4,232 9,978 8,617 -------- -------- -------- -------- 24,243 20,574 46,648 43,058 -------- -------- -------- -------- Operating Income 5,165 4,441 11,027 9,247 -------- -------- -------- -------- Other income (expense), net: Investment income 187 296 363 664 Interest expense (82) (82) (169) (177) Foreign exchange (loss) (70) -- (243) -- -------- -------- -------- -------- 35 214 (49) 487 -------- -------- -------- -------- Income before income taxes 5,200 4,655 10,978 9,734 Provision for income taxes 1,654 1,368 3,491 3,095 -------- -------- -------- -------- Net income $ 3,546 $ 3,287 $ 7,487 $ 6,639 ======== ======== ======== ======== Earnings per common share - Basic $ .25 $ .23 $ .53 $ .45 ======== ======== ======== ======== Basic weighted average shares 14,073 14,464 14,043 14,665 ======== ======== ======== ======== Earnings per common share - Diluted $ .24 $ .22 $ .50 $ .43 ======== ======== ======== ======== Diluted weighted average shares 14,880 15,124 14,826 15,411 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) 26 weeks ended February 1, 2004 (In thousands except share data) Accumulated Common Stock Additional Other ------------ Paid-in Retained Comprehensive Shares Amount Capital Earnings Income (Loss) Total ------ ------ ------- -------- ------------- ----- Balance at August 03, 2003 13,969,151 $ 1,397 104,551 61,478 (184) $ 167,242 Net income 7,487 7,487 Exercise of stock options 141,298 14 1,263 1,277 Tax benefit upon exercise of stock options 409 409 Other comprehensive loss: Unrealized loss on interest rate swap (54) (54) Foreign currency translation gain 1,626 1,626 ---------- -------- ------- ------ ----- --------- Balance at February 1, 2004 14,110,449 $ 1,411 106,223 68,965 1,388 $ 177,987 ========== ======== ======= ====== ===== =========
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) Twenty-six Twenty-seven weeks ended weeks ended February 1, February 2, 2004 2003 -------- -------- Cash flows from operating activities: Net income $ 7,487 $ 6,639 -------- -------- Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 1,976 1,988 Foreign exchange loss 214 -- Equity in income of limited partnership (6) (12) (Increase) in deferred tax assets -- (86) (Increase) in deferred taxes & other (177) -- Changes in operating assets and liabilities: (Increase) in accounts receivable (1,184) (3,081) (Increase) decrease in costs incurred and income recognized in excess of billings on uncompleted contracts (8,519) 292 (Increase) in other receivables (339) (342) (Increase) in inventories (2,463) (3,944) Decrease in prepaid expenses and other -- 122 Increase (decrease) in accounts payable and accrued expenses 574 (324) Increase in billings in excess of revenue 423 -- Increase (decrease) in reserve for contract losses 204 (356) Increase in advance payments on contracts 549 3,756 Increase in income taxes payable 396 -- Other, net 790 112 -------- -------- Total adjustments (7,562) (1,875) -------- -------- Net cash (used in) provided by operating activities (75) 4,764 -------- -------- Cash flows from investing activities: Acquisition of business, net of cash acquired -- (2,384) Proceeds from sale of fixed assets -- 5 Partial distribution from limited partnership 39 27 Capital expenditures (3,124) (2,338) -------- -------- Net cash used in investing activities (3,085) (4,690) -------- -------- Cash flows from financing activities: Proceeds from exercise of stock options 1,277 482 Payments of long-term debt (642) (159) Purchase of treasury stock -- (4,789) -------- -------- Net cash provided by (used in) financing activities 635 (4,466) -------- -------- Net (decrease) in cash and cash equivalents (2,525) (4,392) Cash and cash equivalents at beginning of period 81,523 86,210 -------- -------- Cash and cash equivalents at end of period $ 78,998 $ 81,818 ======== ========
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 condensed 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 condensed 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 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 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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. Adoption of this Standard did not have a material impact on the Company's financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the recognition of liabilities for guarantees that are issued or modified subsequent to December 31, 2002. The liabilities should reflect the fair value, at inception, of the guarantors' obligations to stand ready to perform, in the event that the specified triggering events or conditions occur. Adoption of this Interpretation did not have a material effect on the Company's results of operations or financial condition. