-----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, OWTBf8gXrBte0+zYBggaiCOqQ2ug+Aaxcrl8QFKmPodmSDGbXTvKWfJKexcpK+Bl rwXpSOpqFCucBBcdCCkIPQ== 0000891092-03-000091.txt : 20030129 0000891092-03-000091.hdr.sgml : 20030129 20030129095243 ACCESSION NUMBER: 0000891092-03-000091 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANAREN 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: 03528945 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 e14184_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 December 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, 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 Anaren Microwave, Inc. - -------------------------------------------------------------------------------- (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 January 27, 2003 was 22,418,120. ANAREN, INC. INDEX PART I - FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 3 December 31, 2002 (unaudited) and June 30, 2002 Consolidated Condensed Statements of Earnings 4 for the Three Months Ended December 31, 2002 and 2001 (unaudited) Consolidated Condensed Statements of Earnings 5 for the Six Months Ended December 31, 2002 and 2001 (unaudited) Consolidated Condensed Statements of Cash Flows 6 for the Six Months Ended December 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 25 Item 4. Controls & Procedures 27 PART II - OTHER INFORMATION Item 5. Submission of Matters to a Vote of Security Holders 28 Item 6. Exhibits and Reports on Form 8-K 28 Officer Certifications 30 - 31 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheets December 31, 2002 and June 30, 2002 (Unaudited) Assets December 31, 2002 June 30, 2002 ------ ----------------- ------------- Current assets: Cash and cash equivalents $ 16,290,485 $ 12,565,424 Securities available for sale (note 3) 5,176,818 3,820,942 Securities held to maturity (note 3) 91,728,318 98,955,299 Receivables, less allowance of $558,724 and $529,000, respectively 11,495,026 13,106,583 Inventories (note 4) 17,975,182 20,119,433 Interest and other receivables 1,103,927 1,206,396 Deferred income taxes 1,798,821 1,356,294 Other current assets 1,258,403 1,130,173 ------------ ------------ Total current assets 146,826,980 152,260,544 ------------ ------------ Securities held to maturity 13,458,543 9,564,558 Property, plant and equipment, net (note 5) 27,951,805 26,592,375 Patents, net of accumulated amortization of $251,548 at December 31, 2002 and $215,613 at June 30, 2002 (note 2) 323,418 359,353 Goodwill (note 2) 30,715,861 30,715,861 Other intangible assets, net of accumulated amortization of $570,224 at December 31, 2002 and $356,390 at June 30, 2002 (note 2) 1,879,776 2,093,610 ------------ ------------ $221,156,383 $221,586,301 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,513,396 $ 5,046,048 Accrued expenses (note 6) 3,609,230 3,297,207 Customer advance payments -- 244,831 Other current liabilities (note 8) 218,675 185,725 ------------ ------------ Total current liabilities 7,341,301 8,773,811 Deferred income taxes 1,456,095 1,357,359 Postretirement benefit obligation 1,440,085 1,440,085 Other liabilities (note 8) 449,522 461,808 ------------ ------------ Total liabilities 10,687,003 12,033,063 ------------ ------------ Stockholders' equity: Common stock of $.01 par value Authorized 200,000,000 shares; issued 25,666,742 shares at December 31, 2002 and 25,636,442 at June 30, 2002 256,667 256,364 Additional paid-in capital 169,101,273 168,901,645 Unearned compensation (768,315) (1,086,669) Accumulated other comprehensive loss (457,878) (828,061) Retained earnings 47,703,971 47,082,597 ------------ ------------ 215,835,718 214,325,876 Less cost of 3,249,622 and 3,177,822 treasury shares at December 31, 2002 and June 30, 2002 5,366,338 4,772,638 ------------ ------------ Total stockholders' equity 210,469,380 209,553,238 ------------ ------------ $221,156,383 $221,586,301 ============ ============ See accompanying notes to consolidated condensed financial statements. 