-----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, A+40Um+Fy4hvvVil4ffi1haXjgSRkf+AqOqo+Jcs/33vYeUsuxysRS7aWeZ8Hj7b F6DAUdYX5M66dvd/LEPAIw== 0000891092-02-000199.txt : 20020414 0000891092-02-000199.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891092-02-000199 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANAREN MICROWAVE INC CENTRAL INDEX KEY: 0000006314 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 160928561 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06620 FILM NUMBER: 02546177 BUSINESS ADDRESS: STREET 1: 6635 KIRKVILLE RD CITY: EAST SYRACUSE STATE: NY ZIP: 13057 BUSINESS PHONE: 3154328909 MAIL ADDRESS: STREET 1: 6635 KIRKVILLE ROAD CITY: EAST SYRACUSE STATE: NY ZIP: 13057 FORMER COMPANY: FORMER CONFORMED NAME: MICRONETICS INC DATE OF NAME CHANGE: 19721103 10-Q 1 e1303010q.txt FORM 10-Q 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 quarterly period ended December 31, 2001 |_| 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 0-6620 ------ ANAREN MICROWAVE, INC. ---------------------- (Exact name of Registrant as specified in its Charter) New York 16-0928561 -------- ---------- (State of incorporation) (I.R.S Employer Identification No.) 6635 Kirkville Road 13057 East Syracuse, New York ----- - ----------------------- (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 315-432-8909 N/A - -------------------------------------------------------------------------------- (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. Yes |X| No |_| The number of shares of Registrant's Common Stock outstanding on February 10, 2002 was 22,450,020. ANAREN MICROWAVE, INC. INDEX PART I - FINANCIAL INFORMATION Page No. ------------------------------ -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 3 December 31, 2001 (unaudited) and June 30, 2001 Consolidated Condensed Statements of Earnings 4 for the Three Months Ended December 31, 2001 and 2000 (unaudited) Consolidated Condensed Statements of Earnings 5 for the Six Months Ended December 31, 2001 and 2000 (unaudited) Consolidated Condensed Statements of Cash Flows 6 for the Six Months Ended December 31, 2001 and 2000 (unaudited) Notes to Consolidated Condensed Financial 7 Statements (unaudited) Item 2. Management's Discussion and Analysis 15 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 PART II - OTHER INFORMATION - --------------------------- Item 4. Exhibits and Reports on Form 8-K 26 2 ANAREN MICROWAVE, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheets December 31, 2001 and June 30, 2001 (Unaudited) December 31, June 30, Assets 2001 2001 ------ ------------- ------------ Current assets: Cash and cash equivalents $ 8,839,850 $ 11,748,542 Marketable debt securities 94,502,752 108,557,983 Receivables, less allowance of $173,260 and $195,000, respectively 12,265,822 11,504,168 Inventories (note 3) 19,464,235 18,566,977 Interest and other receivables 1,727,191 1,304,877 Insurance recovery receivable (note 1) 5,410,093 -- Deferred income taxes 900,420 956,759 Other current assets 1,008,033 1,762,203 ------------ ------------ Total current assets 144,118,396 154,401,509 ------------ ------------ Marketable debt securities 18,240,553 11,725,960 Property, plant and equipment, net (note 4) 25,147,406 18,805,901 Deferred income taxes -- 263,348 Patents, net of accumulated amortization of $179,678 at December 31, 2001 and $143,742 at June 30, 2001 (note 2) 395,288 448,224 Goodwill (note 2) 30,715,861 23,410,534 Other intangible assets, net of accumulated amortization of $142,556 at December 31, 2001 (note 2) 2,307,444 -- ------------ ------------ $220,924,948 $209,055,476 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt (note 7) $ 238,423 $ -- Accounts payable 6,108,513 2,985,793 Accrued expenses (note 5) 3,494,349 3,905,242 Customer advance payments 152,173 767,790 Other current liabilities (note 6) 65,000 65,000 ------------ ------------ Total current liabilities 10,058,458 7,723,825 Long term debt, less current installments (note 7) 191,716 -- Deferred income taxes 2,178,552 -- Postretirement benefit obligation 1,467,995 1,391,496 Other liabilities (note 6) 563,942 486,380 ------------ ------------ Total liabilities 14,460,663 9,601,701 ------------ ------------ Stockholders' equity: Common stock of $.01 par value Authorized 200,000,000 shares; issued 25,625,842 shares at December 31, 2001 and 25,496,238 shares at June 30, 2001 256,258 254,962 Additional paid-in capital 168,514,560 166,051,341 Unearned compensation (1,405,023) (1,723,377) Accumulated other comprehensive loss Foreign currency translation (202,444) -- Retained earnings 44,073,572 39,643,487 ------------ ------------ 211,236,923 204,226,413 Less cost of 3,060,822 treasury shares 4,772,638 4,772,638 ------------ ------------ Total stockholders' equity 206,464,285 199,453,775 ------------ ------------ $220,924,948 $209,055,476 ============ ============ See accompanying notes to consolidated condensed financial statements. 3 ANAREN MICROWAVE, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Three Months Ended December 31, 2001 and 2000 (Unaudited) Dec. 31, Dec. 31, 2001 2000 ----------- ----------- Net sales $17,244,979 $25,188,261 Cost of sales 12,777,227 15,117,855 ----------- ----------- Gross profit 4,467,752 10,070,406 ----------- ----------- Operating expenses: Marketing 1,849,196 1,731,592 Research and development 1,591,697 1,342,931 General and administrative 2,083,467 2,159,807 Fire related (note 1) 711,400 -- ----------- ----------- Total operating expenses 6,235,760 5,234,330 ----------- ----------- Operating income (loss) (1,768,008) 4,836,076 ----------- ----------- Other income, primarily interest 1,011,256 1,800,249 Interest expense (68,891) (41,820) ----------- ----------- Income (loss) before income taxes and extraordinary item (825,643) 6,594,505 Income tax expense (benefit) (474,000) 2,300,000 ----------- ----------- Income (loss) before extraordinary item (351,643) 4,294,505 ----------- ----------- Extraordinary item - gain on acquisition (note 1) 3,407,244 -- ----------- ----------- Net income $ 3,055,601 $ 4,294,505 =========== =========== Basic earnings (loss) per share: Income (loss) before extraordinary item $ (0.02) $ 0.19 Extraordinary item - gain on acquisition 0.15 0.00 ----------- ----------- Net income $ 0.13 $ 0.19 =========== =========== Diluted earnings (loss) per share: Income (loss) before extraordinary item $ (0.02) $ 0.18 Extraordinary item - gain on acquisition 0.15 0.00 ----------- ----------- Net income $ 0.13 $ 0.18 =========== =========== Shares used in computing net earnings (loss): Basic 22,336,004 22,085,318 =========== =========== Diluted 23,164,627 23,657,599 =========== =========== Dividends per share $ -- $ -- =========== =========== See accompanying notes to consolidated condensed financial statements. 4 ANAREN MICROWAVE, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Six Months Ended December 31, 2001 and 2000 (Unaudited) Dec. 31, Dec. 31, 2001 2000 ----------- ----------- Net sales $32,246,170 $47,412,235 Cost of sales 22,647,365 28,515,558 ----------- ----------- Gross profit 9,598,805 18,896,677 ----------- ----------- Operating expenses: Marketing 3,368,231 3,306,014 Research and development 2,744,363 2,461,457 General and administrative 3,842,158 4,016,945 Fire related (note 1) 711,400 -- ----------- ----------- Total operating expenses 10,666,152 9,784,416 ----------- ----------- Operating income (loss) (1,067,347) 9,112,261 ----------- ----------- Other income, primarily interest 2,292,327 3,668,917 Interest expense (85,139) (82,587) ----------- ----------- Income before income taxes and extraordinary item 1,139,841 12,698,591 Income tax expense 117,000 4,423,000 ----------- ----------- Income before extraordinary item 1,022,841 8,275,591 Extraordinary item - gain on acquisition (note 1) 3,407,244 -- ----------- ----------- Net income $ 4,430,085 $ 8,275,591 =========== =========== Basic earnings per share: Income before extraordinary item $ 0.05 $ 0.38 Extraordinary item - gain on acquisition 0.15 0.00 ----------- ----------- Net income $ 0.20 $ 0.38 =========== =========== Diluted earnings per share: Income before extraordinary item $ 0.04 $ 0.35 Extraordinary item - gain on acquisition 0.15 0.00 ----------- ----------- Net income $ 0.19 $ 0.35 ============ ============ Shares used in computing net earnings (loss): Basic 22,293,076 22,008,146 ============ ============ Diluted 23,148,911 23,642,139 ============ ============ See accompanying notes to consolidated condensed financial statements. 