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123." The new statement is effective, with respect to the transition provisions, for fiscal years ending after December 15, 2002; and with respect to the disclosure provisions, for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. SFAS No. 148 provides transition alternatives for companies adopting the fair value recognition provisions of FASB Statement No. 123 for stock-based employee compensation; and requires the pro forma disclosures of SFAS No. 123 in interim condensed financial statements for companies continuing to rely on APB Opinion No. 25 as if the provisions of SFAS No. 123 had been adopted. The statement also requires that the pro forma disclosures of the impact on earnings and earnings-per-share be provided in a tabular format and included in the Summary of Significant Accounting Policies or equivalent. The effect of the adoption of SFAS No. 148 was the inclusion of the required disclosures in the Company's condensed consolidated interim financial statements in its quarterly reports, and the addition of a significant accounting policies note included in the Company's Annual Report on Form 10K. The Company has various fixed option plans which reserve shares of common stock for issuance to executives, key employees and directors. The Company continues to use the intrinsic value method in accordance with the recognition and measurement principles of APB Opinion No. 25 and related Interpretations in accounting for these plans. Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" 6 ("SFAS 123") was issued by the FASB in 1995 and , if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. The Company has adopted the disclosure-only provisions of SFAS 123 and SFAS 148. Accordingly, no stock-based employee compensation cost has been recognized for options granted under the stock option plans. Pro forma information regarding net income and earnings per share as required by Statements 123 and 148 has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for options granted is estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. For purposes of computing pro forma (unaudited) consolidated net earnings, the following assumptions were used to calculate the fair value of each option granted for all periods presented: Expected life of options 1.51 years Volatility .68 Risk-free interest rate 2.8% Dividend yield zero Had compensation cost for stock options granted in the first six months of fiscal years 2004 and 2003 been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below using the statutory income tax rate of 34% (in thousands except per share data):
Thirteen weeks ended Twenty-six Twenty-seven -------------------- weeks ended weeks ended February 1, February 2, February 1, February 2, 2004 2003 2004 2003 ---- ---- ---- ---- Net income - as reported $ 3,546 $ 3,287 $ 7,487 $ 6,639 Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (87) (474) (293) (1,372) ----- ----- ----- ----- Net income - pro forma $ 3,459 $ 2,813 $ 7,194 $ 5,267 ===== ===== ===== ===== Earnings per share - as reported Basic $ .25 $ .23 $ .53 $ .45 Diluted .24 .22 .50 .43 Earnings per share - pro forma Basic $ .25 $ .19 $ .51 $ .36 Diluted .23 .19 .49 .34
The effects of applying the pro forma disclosures of SFAS 123 are not likely to be representative of the effects on reported net income for future years due to the various vesting schedules. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." In December 2003 this Interpretation was replaced by FASB Interpretation No. 46(R) ("FIN 46(R)"), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not 7 have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46(R) requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entity's expected losses, is entitled to receive a majority of the entity's expected residual returns, or both. FIN 46(R) is effective for entities being evaluated under FIN 46(R) for consolidation no later than the end of the first reporting period that ends after March 15, 2004. Management does not believe the adoption of FIN 46(R) will have a material impact on the Company's financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 Derivative Instruments and Hedging Activities." The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The Statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The provisions of Statement 149 that relate to Statement 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, will continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, will apply to existing contracts, as well as new contracts entered into after June 30, 2003. Management has determined that the adoption of this Statement will not have a significant impact on the financial position, results of operations or cash flows of the Company. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of this Statement did not have a significant impact on the financial position, results of operations or cash flows of the Company. 2. Inventories at February 1, 2004 and August 3, 2003 are summarized as follows (in thousands):
February 1, 2004 August 3, 2003 ---------------- -------------- Purchased parts and raw materials $ 20,397 $ 19,690 Work in process 19,744 18,646 Finished products 2,656 1,948 ------- ------- 42,797 40,284 Less reserve for excess and obsolete materials 2,789 2,739 ------- ------- $ 40,008 $ 37,545 ====== ======