3 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Three Months Ended December 31, 2002 and 2001 (Unaudited) 2002 2001 ---- ---- Net sales $20,885,138 $17,244,979 Cost of sales 15,314,622 12,777,227 ----------- ----------- Gross profit 5,570,516 4,467,752 ----------- ----------- Operating expenses: Marketing 1,652,078 1,849,196 Research and development 1,527,747 1,591,697 General and administrative 2,388,420 2,083,467 Fire related (note 1) -- 711,400 ----------- ----------- Total operating expenses 5,568,245 6,235,760 ----------- ----------- Operating income (loss) 2,271 (1,768,008) Other income, primarily interest 641,059 1,011,256 Interest expense (10,162) (68,891) ----------- ----------- Income (loss) before income taxes 633,168 (825,643) and extraordinary item Income tax expense (benefit) 158,000 (474,000) ----------- ----------- Income (loss) before extraordinary item 475,168 (351,643) ----------- ----------- Extraordinary item - gain on acquisition (note 1) -- 3,407,244 ----------- ----------- Net income $ 475,168 $ 3,055,601 =========== =========== Basic earnings (loss) per share: Income (loss) before extraordinary item $0.02 $(0.02) Extraordinary item - gain on acquisition 0.00 0.15 ----- ----- Net income $0.02 $0.13 ===== ===== Diluted earnings (loss) per share: Income (loss) before extraordinary item $0.02 $(0.02) Extraordinary item - gain on acquisition 0.00 0.15 ----- ------ Net income $0.02 $ 0.13 ===== ====== Shares used in computing net earnings (loss): Basic 22,301,824 22,336,004 =========== =========== Diluted 22,821,430 23,164,627 =========== =========== See accompanying notes to consolidated condensed financial statements. 4 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Six Months Ended December 31, 2002 and 2001 (Unaudited) Dec. 31, 2002 Dec. 31, 2001 ------------- ------------- Net sales $41,309,011 $32,246,170 Cost of sales 30,346,988 22,647,365 ----------- ----------- Gross profit 10,962,023 9,598,805 ----------- ----------- Operating expenses: Marketing 3,385,883 3,368,231 Research and development 2,928,808 2,744,363 General and administrative 4,697,102 3,842,158 Fire related (note 1) -- 711,400 Restructuring 403,403 -- ----------- ----------- Total operating expenses 11,415,196 10,666,152 ----------- ----------- Operating loss (453,173) (1,067,347) Other income, primarily interest 1,310,231 2,292,327 Interest expense (29,684) (85,139) ----------- ----------- Income before income taxes and extraordinary item 827,374 1,139,841 Income tax expense 206,000 117,000 ----------- ----------- Income before extraordinary item 621,374 1,022,841 Extraordinary item - gain on acquisition (note 1) -- 3,407,244 ----------- ----------- Net income $ 621,374 $ 4,430,085 =========== =========== Basic earnings per share: Income before extraordinary item $0.03 $0.05 Extraordinary item - gain on acquisition 0.00 0.15 ----- ----- Net income $0.03 $0.20 ===== ===== Diluted earnings per share: Income before extraordinary item $0.03 $0.04 Extraordinary item - gain on acquisition 0.00 0.15 ----- ----- Net income $0.03 $0.19 ===== ===== Shares used in computing net earnings (loss): Basic 22,316,557 22,293,076 =========== =========== Diluted 22,816,521 23,148,911 =========== =========== See accompanying notes to consolidated condensed financial statements. 5 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows Six Months Ended December 31, 2002 and 2001 (Unaudited) Dec. 31, 2002 Dec. 31, 2001 Cash flows from operating activities: ------------- ------------- Net income $ 621,374 $ 4,430,085 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,518,680 1,806,254 Amortization of intangibles 249,769 178,491 Deferred income taxes (343,791) (640,849) Unearned compensation 318,354 318,354 Tax benefit from exercise of stock options -- 96,931 Gain on Acquisition (note 2) -- (3,407,244) Changes in operating assets and liabilities, net of acquisition: Receivables 1,611,557 1,447,740 Inventories 2,144,251 814,362 Insurance receivable -- 5,339,020 Interest and other receivables 102,469 (34,311) Other current assets (128,230) 807,988 Accounts payable (1,532,652) 1,125,087 Accrued expenses 312,023 (2,497,355) Customer advance payments (244,831) (615,617) Other liabilities 20,664 77,562 Postretirement benefit obligation -- 76,499 ----------- ------------ Net cash provided by operating activities 5,649,637 9,322,997 ----------- ------------ Cash flows from investing activities: Capital expenditures (3,597,185) (6,325,529) Net maturities of marketable debt and equity securities 1,976,719 7,540,638 Purchase of businesses, net of cash acquired -- (12,073,362) ----------- ------------ Net cash used in investing activities (1,620,466) (10,858,253) ----------- ------------ Cash flows from financing activities: Net payments on long term debt -- (1,546,261) Stock options exercised 199,931 375,269 Purchase of treasury stock (593,700) -- ----------- ------------ Net cash used in financing activities (393,769) (1,170,992) ----------- ------------ Effect of exchange rates 89,659 (202,444) Net increase (decrease) in cash and cash