5 ANAREN MICROWAVE, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows Six Months Ended December 31, 2001 and 2000 (Unaudited) Cash flows from operating activities: 2001 2000 ------------ ------------ Net income $ 4,430,085 $ 8,275,591 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,806,254 1,237,188 Amortization of intangibles 178,491 764,967 Deferred income taxes (640,849) (160,541) Unearned compensation 318,354 207,081 Tax benefit from exercise of stock options 96,931 4,233,791 Gain on acquisition (note 2) (3,407,244) -- Changes in operating assets and liabilities, net of acquisition: Receivables 1,447,740 (3,089,421) Inventories 814,362 (1,410,837) Insurance receivable 5,339,020 -- Interest and other receivables (34,311) 457,268 Other current assets 807,988 (152,675) Accounts payable 1,125,087 (93,041) Accrued expenses (2,497,355) 13,141 Customer advance payments (615,617) (575,043) Other liabilities 77,562 (63,660) Postretirement benefit obligation 76,499 387 ------------ ------------ Net cash provided by operating activities 9,322,997 9,644,196 ------------ ------------ Cash flows from investing activities: Capital expenditures (6,325,529) (5,541,881) Net sale (purchase) of marketable debt securities 7,540,638 15,581,803 Purchase of businesses, net of cash acquired (12,073,362) (17,883,710) ------------ ------------ Net cash used in investing activities (10,858,253) (7,843,788) ------------ ------------ Cash flows from financing activities: Payment on long term debt (1,546,261) (407,864) Stock options exercised 375,269 2,226,536 ------------ ------------ Net cash provided by (used in) financing activities (1,170,992) 1,818,672 ------------ ------------ Effect of exchange rates (202,444) -- Net increase (decrease) in cash and cash equivalents (2,908,692) 3,619,080 Cash and cash equivalents at beginning of period 11,748,542 6,179,202 ------------ ------------ Cash and cash equivalents at end of period $ 8,839,850 $ 9,798,282 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Period For: Interest $ 85,139 $ 82,587 ============ ============ Income taxes $ 1,059,000 $ 500,000 ============ ============ See accompanying notes to consolidated condensed financial statements. 6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The consolidated condensed financial statements are unaudited (except for the balance sheet information as of June 30, 2001, which is derived from the Company's audited consolidated financial statements) and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001, as amended. The results of operations for the six months ended December 31, 2001 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2002, or any future interim period. The income tax rates utilized for interim financial statement purposes for the six months ended December 31, 2001 and 2000 are based on estimates of income and utilization of tax credits for the entire year. NOTE 1: Acquisitions On July 31, 2000, the Company acquired substantially all the net assets of Ocean Microwave Corporation (Ocean). Ocean was based in Neptune, New Jersey, and was primarily engaged in the design and manufacture of isolator and circulator components. The acquired Ocean business was conducted from the Company's subsidiary, Anaren Power Products, Inc. (APPI.) The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the results of operations of Anaren Power Products have been included in the Company's consolidated financial statements since the date of acquisition. The purchase price was $17,990,526, including cash and non-cash direct acquisition costs, which was allocated to the net assets acquired and liabilities assumed based upon respective fair market values. The fair market values of plant and equipment were determined by an independent valuation which also validated the non-existence of any identifiable intangible assets. The excess consideration over such fair values is recorded as goodwill. The allocation of the purchase price to the assets acquired and liabilities assumed follows: Accounts receivable $ 1,488,092 Inventories 1,197,728 Plant and equipment 269,390 Other assets 42,485 Accounts payable (2,531,384) Accrued expenses (184,389) Notes payable (407,864) Goodwill 17,316,468 ----------- $17,990,526 =========== During the fourth quarter of fiscal 2001, Anaren consolidated the operations of APPI into its Syracuse, New York facility. On August 31, 2001 the Company acquired all of the outstanding stock of Amitron, Inc. (Amitron). Amitron is based in North Andover, Massachusetts, and is primarily engaged in the manufacture of precision thick film ceramic components and circuits for the medical, 7 telecommunications, and defense electronics markets. Amitron's technology is very complimentary to the Company's multi-layer stripline technology. Whereas the Company's multi-layer stripline technology is well suited for large scale and high power applications, Amitron's technology is well suited for miniaturization and low power applications. The Company believes that Amitron's technology will enable it to significantly increase its current addressable markets. The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the results of operations of Amitron have been included in the Company's consolidated financial statements since the date of acquisition. The aggregate purchase consideration for Amitron was $11,693,256, consisting of cash of $9,919,664 (including cash direct acquisition costs), non-cash direct acquisition costs in the form of stock options for services of $18,183 and 95,704 shares of the Company's common stock with an aggregate value of $1,755,409. The purchase price was allocated to the net assets acquired and liabilities assumed based upon respective fair market values. The fair market values of plant and equipment and identifiable intangible assets were determined by an independent valuation. The identifiable intangible assets aggregating $2,450,000 with a weighted-average useful life of approximately seven years include customer base of $1,350,000 (six-year weighted-average useful life), favorable lease of $600,000 (ten-year weighted-average useful life), trade name of $320,000 (three-year weighted-average useful life), and non-competition agreements of $180,000 (five-year weighted-average useful life). The excess consideration over such fair values is recorded as goodwill and was assigned to the Company's Wireless segment. The allocation of the purchase consideration to the assets acquired and liabilities assumed follows: Cash $ 12,844 Accounts receivable 1,309,618 Other receivables 2,258 Inventories 1,081,360 Plant and equipment 1,822,230 Other assets 36,818 Accounts payable (228,751) Accrued expenses (430,448) Loans payable (716,154) Net deferred tax liability (951,846) Intangible assets 2,450,000 Goodwill 7,305,327 ----------- $11,693,256 =========== On October 1, 2001, the Company, through its wholly owned subsidiary Anaren Microwave Europe B.V., acquired all of the outstanding stock of The 5M Company Europe B.V. (5M). 5M, based in Almelo, Netherlands is a manufacturer of microwave circuits. 5M's manufacturing technology is very similar to the Company's multi-layer stripline technology. In addition, 5M has a unique metal backing technology that offers performance and cost advantages for high power applications. The Company believes that this acquisition will enable it to reduce its manufacturing costs in Europe, increase its dollar content in high powered applications and provide European customers with a higher level of vendor security with a second manufacturing facility. 5M has recently completed the rebuilding of its factory due to a fire that occurred in July 2001. The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the results of operations of 5M have been included in the Company's consolidated financial statements since the date of acquisition. 