-----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, QJe4RVFxD1VUsO14d7gh1BTVKWw9mTVT65L62NYgbdIzrgM4w5RJmVKkF1VVt9cW fvRtqqWW5OoY24Kf9Cm1Uw== 0000891092-02-000675.txt : 20020515 0000891092-02-000675.hdr.sgml : 20020515 20020515135256 ACCESSION NUMBER: 0000891092-02-000675 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 02650520 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 e13433_10q.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 March 31, 2002 |_| 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 May 10, 2002 was 22,458,620. 1 ANAREN MICROWAVE, INC. INDEX PART I - FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 3 March 31, 2002 (unaudited) and June 30, 2001 Consolidated Condensed Statements of Earnings 4 for the Three Months Ended March 31, 2002 and 2001 (unaudited) Consolidated Condensed Statements of Earnings 5 for the Nine Months Ended March 31, 2002 and 2001 (unaudited) Consolidated Condensed Statements of Cash Flows 6 for the Nine Months Ended March 31, 2002 and 2001 (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 March 31, 2002 and June 30, 2001
(Unaudited) Assets March 31, 2002 June 30, 2001 ------ -------------- ------------- Current assets: Cash and cash equivalents $ 11,125,460 $ 11,748,542 Marketable securities (note 3) 101,254,930 108,557,983 Receivables, less allowance of $253,836 and $195,000, respectively 14,515,413 11,504,168 Inventories (note 4) 19,978,486 18,566,977 Interest and other receivables 1,816,313 1,304,877 Insurance recovery receivable (note 1) 18,261 -- Deferred income taxes 1,071,076 956,759 Other current assets 1,112,390 1,762,203 ------------- ------------- Total current assets 150,892,329 154,401,509 ------------- ------------- Marketable debt securities 13,006,999 11,725,960 Property, plant and equipment, net (note 5) 25,063,916 18,805,901 Deferred income taxes -- 263,348 Patents, net of accumulated amortization of $197,645 at March 31, 2002 and $143,742 at June 30, 2001 (note 2) 377,321 448,224 Goodwill (note 2) 30,715,861 23,410,534 Other intangible assets, net of accumulated amortization of $249,473 at March 31, 2002 (note 2) 2,200,527 -- ------------- ------------- $ 222,256,953 $ 209,055,476 ============= ============= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Current installments of long-term debt (note 8) $ 224,481 $ -- Accounts payable 5,127,016 2,985,793 Accrued expenses (note 6) 4,690,945 3,905,242 Customer advance payments 245,419 767,790 Other current liabilities (note 7) 65,000 65,000 ------------- ------------- Total current liabilities 10,352,861 7,723,825 Long term debt, less current installments (note 8) 320,693 -- Deferred income taxes 1,952,904 -- Postretirement benefit obligation 1,467,995 1,391,496 Other liabilities (note 7) 572,213 486,380 ------------- ------------- Total liabilities 14,666,666 9,601,701 ------------- ------------- Stockholders' equity: Common stock of $.01 par value Authorized 200,000,000 shares; issued 25,635,842 shares at March 31, 2002 and 25,496,238 shares at June 30, 2001 256,358 254,962 Additional paid-in capital 168,563,732 166,051,341 Unearned compensation (1,245,847) (1,723,377) Accumulated other comprehensive loss Foreign currency translation (333,539) -- Unrealized gain on securities held- for-sale 52,321 -- Retained earnings 45,069,900 39,643,487 ------------- ------------- 212,362,925 204,226,413 Less cost of 3,177,822 treasury shares 4,772,638 4,772,638 ------------- ------------- Total stockholders' equity 207,590,287 199,453,775 ------------- ------------- $ 222,256,953 $ 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 March 31, 2002 and 2001 (Unaudited) Mar. 31, 2002 Mar. 31, 2001 ------------- ------------- Net sales $ 19,821,239 $ 21,716,061 Cost of sales 13,450,520 14,042,456 ------------ ------------ Gross profit 6,370,719 7,673,605 ------------ ------------ Operating expenses: Marketing 1,978,719 1,800,057 Research and development 1,776,950 1,193,816 General and administrative 2,064,534 2,292,661 ------------ ------------ Total operating expenses 5,820,203 5,286,534 ------------ ------------ Operating income 550,516 2,387,071 ------------ ------------ Other income, primarily interest 735,623 1,847,513 Interest expense (24,811) (47,778) ------------ ------------ Income before income taxes and extraordinary item 1,261,328 4,186,806 Income tax expense 265,000 1,435,000 ------------ ------------ Income before extraordinary item 996,328 2,751,806 ------------ ------------ Extraordinary item - gain on acquisition (note 1) -- -- ------------ ------------ Income $ 996,328 $ 2,751,806 ============ ============ Basic earnings per share: Income before extraordinary item $ 0.04 $ 0.12 Extraordinary item - gain on acquisition 0.00 0.00 ------------ ------------ Net income $ 0.04 $ 0.12 ============ ============ Diluted earnings per share: Income before extraordinary item $ 0.04 $ 0.12 Extraordinary item - gain on acquisition 0.00 0.00 ------------ ------------ Net income $ 0.04 $ 0.12 ============ ============ Shares used in computing net earnings: Basic 22,349,444 22,299,876 ============ ============ Diluted 23,095,668 23,500,682 ============ ============ Dividends per share $ -- $ -- ============ ============ See accompanying notes to consolidated condensed financial statements. 