equivalents 3,725,061 (2,908,692) Cash and cash equivalents at beginning of period 12,565,424 11,748,542 ----------- ------------ Cash and cash equivalents at end of period $16,290,485 $ 8,839,850 =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Period For: Interest $ 29,684 $ 85,139 =========== ============ Income taxes, net of refunds $ 750,000 $ 1,059,000 =========== ============ 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, 2002, 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, 2002. The results of operations for the six months ended December 31, 2002 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2003, or any future interim period. On December 16, 2002, at a Special Meeting of Shareholders, the Company's shareholders approved the creation of a holding company structure in which the Company's operating assets would be transferred to a newly formed, wholly owned, subsidiary and authorized an amendment to the Company's Certificate of Incorporation to change the name of the Company from Anaren Microwave, Inc. to Anaren, Inc. The name change to Anaren, Inc. became effective on December 20, 2002 and the Company's operating assets were transferred to a wholly owned subsidiary (named Anaren Microwave, Inc.) effective December 31, 2002. The income tax rates utilized for interim financial statement purposes for the six months ended December 31, 2002 and 2001 are based on estimates of income and utilization of tax credits for the entire year. NOTE 1: Acquisitions 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, 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 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. 7 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. (now known as Anaren Europe B.V.). Anaren Europe, based in Almelo, Netherlands, is a manufacturer of microwave circuits. Anaren Europe's manufacturing technology is very similar to the Company's multi-layer stripline technology. In addition, Anaren Europe 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. The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the results of operations of Anaren Europe have been included in the Company's consolidated financial statements since the date of acquisition. The purchase consideration for Anaren Europe 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 Anaren Europe's assets acquired and liabilities assumed exceeded the purchase consideration and the resulting, negative goodwill served to reduce the fair value of purchased equipment to zero with the remaining excess recognized as an extraordinary gain. The 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 =========== 8 The Anaren Europe 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 Anaren Europe purchase price as of October 1, 2001. The following unaudited pro forma financial information presents the combined results of operations of the Company, Amitron and Anaren Europe as if the acquisitions had taken place as of July 1, 2001. 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, Amitron and Anaren Europe constituted a single entity during such periods. Three Months Ended Six Months Ended ------------------------- ------------------------- December 31 December 31 December 31 December 31 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net sales $20,885,138 $17,244,979 $41,309,011 $34,578,482 Insurance recoveries -- 14,126,694 -- 15,999,972 Net income 475,168 9,838,474 621,374 9,871,285 Earnings per share: Basic $0.02 .44 $0.03 .44 Diluted $0.02 .42 $0.03 .43 For purposes of the pro forma financial information, the July 2001 Anaren Europe 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. The pro forma information reflects no goodwill amortization for the three and six months ended December 31, 2002 and 2001 due to the adoption of FASB 142, "Goodwill and Intangible Assets", by the Company. 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: 9 INTANGIBLE ASSETS: Intangible assets as of December 31, 2002 are as follows: Gross Carrying Accumulated Amount Amortization -------------- ------------ Patent $ 574,966 $251,548 Customer Base 1,350,000 300,000 Trade Name 320,000 142,224 Non-Competition Agreements 180,000 48,000 Favorable Lease 600,000 80,000 ---------- -------- Total $3,024,966 $821,772 ========== ======== Intangible asset amortization expense for the six month period ended December 31, 2002 and 2001 aggregated $249,769 and $178,491, respectively. Amortization expense related to intangible assets for the next five years is as follows: Year Ending June 30, 2003 $499,539 2004 $499,539 2005 $410,645 2006 $392,871 2007 $362,879 GOODWILL: The changes in the carrying amount of goodwill for the three month period ended December 31 are as follows: Fiscal Fiscal 2003 2002 ------ ------ Balance as of June 30, 2002 $30,715,861 $23,410,534 and 2001, respectively Goodwill acquired -- 7,305,327 Goodwill amortization -- -- ----------- ----------- Balance as of December 31, 2002 and 2001, respectively $30,715,861 $30,715,861 =========== =========== 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. In addition, the Company completed a valuation as of the one year anniversary of adoption of the new standard. As a result of the impairment assessment, no goodwill impairment was found and no current asset write down is required. 10 NOTE 3: Marketable Securities Marketable securities are summarized as follows: December 31 June 30 ----------- ------- Marketable debt securities - held-to-maturity $105,186,861 $108,519,857 Marketable equity securities - available for sale 5,176,818 3,820,942 ------------ ------------ Total 110,363,679 112,340,799 Current portion 96,905,136 102,776,241 ------------ ------------ Long term $ 13,458,543 $ 9,564,558 ============ ============ NOTE 4: Inventories Inventories are summarized as follows: December 31 June 30 ----------- ------- Component parts $ 7,975,673 $ 9,086,987 Work in process 6,630,508 6,179,545 Finished goods 3,369,001 4,852,901 ----------- ----------- $17,975,182 $20,119,433 =========== =========== NOTE 5: 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, furniture and fixtures 12,612,113 12,258,796 Machinery and equipment 51,245,675 47,720,881 ----------- ----------- $65,453,609 $61,575,498 Less accumulated depreciation and amortization 37,501,804 34,983,123 ----------- ----------- $27,951,805 $26,592,375 =========== =========== NOTE 6: Accrued Expenses Accrued expenses consist of the following: December 31 June 30 ----------- ------- Compensation $ 951,637 $1,045,085 Commissions 645,872 573,325 Accrued pension cost 612,569 535,874 Income taxes 415,929 530,857 Health insurance 519,909 330,177 Restructuring (note 7) 83,171 -- Other 380,143 281,889 ---------- ---------- $3,609,230 $3,297,207 ========== ========== 11 NOTE 7: Restructuring In September 2002, the Company recorded $403,403 of restructuring charges. The restructuring charges were associated with the Company's restructuring plan as it relates to its wholly owned subsidiary Anaren Europe, B.V. The Company's restructuring plan was primarily aimed at reducing the cost of excess personnel, including termination of 24 employees. The Company's restructuring plans and associated costs consisted of the following: September 30, Cash December 31, 2002 Payments 2002 ------------- -------- ------------ Severance payment $293,206 ($279,514) $13,692 Outplacement services and others 110,197 (40,718) 69,479 -------- --------- ------- Total $403,403 ($320,232) $83,171 ======== ========= ======= All terminations and termination benefits were communicated to the affected employees prior to the quarter ended September 30, 2002, and severance benefits are expected to be paid in full during fiscal year 2003. Under the restructuring, 24 employees were terminated. At December 31, 2002, outstanding liabilities related to the restructuring totaled $83,171 and are included in accrued expenses in the accompanying Balance Sheets. NOTE 8: Other Liabilities Other liabilities consist of the following: December 31 June 30 ----------- ------- Deferred compensation $514,522 $526,808 Other 153,675 120,725 -------- -------- 668,197 647,533 Less current portion 218,675 185,725 -------- -------- $449,522 $461,808 ======== ======== 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 weighted average number of common shares utilized in the calculation of the diluted income per share does not include antidilutive shares aggregating 2,425,700 and 2,225,200 at December 31, 2002 and 2001, respectively. 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. 12 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: 2002 2001 2002 2001 ---- ---- ---- ---- Earnings available to common stockholders $ 475,168 $ 3,055,601 $ 621,374 $ 4,430,085 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 22,301,824 22,336,004 22,316,557 22,293,076 =========== =========== =========== =========== Denominator for diluted earnings per share: Weighted average shares outstanding 22,301,824 22,336,004 22,316,557 22,293,076 Common stock options and restricted stock 519,606 828,623 499,964 855,835 ----------- ----------- ----------- ----------- Weighted average shares and conversions 22,821,430 23,164,627 22,816,521 23,148,911 =========== =========== =========== ===========