3. 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 8 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 cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. 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 approximately $153,000 as of February 1, 2004. 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 February 1, 2004 as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. 4. 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 six months ended February 1, 2004 is as follows (in thousands): Balance at August 3, 2003 $ 25,729 Foreign currency translation adjustment 719 ------ Balance at February 1, 2004 $ 26,448 ====== Intangibles consist of the following (in thousands):
February 1, August 3, Estimated 2004 2003 useful life ---- ---- ----------- Technology (1) $ 1,021 $ 1,021 15 years Backlog (1) 325 325 2 years Non-compete (1) 31 31 5 years Foreign currency translation Adjustment (1) 185 - Patents 568 568 14 years ----- ----- 2,130 1,945 Accumulated amortization 541 403 ----- ----- $ 1,589 $ 1,542 ===== =====
9 --------- (1) Related to the acquisition of EWST (See Note 10.) Amortization expense for the thirteen weeks ended February 1, 2004 and February 2, 2003 was approximately $69,000 and $10,000, respectively , and for the twenty-six weeks ended February 1, 2004 and twenty-seven weeks ended February 2, 2003 was approximately $138,000 and $21,000, respectively. Estimated aggregate amortization expense for each of the next five fiscal years is as follows (in thousands): 2004 $ 277 2005 129 2006 116 2007 115 2008 109 The carrying amount of intangibles is evaluated on a recurring basis. 5. 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. In connection with the Robinson Laboratories, Inc. ("RLI") litigation, as discussed in Part II, Item 1. "Legal Proceedings", at a proceeding in April 2003 the Court decided to delay ruling on all of the petitions for fees and costs until after appeals are exhausted. In January 2004, the Second Circuit affirmed the trial court judgment in its entirety, however, RLI submitted a letter request to the trial court for relief from the judgment on RLI's claim for the earn-out stock. Herley submitted its response in opposition and on February 26, 2004, the parties appeared before the Court concerning the various applications and were directed to submit legal briefs on various legal issues. 6. The Company has outstanding an aggregate of approximately $19,000,000 in open purchase orders as of February 1, 2004. These open purchase orders represent executory contracts for the purchase of goods and services which will be substantially fulfilled in the next six months. 7. The following tables show the calculation of basic and diluted weighted-average shares outstanding (in thousands):
Thirteen weeks ended -------------------- February 1, 2004 February 2, 2003 ---------------- ---------------- Basic weighted-average shares 14,073 14,464 Effect of dilutive securities: Employee stock options and warrants 807 660 ------ ------- Diluted weighted-average shares 14,880 15,124 ====== ======
There were no anti-dilutive options outstanding during the quarter ended February 1, 2004. Options to purchase 704,500 weighted shares of common stock, with exercise prices ranging from $16.80 to $19.52, were outstanding during the second 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. 10
Twenty-six Twenty-seven weeks ended weeks ended February 1, 2004 February 2, 2003 ---------------- ---------------- Basic weighted-average shares 14,043 14,665 Effect of dilutive securities: Employee stock options and warrants 783 746 ------ ------ Diluted weighted-average shares 14,826 15,411 ====== ======
Options to purchase 637,758 weighted shares of common stock, with an exercise price of $19.52, were outstanding during the first six months of fiscal 2004, 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 May 21, 2012, were still outstanding as of February 1, 2004. Options to purchase 694,188 weighted shares of common stock, with exercise prices ranging from $17.42 to $19.52, were outstanding during the first six months 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. 8. The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended Twenty-six Twenty-seven -------------------- weeks ended weeks ended February 1, February 2, February 1, February 2, 2004 2003 2004 2003 ---- ---- ---- ---- Net income $ 3,546 $ 3,287 $ 7,487 $ 6,639 Unrealized loss on interest rate swap (19) - (54) (12) Foreign currency translation gain (loss) 1,382 (42) 1,626 (41) ----- ----- ----- ----- Comprehensive income $ 4,909 $ 3,245 $ 9,059 $ 6,586 ===== ===== ===== =====
The components of accumulated other comprehensive income (loss) is as follows (in thousands):
February 1, 2004 August 3, 2003 ---------------- -------------- Unrealized (loss) from available-for-sale securities $ (48) $ (48) Unrealized (loss) on interest rate swap (104) (50) Foreign currency translation gain 1,540 (86) ----- --- Accumulated other comprehensive income $ 1,388 $ (184) ===== ===