4 ANAREN MICROWAVE, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Nine Months Ended March 31, 2002 and 2001 (Unaudited) Mar. 31, 2002 Mar. 31, 2001 ------------- ------------- Net sales $ 52,067,409 $ 69,128,296 Cost of sales 36,097,885 42,558,014 ------------ ------------ Gross profit 15,969,524 26,570,282 ------------ ------------ Operating expenses: Marketing 5,346,950 5,106,071 Research and development 4,521,313 3,655,273 General and administrative 5,906,692 6,309,606 Fire related (note 1) 711,400 -- ------------ ------------ Total operating expenses 16,486,355 15,070,950 ------------ ------------ Operating income (loss) (516,831) 11,499,332 ------------ ------------ Other income, primarily interest 3,027,950 5,516,430 Interest expense (109,950) (130,365) ------------ ------------ Income before income taxes and extraordinary item 2,401,169 16,885,397 Income tax expense 382,000 5,858,000 ------------ ------------ Income before extraordinary item 2,019,169 11,027,397 Extraordinary item - gain on acquisition (note 1) 3,407,244 -- ------------ ------------ Net income $ 5,426,413 $ 11,027,397 ============ ============ Basic earnings per share: Income before extraordinary item $ 0.09 $ 0.50 Extraordinary item - gain on acquisition 0.15 0.00 ------------ ------------ Net income $ 0.24 $ 0.50 ============ ============ Diluted earnings per share: Income before extraordinary item $ 0.09 $ 0.47 Extraordinary item - gain on acquisition 0.15 0.00 ------------ ------------ Net income $ 0.24 $ 0.47 ============ ============ Shares used in computing net earnings: Basic 22,311,591 22,103,970 ============ ============ Diluted 23,130,889 23,593,567 ============ ============ See accompanying notes to consolidated condensed financial statements. 5 ANAREN MICROWAVE, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows Nine Months Ended March 31, 2002 and 2001 (Unaudited) 2002 2001 ------------ ------------ Cash flows from operating activities: Net income $ 5,426,413 $ 11,027,397 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,743,649 1,981,411 Amortization of intangibles 303,375 1,194,940 Deferred income taxes (1,037,153) (13,083) Unearned compensation 477,530 366,257 Tax benefit from exercise of stock options 130,203 5,373,265 Gain on acquisition (note 1) (3,407,244) -- Unrealized gain on securities held-for-resale 52,321 -- Changes in operating assets and liabilities, net of acquisition: Receivables (801,851) 1,495,666 Inventories 300,111 (3,291,986) Insurance receivable 10,730,852 -- Interest and other receivables (123,433) 948,676 Other current assets 703,631 (387,153) Accounts payable 143,590 (930,578) Accrued expenses (1,300,759) 388,526 Customer advance payments (522,371) (565,842) Other liabilities 85,833 (112,076) Postretirement benefit obligation 76,499 387 ------------ ------------ Net cash provided by operating activities 13,981,196 17,475,807 ------------ ------------ Cash flows from investing activities: Capital expenditures (7,179,434) (7,235,362) Net sale of marketable debt securities 6,022,014 13,268,849 Purchase of businesses, net of cash acquired (12,073,362) (17,883,710) ------------ ------------ Net cash used in investing activities (13,230,782) (11,850,223) ------------ ------------ Cash flows from financing activities: Net payments on long term debt (1,431,226) (407,864) Stock options exercised 391,269 2,864,646 ------------ ------------ Net cash provided by (used in) financing activities (1,039,957) 2,456,782 ------------ ------------ Effect of exchange rates (333,539) -- Net increase (decrease) in cash and cash equivalents (623,082) 8,082,366 Cash and cash equivalents at beginning of period 11,748,542 6,179,202 ------------ ------------ Cash and cash equivalents at end of period $ 11,125,460 $ 14,261,568 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Period For: Interest $ 109,950 $ 130,365 ============ ============ Income taxes, net of refunds $ 1,057,200 $ 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 nine months ended March 31, 2002 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 nine months ended March 31, 2002 and 2001 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 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. 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 Anaren Power Products into its Syracuse, New York facility. On August 31, 2001 the Company acquired all of the outstanding stock of Amitron, Inc. 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, telecommunications, 7 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 power applications and provide 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 the 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 six months ended March 31, 2002, 5M recognized incremental outsourcing costs aggregating $555,120 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 income, 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 Nine Months Ended ------------------------- ------------------------- March 31 March 31 March 31 March 31 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net sales $19,821,239 $27,485,113 $54,399,721 $86,366,394 Insurance recoveries -- -- 15,999,972 -- Net income 996,328 2,924,578 10,867,613 11,020,935 Earnings per share: Basic $ 0.04 $ 0.13 $ 0.49 $ 0.50 Diluted $ 0.04 $ 0.13 $ 0.47 $ 0.47 9 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 $0 and $15,999,972 for the three and