NOTE 10: Segment Information The Company operates predominately in the wireless communications, satellite communications 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, 2002 $13,316,311 7,568,827 -- $ 20,885,138 December 31, 2001 $10,612,648 6,632,331 -- $ 17,244,979 Six months ended December 31, 2002 $26,424,657 14,884,354 -- $ 41,309,011 December 31, 2001 $19,155,624 13,090,546 -- $ 32,246,170 Operating income (loss): Three months ended: December 31, 2002 (1,521,726) 1,523,997 -- 2,271 December 31, 2001 (3,399,840) 1,631,832 -- (1,768,008) Six months ended: December 31, 2002 (3,637,320) 3,184,147 -- (453,173) December 31, 2001 (4,176,916) 3,109,569 -- (1,067,347) Goodwill and intangible assets: December 31, 2002 32,919,055 -- -- 32,919,055 June 30, 2002 33,168,824 -- -- 33,168,824 Identifiable assets:* December 31, 2002 15,713,308 13,756,900 158,767,120 188,237,328 June 30, 2002 19,147,586 14,096,923 155,172,968 188,417,477 Depreciation:** Three months ended: December 31, 2002 963,102 373,348 -- 1,336,450 December 31, 2001 694,881 284,684 -- 979,565 Six months ended: December 31, 2002 1,775,290 743,390 -- 2,518,680 December 31, 2001 1,181,343 624,911 -- 1,806,254 Goodwill and intangibles amortization:*** Three months ended: December 31, 2002 124,884 -- -- 124,884 December 31, 2001 124,884 -- -- 124,884 Six months ended: December 31, 2002 249,769 -- -- 249,769 December 30, 2001 178,491 -- -- 178,491
* 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 equivalents, marketable securities, other receivables, prepaid expenses, deferred income taxes, and property, plant and equipment not specific to business acquisitions. 14 ** 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 three month and six month periods ended December 31, 2002 and its financial condition at December 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 December 31, 2002 and June 30, 2002, and the consolidated results of operations and cash flows of the Company for the six months ended December 31, 2002 and 2001. On December 16, 2002, at a Special Meeting of Shareholders, the Company's shareholders approved the creation of a holding company structure in which the Company's operating assets would be transferred to a newly formed, wholly owned, subsidiary and authorized an amendment to the Company's Certificate of Incorporation to change the name of the Company from Anaren Microwave, Inc. to Anaren, Inc. The name change to Anaren, Inc. became effective on December 20, 2002 and the Company's operating assets were transferred to a wholly owned subsidiary (named Anaren Microwave, Inc.) effective December 31, 2002. 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, Lucent Technologies, Motorola, Nokia, Nortel Networks, and Powerwave and to satellite communications and defense electronics companies such as Boeing Satellite, I.T.T., Lockheed Martin, Northrup Grumman and Raytheon. 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 15 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. 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 (now known as Anaren Europe, B.V.), a manufacturer of microwave circuits based in Almelo, Netherlands. Anaren Europe'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, Anaren Europe completed the reconstruction of its factory due to a fire in July 2001, which partially destroyed this facility. As of July 2002, Anaren Europe's facility was fully operational and the Company is actively engaged in rebuilding its customer base lost due to the fire. As a result of the fire, Anaren Europe 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 and repairing the facility and equipment damaged in the fire and to recognize the replacement cost for inventory and equipment destroyed by the fire. In March 2002, the Company, through a newly created subsidiary, Anaren Communication Suzhou Co., Ltd., signed a three-year lease for a 12,300 square foot manufacturing facility in Suzhou Industrial Park in Suzhou, China. The Company has hired a General Manager and additional staff for the facility and began light manufacturing and assembly at this location during the second quarter of fiscal 2003. It is anticipated that this facility will serve all of the Company's Asian customers and will concentrate on producing more labor intensive products. Additionally, it is expected that the Company will use this location to facilitate procurement of raw materials in China, when possible, for the Company's other subsidiaries. In September 2002, as a result of customers lost due to the fire and the general decline in the wireless market, the Company made a decision to downsize the Anaren Europe workforce by 24 people. The cost of this restructuring was $403,403 and included notice and severance pay, benefit costs, and outplacement costs. This charge has been recognized as a separate line item in the income statement for the six months ended December 31, 2002, and is expected to be paid in full during fiscal year 2003. 