9. Geographic net sales for the second quarter, based on place of contract performance, were as follows (in thousands):
Thirteen weeks ended Thirteen weeks ended February 1, 2004 February 2, 2003 ---------------- ---------------- United States $ 23,495 $ 20,647 Israel 2,972 3,025 England 2,941 1,343 ------ ------ $ 29,408 $ 25,015 ====== ======
11 Geographic net sales for the six months, based on place of contract performance, were as follows (in thousands):
Twenty-six weeks ended Twenty-seven weeks ended February 1, 2004 February 2, 2003 ---------------- ---------------- United States $ 45,566 $ 43,804 Israel 6,028 5,836 England 6,081 2,665 ------ ------ $ 57,675 $ 52,305 ====== ======
Net property, plant and equipment by geographic area was as follows (in thousands): February 1, August 3, 2004 2003 ---- ---- United States $ 19,738 $ 18,945 Israel 3,108 3,071 England 896 390 ------ ------ $ 23,742 $ 22,406 ====== ====== 10. 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 of the Company. 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. 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% based on LIBOR at the date of acquisition. The note has a balance of $1,214,000 at February 1, 2004 (adjusted for foreign exchange rate fluctuations) payable in two remaining installments annually on October 1, of $607,000. 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. 11. Supplemental cash flow information is as follows (in thousands):
Twenty-six Twenty seven weeks ended weeks ended February 1, 2004 February 2, 2003 ---------------- ---------------- Cash paid during the period for: Interest $ 160 $ 180 Income taxes 3,178 2,950 Tax benefit related to stock options 409 641 Deferred purchase price of business acquired - 1,500
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 12 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 - --------------------- Thirteen weeks ended February 1, 2004 and February 2, 2003 - ---------------------------------------------------------- Net sales for the thirteen weeks ended February 1, 2004 were approximately $29,408,000 compared to $25,015,000 in the fourteen weeks ended February 2, 2003, an increase of $4,393,000 (17.6%). Net sales at EWST accounted for $1,598,000 of the increase, and defense electronics microwave systems and components increased by $3,035,000. This increase includes revenue from products shipped under certain new programs and price increases on legacy products and programs. This was offset by a decrease of $240,000 in commercial technologies, which continues to experience a drop in orders in medical and scientific products. The gross profit margin in the thirteen weeks ended February 1, 2004 was 35.2% compared to 34.7% in the second quarter of fiscal 2003. The increase in gross profit of $1,690,000 is primarily attributable to the increase in volume for the quarter, including the increased revenue at EWST as well as higher pricing on existing products. The gross profit margin increased from microwave components through production efficiencies due primarily to automation. Billings of approximately $3,000,000 relating to engineering programs with very low margins, offset these increases. These programs will now transition into production which will result in higher margins from the related products. Selling and administrative expenses for the thirteen weeks ended February 1, 2004 were 17.7% of net sales as compared to 16.9% in the second quarter of fiscal 2003. Major components of the net increase in expenses of $966,000 includes increased expenses attributable to the acquisition of EWST of $220,000 (including amortization of acquired intangibles and additional personnel); an increase in incentive compensation under employment contracts and discretionary bonuses of $287,000; and additional personnel and related costs including fringe benefits and travel, primarily in domestic and international marketing, of $473,000. Litigation costs related to the Robinson Labs litigation were $61,000 in the second quarter of fiscal 2004, as compared to $178,000 in the second quarter of fiscal 2003. (See Part II, Item 1. "Legal Proceedings"). Operating income for the quarter was $5,165,000 or 17.6% of net sales, as compared to $4,441,000 or 17.8% of net sales in 2003. The increase in operating income is primarily attributable to the overall increase in revenue for the quarter. Our foreign operations contributed $854,000 in operating income for the quarter as compared to $549,000 in fiscal 2003. The offsetting effects of the improvement in gross profit margin and the increases in selling and administrative expenses on operating income are discussed above. Investment income decreased by $109,000 in fiscal 2004 as a result of a 30% decline in the rate of interest earned on the investment of excess cash reserves during the quarter as compared to interest rates in fiscal 2003, and a decrease on average of approximately $1,300,000 in funds invested. 