-----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, FnDrjUZEi98WoFjWPqq0bPjoOaxkaE4J7r3fg5P3j8ogdEyBGwNrr95KLDZQDd3z vSdAxWOldfaDGJxT2T7y2w== 0000047035-99-000008.txt : 19990317 0000047035-99-000008.hdr.sgml : 19990317 ACCESSION NUMBER: 0000047035-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990316 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: SEC FILE NUMBER: 000-05411 FILM NUMBER: 99566332 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 MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY INDUSTRIES INC DATE OF NAME CHANGE: 19831103 10-Q 1 QUARTERLY REPORT FOR QUARTER ENDED JAN. 31, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended: January 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ................ to ................... Commission File Number 0-5411 HERLEY INDUSTRIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE #23-2413500 - -------------------------------- ---------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 10 Industry Drive, Lancaster, Pennsylvania 17603 - ------------------------------------------ ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (717) 397-2777 -------------- --------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of March 9, 1999 - 5,171,878 shares of Common Stock. HERLEY INDUSTRIES, INC AND SUBSIDIARIES INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION PAGE Item 1 - Financial Statements: Consolidated Balance Sheets - January 31, 1999 and August 2, 1998 2 Consolidated Statements of Income - For the thirteen and twenty-six weeks ended January 31, 1999 and February 1, 1998 3 Consolidated Statements of Cash Flows - For the thirteen and twenty-six weeks ended January 31, 1999 and February 1, 1998 4 Notes to Consolidated Financial Statements 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 11 PART II -OTHER INFORMATION 12 Signatures 13
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31, August 2, 1999 1998 ----------- ----------- Unaudited Audited ASSETS Current Assets: Cash and cash equivalents $ 1,911,429 $ 10,689,193 Accounts receivable 9,664,790 6,193,947 Costs incurred and income recognized in excess of billings on uncompleted contracts 4,060,599 1,665,008 Other receivables 217,415 248,298 Prepaid income taxes -- 377,448 Inventories 19,178,206 15,068,618 Deferred taxes and other 3,288,056 2,194,004 ----------- ----------- Total Current Assets 38,320,495 36,436,516 Property, Plant and Equipment, net 22,691,134 12,549,343 Intangibles, net of amortization of $1,742,798 at January 31, 1999 and $1,524,393 at August 2, 1998 13,573,521 6,080,218 Available-for-sale Securities 143,330 143,330 Other Investments 896,383 849,324 Other Assets 1,412,058 1,493,798 =========== =========== $ 77,036,921 $ 57,552,529 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 1,069,829 $ 404,984 Accounts payable and accrued expenses 8,082,806 6,468,183 Income taxes payable 348,101 -- Reserve for contract losses 1,086,048 1,145,128 Advance payments on contracts 1,179,915 1,824,746 ----------- ----------- Total Current Liabilities 11,766,699 9,843,041 Long-term Debt 14,762,681 4,110,885 Deferred Income Taxes 5,999,447 3,158,353 Minority Interest 59,263 -- ----------- ----------- 32,588,090 17,112,279 ----------- ----------- Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 5,224,028 at January 31, 1999 and 5,266,159 at August 2, 1998 522,403 526,616 Additional paid-in capital 20,592,609 20,323,895 Retained earnings 23,333,819 19,589,739 ----------- ----------- Total Shareholders' Equity 44,448,831 40,440,250 =========== =========== $ 77,036,921 $ 57,552,529 =========== ===========
The accompanying notes are an integral part of these financial statements. 2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Thirteen weeks ended Twenty-six weeks ended January 31, February 1, January 31, February 1, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net sales $ 14,532,161 $ 9,051,165 $ 26,183,006 $ 19,624,470 ----------- ----------- ----------- ----------- Cost and expenses: Cost of products sold 8,920,244 4,997,814 15,691,564 11,486,429 Selling and administrative expenses 2,528,057 2,259,614 4,651,830 4,262,410 ----------- ----------- ----------- ----------- 11,448,301 7,257,428 20,343,394 15,748,839 ----------- ----------- ----------- ----------- Operating income 3,083,860 1,793,737 5,839,612 3,875,631 ----------- ----------- ----------- ----------- Other income (expense): Investment income 82,539 143,259 185,656 234,629 Interest expense (163,272) (64,607) (265,188) (201,122) ----------- ----------- ----------- ----------- (80,733) 78,652 (79,532) 33,507 ----------- ----------- ----------- ----------- Income before income taxes 3,003,127 1,872,389 5,760,080 3,909,138 Provision for income taxes 1,051,000 636,500 2,016,000 1,329,000 ----------- ----------- ----------- ----------- Net income $ 1,952,127 $ 1,235,889 $ 3,744,080 $ 2,580,138 =========== =========== =========== =========== Earnings per common share - Basic $.37 $.25 $.71 $.55 === === === === Basic weighted average shares 5,290,225 4,891,147 5,281,957 4,714,046 ========= ========= ========= ========= Earnings per common share -Diluted $.34 $.22 $.67 $.48 === === === === Diluted weighted average shares 5,696,776 5,570,434 5,614,895 5,399,922 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. 