8 The purchase consideration for 5M was $3,869,823 in cash, including direct acquisition costs, and Company stock options with an aggregate fair value of $218,724. The fair values of 5M's assets acquired and liabilities assumed exceeded the purchase consideration and such negative goodwill served to reduce the fair value of purchased equipment to zero with the remaining excess recognized as an extraordinary gain. The preliminary allocation of the purchase consideration to the assets acquired, liabilities assumed, and extraordinary gain follows: Cash $ 1,703,281 Accounts receivable 899,776 Insurance receivable 10,749,113 Other receivables 385,745 Inventories 630,260 Accounts payable (1,768,882) Accrued expenses (1,656,014) Notes payable (856,978) Long term debt (403,268) Net deferred tax liability (2,187,242) Extraordinary gain (3,407,244) ----------- $ 4,088,547 =========== The 5M fire loss in July 2001 was subject to property, casualty and business interruption insurance. As of December 31, 2001, the Company settled the insurance claim and an insurance receivable aggregating $10,749,113 is reflected in the allocation of the 5M purchase price as of October 1, 2001. During the three months ended December 31, 2001, 5M recognized incremental outsourcing costs aggregating $659,575 in cost of sales, and fire related cleaning and remediation expenses of $711,400 in operating expenses. The following unaudited pro forma financial information presents the combined results of operations of the Company, Ocean, Amitron and 5M as if the acquisitions had taken place as of July 1, 2000. The pro forma information includes certain adjustments, including insurance recovery accounting, the amortization of goodwill and intangibles, reduction of interest expense and certain other adjustments, together with the related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company, Ocean, Amitron and 5M constituted a single entity during such periods. Three Months Ended Six Months Ended -------------------------- ------------------------- December 31 December 31 December 31 December 31 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net sales $17,244,979 30,927,631 34,578,482 58,881,281 Insurance recoveries 14,126,694 -- 15,999,972 -- Net income 9,838,474 4,560,841 9,871,285 7,958,562 Earnings per share: Basic .44 .21 .44 .36 Diluted .42 .19 .43 .34 For purposes of the pro forma financial information, the July 2001 5M fire loss insurance recoveries have been reflected in operations versus the recognition as a pre-acquisition contingency in the purchase price allocation as previously discussed. The pro forma information reflects insurance recoveries of $14,126,694 and $15,999,972 for the three and six months ended December 31, 2001, respectively. 9 The pro forma information reflects no goodwill amortization for the three and six months ended December 31, 2001 due to the adoption of FASB 142, "Goodwill and Intangible Assets", by the Company. The pro forma information does reflect goodwill amortization aggregating $411,461 and $855,282 for the three months and six months ended December 31, 2000, respectively, related to acquisitions which occurred prior to the adoption of FASB 142. Note 2: Adoption of Accounting Standards Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 141, "Business Combinations" (FASB 141) and Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" (FASB 142). FASB 141, which supercedes APB Opinion 16 and FASB Statement No. 38, requires all business combinations be accounted for using the purchase method. SFAS 142, which supercedes APB Opinion No. 17, eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition of goodwill and intangible assets. The following information provides the required disclosures and describes the impact the early adoption of FASB 141 and 142 had on the Company during the periods reported: INTANGIBLE ASSETS: Intangible assets as of December 31, 2001 are as follows: Gross Carrying Accumulated Amount Amortization -------------- ------------ Patent $ 574,966 $ 179,678 Customer Base 1,350,000 75,000 Trade Name 320,000 35,556 Non-Competition Agreements 180,000 12,000 Favorable Lease 600,000 20,000 ---------- ---------- Total $3,024,966 $ 322,234 ========== ========== Intangible asset amortization expense for the six month period ended December 31, 2001 and 2000 aggregated $178,491 and $35,935, respectively. Amortization expense related to intangible assets for the next five years is as follows: Year Ending June 30, 2002 $ 428,261 2003 $ 499,539 2004 $ 499,539 2005 $ 410,645 2006 $ 392,871 10 GOODWILL: The changes in the carrying amount of goodwill for the six month periods ended December 31 are as follows: 2001 2000 ---- ---- Balance as of June 30 $23,410,534 $ 7,647,108 Goodwill acquired 7,305,327 16,898,418 Goodwill amortization -- (729,032) ----------- ----------- Balance as of December 31 $30,715,861 $23,816,494 =========== =========== In connection with the adoption of FASB 142, the Company completed the transitional impairment assessment within six months from the date of adoption as allowed by the standard. As a result of the impairment assessment, no goodwill impairment was found and no current asset write down is required. The impact that the adoption of FASB No. 142 had on net income and earnings per share for the periods presented is as follows:
Three Months Ended Six Months Ended December 31 December 31 ------------------------- ------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Reported net income for the period $3,055,601 $4,294,505 $4,430,085 $8,275,591 Add back: Goodwill amortization -- 411,459 -- 729,032 ---------- ---------- ---------- ---------- Adjusted net income for the period $3,055,601 $4,705,964 $4,430,085 $9,004,623 ========== ========== ========== ========== Basic earnings per share: Reported net income $0.13 $0.19 $0.20 $0.38 Goodwill amortization -- 0.02 -- 0.03 ----- ----- ----- ----- Adjusted net income $0.13 $0.21 $0.20 $0.41 ===== ===== ===== ===== Diluted earnings per share: Reported net income $0.13 $0.18 $0.19 $0.35 Goodwill amortization -- 0.02 -- 0.03 ----- ----- ----- ----- Adjusted net income $0.13 $0.20 $0.19 $0.38 ===== ===== ===== =====
NOTE 3: Inventories Inventories are summarized as follows: December 31 June 30 ----------- ------- Component parts $10,861,816 $ 9,995,712 Work in process 5,138,126 4,497,996 Finished goods 3,464,293 4,073,269 ----------- ----------- $19,464,235 $18,566,977 =========== =========== 11 NOTE 4: Property, Plant and Equipment Property, plant and equipment are summarized as follows: December 31 June 30 ----------- ------- Land and land improvements $ 1,595,821 $ 1,595,821 Buildings 9,243,047 9,095,944 Machinery and equipment 47,017,742 39,213,503 Construction in process 235,340 155,899 ----------- ----------- $58,091,950 $50,061,167 Less accumulated depreciation and amortization 32,944,544 31,255,266 ----------- ----------- $25,147,406 $18,805,901 =========== =========== NOTE 5: Accrued Expenses Accrued expenses consist of the following: December 31 June 30 ----------- ------- Compensation $1,072,795 $ 989,499 Commissions 645,555 790,609 Restructuring -- 307,843 Accrued pension cost 240,709 401,032 Income taxes 444,387 938,984 Other 1,090,903 477,275 ---------- ---------- $3,494,349 $3,905,242 ========== ========== NOTE 6: Other Liabilities Other liabilities consist of the following: December 31 June 30 ----------- ------- Deferred compensation $541,142 $551,380 Other 87,800 -- -------- -------- 628,942 551,380 Less current portion 65,000 65,000 -------- -------- $563,942 $486,380 ======== ======== NOTE 7: Long-Term Debt Long-term debt is summarized as follows: December 31 June 30 ----------- ------- Capitalized lease obligations $391,468 $ -- Other 38,671 -- -------- ----- 430,139 -- Less current installments 238,423 -- -------- ----- $191,716 $ -- ======== ===== 12 NOTE 8: Net Income Per Share Basic income per share is based on the weighted average number of common shares outstanding. Diluted income per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company's case, comprise shares issuable under the stock option and restricted stock plans. The treasury stock method is used to calculate dilutive shares which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised. The following table sets forth the computation of basic and fully diluted earnings per share:
Three Months Ended Six Months Ended December 31 December 31 ------------------ ---------------- Numerator: 2001 2000 2001 2000 ---- ---- ---- ---- Earnings available to common stockholders $ 3,055,601 $ 4,294,505 $ 4,430,085 $ 8,275,591 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 22,336,004 22,085,318 22,293,076 22,008,146 =========== =========== =========== =========== Denominator for diluted earnings per share: Weighted average shares outstanding 22,336,004 22,085,318 22,293,076 22,008,146 Common stock options and restricted stock 828,623 1,572,281 855,835 1,633,993 ----------- ----------- ----------- ----------- Weighted average shares and conversions 23,164,627 23,657,599 23,148,911 23,642,139 =========== =========== =========== ===========