nine months ended March 31, 2002, respectively. The pro forma information reflects no goodwill amortization for the three and nine months ended March 31, 2002 due to the adoption of FASB 142, "Goodwill and Intangible Assets", by the Company. The pro forma information does reflect goodwill amortization aggregating $412,005 and $1,237,240 for the three and nine months ended March 31, 2001, 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 March 31, 2002 are as follows: Gross Carrying Accumulated Amount Amortization -------------- ------------ Patent $ 574,966 $ 197,645 Customer Base 1,350,000 131,250 Trade Name 320,000 62,223 Non-Competition Agreements 180,000 21,000 Favorable Lease 600,000 35,000 ---------- ---------- Total $3,024,966 $ 447,118 ========== ========== Intangible asset amortization expense for the nine month period ended March 31, 2002 and 2001 aggregated $303,375 and $53,902, 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 nine month periods ended March 31 are as follows: Fiscal Fiscal 2002 2001 ------------ ------------ Balance as of June 30, 2001 $ 23,410,534 $ 7,647,108 and 2000, respectively Goodwill acquired 7,305,327 16,898,418 Goodwill amortization -- (1,141,037) ------------ ------------ Balance as of March 31, 2002 and 2001, respectively $ 30,715,861 $ 23,404,489 ============ ============ 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 Nine Months Ended March 31 March 31 ---------------------- ------------------------- 2002 2001 2002 2001 -------- ---------- ---------- ----------- Reported net income for the period $996,328 $2,751,806 $5,426,413 $11,027,397 Add back: Goodwill amortization -- 412,005 -- 1,141,037 -------- ---------- ---------- ----------- Adjusted net income for the period $996,328 $3,163,811 $5,426,413 $12,168,434 ======== ========== ========== =========== Basic earnings per share: Reported net income $ 0.04 $ 0.12 $ 0.24 $ 0.50 Goodwill amortization -- 0.02 -- 0.05 -------- ---------- ---------- ----------- Adjusted net income $ 0.04 $ 0.14 $ 0.24 $ 0.55 ======== ========== ========== =========== Diluted earnings per share: Reported net income $ 0.04 $ 0.12 $ 0.24 $ 0.47 Goodwill amortization -- 0.02 -- 0.05 -------- ---------- ---------- ----------- Adjusted net income $ 0.04 $ 0.14 $ 0.24 $ 0.52 ======== ========== ========== ===========
NOTE 3: Marketable Securities Marketable securities are summarized as follows: March 31 June 30 ------------ ------------ Marketable debt securities - held-to-maturity $113,128,929 $120,283,943 Marketable equity securities - available for sale 1,133,000 -- ------------ ------------ Total 114,261,929 120,283,943 Current portion 101,254,930 108,557,983 ------------ ------------ Long term $ 13,006,999 $ 11,725,960 ============ ============ 11 NOTE 4: Inventories Inventories are summarized as follows: March 31 June 30 ----------- ----------- Component parts $11,103,129 $ 9,995,712 Work in process 4,953,734 4,497,996 Finished goods 3,921,623 4,073,269 ----------- ----------- $19,978,486 $18,566,977 =========== =========== NOTE 5: Property, Plant and Equipment Property, plant and equipment are summarized as follows: March 31 June 30 ----------- ----------- Land and land improvements $ 1,595,821 $ 1,595,821 Buildings 9,286,675 9,095,944 Machinery and equipment 47,827,332 39,213,503 Construction in process 236,027 155,899 ----------- ----------- $58,945,855 $50,061,167 Less accumulated depreciation and amortization 33,881,939 31,255,266 ----------- ----------- $25,063,916 $18,805,901 =========== =========== NOTE 6: Accrued Expenses Accrued expenses consist of the following: March 31 June 30 ----------- ----------- Compensation $ 1,284,285 $ 989,499 Commissions 718,346 790,609 Restructuring -- 307,843 Accrued pension cost 300,709 401,032 Income taxes 1,074,395 938,984 Other 1,313,210 477,275 ----------- ----------- $ 4,690,945 $ 3,905,242 =========== =========== NOTE 7: Other Liabilities Other liabilities consist of the following: March 31 June 30 ----------- ----------- Deferred compensation $ 532,951 $ 551,380 Other 104,262 -- ----------- ----------- 637,213 551,380 Less current portion 65,000 65,000 ----------- ----------- $ 572,213 $ 486,380 =========== =========== 12 NOTE 8: Long-Term Debt Long-term debt is summarized as follows: March 31 June 30 ----------- ----------- Capitalized lease obligations $ 350,515 $ -- Other 194,659 -- ----------- ----------- 545,174 -- Less current installments 224,481 -- ----------- ----------- $ 320,693 $ -- =========== =========== NOTE 9: 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 Nine Months Ended March 31 March 31 ------------------------- ------------------------- Numerator: 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Earnings available to common stockholders $ 996,328 $ 2,751,806 $ 5,426,413 $11,027,397 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 22,349,444 22,299,876 22,311,591 22,103,970 =========== =========== =========== =========== Denominator for diluted earnings per share: Weighted average shares outstanding 22,349,444 22,299,876 22,311,591 22,103,970 Common stock options and restricted stock 746,224 1,200,806 819,298 1,489,597 ----------- ----------- ----------- ----------- Weighted average shares and conversions 23,095,668 23,500,682 23,130,889 23,593,567 =========== =========== =========== ===========