3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Twenty-six weeks ended January 31, February 1, 1999 1998 ------------ ------------ Cash flows from operating activities: Net income $ 3,744,080 $ 3,308,726 ------------ ------------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,325,890 890,891 Loss on disposal of equipment 7,841 - Equity in income of limited partnership (47,059) (65,819) Minority interest in earnings of consolidated subsidiary 1,044 - (Increase) in deferred tax assets (316,326) - Increase in deferred tax liabilities 952,425 182,207 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 652,731 (582,525) Decrease in notes receivable-officers - 2,100,913 (Increase) in costs incurred and income recognized in excess of billings on uncompleted contracts (2,395,591) - (Increase) decrease in other receivables 30,883 (159,231) Decrease in prepaid income taxes 377,448 - (Increase) decrease in inventories 1,431,491 (1,949,084) (Increase) decrease in deferred taxes and other 5,418 (170,896) (Decrease) in accounts payable and accrued expenses (1,477,930) (342,771) (Decrease) in income taxes payable (109,858) - (Decrease) in reserve for contract losses (59,080) - (Decrease) in advance payments on contracts (878,729) (166,809) Other, net 63,521 101,187 ------------ ------------ Total adjustments (435,881) (161,937) ------------ ------------ Net cash provided by operating activities 3,308,199 3,146,789 ------------ ------------ Cash flows from investing activities: Acquisition of business, net of cash acquired (20,101,475) - Proceeds from sale of equipment 1,250 - Capital expenditures (990,869) (623,638) ------------ ------------ Net cash used in investing activities (21,091,094) (623,638) ------------ ------------ Cash flows from financing activities: Net proceeds from public offering of common stock - 7,511,202 Borrowings under bank line of credit 19,400,000 1,200,000 Proceeds from exercise of stock options and warrants 398,201 99,266 Payments under lines of credit (8,900,000) (1,200,000) Payments of long-term debt (309,370) (1,059,866) Purchase of treasury stock (1,583,700) - ------------ ------------ Net cash provided by financing activities 9,005,131 6,550,602 ------------ ------------ Net (decrease) increase in cash and cash equivalents (8,777,764) 9,073,753 Cash and cash equivalents at beginning of period 10,689,193 1,194,650 ------------ ------------ Cash and cash equivalents at end of period $ 1,911,429 $ 10,268,403 ============ ============
The accompanying notes are an integral part of these financial statements. 4 Herley Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements - (Unaudited) 1. The consolidated financial statements include the accounts of Herley Industries, Inc. and its subsidiaries, all of which are wholly-owned. All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of the Company, the accompanying consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods presented. These financial statements (except for the balance sheet presented at August 2,1998) are unaudited and have not been reported on by independent public accountants. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year due to external factors which are beyond the control of the Company. 2. Inventories at January 31, 1999 and August 2,1998 are summarized as follows: January 31, 1999 August 2,1998 ---------------- ------------- Purchased parts and raw materials $ 9,498,918 $ 7,377,882 Work in process 8,585,331 7,303,533 Finished products 1,093,957 387,203 ---------- ---------- $ 19,178,206 $ 15,068,618 ========== ========== 3. In February 1999, the Company entered into a new loan agreement with a bank that provides for a revolving loan in the aggregate principal amount of $20,000,000 which may be used for general corporate purposes, including business acquisitions, and a mortgage loan in the amount of $2,915,000. The revolving credit facility requires the payment of interest only on a monthly basis and payment of the