NOTE 9: Segment Information The Company operates predominately in the wireless communications, satellite communications and space and defense electronics markets. The Company's two reportable segments are the wireless group and the space and defense group. These segments have been determined based upon the nature of the products and services offered, customer base, technology, availability of discrete internal financial information, homogeneity of products and delivery channel, and are consistent with the way the Company organizes and evaluates financial information internally for purposes of making operating decisions and assessing performance. The wireless segment designs, manufactures and markets commercial products used mainly by the wireless communications market. The space and defense segment of the business designs, manufactures and markets specialized products for the radar and satellite communications markets. The revenue disclosures for the Company's reportable segments depict products that are similar in nature. 13 The following table reflects the operating results of the segments consistent with the Company's internal financial reporting process. The following results are used in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments:
Space & Corporate and Wireless Defense Unallocated Consolidated -------- ------- ------------- ------------ Net sales: Three months ended: December 31, 2001 $ 10,612,648 6,632,331 -- $ 17,244,979 December 31, 2000 $ 19,768,681 5,419,580 -- $ 25,188,261 Six months ended December 31, 2001 $ 19,155,624 13,090,546 -- $ 32,246,170 December 31, 2000 $ 36,564,405 10,847,830 -- $ 47,412,235 Operating income (loss): Three months ended: December 31, 2001 (3,399,840) 1,631,832 -- (1,768,008) December 31, 2000 3,909,200 926,876 -- 4,836,076 Six months ended: December 31, 2001 (4,176,916) 3,109,569 -- (1,067,347) December 31, 2000 6,945,494 2,166,767 -- 9,112,261 Goodwill and intangible assets: December 31, 2001 33,418,593 -- -- 33,418,593 June 30, 2001 23,858,758 -- -- 23,858,758 Identifiable assets:* Six months ended: December 31, 2001 18,524,895 13,205,162 155,776,298 187,506,355 June 30, 2001 17,510,855 12,453,474 155,232,389 185,196,718 Depreciation:** Three months ended: December 31, 2001 694,881 284,684 -- 979,565 December 31, 2000 412,463 256,788 -- 669,251 Six months ended: December 31, 2001 1,181,343 624,911 -- 1,806,254 December 31, 2000 774,194 462,994 -- 1,237,188 Goodwill and intangibles amortization:*** Three months ended: December 31, 2001 124,884 -- -- 124,884 December 31, 2000 429,427 -- -- 429,427 Six months ended: December 31, 2001 178,491 -- -- 178,491 December 30, 2000 764,967 -- -- 764,967
* Segment assets primarily include receivables, inventories, and property, plant and equipment related to business acquisitions. The Company does not segregate other assets on a products and services basis for internal management reporting and, therefore, such information is not presented. Assets included in corporate and unallocated principally are cash and cash 14 equivalents, marketable debt securities, other receivables, prepaid expenses, deferred income taxes and property, plant and equipment not specific to business acquisitions. ** Depreciation expense related to acquisition-specific property, plant and equipment is included in the segment classification of the acquired business. Depreciation expense related to nonbusiness combination assets is allocated departmentally based on an estimate of capital equipment employed by each department. Depreciation expense is then further allocated within the department as it relates to the specific business segment impacted by the consumption of the capital resources utilized. Due to the similarity of the property, plant and equipment utilized, the Company does not specifically identify these assets by individual business segment for internal reporting purposes. *** Amortization of goodwill and identifiable intangible assets arising from business combinations, and patent amortization, is allocated to the segments based on the segment classification of the acquired or applicable operation. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis set forth below reviews the Company's operating results for the six month period ended December 31, 2001 and its financial condition at December 31, 2001. This review should be read in conjunction with the accompanying consolidated condensed financial statements. Statements contained in management's discussion and analysis, other than historical facts, are forward-looking statements that are qualified by the cautionary statements at the end of this discussion. Overview The consolidated condensed financial statements present the financial condition of the Company as of December 31, 2001 and June 30, 2001, and the consolidated results of operations and cash flows of the Company for the six months ended December 31, 2001 and 2000. The Company designs, develops and markets microwave components and assemblies for the wireless communications, satellite communications and defense electronics markets. The Company's distinctive manufacturing and packaging techniques enable it to cost-effectively produce compact, lightweight microwave products for use in base stations for wireless communications systems, in satellites and in defense electronics systems. The Company sells its products to leading wireless communications equipment manufacturers such as Ericsson, Motorola, Lucent Technologies, and Nortel Networks and to satellite communications companies such as Boeing Satellite and Lockheed Martin. The Company operates predominantly in the wireless communications, satellite communications, and defense electronics markets. The two reporting segments of the Company are the Wireless group and the Space and Defense group. These groups have been determined based upon the nature of the products and services offered, customer base, technology, availability of discrete internal financial information, homogeneity of products, and delivery channel, and are consistent with the way the Company organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company generally recognizes sales at the time products are shipped to customers, provided that persuasive evidence of an arrangement exists, the sales price is fixed or easily determinable, 15 collectibility is reasonably assured and title and risk of loss have passed to the customer. Title and the risks and rewards of ownership of products are transferred at the time of shipment. Payments received from customers in advance of products delivered are recorded as customer advance payments until earned. A small percentage of sales are derived from long-term fixed-price contracts for the sale of large space and defense electronics products. Sales and estimated profits under long-term contracts are recognized using the percentage of completion method of accounting on a units-of-delivery basis. Profit estimates are revised periodically based upon changes in sales value and costs at completion. Any losses on these contracts are recognized in the period in which such losses are determined. Effective July 1, 2001, the Company adopted Financial Accounting Standard Board (FASB) Statement No. 141 - Business Combinations and Statement No. 142 - Goodwill and Other Intangibles. As a result of the adoption of these new standards and in conjunction with the completion of goodwill impairment reviews by an outside appraisal firm, the Company ceased amortization of the goodwill recorded as part of its previous acquisition transactions. If the Company had discontinued amortization of goodwill at the beginning of the first quarter of the prior fiscal year (2001), net earnings and basic and diluted earnings per share would have been increased by $411,459, or $0.02 per share and $729,032, or $0.03 per share for the three and six months ended December 31, 2000, respectively. On August 31, 2001, the Company acquired all of the outstanding capital stock of Amitron. Amitron is based in North Andover, Massachusetts and is primarily engaged in the design and manufacture of ceramic components and circuits for the medical, telecommunications and defense electronics market. The aggregate purchase consideration was $11,693,256, consisting of cash of $9,919,664 (including cash direct acquisition costs), non-cash direct acquisition costs in the form of stock options for services of $18,183 and 95,704 shares of the Company's common stock with an aggregate value of $1,755,409. The acquisition was accounted for under the purchase method of accounting for business combinations. Effective October 1, 2001 the Company acquired all of the outstanding capital stock of 5M, a manufacturer of microwave circuits based in Almelo, Netherlands. 5M's manufacturing technology, which is similar to the Company's multi-layer stripline technology, uses a unique metal backing technology, which offers both cost and performance advantages for high power applications. The aggregate purchase consideration for this transaction was $4,088,547, consisting of cash of $3,869,823 (including direct acquisition costs), and Company stock options with an aggregate fair value of $218,724. The acquisition was accounted for under the purchase method of accounting for business combinations. 