NOTE 10: 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 13 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. 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: March 31, 2002 $13,350,657 6,470,582 -- $ 19,821,239 March 31, 2001 $16,071,247 5,644,814 -- $ 21,716,061 Nine months ended March 31, 2002 $32,506,281 19,561,128 -- $ 52,067,409 March 31, 2001 $52,635,652 16,492,644 -- $ 69,128,296 Operating income (loss): Three months ended: March 31, 2002 (1,498,856) 2,049,372 -- 550,516 March 31, 2001 1,714,494 672,577 -- 2,387,071 Nine months ended: March 31, 2002 (5,673,872) 5,157,041 -- (516,831) March 31, 2001 8,659,988 2,839,344 -- 11,499,332 Goodwill and intangible assets: March 31, 2002 33,293,709 -- -- 33,293,709 June 30, 2001 23,858,758 -- -- 23,858,758 Identifiable assets:* March 31, 2002 21,230,462 13,263,437 154,469,345 188,963,244 June 30, 2001 17,510,855 12,453,474 155,232,389 185,196,718 Depreciation:** Three months ended: March 31, 2002 646,813 290,582 -- 937,395 March 31, 2001 434,330 309,891 -- 744,221 Nine months ended: March 31, 2002 1,828,156 915,493 -- 2,743,649 March 31, 2001 1,208,526 772,885 -- 1,981,411 Goodwill and intangibles amortization: *** Three months ended: March 31, 2002 124,884 -- -- 124,884 March 31, 2001 429,973 -- -- 429,973 Nine months ended: March 31, 2002 303,375 -- -- 303,375 March 30, 2001 1,194,940 -- -- 1,194,940
* 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 14 services basis for internal management reporting and, therefore, such information is not presented. Assets included in corporate and unallocated principally are cash and cash equivalents, marketable 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 non business 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 nine month period ended March 31, 2002 and its financial condition at March 31, 2002. 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 March 31, 2002 and June 30, 2001, and the consolidated results of operations and cash flows of the Company for the nine months ended March 31, 2002 and 2001. 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, Powerwave, Nokia, Motorola, Lucent Technologies, and Nortel Networks and to satellite communications and defense electronics companies such as Boeing Satellite, Lockheed Martin I.T.T., Raytheon and Northrup Grumman. 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. 15 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, 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 generally 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 $412,005, or $0.02 per share and $1,141,037, or $0.05 per share for the three and nine months ended March 31, 2001, 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. In January 2002, 5M completed the reconstruction of its factory due to a fire in July 2001, which partially destroyed this facility. As of April 2002, 5M's facility is fully operational and 5M is actively engaged in rebuilding its customer base. 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 5M's assets at the time of purchase was significantly higher than the consideration paid by Anaren. This situation resulted 16 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. Net sales for the third quarter ended March 31, 2002 were $19,821,000, down 9.0% from net sales of $21,716,000 for the same period in fiscal 2001. Net sales for the quarter included $881,000 and $1,685,000 from 5M and Amitron, respectively, which Anaren acquired during the first half of fiscal 2002. The Company recorded net income of $996,000, or $0.04 per diluted share, for the third quarter of fiscal 2002, compared to net income of $2,752,000, or $0.12 per diluted share, for the third quarter in fiscal 2001. 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 Nine Months Ended ----------------------------- ----------------------------- Mar. 31, 2002 Mar. 31, 2001 Mar. 31, 2002 Mar. 31, 2001 ------------- ------------- ------------- ------------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 67.9% 64.7% 69.3% 61.6% ----- ----- ----- ----- Gross profit 32.1% 35.3% 30.7% 38.4% ----- ----- ----- ----- Operating expenses: Marketing 10.0% 8.3% 10.3% 7.4% Research and development 8.9% 5.5% 8.7% 5.3% General and administrative 10.4% 10.5% 11.3% 9.1% Fire related 0.0% 0.0% 1.4% 0.0% ----- ----- ----- ----- Total operating expenses 29.3% 24.3% 31.7% 21.8% ----- ----- ----- ----- Operating income (loss) 2.8% 11.0% (1.0%) 16.6% ----- ----- ----- ----- Other income (expense): Other, primarily interest income 3.7% 8.5% 5.8% 8.0% Interest expense (0.1%) (0.2%) (0.2%) (0.2%) ----- ----- ----- ----- Total other income (expense), net 3.6% 8.3% 5.6% 7.8% ----- ----- ----- ----- Income (loss) before income taxes and extraordinary item 6.4% 19.3% 4.6% 24.4% Income taxes 1.4% 6.6% 0.7% 8.5% ----- ----- ----- ----- Income (loss) before extraordinary item 5.0% 12.7% 3.9% 15.9% Extraordinary item - gain on acquisition 0.0% 0.0% 6.5% 0.0% ----- ----- ----- ----- Net income 5.0% 12.7% 10.4% 15.9% ===== ===== ===== =====