13 The net foreign exchange loss in the second quarter of fiscal 2004 of $70,000 is attributable to the weaker U. S. dollar during the current quarter causing the Company's foreign denominated liabilities to increase in value resulting in an unrealized foreign exchange loss of $84,000. The Company realized a net foreign exchange gain in the United Kingdom of $14,000. Twenty-six weeks ended February 1, 2004 and Twenty-seven weeks ended February 2, 2003 - ---------------- Net sales for the twenty-six weeks ended February 1, 2004 were approximately $57,675,000 compared to $52,305,000 in the first six months of fiscal 2003. The sales increase of $5,370,000 (10.3%) is attributable to increased revenue in defense electronics of $6,875,000 (including $3,416,000 attributable to the acquisition of EWST). This increase includes revenue from products shipped under certain new programs and price increases on legacy products and programs. This was offset by decreased revenue of $1,505,000 in commercial technologies which has experienced a decrease in new orders in medical and scientific products. The Company expects revenues in defense electronics to continue at a level above the prior fiscal year, and revenues from medical products to remain flat for the balance of fiscal 2004. The gross profit margin of 36.4% in the twenty-six weeks ended February 1, 2004 was higher than the margin of 34.2% in fiscal 2003. Gross profit increased $3,141,000 as a result of increased volume over fiscal 2003, including the increased revenue at EWST of $3,416,000, as well as higher pricing on existing products. Margins on foreign shipments from the U.S. are higher than similar products shipped domestically due to the pricing on smaller quantity orders. Margins also improved in microwave components due to production efficiencies, including automation. Billings of approximately $3,000,000 relating to engineering programs with very low margins, offset these increases. These programs will now transition into production which will result in higher margins from the related products. Selling and administrative expenses for the twenty-six weeks ended February 1, 2004 were 17.3% of net sales as compared to 16.5% in the first half of fiscal 2003. There was a net increase in expenses of $1,361,000 which includes expenses of EWST of $421,000, and an increase in incentive compensation under employment contracts and discretionary bonuses of $685,000; and additional personnel and related costs including fringe benefits and travel, primarily in domestic and international marketing, of $787,000. Litigation costs of $98,000 were incurred in the six months ended February 1, 2004, as compared to $828,000 in fiscal 2003, in connection with the Robinson Labs litigation. (See Part II, Item 1. "Legal Proceedings"). Operating income for the six months was $11,027,000 or 19.1% of net sales, as compared to $9,247,000 or 17.7% of net sales in 2003. The increase in operating income is primarily attributable to the overall increase in revenue for the period. Our foreign operations contributed $2,400,000 in operating income for the six months as compared to $1,241,000 in fiscal 2003. The offsetting effects of the improvement in gross profit margin and the increases in selling and administrative expenses on operating income are discussed above. Investment income decreased by $301,000 in fiscal 2004 as a result of a 39% decline in the rate of interest earned on the investment of excess cash reserves during the six months as compared to interest rates in fiscal 2003, and a decrease on average of approximately $2,900,000 in funds invested. The foreign exchange loss of $243,000 in the six months ended February 1, 2004 is attributable to the weaker U. S. dollar during the period causing the Company's foreign denominated liabilities to increase in value resulting in an unrealized foreign exchange loss of $214,000, and a net foreign exchange loss realized of $29,000, net of foreign exchange gains in the United Kingdom of $26,000. 14 Liquidity and Capital Resources - ------------------------------- As of February 1, 2004 and August 3, 2003, working capital was $135,918,000 and $127,613,000, respectively, and the ratio of current assets to current liabilities was 7.5 to 1 and 7.7 to 1, respectively. As is customary in the defense industry, inventory is partially financed by customer deposits and progress payments. The unliquidated balance of these deposits and payments was approximately $1,405,000 at February 1, 2004, and $856,000 at August 3, 2003. The net increase is attributable to advance payments received on certain foreign contracts. Net cash used in operations during the thirteen weeks ended February 1, 2004 was approximately $75,000 as compared to net cash provided by operations of $4,764,000 during the comparable period in the prior year. Significant items contributing to the sources of funds include income from operations of $9,677,000 (adjusted for depreciation, amortization, and foreign exchange losses), and an aggregate increase in