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: October 29, 2000
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.
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(Exact name of registrant as specified in its charter)
DELAWARE #23-2413500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 Industry Drive, Lancaster, Pennsylvania 17603
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (717) 397-2777
--------------
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of December 8, 2000 - 6,985,015 shares of Common Stock.
<PAGE>
HERLEY INDUSTRIES, INC
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
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Item 1 - Financial Statements:
Consolidated Balance Sheets -
October 29, 2000 and July 30, 2000 2
Consolidated Statements of Income -
For the thirteen weeks ended
October 29, 2000 and October 31, 1999 3
Consolidated Statements of Cash Flows -
For the thirteen weeks ended
October 29, 2000 and October 31, 1999 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 10
PART II -OTHER INFORMATION 11
Signatures 12
<PAGE>
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
October 29, July 30,
2000 2000
------------ ------------
Unaudited Audited
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,559 $ 7,665
Accounts receivable 15,346 14,315
Costs incurred and income recognized in excess
of billings on uncompleted contracts 780 146
Other receivables 240 293
Inventories 26,097 23,045
Deferred taxes and other 2,733 2,795
------------ ------------
Total Current Assets 48,755 48,259
Property, Plant and Equipment, net 19,553 18,004
Intangibles, net of amortization of $3,418 at
October 29, 2000 and $3,095 at July 30, 2000 26,853 18,096
Available-For-Sale Securities 146 146
Other Investments 1,031 1,020
Other Assets 1,142 1,131
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$ 97,480 $ 86,656
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 4,160 $ 282
Accounts payable and accrued expenses 10,620 9,602
Income taxes payable 1,317 1,426
Reserve for contract losses 347 467
Advance payments on contracts 1,268 1,006
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Total Current Liabilities 17,712 12,783
Long-term Debt 5,931 2,931
Deferred Income Taxes 5,578 5,571
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29,221 21,285
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Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
6,058,119 at October 29, 2000 and 5,993,870
at July 30, 2000 606 599
Additional paid-in capital 30,659 29,808
Retained earnings 36,994 34,964
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Total Shareholders' Equity 68,259 65,371
------------ ------------
$ 97,480 $ 86,656
============ ============
</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)
(In thousands except per share data)
Thirteen weeks ended
--------------------
October 29, October 31,
2000 1999
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<S> <C> <C>
Net sales $ 18,094 $ 16,139
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Cost and expenses:
Cost of products sold 11,239 9,665
Selling and administrative expenses 3,805 3,246
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15,044 12,911
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Operating income 3,050 3,228
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Other income (expense):
Investment income 124 54
Interest expense (50) (272)
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74 (218)
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Income before income taxes 3,124 3,010
Provision for income taxes 1,094 1,054
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Net income $ 2,030 $ 1,956
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Earnings per common share - Basic $ .34 $ .40
=== ===
Basic weighted average shares 5,990 4,883
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Earnings per common share - Diluted $ .30 $ .38
=== ===
Diluted weighted average shares 6,756 5,176
===== =====
</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)
(In thousands)
Thirteen weeks ended
--------------------
October 29, October 31,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,030 $ 1,956
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Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 987 938
(Gain) loss on sale of fixed assets - (18)
Equity in income of limited partnership (11) (13)
Decrease (increase) in deferred tax assets 39 (90)
Increase in deferred tax liabilities 7 429
Changes in operating assets and liabilities:
Decrease in accounts receivable 226 280
(Increase) in costs incurred and income recognized
in excess of billings on uncompleted contracts (634) -
(Decrease) increase in other receivables 53 (2)
(Increase) in inventories (1,580) (881)
Decrease (increase) in prepaid expenses and other 23 (189)
(Decrease) increase in accounts payable and
accrued expenses (513) 1,355
(Decrease) increase in income taxes payable (109) 537
(Decrease) in reserve for contract losses (120) (172)
Increase in advance payments on contracts 262 73
Other, net (24) -
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Total adjustments (1,394) 2,247
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Net cash provided by operating activities 636 4,203
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Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (5,181) -
Proceeds from sale of fixed assets - 4,124
Capital expenditures (400) (1,116)
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Net cash (used in) provided by investing activities (5,581) 3,008
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Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 1,052 159
Payments under lines of credit - (1,000)
Payments of long-term debt (19) (151)
Purchase of treasury stock (194) (7,151)
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Net cash provided by (used in) financing activities 839 (8,143)
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Net decrease in cash and cash equivalents (4,106) (932)
Cash and cash equivalents at beginning of period 7,665 2,741
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Cash and cash equivalents at end of period $ 3,559 $ 1,809
=========== ===========
</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 July 30, 2000) 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. The Company entered into an agreement effective as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common
stock of Terrasat, Inc. ("Terrasat"), a California corporation. The
transaction provides for the payment of $6,000,000 in cash, $3,000,000
which was paid in December 2000 and $3,000,000 to be paid in December 2001,
and the assumption of approximately $1,025,000 in liabilities. In addition,
the agreement provides for additional cash payments in the future up to
$2,000,000, based on gross revenues through December 31, 2001. The
transaction has been accounted for under the purchase method. Accordingly,
the consolidated balance sheet includes the assets and liabilities of
Terrasat at October 29, 2000, and the consolidated statement of income
includes the results of Terrasat operations from October 1, 2000. Excess
cost over the fair value of net assets acquired of approximately $4,971,000
is being amortized over 20 years. The allocation of the aggregate estimated
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.