17 The following table summarizes the Company's net sales by operating segments for the periods indicated. Amounts are in thousands. Three Months Ended Nine Months Ended March 31 March 31 -------------------- -------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Wireless $13,350 $16,071 $32,506 $52,636 Space and Defense 6,471 5,645 19,561 16,492 ------- ------- ------- ------- $19,821 $21,716 $52,067 $69,128 ======= ======= ======= ======= Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 Net Sales. Net sales decreased $1.9 million, or 9.0%, to $19.8 million for the three months ended March 31, 2002 compared to $21.7 million for the third quarter of the previous year. This decrease was caused by a 17.0% drop in Wireless sales, which was partially offset by a 15.0% 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 push outs beginning in March 2001 and continuing through the third quarter of fiscal 2002. This market downturn has affected all of 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 $2.6 million in sales in the third quarter of fiscal 2002 from 5M and Amitron. Although delivery push outs have stopped and the Company saw a $2.7 million, increase in Wireless sales from quarter two to quarter three, this worldwide Wireless market downturn is expected to continue through 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 $826,000, or 15.0%, in the third quarter of fiscal 2002, compared to the same quarter in the prior fiscal year. This increase in shipments resulted from factory 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, through the remainder of calendar 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 third quarter of fiscal 2002 was $6.4 million (32.1% of net sales), down from $7.7 million (35.3% of net sales) for the third quarter of the prior year. The decrease in gross margin resulted from the decline in sales volume, which caused under absorption of factory overhead compared to the previous year. Presently, the Company expects gross margins to remain at or below current levels in the last quarter of fiscal 2002 and not to improve significantly without an 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 9.9% to $2.0 million (10.0% of net sales) for the third quarter of fiscal 2002 from $1.8 million (8.3% of net sales) for the third quarter of fiscal 2001. Marketing expense increased due to the addition of new east and west coast marketing offices and the 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 48.8% to $1.8 million (8.9% of net sales) in the third quarter of fiscal 2002 from $1.2 million (5.5% of net sales) for the third 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 (in fiscal 2001) and intangible amortization, travel related expenses and other corporate costs. General and administrative expenses decreased 10.0% to $2.1 million (10.4% of net sales) for the third quarter of fiscal 2002 from $2.3 million (10.5% of net sales) for the third 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 $412,000 in the current quarter compared to the third quarter last year. This reduction in goodwill amortization was partially offset by an increase in identifiable intangible amortization of $107,000 in the third quarter of fiscal 2002 associated with the Company's acquisition of Amitron. Additionally, general and administrative expense for the third quarter of fiscal 2002 includes three months of expense for Amitron and 5M. Operating Income: Operating income decreased 77.0%, to $551,000 (2.8% of net sales) for the third quarter of fiscal 2002, down $1.8 million from $2.4 million (11.0% of net sales) for the same period in fiscal 2001. On a reporting segment basis, the Wireless operating loss was $1.5 million for the third quarter of fiscal 2002, down 187.5% or $3.2 million from $1.7 million operating income in the third quarter of fiscal 2001. The principal reason for the decrease in Wireless operating income in the third quarter of fiscal 2002 compared to the same period in fiscal 2001 was the 17% decrease in Wireless sales year over year due to the large decrease in Wireless base station equipment demand worldwide, which began in the last half of fiscal 2001 and continues at the present time. The large decline 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 $1.0 million operating loss at 5M in the second quarter of fiscal 2002 due to fire recovery costs and the low level of sales caused by the fire. Space and Defense operating income rose $1.4 million or 205% for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. This increase resulted from a $826,000 rise in Space and Defense revenues year over year, due to the Spaceway Program entering full production at the end of fiscal year 2001, which resulted in better absorption of fixed overhead in fiscal 2002 compared to the previous year. Additionally, cost reduction and efficiency efforts in this segment were successful in reducing the overall cost of operations in fiscal 2002 compared to last year. 19 Other Income. Other income is primarily interest income received on invested cash balances. Other income decreased 60.0% to $736,000 (3.7% of net sales) for the quarter ended March 31, 2002 from $1.8 million (8.5% 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 $12.1 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 investible cash balances. Interest Expense: Interest expense primarily represents loan interest, commitment fees and interest incurred on certain deferred obligations. Interest expense for the third quarter of fiscal 2002 was $25,000 (0.1% of net sales) compared to $48,000 (0.2% of net sales) for the third quarter of fiscal 2001. Interest expense is minor and fluctuates