5M has recently completed the reconstruction of its factory due to a fire in July 2001 which destroyed this facility. As of January 2002, 5M had repopulated the rebuilt facility and was testing various processes to re-enter production. As a result of the fire, 5M received an insurance settlement through its property and business interruption insurance policies of approximately $16.0 million in December 2001 to offset expenses incurred in out-sourcing production, cleaning the facility and equipment and repairing equipment damaged but not destroyed in the fire and to recognize the replacement cost to be received for inventory and equipment destroyed by the fire. As a result of the fire and the subsequent insurance claim, the value of the 5M assets at the time of purchase was significantly higher than the consideration paid by Anaren. This situation resulted in significant negative goodwill being generated by the transaction, which, under current accounting convention, was first offset by writing down the acquired long-lived assets to zero and 16 then by recognizing an "extraordinary gain" of $3,407,000, or $0.15 per share, in both the second quarter and six months ended December 31, 2001. Net sales for the second quarter ended December 31, 2001 were $17,245,000, down 32% from net sales of $25,188,000 for the same period in fiscal 2001. Net sales for the quarter included $777,000 from 5M which Anaren acquired effective October 1, 2001. The Company recorded a loss before extraordinary item of ($352,000), or ($0.02) per diluted share, for the second quarter of fiscal 2002, including a loss before extraordinary item at 5M of ($1,557,000), or ($0.07) per share. The extraordinary gain for the quarter was $3,407,000, or $0.15 per diluted share, resulting in net income of $3,056,000, or $0.13 per diluted share, compared to net income of $4,295,000, or $0.18 per diluted share, for the second quarter in fiscal 2001. Excluding 5M results, Anaren's results for the second quarter included net sales of $16,468,000, and net income $1,205,000, or $0.05 per diluted share. Results of Operations The following table sets forth the percentage relationships of certain items from the Company's consolidated condensed statements of earnings as a percentage of net sales.
Three Months Ended Six Months Ended Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2000 ------------- ------------- ------------- ------------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 74.1% 60.0% 70.2% 60.1% ----- ----- ----- ----- Gross profit 25.9% 40.0% 29.8% 39.9% ----- ----- ----- ----- Operating expenses: Marketing 10.7% 6.9% 10.5% 7.0% Research and development 9.2% 5.3% 8.5% 5.2% General and administrative 12.1% 8.6% 11.9% 8.5% Fire related 4.2% 0.0% 2.2% 0.0% ----- ----- ----- ----- Total operating expenses 36.2% 20.8% 33.1% 20.7% ----- ----- ----- ----- Operating income (loss) (10.3%) 19.2% (3.3%) 19.2% ----- ----- ----- ----- Other income (expense): Other, primarily interest income 5.9% 7.2% 7.1% 7.7% Interest expense (0.4%) (0.2%) (0.3%) (0.2%) ----- ----- ----- ----- Total other income (expense), net 5.5% 7.0% 6.8% 7.5% ----- ----- ----- ----- Income (loss) before income taxes and extraordinary item (4.8%) 26.2% 3.5% 26.7% Income taxes (2.8%) 9.2% 0.3% 9.3% ----- ----- ----- ----- Income (loss) before extraordinary item (2.0%) 17.0% 3.2% 17.4% Extraordinary item - gain on acquisition 19.7% 0.0% 10.5% 0.0% ----- ----- ----- ----- Net income 17.7% 17.0% 13.7% 17.4% ===== ===== ===== =====
17 The following table summarizes the Company's net sales by operating segments for the periods indicated. Amounts are in thousands. Three Months Ended Six Months Ended December 31 December 31 ----------- ----------- 2001 2000 2001 2000 ---- ---- ---- ---- Wireless $10,613 $19,769 $19,156 $36,564 Space and Defense 6,632 5,419 13,090 10,848 ------- ------- ------- ------- $17,245 $25,188 $32,246 $47,412 ======= ======= ======= ======= Three Months Ended December 31, 2001 Compared to Three Months Ended December 31, 2000 Net Sales. Net sales decreased $8.0 million, or 32%, to $17.2 million for the three months ended December 31, 2001, compared to $25.2 million for the second quarter of the previous year. This decrease was caused by a 46% drop in Wireless sales which was partially offset by a 22% rise in sales of Space and Defense products. The decrease in sales of Wireless products, which consist of standard surface mount components and custom subassemblies for use in building wireless base station equipment, was caused by a rapid downturn in capital expenditures for wireless infrastructure equipment which began in the latter part of the third quarter of fiscal 2001. This downturn resulted in a number of reductions in customer demand forecasts and delivery pushouts beginning in March 2001 and continuing through the first quarter of fiscal 2002. This market downturn has affected all the Company's Wireless product lines and has most severely affected sales of Wireless standard components. The downturn in Wireless market sales was somewhat offset by the inclusion of $2.3 million in sales in the first quarter of fiscal 2002 for 5M and Amitron. Although delivery pushouts have stopped and the Company believes the sales decline has bottomed out, this worldwide Wireless market downturn is expected to continue through most of calendar 2002. Space and Defense products consist of custom components and assemblies for communication satellites and defense radar countermeasures subsystems for the military. Sales in the Space and Defense group rose $1.2 million, or 22.0%, in the second quarter of fiscal 2002, compared to the same quarter in the prior fiscal year. This increase in shipments resulted from the initial production shipments for the Boeing Spaceway program. This satellite program, which entered full factory production in the fourth quarter of fiscal 2001, is expected to place Space and Defense shipments in the $6.0 - $7.0 million range, quarterly, for the remainder of fiscal 2002. Gross Profit. Cost of sales consists primarily of engineering design costs, material, material fabrication costs, assembly costs and test costs. Gross profit for the second quarter of fiscal 2002 was $4.5 million (25.9% of net sales), down from $10.1 million (40.0% of net sales) for the second quarter of the prior year. The decrease in gross margin resulted from the significant decline in sales volume, which caused significant under absorption of the factory overhead compared to the previous year. Presently, the Company expects gross margins to remain at or below current levels in the second half of fiscal 2002 and not to improve absent a significant increase in sales volume, both domestically and at 5M in the Netherlands. Marketing. Marketing expenses consist mainly of employee related expenses, commissions paid to sales representatives, trade show expenses, advertising expenses and related travel expenses. 18 Marketing expenses increased 6.8% to $1.8 million (10.7% of net sales) for the second quarter of fiscal 2002 from $1.7 million (6.9% of net sales) for the second quarter of fiscal 2001. Marketing expense increased due to the addition of new east and west coast marketing offices and marketing expenses associated with the Company's acquired businesses, Amitron and 5M. Research and Development. Research and development expenses consist of material and salaries and related overhead costs of employees engaged in ongoing research, design and development activities associated with new products and technology development. Research and development expenses increased 18.5% to $1.6 million (9.2% of net sales) in the second quarter of fiscal 2002 from $1.3 million (5.3% of net sales) for the second quarter of fiscal 2001. Research and development expenditures are supporting further development of wireless infrastructure products and new broadband fixed wireless product opportunities. Despite the current wireless market downturn, the Company does not expect to reduce its current research and development efforts in the near term and is presently working on a number of new standard wireless products. General and Administrative. General and administrative expenses consist of employee related expenses, professional services, goodwill and intangible amortization, travel related expenses and other corporate costs. General and administrative expenses decreased 3.6% to $2.1 million (12.1% of net sales) for the second quarter of fiscal 2002 from $2.2 million (8.6% of net sales) for the second quarter of fiscal 2001. General and administrative expenses have decreased