The Company entered into an agreement as of September 1, 2000 to acquire
certain assets and the business, subject to the assumption of certain
liabilities, of American Microwave Technology, Inc., ("AMT"), a California
corporation, which is being operated as a division of Herley Industries,
Inc. The transaction provided for the payment of $5,400,000 in cash, and
the assumption of approximately $1,153,000 in liabilities. In addition, the
Company entered into an exclusive license agreement for certain products
providing for a royalty of 10% on the net shipments of such products
through October 2004. The transaction has been accounted for under the
purchase method. Accordingly, the consolidated balance sheet includes the
assets and liabilities of AMT at October 29, 2000, and the consolidated
statement of income includes the results of AMT's operations from September
1, 2000. Excess cost over the fair value of net assets acquired of
approximately $4,109,000 is being amortized over 20 years. The allocation
of the aggregate 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.
5
<PAGE>
3. Inventories at October 29, 2000 and July 30, 2000 are summarized as follows
(in thousands):
October 29, 2000 July 30, 2000
---------------- -------------
Purchased parts and raw materials $ 14,415 $ 12,804
Work in process 10,698 9,358
Finished products 984 883
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$ 26,097 $ 23,045
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4. In January 2000, the Company entered into an amendment to its revolving
loan agreement with a bank that provides for a revolving unsecured loan in
the aggregate principal amount of $30,000,000 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, 2002. Interest
is set at 1.65% over the FOMC Federal Funds Target Rate based on tangible
net worth in excess of $25,000,000, or at an increment of 1.80% if tangible
net worth is less than $25,000,001. The FOMC Federal Funds Target Rate was
6.50% at October 29, 2000. There is a fee of 15 basis points per annum on
the unused portion of the credit line in excess of $20,000,000 payable
quarterly. There were no borrowings outstanding as of October 29, 2000 and
July 30, 2000. 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 October 29, 2000, stand-by letters of
credit aggregating $1,797,109 were outstanding under this facility.
The agreement contains various financial covenants, including, among other
matters, minimum tangible net worth, debt to tangible net worth, debt
service coverage, and restrictions on other borrowings.
5. The following table shows the calculation of basic earnings per share and
earnings per share assuming dilution (in thousands except per share data):
Thirteen weeks ended
--------------------
October 29, October 31,
2000 1999
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Numerator:
Net Income $ 2,030 $ 1,956
===== =====
Denominator:
Basic weighted-average shares 5,990 4,883
Effect of dilutive securities:
Employee stock options and warrants 766 293
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Diluted weighted-average shares 6,756 5,176
===== =====
Options and warrants to purchase 8,000 shares of common stock, with an
exercise price of $20.50, were outstanding during the first quarter of
fiscal 2001, but were not included in the computation of diluted EPS
because the exercise price is greater than the average market price of the
common shares. The options, which expire October 11, 2005, were still
outstanding as of October 29, 2000. Options and warrants to purchase
2,652,175 shares of common stock, with exercise prices ranging from $13.88
to $16.46, were outstanding during the first quarter of fiscal 2000 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
<PAGE>
Subsequent to the close of the quarter, approximately 946,300 of the
warrants which were called for redemption as of November 13, 2000 were
exercised at $15.60 per share of common stock resulting in proceeds of
approximately $14,762,000. The proceeds have been invested in a short term
money fund.
As of December 8, 2000, 6,985,015 shares of common stock were outstanding.
6. Supplemental cash flow information is as follows (in thousands):
October 29, October 31,
2000 1999
----------- ----------
Cash paid during the period for:
Interest $ 70 $ 268
Income Taxes 1,270 98
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 fiscal 2000 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 October 29, 2000 and October 31, 1999
Net sales for the thirteen weeks ended October 29, 2000 were approximately
$18,094,000 compared to $16,139,000 in the first quarter of fiscal 2000. The
sales increase of $1,955,000 (12.1%) is attributable to an increase in revenue
of $5,070,000 from microwave products, offset by a decrease of $3,115,000 in
flight instrumentation products revenue. Included in microwave products are
revenues of $1,065,000 attributable to businesses acquired during the first
quarter of fiscal 2001.