with the level of lease debt at the Company's subsidiaries. Income Taxes: The tax expense for the third quarter of fiscal 2002 was $265,000 (1.4% of net sales), representing an effective tax rate of 21.0%. This compared to $1.4 million (6.6% of net sales) for the third quarter of fiscal 2001, representing an effective tax rate of 34.3%. The reduction in the Company's effective tax rate is a direct result of the increased proportion of federally exempt state municipal bond income in relation to income before taxes, and as a result of the current loss at 5M, which is generating a foreign tax benefit. Presently, the Company is finalizing an analysis of certain available tax credits and benefits. The Company expects the anticipated completion of the analysis in the fourth quarter of fiscal 2002 to result in a reduction in the effective tax rate. Nine Months ended March 31, 2002 Compared to Nine Months Ended March 31, 2001 Net Sales. Net sales decreased $17.1 million, or 24.6%, to $52.1 million for the nine months ended March 31, 2002, compared to $69.1 million for the first nine months of the previous year. This decrease was caused by a 38.2% drop in Wireless sales, which was partially offset by an 18.6% 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 March 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 from 5M and Amitron. Although delivery push-outs have stopped and the Company saw a small increase in Wireless sales from the second quarter to the third quarter of fiscal 2002, this worldwide Wireless market downturn is expected to continue through the remainder of calendar 2002. Sales in the Space and Defense group rose $3.1 million, or 18.6%, in the first nine months of fiscal 2002, compared to the same period in the prior fiscal year. This increase in shipments resulted from production shipments for the Boeing Spaceway program. This program, which entered full factory production at the end of fiscal 2001, is expected to place Space and Defense shipments in the $6.0 - $7.0 million range, quarterly, for the remainder of calendar 2002. Gross Profit. Gross profit for the first nine months of fiscal 2002 was $15.9 million (30.7% of net sales), down from $26.6 million (38.4% of net sales) for the first nine months of the prior year. The decrease in gross margin resulted from the decline in sales volume, which caused significant under absorption of the factory overhead compared to the previous year. Additionally, margins were further eroded by the acquisition of 5M, whose results reflect costs incurred for 20 outsourcing production and to repair the manufacturing facility, which was partially destroyed by fire in July 2001. Presently, the Company expects gross margins to remain at or below current levels for the remainder of fiscal 2002 without an additional increase in sales volume, both domestically and at 5M. Marketing. Marketing expenses increased 4.7% to $5.3 million (10.3% of net sales) for the first nine months of fiscal 2002 from $5.1 million (7.4% of net sales) for the first nine months of fiscal 2001. This increase resulted from new marketing personnel, the issuance of a new catalog and remodeling of the Company website. 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 partially offset these increases in expense. Marketing expense is expected to increase over the remainder 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 23.7% to $4.5 million (8.7% of net sales) in the first nine months of fiscal 2002 from $3.7 million (5.3% of net sales) for the first nine months of fiscal 2001. Research and development expenditures are supporting further development of wireless infrastructure products and new wireless networking 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 6.4% to $5.9 million (11.3% of net sales) for the first nine months of fiscal 2002 from $6.3 million (9.1% of net sales) for the first nine months 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 $1,141,000 in the first nine months compared to the first three quarters of last year. This reduction in goodwill amortization was partially offset by an increase in identifiable intangibles amortization of $250,000 in the first nine months of fiscal 2002 associated with the Company's acquisition of Amitron. Additionally, general and administrative expense for the first nine months of fiscal 2002 includes $1.5 million representing seven months of expense for Amitron and six 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 $517,000, (1.0% of net sales) for the first nine months of fiscal 2002, down $12.0 million from operating income of $11.5 million (16.6% of net sales) for the same period in fiscal 2001. On a reporting segment basis, the Wireless operating loss was $5.7 million for the first nine months of fiscal 2002, down 165.5% or $14.3 million from operating income of $8.6 million in the first nine months of fiscal 2001. The principal reason for the decrease in Wireless operating income in the first three quarters of fiscal 2002 compared to the same period in fiscal 2001 was the 38.2% decrease in Wireless sales year over year due to the large drop-off in wireless base station equipment demand worldwide which began in the latter part of fiscal 2001 and continues at the present time. The large decline in sales levels in the Wireless segment resulted in significant under absorption of fixed