various liabilities of $2,936,000. Offsetting these sources of funds are increases in costs incurred and income recognized on uncompleted contracts of $8,519,000, accounts receivable of $1,184,000, and inventory of $2,463,000. EWST contracts accounted for $4,016,000 of the increase in costs incurred and income recognized on uncompleted contracts. These contracts, which were included in the backlog of EWST at the date of acquisition, provided for minimal advanced payments and milestone payments. In accordance with Company policy on long term contracts, new contracts entered into by EWST now include provisions for advanced payments and milestone payments. The Company expects to bill approximately $5,585,000 of the balance at February 1, 2004 by the end of its current fiscal year. Net cash used in investing activities includes $3,124,000 for capital expenditures. Net cash generated from financing activities of $635,000 consists of the exercise of stock options for $1,277,000, offset by the payment of the deferred purchase price of $500,000 related to the acquisition of EWST, a payment of $42,000 on the Mortgage note, and a payment of $100,000 on the Industrial Revenue Bonds. The Company has a future commitment for $1,214,000 (adjusted for foreign exchange rate fluctuations), including interest at 1.8%, in connection with the acquisition of EWST payable in annual installments of $607,000. 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, 2005. The Company may elect to borrow up to a maximum of $5,000,000 with interest based on the Federal Funds Target Rate, as established by the Federal Open Market Committee ("FMOC") of the Federal Reserve Board, 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 1.00% and 1.10%, respectively, at February 1, 2004. 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 February 1, 2004 and August 3, 2003. Stand-by letters of credit were outstanding in the amount of approximately $12,440,000 under the credit facility at February 1, 2004. 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 $79,000,000. A significant portion of the Company's revenue for fiscal 2004 will be generated from its existing backlog of sales orders. The backlog of orders at February 1, 2004 was approximately $102,000,000. All orders included in backlog are covered by signed contracts or purchase orders. Nevertheless, contracts involving government programs may be terminated at the 15 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 $37,560,000 available under its bank credit facility, net of outstanding stand-by letters of credit of approximately $12,440,000. Future payments required on long-term debt are as follows (in thousands):
Twelve months Industrial ended Mortgage revenue Other February Total note bonds obligations -------- ----- ---- ----- ----------- 2005 $ 801 $ 89 $ 105 $ 607 2006 814 97 110 607 2007 219 104 115 - 2008 233 113 120 - 2009 246 121 125 - Thereafter 4,428 2,045 2,230 153 ----- ----- ----- ----- $ 6,741 $ 2,569 $ 2,805 $ 1,367 ===== ===== ===== =====
Other obligations include the remaining installments due in connection with the acquisition of EWST (as adjusted for foreign exchange fluctuations) of (pound)500,000 payable October 1, 2004 and 2005. The $153,000 represents the fair value of the interest rate swap as of February 1, 2004, which matures October 1, 2011 (discussed in Note 3). The Company has outstanding an aggregate of approximately $19,000,000 in open purchase orders as of February 1, 2004. These open purchase orders represent executory contracts for the purchase of goods and services which will be substantially fulfilled in the next six months. Stand-by letters of credit expire as follows (in thousands): During fiscal year Amount ---- ------ 2004 $ 6,229 2005 530 2006 2,090 2007 3,393 2008 30 2009 168 ------ $ 12,440 ====== 16 Minimum annual rentals under noncancellable operating leases are as follows (in thousands): During fiscal year Amount ---- ------ 2004 $ 1,275 2005 1,056 2006 978 2007 983 2008 958 Thereafter 1,171 ----- $ 6,421 ===== 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). Contract costs include all direct material and labor costs and those indirect costs related to contract performance. 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. Prospective losses on contracts are based upon the anticipated excess of manufacturing costs over the selling price of the units to be delivered under the contract and are recorded when first reasonably determinable. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs. Inventories are stated at lower of cost (principally first-in, first-out) or market. A valuation allowance for obsolete and slow-moving inventory is established based upon an aging of raw material components. Current requirements for raw materials are evaluated based on current backlog of orders for products in which the components are used and anticipated future orders. Under the non-amortization approach in accounting for goodwill under SFAS No. 142, goodwill is not amortized into results of operations but instead is reviewed for impairment and written down and charged to results of operations in the period in which the recorded value of goodwill is more than its fair value. An annual impairment test is performed in the fourth quarter of each fiscal year and any impairment of goodwill is charged to operations. Provisions for federal, foreign, state and local income taxes are calculated on reported financial statement pretax income based on current tax law and also include the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. New Accounting Pronouncements - ----------------------------- In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." 17 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. Adoption of this Standard did not have a material impact on the Company's financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the recognition of liabilities for guarantees that are issued or modified subsequent to December 31, 2002. The liabilities should reflect the fair value, at inception, of the guarantors' obligations to stand ready to perform, in the event that the specified triggering events or conditions occur. Adoption of this Interpretation did not have a material effect on the Company's results of operations or financial condition. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123." The new statement is effective, with respect to the transition provisions, for fiscal years ending after December 15, 2002; and with respect to the disclosure provisions, for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. SFAS No. 148 provides transition alternatives for companies adopting the fair value recognition provisions of FASB Statement No. 123 for stock-based employee compensation; and requires the pro forma disclosures of SFAS No. 123 in interim condensed financial statements for companies continuing to rely on APB Opinion No. 25 as if the provisions of SFAS No. 123 had been adopted. The statement also requires that the pro-forma disclosures of the impact on earnings and earnings-per-share be provided in a tabular format and included in the Summary of Significant Accounting Policies or equivalent. The effect of the adoption of SFAS No. 148 was the inclusion of the required disclosures in the Company's condensed consolidated interim financial statements in its quarterly reports, and the addition of a significant accounting policies note included in the Company's Annual Report on Form 10K. In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." In December 2003 this Interprtation was replaced by FASB Interpretation No. 46(R) ("FIN 46(R)"), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46(R) requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entity's expected losses, is entitled to receive a majority of the entity's expected residual returns, or both. FIN 46(R) is effective for entities being evaluated under FIN 46(R) for consolidation no later than the end of the first reporting period that ends after March 15, 2004. Management does not believe the adoption of FIN 46(R) will have a material impact on the Company's financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 Derivative Instruments and Hedging Activities." The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The Statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The provisions of Statement 149 that relate to Statement 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, will continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, will apply to existing contracts, as well as new contracts entered into after June 30, 18 2003. Management has determined that the adoption of this Statement will not have a significant impact on the financial position, results of operations or cash flows of the Company. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of this Statement did not have a significant impact on the financial position, results of operations or cash flows of the Company. Item 3: Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with changes in interest rates, and foreign currency exchange. The Company has not entered into any market risk sensitive instruments for trading purposes. 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 3 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 approximately $153,000 as of February 1, 2004. 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 February 1, 2004, as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. 