primarily due to the adoption of FASB Statement No. 142 which eliminated the amortization of goodwill starting in the first quarter of fiscal 2002. The reduction in goodwill reduced general and administrative expenses by $411,000 in the current quarter compared to the second quarter last year. This reduction in goodwill amortization was partially offset by an increase in identifiable intangible amortization of $107,000 in the second quarter of fiscal 2002 associated with the Company's acquisition of Amitron. Additionally, general and administrative expense for the second quarter of fiscal 2002 includes three months of expense for Amitron and 5M, the Company's acquisitions in the current fiscal year. Operating Income: Operating income decreased 137.0%, to a loss of $1.8 million (10.3% of net sales) for the second quarter of fiscal 2002, down $6.6 million from operating income of $4.8 million (19.2% of net sales) for the same period in fiscal 2001. On a reporting segment basis, the Wireless operating loss was $3.4 million for the second quarter of fiscal 2002, down 187.2% or $7.3 million from $3.9 million operating income in the second quarter of fiscal 2001. The principal reason for the decrease in Wireless operating income in the second quarter of fiscal 2002 compared to the same period in fiscal 2001 was the 46.6% decrease in Wireless sales year over year due to the large decrease in Wireless base station equipment demand worldwide which began in the third quarter of fiscal 2001 and continues at the present time. The large decrease in sales levels in the wireless segment resulted in significant under absorption of fixed overhead within the group during the current quarter. Additionally, operating income in the Wireless sector was further decreased by the $2.4 million operating loss at 5M in the second quarter of fiscal 2002 due to fire recovery costs and a lower level of sales due to the fire. Space and defense operating income rose $705,000 or 76.0% for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001. This increase resulted from a $1.2 million rise in space and defense revenues year over year, due to the Boeing Spaceway Program entering full production at the end of fiscal year 2001. The higher sales levels resulted in better absorption of fixed overhead in fiscal 2002 compared to the previous year. Other Income. Other income is primarily interest income received on invested cash balances. Other income decreased 44.0% to $1.0 million (5.9% of net sales) for the quarter ended 19 December 31, 2001 from $1.8 million (7.2% of net sales) for the same quarter last year. This decrease was caused mainly by the decline in market interest rates over the last 12 months brought about by reductions in the Federal Fund rates and the use of approximately $13.5 million in cash to complete the acquisitions of Amitron and 5M. Interest income will fluctuate based on the level of interest rates and the level of investable cash balances. Interest Expense: Interest expense primarily represents loan interest, commitment fees and interest incurred on certain deferred obligations. Interest expense for the second quarter of fiscal 2002 was $69,000 (0.4% of net sales) compared to $42,000 (0.2% of net sales) for the second quarter of fiscal 2001. Additionally, the increase in interest expense resulted from the addition of both short and long-term debt outstanding at 5M. Income Taxes: The tax benefit for the second quarter of fiscal 2002 was ($474,000) (2.8% of net sales), representing an effective tax benefit rate of 57.4%. This compared to $2.3 million (9.2% of net sales) for the second quarter of fiscal 2001, representing an effective tax rate of 35.0%. The tax benefit arises from the loss at 5M in the Netherlands and is large enough to more than offset the U.S. domestic taxes, due to the large amount of tax exempt investment income that the Company is currently generating in the U.S. Extraordinary gain: The extraordinary gain of $3.4 million (19.7% of net sales) resulted from the purchase of 5M. As a result of the fire and the subsequent insurance claim, the value of the 5M assets at the time of purchase was significantly higher than the consideration paid by Anaren. This situation resulted in significant negative goodwill being generated by the transaction, which, under current accounting convention, was first offset by writing down the acquired long-lived assets to zero and then by recognizing an "extraordinary gain" of $3,407,000, or $0.15 per share, in the second quarter ended December 31, 2001. Six Months ended December 31, 2001 Compared to Six Months Ended December 31, 2000 Net Sales. Net sales decreased $15.2 million, or 32.0%, to $32.2 million for the six months ended December 31, 2001, compared to $47.4 million for the second quarter of the previous year. This decrease was caused by a 48.0% drop in Wireless sales which was partially offset by a 21.0% rise in sales of Space and Defense products. The decrease in sales of Wireless products was caused by a rapid downturn in capital expenditures for wireless infrastructure equipment which began in the latter part of the third quarter of fiscal 2001. This downturn has resulted in an increasing number of reductions in customer demand forecast and delivery pushouts beginning in March 2001 and continuing through September 31, 2001. This market downturn has affected all the Company's Wireless product lines and has most severely affected sales of Wireless standard components. The downturn in Wireless market sales was somewhat offset by the inclusion of $2.8 million in sales in the first six months of fiscal 2002 for 5M and Amitron. Although delivery pushouts have stopped and the Company believes the sales decline has bottomed out, this worldwide Wireless market downturn is expected to continue through most of calendar 2002. Sales in the Space and Defense group rose $2.2 million, or 21.0%, in the first six months of fiscal 2002, compared to the same period in the prior fiscal year. This increase in shipments resulted from the initial production shipments for the Boeing Spaceway program. This program, which entered full factory production at the end of fiscal 2001, is expected to place 20 Space and Defense shipments in the $6.0 - $7.0 million range, quarterly, for the remainder of fiscal 2002. Gross Profit. Gross profit for the first six months of fiscal 2002 was $9.6 million (29.8% of net sales), down from $18.9 million (39.9% of net sales) for the first half of the prior year. The decrease in gross margin resulted from the significant decline in sales volume which caused significant under absorption of the factory overhead compared to the previous year. Additionally, margins were further hurt by the addition of 5M whose results consist mainly of costs incurred to repair its manufacturing facility which was destroyed by fire in July 2001. Presently, the Company expects gross margins to remain at or below current levels and not to improve in the second half of fiscal 2002 without a significant increase in sales volume, both domestically and at 5M in the Netherlands. Marketing. Marketing expenses increased 1.9% to $3.4 million (10.5% of net sales) for the first six months of fiscal 2002 from $3.3 million (7.0% of net sales) for the first half of fiscal 2001. This small increase resulted from lower commission expense due to the decline in sales volume and the Company's cost containment efforts instituted in the fourth quarter of fiscal 2001 which more than offset increases in expense due to new marketing personnel, the issuance of a new catalog and remodeling of the Company website. Marketing expense is expected to increase over the remaining two quarters of fiscal 2002 due to the addition of new east and west coast marketing offices and marketing expenses associated with the Company's acquired businesses. Research and Development. Research and development expenses increased 11.5% to $2.7 million (8.5% of net sales) in the first six months of fiscal 2002 from $2.5 million (5.2% of net sales) for the first half of fiscal 2001. Research and development expenditures are supporting further development of wireless infrastructure products and new broadband fixed wireless product opportunities with a renewed emphasis on developing new standard surface mount wireless products. Despite the current wireless market downturn, the Company does not expect to reduce its current research and development efforts in the near term. General and Administrative. General and administrative expenses decreased 4.3% to $3.8 million (11.9% of net sales) for the first six months of fiscal 2002 from $4.0 million (8.5% of net sales) for the first half of fiscal 2001. General