overhead within the group during the first nine months of fiscal 2002. Additionally, operating income in the Wireless sector was further decreased by the $3.4 million operating loss at 5M, incurred over the second and third quarters due to fire recovery expenses and the lower level of sales due to the fire. 21 Space and Defense operating income rose $2.3 million or 81.6% for the first three quarters of fiscal 2002 compared to the first nine months of fiscal 2001. This increase resulted from a $3.1 million rise in space and defense revenues year over year in the first nine months, due to the 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. Additionally, cost reduction and efficiency efforts in this segment were successful in reducing the overall cost of operations in this segment in the current year compared to fiscal 2001. Other Income. Other income decreased 45.1% to $3.0 million (5.8% of net sales) for the nine months ended March 31, 2002 from $5.5 million (8.0% of net sales) for the same period last year. This decrease was caused by the significant decline in market interest rates over the last 12 months brought about by reductions in the Federal Fund rates to stimulate the economy. 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 nine months of fiscal 2002 was $110,000 (0.2% of net sales) compared to $130,000 (0.2% of net sales) for the first nine months of fiscal 2001. The decrease in interest expense resulted from the payoff of a deferred obligation in the third quarter of last fiscal year. Income Taxes. Income tax expense for the first nine months of fiscal 2002 was $382,000 (0.7% of net sales), representing an effective tax rate of 15.9%. This compared to $5.9 million (8.5% of net sales) for the first nine months of fiscal 2001, representing an effective tax rate of 34.7%. The reduction in the Company's effective tax rate is a direct result of the increased proportion of federally exempt state municipal bond income in relation to income before tax and extraordinary item 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 (6.5% 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 second quarter of fiscal 2002. Critical Accounting Policies The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The U.S. Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical policies include: valuation of accounts receivable, which impacts general and administrative expense; valuation of inventory, which impacts cost of sales and gross margin; the assessment of recoverability of goodwill and other intangible assets, which impacts write-offs of goodwill and intangibles, and; accounting for income taxes, which impacts valuation allowance and the effective tax rate. We review the estimates, including, but not limited to, allowance for doubtful accounts, inventory reserves and income tax valuations on a regular basis and makes adjustments based on historical experiences, current conditions and future expectations. The reviews are performed regularly and adjustments are made as required by current available information. We believe these estimates are reasonable, but actual results could differ from these estimates. We state inventory at the lower of cost or market, using a standard cost methodology to determine the cost basis for the inventory. This method approximates actual cost on a first-in-first-out basis. The recoverability of inventories is based on the types and levels of inventory held, forecasted demand, price competition and changes in technology. The Company's accounts receivable represent those amounts, which have been billed to our customers but not yet collected. We analyze various factors including historical experience, credit worthiness of customers and current market and economics conditions. The allowance for doubtful accounts balance is established based on the portion of those accounts receivable, which are deemed to be potentially uncollectible. Changes in judgment on these factors could impact the timing of costs recognized. The Company records valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. Presently, we feel that all deferred tax assets will more likely than not be realized and a valuation allowance is not required. We evaluate the need for valuation allowances on a regular basis and adjusts as needed. These adjustments, when made, would have an impact on the Company's financial statements in the period that they were recorded. Our excess cash investment portfolio consists of both hold-to-maturity marketable debt securities and held-for-sale equity securities. The hold-to-maturity marketable debt securities consist of highly rated short and medium term investments, such as municipal securities, U.S. Treasury securities, corporate debt securities and other similar low risk investments. Although the Company manages its investments under an investment policy, market, economic and other events may occur to the investment security issuers, which the Company cannot control. The Company does not hold or issue derivatives, derivative commodity instruments or other financial instruments for trading purposes. Intangible assets with estimable useful lives are amortized to their residual values over those estimated useful lives in proportion to the economic benefit consumed. Goodwill is tested annually for impairment by the Company at the reporting unit