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 February 1, 2004. (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 February 1, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 19 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. On February 5, 2003, the Court denied the post-trial motions filed by the parties, thus leaving the jury verdict undisturbed. At a proceeding on April 28, 2003, the Court decided to delay ruling on all of the petitions for fees and costs until after appeals are exhausted. Accordingly, by Order dated May 6, 2003, the Court denied without prejudice all of the parties' petitions. On May 12, 2003, Herley filed its appeal to the United States Court of Appeals for the Second Circuit. On May 28, 2003, RLI filed a notice of cross-appeal. Robinson did not appeal. Herley filed its brief in support of its appeal before the Second Circuit on August 22, 2003. RLI timely filed its brief in response to Herley's appeal and in support of RLI's cross-appeal. Herley timely filed a response to RLI's brief and thereafter RLI timely filed a response to Herley's brief. Oral argument was held on December 18, 2003. By Summary Order on January 26, 2004, the Second Circuit affirmed the trial court judgment in its entirety. On 20 February 4, 2004, RLI submitted a letter request to the trial court for relief from the judgment on RLI's claim for the earn-out stock under Federal Rule of Civil Procedure 60. RLI contends that it has "newly discovered evidence," first learned in August 2003, to justify its requested relief. Herley submitted its response in opposition by letter dated February 10, 2004. On February 26, 2004, the parties appeared before the Court concerning the various applications and were directed to submit legal briefs on various legal issues. Herley will submit its briefs by the end of March 2004. 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: (1) The Registrant held its Annual Meeting of Stockholders on January 15, 2004. (2) Four directors were elected at the Annual Meeting of Stockholders as follows: Class I - To serve until the Annual Meeting of Stockholders in 2006 or until their successors are chosen and qualified: Name Votes For Votes Withheld ---- --------- -------------- Lee N. Blatt 8,807,406 4,205,251 Adm. Edward K. Walker, Jr. (Ret.) 12,272,943 739,714 Class II - To serve until the Annual Meeting of Stockholders in 2004 or until their successors are chosen and qualified: Name Votes For Votes Withheld ---- --------- -------------- Dr. Edward A. Bogucz 12,272,943 739,714 Class III - To serve until the Annual Meeting of Stockholders in 2005 or until their successors are chosen and qualified: Name Votes For Votes Withheld ---- --------- -------------- Adm. Robert M. Moore (Ret.) 12,272,943 739,714 21 Item 5 - Other Information: None Item 6 - Exhibits And Reports On Form 8-K: (a) Exhibits 31.1 Certification of Myron Levy pursuant to Rule 13a-14(a). 31.2 Certification of Anello C. Garefino pursuant to Rule 13a-14(a). 32.1 Certification of Myron Levy pursuant to 18 U.S.C. Section 1350. 32.2 Certification of Anello C. Garefino pursuant to 18 U.S.C. Section 1350. (b) Reports on Form 8-K During the second quarter of fiscal 2004, the Registrant filed the following report on Form 8-K: The Company filed a report on December 11, 2003 in connection with the release of its financial results for the first quarter of fiscal year 2004 for the quarter ended November 2, 2003. 22 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: March 17, 2004 23 EX-31 3 ex31-1levy.txt MYRON LEVY CERT. 302 EXHIBIT 31.1 ------------ CERTIFICATION PURSUANT TO RULE 13a-14(a) I, Myron Levy, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Herley Industries, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the quarter ended February 1, 2004 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 17, 2004 By: /s/ Myron Levy ---------------------- Name: Myron Levy Title: Vice Chairman of the Board and Chief Executive Officer EX-31 4 ex31-2garefino.txt ANELLO C. GAREFINO CERT. 302 EXHIBIT 31.2 ------------ CERTIFICATION PURSUANT TO RULE 13a-14(a) I, Anello C. Garefino, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Herley Industries, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the quarter ended February 1, 2004 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 17, 2004 By: /s/ Anello C. Garefino -------------------------- Name: Anello C. Garefino Title: Vice President Finance and Chief Financial Officer EX-32 5 ex32-1levy.txt MYRON LEVY CERT. 906 EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of Herley Industries, Inc. (the "Company") on Form 10-Q for the quarter ended February 1, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Myron Levy, Vice Chairman of the Board and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities 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. Date: March 17, 2004 By: /s/ Myron Levy ------------------------------ Name: Myron Levy Title: Vice Chairman of the Board and Chief Executive Officer EX-32 6 ex32-2garefino.txt ANELLO C. GAREFINO CERT. 906 EXHIBIT 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of Herley Industries, Inc. (the "Company") on Form 10-Q for the quarter ended February 1, 2004, 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. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities 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. Date: March 17, 2004 By: /s/ Anello C. Garefino -------------------------- Name: Anello C. Garefino Title: Vice President Finance and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----