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.
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, August 2,
1999 1998
<S> <C> <C>
----------- -----------
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
----------- ----------- ----------- -----------
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
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Twenty-six weeks ended
January 31, February 1,
1999 1998
<S> <C> <C>
------------ ------------
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
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-1-1999
<PERIOD-START> NOV-2-1998
<PERIOD-END> JAN-31-1998
<CASH> 1,911,429
<SECURITIES> 0
<RECEIVABLES> 9,664,790
<ALLOWANCES> 0
<INVENTORY> 19,178,206
<CURRENT-ASSETS> 38,320,495
<PP&E> 38,606,604
<DEPRECIATION> 15,915,470
<TOTAL-ASSETS> 77,036,921
<CURRENT-LIABILITIES> 11,766,699
<BONDS> 0
0
0
<COMMON> 522,403
<OTHER-SE> 43,926,428
<TOTAL-LIABILITY-AND-EQUITY> 77,036,921
<SALES> 14,532,161
<TOTAL-REVENUES> 14,532,161
<CGS> 8,920,244
<TOTAL-COSTS> 11,448,301
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163,272
<INCOME-PRETAX> 3,003,127
<INCOME-TAX> 1,051,000
<INCOME-CONTINUING> 1,952,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,952,127
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.34
</TABLE>