outstanding principal balance on January 31, 2001. Interest is set biweekly at 1.65% over the FOMC Target Rate (an aggregate rate of 6.4% at January 31, 1999). The credit facility also provides for the issuance of stand-by letters of credit with a fee of 1.0% per annum of the amounts outstanding under the facility. At January 31, 1999, stand-by letters of credit aggregating $1,309,438 were outstanding under this facility. The mortgage loan is for a term of ten years with monthly installments of $23,359, including interest at a fixed rate of 7.43%, based upon a twenty year amortization. The loan is secured by a mortgage on the Company's land and building at 10 Industry Drive, Lancaster, Pennsylvania. The proceeds of the mortgage loan were used to prepay the existing mortgage note having an outstanding balance of $2,890,000 plus a prepayment premium of $115,600. The prepayment premium will be treated as an extraordinary loss in the quarter ended May 2, 1999. The agreement contains various financial covenants, including, among other matters, the maintenance of working capital, tangible net worth, and restrictions on other borrowings. 4. As of January 4, 1999, the Company completed the acquisition of all of the issued and outstanding common stock of General Microwave Corp., a New York corporation, including outstanding stock options, for $18.00 per share and 966,675 three-year warrants to purchase one share of the Company's common stock, at an estimated aggregate purchase price of approximately $24,556,000. The estimated purchase price includes shares of common stock of General Microwave purchased in the open market, acquisition of the remaining shares of common stock outstanding, an estimate of the fair market value of the warrants based on the trading price of similar warrants currently on the market, and estimated transaction expenses. The warrant is exercisable at $15.60 per share of common stock of the Company and expire in January 2002. 5 The aggregate estimated purchase price is calculated as follows (in thousands, except share and per share data): 365,600 shares previously acquired in the open market $ 6,273 848,675 shares at $18.00 per share 15,276 118,000 stock options at $18.00 per share, net of exercise price 1,279 966,675 Warrants at $1.50 1,450 Estimated transaction expenses 278 ------ Estimated purchase price $ 24,556 ====== General Microwave designs, manufactures and markets microwave components and subsystems, and related electronic test and measurement equipment. The company is headquartered in Amityville, New York, and operates two other facilities, one in Billerica, Massachusetts, and one in Israel. The transaction has been accounted for under the purchase method. Accordingly, the consolidated balance sheet includes the assets and liabilities of General Microwave at January 31, 1999, and the consolidated statements of income include the results of General Microwave operations from January 4, 1999. The allocation of the purchase price will be revised when additional information concerning asset and liability valuations is obtained. Adjustments, which could be significant, will be made during the allocation period based on detailed reviews of the fair values of assets acquired and liabilities assumed and could result in a substantial change in the excess of cost over the fair value of net assets acquired. On the basis of a pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of fiscal 1998, unaudited consolidated net sales, net income, and earnings per share for the thirteen and twenty-six weeks ended February 1, 1998 would have been approximately $15,272,000, $2,170,000, and $0.39, and approximately $30,467,000, $3,452,000, and $0.64, respectively; and for the twenty-six weeks ended January 31, 1999 would have been approximately $35,496,000, $3,490,000, and $.62, respectively. The pro forma information includes adjustments for additional depreciation based on the estimated fair market value of the property, plant, and equipment acquired, and the amortization of intangibles arising from the transaction. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected at the beginning of fiscal 1998. 