and administrative expenses have decreased primarily due to the adoption of FASB Statement No. 142 which eliminated the amortization of goodwill in the first quarter of fiscal 2002. The reduction in goodwill reduced general and administrative expenses by $729,000 in the first six months compared to the first half of last year. This reduction in goodwill amortization was partially offset by an increase in identifiable intangibles amortization of $143,000 in the first half of fiscal 2002 associated with the Company's acquisition of Amitron. Additionally, general and administrative expense for the first half of fiscal 2002 includes four months of expense for Amitron and three months of expense for 5M, the Company's acquisitions in the current fiscal year. Operating Income: Operating income decreased 111.7% to a loss of $1.1 million, (3.3% of net sales) for the first six months of fiscal 2002, down $10.0 million from operating income of $9.1 million (19.2% of net sales) for the same period in fiscal 2001. On a reporting segment basis, the Wireless operating loss was $4.2 million for the first half of fiscal 2002, down 160.0% or $11.2 million from operating income of $7.0 million in the first half of fiscal 2001. The principal reason for the decrease in Wireless operating income in the first half of fiscal 2002 compared to the same period in fiscal 2001 was the 48% decrease in Wireless sales year over year due to the large decrease in wireless base station equipment demand worldwide which began in the third quarter of fiscal 2001 and continues at the present time. The large decrease in sales levels in the 21 Wireless segment resulted in significant under absorption of fixed overhead within the group during the current quarter. Additionally, operating income in the Wireless sector was further decreased by the $2.4 million operating loss at 5M in the second quarter due to fire recovery expenses and a lower level of sales due to the fire. Space and Defense operating income rose $943,000 or 43.5% for the first half of fiscal 2002 compared to the first six months of fiscal 2001. This increase resulted from a $2.3 million rise in space and defense revenues year over year in the first six months, due to the Boeing Spaceway Program entering full production at the end of fiscal 2001. The higher sales levels resulted in better absorption of fixed overhead in fiscal 2002 compared to the previous year. Other Income. Other income decreased 37.5% to $2.3 million (7.1% of net sales) for the six months ended December 31, 2001 from $3.7 million (7.7% of net sales) for the same period last year. This decrease was caused mainly by the decline in market interest rates over the last 12 months brought about by reductions in the Federal Fund rates. Interest income will fluctuate based on the level of interest rates and the level of investable cash balances. Interest Expense. Interest expense for the first six months of fiscal 2002 was $85,000 (0.3% of net sales) compared to $82,000 (0.2% of net sales) for the first six months of fiscal 2001. The decrease in interest expense resulted from the payoff of a deferred obligation in the third quarter of fiscal 2001. Income Taxes. Income tax expense for the first half of fiscal 2002 was $117,000 (0.3% of net sales), representing an effective tax rate of 10.0%. This compared to $4.4 million (9.3% of net sales) for the first half of fiscal 2001, representing an effective tax rate of 35.0%. The Company's reduced effective tax rate is a direct result of the proportion of federally exempt state municipal bond income in relation to reduced levels of taxable income and a result of the current loss at 5M, which is generating a foreign tax benefit. Extraordinary gain. The extraordinary gain of $3.4 million (10.5% of net sales) resulted from the purchase of 5M. As a result of the fire and the subsequent insurance settlement, the value of the 5M assets at the time of purchase was significantly higher than the consideration paid by Anaren. This situation resulted in significant negative goodwill being generated by the transaction, which, under current accounting convention, was first offset by writing down the acquired fixed assets to zero and then by recognizing an "extraordinary gain" of $3,407,000, or $0.15 per share, in the six months ended December 31, 2002. Liquidity and Capital Resources Net cash provided by operations for the six months ended December 31, 2001 and the six months ended December 31, 2000 were $9.3 million and $9.6 million, respectively. The positive flow from operations in the first six months of both fiscal 2002 and 2001 was due primarily to the net income attained in both periods and, in fiscal 2002, to the large amount of cash received in the second quarter ($5.3 million) from the 5M insurance settlement. Net cash used in investing activities consists of funds used to purchase capital equipment and cash used to purchase the capital stock of Amitron in August and 5M in October 2001. Capital equipment placed in service amounted to $6.3 million, including $4.7 million at 5M, in the six months ended December 31, 2001 compared to $5.5 million in the first six months of the previous fiscal year. The Company expended $9.9 million in cash to purchase all the capital 22 stock of Amitron. Funds for this transaction were obtained through the proceeds of matured marketable debt securities in the amount of $9.6 million. The Company expended $3.9 million in cash to purchase the capital stock of the 5M. Funds for this transaction came from the Company's operating cash account. Significant cash used in investing activities in the first half of the prior year was $17.9 million used to purchase the assets of Ocean. Funds for this transaction were obtained through the proceeds of matured marketable debt securities in the amount of $18.5 million. Net cash used by financing activities was $1.2 million for the first six months of fiscal 2002 and consisted of $1.5 million used to pay off loans of Amitron and 5M and $375,000 generated by the exercise of stock options. In the first half of the prior year funds generated by financing activities amounted to $1.8 million and consisted of $2.2 million generated through the exercise of stock options, and $408,000 used to pay off loans of Ocean which were assumed as part of the asset purchase. During the remainder of fiscal 2002, the Company's main cash requirements will be for additions to capital equipment. Capital expenditures, in addition to the equipment replaced at 5M, have been budgeted at approximately $4.0 million for fiscal 2002 and consist mainly of upgrades and replacements of production equipment. In addition to the Company's cash and marketable debt securities, the Company has a credit facility providing an unsecured $10 million working capital revolving line of credit bearing interest at the LIBOR interest rate plus one hundred twenty-five basis points and maturing December 31, 2006. The terms of the credit facility require maintenance of minimum tangible net worth, ratio of cash flows to maturities, and leverage ratio as defined in the loan agreement. The Company believes that it was in compliance with all restrictions and covenants at December 31, 2001. At December 31, 2001, zero was outstanding under the credit facility. The Company believes that its cash requirements for the foreseeable future will be satisfied by currently invested cash balances, expected cash flows from operations, and funds available under its credit facilities. Recent Accounting Pronouncements In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." FASB 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FASB 143 is required for adoption for fiscal years beginning after June 14, 2002. The Company has reviewed the provisions of FASB 143, and believes that upon adoption, the Statement will not have a significant effect on its consolidated financial statements. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." FASB 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. FASB 144 is required for adoption for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company has reviewed the provisions of FASB 144, and believes that upon adoption, the Statement will not have a significant effect on its consolidated financial statements. 