The gross profit margin of 37.9% in the thirteen weeks ended October 29, 2000
was lower than the margin of 40.1% in the first quarter of the prior year
primarily due to the shift in volume to microwave products as noted above , with
lower gross margins, and the investment in new product development related to
commercial wireless applications.
Selling and administrative expenses for the thirteen weeks ended October 29,
2000 increased approximately $559,000 as compared to the first quarter of fiscal
2000. Contributing to this increase were selling and administrative expenses of
$673,000 from businesses acquired.
Investment income increased approximately $70,000 from the prior year primarily
from the investment of proceeds from the exercise of warrants in May 2000.
Interest expense decreased $222,000 as compared to the first quarter of fiscal
2000 due to the repayment of bank borrowings out of the proceeds of the exercise
of the warrants. Bank borrowings outstanding at October 31, 1999 were
$11,500,000. There was no bank debt outstanding during the quarter ended October
29, 2000.
Business Acquisitions
The Company entered into an agreement effective as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common stock of
Terrasat, Inc. ("Terrasat"), a California corporation. The transaction provides
for the payment of $6,000,000 in cash, $3,000,000 which was paid in December
2000 and $3,000,000 to be paid in December 2001, and the assumption of
approximately $1,025,000 in liabilities. In addition, the agreement provides for
additional cash payments in the future up to $2,000,000, based on gross revenues
through December 31, 2001. The transaction has been accounted for under the
purchase method. Accordingly, the consolidated balance sheet includes the assets
and liabilities of Terrasat at October 29, 2000, and the consolidated statement
of income includes the results of Terrasat operations from October 1, 2000.
Excess cost over the fair value of net assets acquired of approximately
$4,971,000 is being amortized over 20 years. The allocation of the aggregate
estimated 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.
8
<PAGE>
The Company entered into an agreement, as of September 1, 2000, to acquire
certain assets and the business, subject to the assumption of certain
liabilities, of American Microwave Technology, Inc., ("AMT"), a California
corporation, which is being operated as a division of Herley Industries, Inc.
The transaction provided for the payment of $5,400,000 in cash, and the
assumption of approximately $1,153,000 in liabilities. In addition, the Company
entered into an exclusive license agreement for certain products providing for a
royalty of 10% on the net shipments of such products through October 2004. The
transaction has been accounted for under the purchase method. Accordingly, the
consolidated balance sheet includes the assets and liabilities of AMT at October
29, 2000, and the consolidated statement of income includes the results of AMT's
operations from September 1, 2000. Excess cost over the fair value of net assets
acquired of approximately $4,109,000 is being amortized over 20 years. The
allocation of the aggregate 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.
Liquidity and Capital Resources
As of October 29, 2000 and July 30, 2000, working capital was $31,043,000 and
$35,476,000, respectively, and the ratio of current assets to current
liabilities was 2.75 to 1 and 3.78 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 $1,268,000 at October 29, 2000, and $1,006,000 at July 30, 2000.
Net cash provided by operations during the period was approximately $636,000 as
compared to $4,203,000 in the prior fiscal year. Significant changes causing the
decrease from fiscal 2000 include net increases in inventories of $699,000 and
costs incurred on uncompleted contracts of $634,000, and reductions in accounts
payable and accrued expenses of $1,868,000 and income taxes payable of $646,000.
Net cash used in investing activities consists of the acquisition of AMT for net
cash of approximately $5,181,000, as discussed above under "Business
Acquisition", and $400,000 for capital expenditures.
The Company maintains a revolving credit facility with a bank for an aggregate
of $30,000,000, as amended in January 2000, which expires January 31, 2002.
There were no borrowings outstanding as of October 29, 2000 and July 30, 2000.
During the period ended October 29, 2000, the Company received proceeds of
approximately $1,052,000 from the exercise of common stock options by employees
and publicly traded warrants, and acquired 10,800 shares of treasury stock
through open market purchases at a cost of $194,000. All treasury shares have
been retired.
Subsequent to the close of the quarter, approximately 946,300 of the warrants
which were called for redemption as of November 13, 2000 were exercised at
$15.60 per share of common stock resulting in proceeds of approximately
$14,762,000. The proceeds have been invested in a short term money fund.
At October 29, 2000, the Company had cash and cash equivalents of approximately
$3,559,000.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities.
9
<PAGE>
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 July 30, 2000.
10
<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:
None
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
10.1 Asset Purchase Agreement dated as of October 12, 2000 between
Registrant and American Microwave Technology, Inc.
10.2 Common Stock Purchase Agreement dated as of December 4, 2000
between Registrant and Terrasat, Inc.
27. Financial Data Schedule (for electronic submission only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of fiscal
2000.
11
<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: December 12, 2000
12