5. The following table shows the calculation of basic earnings per share and earnings per share assuming dilution: Thirteen weeks ended January 31, February 1, 1999 1998 ----------- ----------- Numerator: Net Income $ 1,952,127 $ 1,235,889 ========= ========= Denominator: Basic weighted-average shares 5,290,225 4,891,147 Effect of dilutive securities: Employee stock options and warrants 406,551 679,287 --------- --------- Diluted weighted-average shares 5,696,776 5,570,434 ========= ========= Earnings per common share - Basic $ .37 $ .25 === === Earnings per common share - Diluted $ .34 $ .22 === === Options and warrants to purchase 2,582,342 shares of common stock, with exercise prices ranging from $12.19 to $16.46 were outstanding during the second quarter of fiscal 1999 but were not included in the computation of diluted EPS because the exercise prices are greater than the average market price of the common shares. The options and warrants, which expire at various dates through August 14, 2008, were still outstanding as of January 31, 1999. Options and warrants to purchase 1,407,833 shares of common stock, with exercise prices ranging from $13.69 to $14.40 were outstanding during the second quarter of fiscal 1998 but were not included in the computation of diluted EPS because the exercise prices are greater than the average market price of the 6 common shares. Twenty-six weeks ended January 31, February 1, 1999 1998 ----------- ----------- Numerator: Net Income $ 3,744,080 $ 2,580,138 ========= ========= Denominator: Basic weighted-average shares 5,281,957 4,714,046 Effect of dilutive securities: Employee stock options and warrants 332,938 685,876 --------- --------- Diluted weighted-average shares 5,614,895 5,399,922 ========= ========= Earnings per common share - Basic $ .71 $ .55 === === Earnings per common share - Diluted $ .67 $ .48 === === Options and warrants to purchase 2,630,175 shares of common stock, with exercise prices ranging from $10.81 to $16.46 were outstanding during the first six months of fiscal 1999 but were not included in the computation of diluted EPS because the exercise prices are greater than the average market price of the common shares. The options and warrants, which expire at various dates through August 14, 2008, were still outstanding as of January 31, 1999. Options and warrants to purchase 1,409,667 shares of common stock, with exercise prices ranging from $13.69 to $14.40 were outstanding during the first six months of fiscal 1998 but were not included in the computation of diluted EPS because the exercise prices are greater than the average market price of the common shares. 6. Supplemental cash flow information is as follows: January 31, 1999 February 1, 1998 ---------------- ---------------- Cash paid during the period for: Interest $ 198,100 $ 196,418 Income Taxes 1,206,058 978,830 Cashless exercise of stock options 228,353 - Warrants issued for business acquired 1,450,000 - Tax benefit related to stock options 210,000 - 7 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 - -------------------------------------------------------------------------------- The statements contained in this report which are not historical fact are "forward-looking statements" that involve various important assumptions, risks, uncertainties and other factors which could cause the Company's actual results for 1999 and beyond to differ materially from those expressed in such forward-looking statements. These important factors include, without limitation, competitive factors and pricing pressures, changes in legal and regulatory requirements, technological change or difficulties, product development risks, commercialization and trade difficulties and general economic conditions, as well as other risks previously disclosed in the Company's securities filings and press releases. Results of Operations - --------------------- Thirteen weeks ended January 31, 1999 and February 1, 1998 - ---------------------------------------------------------- Net sales for the 13 weeks ended January 31, 1999 were approximately $14,532,000 compared to $9,051,000 in the second quarter of fiscal 1998. The sales increase of $5,481,000 (60.6%) is primarily attributable to increased volume in flight instrumentation products of $2,450,000 and $1,017,000 in microwave products, and revenue generated by General Microwave of $2,014,000. Gross profit margin of 38.6% for the 13 weeks ended January 31, 1999 was 6.2 percentage points lower than the second quarter in the prior year of 44.8% due to lower margins on microwave components and certain foreign contracts, as well as lower than the Company's historical margins from the General Microwave revenues Selling and administrative expenses for the 13 weeks ended January 31, 1999 are unchanged in absolute dollars as compared to the second quarter of fiscal 1998, however, as a percentage of revenue decreased from 25% in 1998 to 17.4% in 1999 primarily due to increased sales volume with no significant increase in overhead expenses. Included in 1999 are selling and administrative expenses of General Microwave of $437,000. Investment income