23 Forward-Looking Cautionary Statement In an effort to provide investors a balanced view of the Company's current condition and future growth opportunities, this Quarterly Report on Form 10-Q includes comments by the Company's management about future performance. Because these statements are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, management's forecasts involve risks and uncertainties, and actual results could differ materially from those predicted in the forward-looking statements. Among the factors that could cause actual results to differ materially are the following: o further decline in the general economy, and particularly the wireless telecommunications sector; o decreased capital expenditures by wireless service providers; o loss of one or more of a limited number of original equipment manufacturers as customers; o unpredictable difficulties or delays in the development of new products; o the unavailability of component parts and services from a limited number of suppliers; o the risks associated with any technological shifts away from the Company's technologies and core competencies; o additional cancellation of existing contracts or orders, or other declines in demand for the Company's products; o difficulties in successfully integrating the businesses of Amitron and 5M; o unexpected delay in the resumption of 5M's manufacturing capacity; o unanticipated difficulties in becoming requalified by 5M's customers; o inability to effectively manage possible future growth; o increased pricing pressure and increased competition; o the failure of wireless customers' annual procurement forecasts to result in future sales; o unanticipated impairments of assets and investment values; o foreign currency fluctuations; and o litigation involving antitrust, intellectual property, product warranty, and other issues. Item 3. Quantitative and Qualitative Disclosures About Market Risk The following discusses the Company's possible exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including factors described elsewhere in this Quarterly Report on Form 10-Q. As of December 31, 2001, the Company had cash, cash equivalents and marketable debt securities of $121.6 million, of which approximately $112.7 million consisted of highly liquid investments in marketable debt securities. These investments at the date of purchase normally have maturities between one and 18 months, are exposed to interest rate risk and will decrease in value if market interest rates increase. A hypothetical decrease in market interest rate of 10.0% from December 31, 2001 rates, or 0.3%, would have reduced net income and cash flow by approximately $82,000, or $0.004 per share. Due to the relatively short maturities of the securities and its ability to hold those investments to maturity, the Company does not believe that an immediate decrease in interest rates would have a significant effect on its financial condition 24 or results of operations. Over time, however, declines in interest rates will reduce the Company's interest income. The Company does not currently own any material equity investments. Therefore, the Company does not currently have any direct equity price risk. All of the Company's sales from its domestic U.S. subsidiaries to foreign customers are denominated in United States dollars and, accordingly are not exposed to foreign currency exchange risk. Sales of the Company's Netherlands subsidiary, 5M, are denominated in Euros to European customers and United States dollars to U.S. customers. Sales to U.S. customers by 5M denominated in United States dollars would be subject to currency exchange losses. At present, due to the fire at 5M, sales of that subsidiary to U.S. customers in U.S. dollars subject to possible currency losses are less than $100,000 per quarter and thus any possible losses due to currency fluctuations would not be material to the operating results of the Company. 25 Item 4. Submission of Matters to a Vote of Security Holders The Company's annual shareholders' meeting was held on November 1, 2001, at which time the election of Directors was conducted. The following named individuals were nominated and re-elected as Directors. Votes Votes For Against ----- ------- Hugh A. Hair 20,120,572 616,192 Matthew Robison 20,407,559 329,205 Herbert I. Corkin 20,407,573 329,191 Dale F. Eck 20,373,088 363,676 Messrs. Hair, Robison and Corkin were elected to terms expiring in 2004. Mr. Eck was elected to a term expiring in 2003. The terms of Directors Lawrence A. Sala, Carl W. Gerst, Jr. and Dr. David Wilemon continued after the meeting. Mr. Hair passed away on January 26, 2002. Item 6. Exhibits and Reports on Form 8-K Item 6(a) Exhibits Exhibit 10.1 Amendment to Revolving Credit Agreement. Item 6(b) Reports on Form 8-K None. 26 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. Anaren Microwave, Inc. -------------------------------------- (Registrant) Date: February 14, 2002 S/Lawrence A. Sala -------------------------------------- President & Chief Executive Officer Date: February 14, 2002 S/Joseph E. Porcello -------------------------------------- Vice President of Finance and Treasurer 27 EX-10.1 3 e13030ex101.txt REVOLVING CREDIT AGREEMENT Exhibit 10.1 MODIFICATION NO. 3 TO AMENDED AND RESTATED REVOLVING CREDIT FACILITY AGREEMENT DATED DECEMBER 23, 1997 (the "Agreement") AND THE REVOLVING CREDIT NOTE IN THE PRINCIPAL AMOUNT OF TEN MILLION DOLLARS DATED DECEMBER 23, 1997 (the "Note") THIS MODIFICATION NO. 3 OF THE AGREEMENT AND NOTE is made by and between ANAREN MICROWAVE, INC. (the "Borrower") and MANUFACTURERS AND TRADERS TRUST COMPANY (the "Bank") as of January 1, 2002. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Agreement or the Note. 1. The definition of "Termination Date" stated in the Agreement as previously modified by prior modifications is hereby modified to now read as follows: "Termination Date" shall mean the earlier of (i) December 31, 2006 or (ii) the date of an Event of Default. 2. References in the Agreement and the Note as previously modified which refer to the "Termination Date" shall be deemed to now refer to the definition set forth in this Modification No. 3. 3. References in the Agreement and the Note as previously modified which refer to the applicable rate for LIBOR Loans as the LIBOR Interest Rate plus one hundred seventy five (175) basis points are hereby modified and now deemed to refer to the applicable rate for LIBOR Loans as the LIBOR Interest Rate plus one hundred twenty-five (125) basis points. 4. The Borrower shall pay the Bank an annual facility fee equal to three-eighths percent (3/8%) of the Maximum Principal Amount ($37,500), which shall be payable quarterly in advance. 5. All of the wholly-owned U.S. Subsidiaries of the Borrower, as formed from time to time, shall execute and deliver unconditional and continuing guarantees (in a form prescribed by the Bank) of the obligations owed by the Borrower to the Bank, including but not limited to those obligations represented by the Agreement and the Note, as modified from time to time. As the present date, the wholly-owned Subsidiaries are RF Power Components, Inc. and Amitron, Inc., each of which shall deliver such guarantees to Lender contemporaneous with this Modification No. 3. 6. Except as specifically modified herein, all other terms of the Note and the Agreement as modified by any previous modification remain unchanged and in full force and effect. 7. This Modification No. 3 shall only be effective when accepted by the Bank. 28 IN WITNESS WHEREOF, The Borrower and Bank have agreed to the terms of and have each executed and delivered this Modification No. 3, which is dated as of first written above. ANAREN MICROWAVE, INC. By: S/Joseph E. Porcello, Vice President of Finance ----------------------------------------------- Title ACCEPTED: MANUFACTURERS AND TRADERS TRUST COMPANY By: S/David E. McKeon, Vice President --------------------------------- Title STATE OF NEW YORK ) ) : ss: COUNTY OF ONONDAGA ) On the 18th day of January in the year 2002 before me personally came JOSEPH E. PORCELLO to me known, who being by me duly sworn, did depose and say that he resides at 218 Dawley Road, Fayetteville, NY 13066; that he is the Vice President of Finance and Treasurer of ANAREN MICROWAVE, INC., the corporation described in and which executed the above instrument; and that he signed his name by authority of the board of directors of the corporation. S/Anne M. Savage -------------------------------- Notary Public STATE OF NEW YORK ) ) : ss: COUNTY OF ONONDAGA ) On the 22nd day of January in the year 2002 before me personally came DAVID E. MCKEON to me known, who being by me duly sworn, did depose and say that he resides at Camillus, New York; that he is the Vice President of Manufacturers and Traders Trust Company, the corporation described in and which executed the above instrument; and that he signed his name by authority of the board of directors of the corporation. S/Lynn A. Knittel -------------------------------- Notary Public 29 -----END PRIVACY-ENHANCED MESSAGE-----