level, by comparing the fair value of the reporting unit with its carrying value. Valuation methods for determining the fair value of the reporting unit include reviewing quoted market prices and discounted cash flows. If the goodwill is indicated as being impaired (the fair value of the reporting units is less than the carrying amount), the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value of the reporting unit goodwill is then compared with the carrying amount of the reporting unit goodwill and, if it is less, the Company would then recognize an impairment loss. The preparation of future cash flows requires significant judgments and estimates with respect to future revenues related to the asset and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in change in this assessment and result in an impairment charge. The use of different assumptions could increase or decrease the related impairment charge. Liquidity and Capital Resources Net cash provided by operations for the nine months ended March 31, 2002 and the nine months ended March 31, 2001 were $13.9 million and $17.5 million, respectively. The positive flow from operations in the first nine months of both fiscal 2002 and 2001 was due to the net income attained in both periods and, in fiscal 2002, to the large amount of cash received in the second and third quarters ($10.7 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 2001 and 5M in October 2001. Capital equipment placed in service amounted to $7.2 million, including $5.0 million at 5M, in the nine months ended March 31, 2002 compared to $7.2 million in the first nine months of the previous fiscal year. The Company expended $9.9 million in cash to purchase all the capital stock of Amitron. Funds for this transaction were obtained through the proceeds of matured marketable debt securities in the amount of $13.3 million. 22 The Company expended $3.9 million in cash to purchase the capital stock of 5M. Funds for this transaction came from the Company's operating cash account. Significant cash used in investing activities in the first nine months of the prior year was $17.9 million used to purchase the assets of Ocean Microwave, Inc. 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 $1.0 million for the first nine months of fiscal 2002 and consisted of $1.4 million used to pay off loans of Amitron and 5M; reduced by $391,000 generated from the exercise of stock options. In the first half of the prior year funds generated by financing activities amounted to $2.5 million and consisted of $2.8 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 March 31, 2002. At March 31, 2002, 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. Disclosures About Contractual Obligations and Commercial Commitments Accounting standards require disclosure concerning the Company's obligation and commitments to make future payments under contracts, such as debt, lease agreements, and under contingent commitments, such as debt guarantees. The Company's obligations and commitments are as follows:
Less Total than 1 Yr. 2-3 Yrs 4-5 Yrs Over 5 Yrs ---------- ---------- ---------- ---------- ---------- Contractual obligations Payment Due by Period - ----------------------- --------------------- Long term debt $ 545,174 $ 224,481 $ 320,693 $ -- $ -- Operating leases - facilities 5,921,363 854,662 1,271,291 1,097,817 2,697,593 Deferred compensation 532,951 65,000 130,000 130,000 207,951 Lines of credit -- -- -- -- --
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 23 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. 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 risks associated with any technological shifts away from the Company's technologies and core competencies; o 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 unanticipated difficulties in becoming requalified by 5M's customers; 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 March 31, 2002, the Company had cash, cash equivalents and marketable debt securities of $125.4 million, of which approximately $112.6 million consisted of highly liquid investments in 24 marketable debt securities and $1.1 million consisted of marketable equity securities. The marketable debt securities at 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 March 31, 2002 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 or results of operations. Over time, however, declines in interest rates will reduce the Company's interest income. The Company currently owns equity investments held for sale with a market value of approximately $1.1 million. Fluctuations in market value of these securities are charged to shareholder's equity monthly. A theoretical 10% decline in market value of these securities would result in an $110,000 reduction in shareholder's equity. 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 until such time as 5M's sales increase significantly. 25 Item 4. Submission of Matters to a Vote of Security Holders None. Item 6. Exhibits and Reports on Form 8-K Item 6(a) Exhibits None. 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: May 14, 2002 S/Lawrence A. Sala ---------------------------------------- President & Chief Executive Officer Date: May 14, 2002 S/Joseph E. Porcello ---------------------------------------- Vice President of Finance and Treasurer 27 -----END PRIVACY-ENHANCED MESSAGE-----