declined $61,000 from the prior year due to a decrease in investments, the proceeds of which were used to partially fund the acquisition of General Microwave. In addition, bank borrowings of $11,400,000 used to fund the acquisition contributed to an increase in interest expense of $99,000. Twenty-six weeks ended January 31, 1999 and February 1, 1998 - ------------------------------------------------------------ Net sales for the twenty-six weeks ended January 31, 1999 were approximately $26,183,000 compared to $19,624,000 in the comparable prior year period. The sales increase of $6,559,000 (33.4%) is primarily attributable to increased volume in flight instrumentation products of $3,449,000 and $1,096,000 in microwave products, and revenue generated by General Microwave of $2,014,000. Gross profit margin for the twenty-six weeks ended January 31, 1999 was 40.1%as compared to 41.5% in fiscal 1998. The decline in margin of 1.4% is due primarily to lower margins on microwave components and certain foreign contracts. Selling and administrative expenses for the twenty-six weeks ended January 31, 1999 were $4,652,000 compared to $4,262,000 in the first six months of fiscal 1998, an increase of $390,000. The increase is primarily attributable to the General Microwave acquisition. Investment income declined $49,000 from the prior year due to a decrease in investments, the proceeds of which were used to partially fund the acquisition of General Microwave. In addition, bank borrowings of $11,400,000 8 used to fund the acquisition resulted in a net increase in interest expense of $64,000. Business Acquisition - -------------------- As of January 4, 1999, the Company completed the acquisition of all of the issued and outstanding common stock of General Microwave Corp., a New York corporation, including outstanding stock options, for $18.00 per share and 966,675 three-year warrants to purchase one share of the Company's common stock, at an estimated aggregate purchase price of approximately $24,556,000. The estimated purchase price includes shares of common stock of General Microwave purchased in the open market, acquisition of the remaining shares of common stock outstanding, an estimate of the fair market value of the warrants based on the trading price of similar warrants currently on the market, and estimated transaction expenses. The warrant is exercisable at $15.60 per share of common stock of the Company and expire in January 2002. The aggregate estimated purchase price is calculated as follows (in thousands, except share and per share data): 365,600 shares previously acquired in the open market $ 6,273 848,675 shares at $18.00 per share 15,276 118,000 stock options at $18.00 per share, net of exercise price 1,279 966,675 Warrants at $1.50 1,450 Estimated transaction expenses 278 ------ Estimated purchase price $24,556 ====== General Microwave designs, manufactures and markets microwave components and subsystems, and related electronic test and measurement equipment. The company is headquartered in Amityville, New York, and operates two other facilities, one in Billerica, Massachusetts, and one in Israel. The transaction has been accounted for under the purchase method. Accordingly, the consolidated balance sheet includes the assets and liabilities of General Microwave at January 31, 1999, and the consolidated statements of income include the results of General Microwave operations from January 4, 1999. The allocation of the purchase price will be revised when additional information concerning asset and liability valuations is obtained. Adjustments, which could be significant, will be made during the allocation period based on detailed reviews of the fair values of assets acquired and liabilities assumed and could result in a substantial change in the excess of cost over the fair value of net assets acquired. On the basis of a pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of fiscal 1998, unaudited consolidated net sales, net income, and earnings per share for the thirteen and twenty-six weeks ended February 1, 1998 would have been approximately $15,272,000, $2,170,000, and $0.39, and approximately $30,467,000, $3,452,000, and $0.64 respectively; and for the twenty-six weeks ended January 31, 1999 would have been approximately $35,496,000, $3,490,000, and $.62, respectively. The pro forma information includes adjustments for additional depreciation based on the estimated fair market value of the property, plant, and equipment acquired, and the amortization of intangibles arising from the transaction. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected at the beginning of fiscal 1998. Liquidity and Capital Resources - ------------------------------- As of January 31, 1999 and August 2, 1998, working capital was approximately $26,554,000 and $26,593,000, respectively, and the ratio of current assets to current liabilities was 3.26 to 1 and 3.70 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 $1,180,000 at January 31, 1999, and $1,825,000 at August 2, 1998. Net cash provided by operations during the period was approximately $3,308,000. 9 Net cash used in investing activities consists of the acquisition of General Microwave Corporation, in part for cash of approximately $20,101,000 as discussed above under "Business Acquisition"; and $991,000 for capital expenditures. The Company maintains a revolving credit facility with a bank for an aggregate of $20,000,000, as amended in February 1999, which expires January 31, 2001. As of January 31, 1999 and August 2, 1998, the Company had borrowings outstanding of $12,000,000 and $1,500,000, respectively. During the period ended January 31, 1999, the Company received net proceeds of approximately $398,000 from the exercise of common stock options and warrants by employees and acquired 156,400 shares of treasury stock through open market purchases at a cost of $1,469,000. The Company also acquired 25,091 shares of common stock valued at $343,053 in connection with certain "stock-for-stock" exercises of stock options by which certain employees elected to surrender "mature" shares owned in settlement of the option price, and related tax obligations of $114,700. Such exercises are treated as an exercise of a stock option and the acquisition of treasury shares by the Company. All such treasury shares have been retired. At January 31, 1999, the Company had cash and cash equivalents of approximately $1,911,000. The Company believes that presently anticipated future cash requirements will be provided by internally generated funds and existing credit facilities. The Company is currently negotiating the sale of General Microwave's property in Amityville, New York with the intentions of relocating the plant to nearby leased facilities. Proceeds from the sale would be used to reduce outstanding bank debt. Year 2000 Readiness - ------------------- The "Year 2000" problem relates to computer systems that have time and date-sensitive programs that were designed to read years beginning with "19", but may not properly recognize the year 2000. If a computer system or software application used by the Company or a third party dealing with the Company fails because of the inability of the system or application to properly read the year 2000 the results could have a material adverse effect on the Company. A substantial part of the Company's revenues are derived from firm fixed price contracts with U.S. government agencies, prime contractors or subcontractors on military or aerospace programs, and many foreign governments. If the Company is unable to perform under these contracts due to a Year 2000 problem, the customer could terminate the contract for default. While lost revenues from such an event are a concern for the Company, the greater risks are the consequential damages for which the Company could be liable for failure to perform under the contracts. Such damages could have a material adverse impact on the Company's results of operations and financial position. The most likely reason for a customer to terminate a contract for default would be due to the Company's inability to manufacture and deliver product under the contract. Breakdowns in any number of the Company's computer systems and applications could prevent the Company from being able to manufacture and ship its products. Examples are failures in the Company's manufacturing application software, computer chips embedded in engineering test equipment, lack of supply of materials from its suppliers, or lack of power, heat, or water from utilities servicing its facilities. The Company's products do not contain computer devices that require remediation to meet Year 2000 requirements. A review of the Company's status with respect to remediating its computer systems for Year 2000 compliance is presented below. For its information technology, the Company currently utilizes a Hewlett Packard HP3000-based computing environment. The HP3000 hardware is in compliance with Year 2000 requirements. The Company's financial, manufacturing, and other software applications related to the HP3000 were updated to comply with Year 2000 10 requirements during the fiscal year ended August 2, 1998 at a cost of approximately $350,000. Certain modules have been fully tested, with the remaining modules to be tested by the end of fiscal 1999. In addition, the Company utilizes a wide area network ("WAN") to connect its operating facilities to the HP3000. The WAN has been updated to comply with Year 2000 requirements. A local area network ("LAN") is used to supplement the HP3000 environment and has also been upgraded and is fully Year 2000 compliant. The financial and operational systems of General Microwave have also been reviewed and tested and are in compliance with Year 2000 requirements. The Company is also reviewing its utility systems (heat, light, phones, liquid nitrogen, etc.) for the impact of Year 2000, as well as determining the state of readiness of its material suppliers and test equipment manufacturers. The Company has mailed a questionnaire to its significant suppliers and test equipment manufacturers regarding their compliance and attempts to identify any problem areas with respect to their systems and equipment. This process will be ongoing and the Company's efforts with respect to specific problems identified, and future costs associated with them, will depend in part upon its assessment of the risk that any such problems may cause a disruption in manufacturing or other problem which the Company believes would have a material adverse impact on its operations. However, the Company cannot control the conduct of its suppliers. Therefore, there can be no guarantee that Year 2000 problems originating with a supplier will not occur. The Company has not yet developed contingency plans in the event of a Year 2000 failure caused by a supplier or third party, but would intend to do so if a specific problem is identified through the process described above. The Company has developed multiple sources for a substantial portion of its raw material requirements and, therefore, does not believe there would be a significant disruption in supply. The information set forth above identifies the key steps taken by the Company to address the Year 2000 problem. There can be no absolute assurance that third parties will convert their systems in a timely manner. The Company believes that its actions will minimize these risks and that any additional cost of Year 2000 compliance for its information and production systems will not be material to its consolidated results of operations and financial position. Item 3: Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with changes in interest rates and stock prices. The Company has not entered into any derivative financial instruments to manage the above risks and the Company has not entered into any market risk sensitive instruments for trading purposes. There have been no material changes in market risk to the Company since its fiscal year end as disclosed in the Company's Annual Report Form 10K as of August 2, 1998. 11 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS: The Company is not involved in any material legal proceedings. ITEM 2 - CHANGES IN SECURITIES: None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES: None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: (a) The Registrant held its Annual Meeting of Stockholders on January 26, 1999. (b) Three directors were elected at the Annual Meeting of Stockholders as follows: Class II - To serve until the Annual Meeting of Stockholders in 2001 or until their successors are chosen and qualified: Name Votes For Votes Withheld -------------------------- --------- -------------- Dr. Alvin M. Silver 4,285,114 6,832 John A. Thonet 4,287,247 4,699 Myron Levy 4,287,247 4,699 ITEM 5 - OTHER INFORMATION: None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K: (a) During the quarter for which this report is filed, the Registrant filed the following reports under Form 8-K: The Company filed Reports on Form 8-K on January 20, 1999 as amended by Form 8-K/A on March 4, 1999 in connection with the acquisition of General Microwave Corporation. 12 FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HERLEY INDUSTRIES, INC. ----------------------- Registrant BY: /S/ Myron Levy --------------------- Myron Levy, President BY: /S/ Anello C. Garefino --------------------------- Anello C. Garefino Principal Financial Officer DATE: March 16, 1999 13 EX-27 2 FDS--JAN-31-1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 13 WEEKS ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS AUG-1-1999 NOV-2-1998 JAN-31-1998 1,911,429 0 9,664,790 0 19,178,206 38,320,495 38,606,604 15,915,470 77,036,921 11,766,699 0 0 0 522,403 43,926,428 77,036,921 14,532,161 14,532,161 8,920,244 11,448,301 0 0 163,272 3,003,127 1,051,000 1,952,127 0 0 0 1,952,127 0.37 0.34
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