16 On September 19, 2002, the Company submitted an acquisition proposal to Celeritek, Inc.'s Chairman, President and Chief Executive Officer, which stated that the Company was prepared to offer $8.75 per share in an all-cash transaction to acquire all of the outstanding shares of Celeritek, subject to successful completion of customary due diligence and negotiation and execution of a definitive acquisition agreement. On September 25, 2002, Celeritek issued a press release announcing that its Board had rejected the Company's proposal claiming it "is not in the best interests of Celeritek shareholders." The Company has taken no further action regarding its equity position in Celeritek or its offer to purchase all of the outstanding shares of Celeritek since learning of Celeritek's rejection on September 25, 2002. Anaren intends to continue to consider all of the alternatives available to it, and may pursue one or more of the possible actions outlined in its Schedule 13D, as amended. The Company's original investment in Celeritek common stock averaged approximately $8.47 a share and totaled $6.6 million. During the six month reporting period ended December 31, 2002 the market value of Celeritek common stock has fluctuated substantially, and has, at times traded above the cost of the Company's investment. This investment had a market value at December 31, 2002 of approximately $5.2 million, a decline of $1.4 million. The Company considers this to be a temporary decline in market value and it has been recorded as a charge to other comprehensive loss in the shareholders'equity section of the balance sheet at December 31, 2002. If, at a future date, this drop in market value is determined to be other than temporary, then the decline in value, including the amount previously charged as other comprehensive loss to shareholders equity, would at that time be recognized as a loss in the current period income statement. Net sales for the second quarter ended December 31, 2002 were $20,885,000, up 21.1% from net sales of $17,245,000 for the same period in fiscal 2002. The Company recorded earnings of $475,000, or $0.02 per diluted share, for the second quarter of fiscal 2003, compared to a net loss before extraordinary item of ($352,000), or ($0.02) per diluted share and net income of $3.1 million, or $0.13 per diluted share for the same quarter last year. 17 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, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2001 ------------- ------------- ------------- ------------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 73.3% 74.1% 73.5% 70.2% ----- ------ ----- ----- Gross profit 26.7% 25.9% 26.5% 29.8% ----- ------ ----- ----- Operating expenses: Marketing 7.9% 10.7% 8.2% 10.5% Research and development 7.3% 9.2% 7.1% 8.5% General and administrative 11.5% 12.1% 11.3% 11.9% Restructuring -- -- 1.0% -- Fire related -- 4.2% -- 2.2% ----- ------ ----- ----- Total operating expenses 26.7% 36.2% 27.6% 33.1% ----- ------ ----- ----- Operating income (loss) -- (10.3%) (1.1%) (3.3%) ----- ------ ----- ----- Other income (expense): Other, primarily interest income 3.1% 5.9% 3.2% 7.1% Interest expense (0.1%) (0.4%) (0.1%) (0.3%) ----- ------ ----- ----- Total other income (expense), net 3.0% 5.5% 3.1% 6.8% ----- ------ ----- ----- Income (loss) before income taxes and extraordinary item 3.0% (4.8%) 2.0% 3.5% Income taxes 0.7% (2.8%) 0.5% 0.3% ----- ------ ----- ----- Income (loss) before extraordinary item 2.3% (2.0%) 1.5% 3.2% Extraordinary item - gain on acquisition -- 19.7% -- 10.5% ----- ------ ----- ----- Net income 2.3% 17.7% 1.5% 13.7% ===== ====== ===== =====
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 ------------------ ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- Wireless $13,316 $10,613 $26,424 $19,156 Space and Defense 7,569 6,632 14,885 13,090 ------- ------- ------- ------- $20,885 $17,245 $41,309 $32,246 ======= ======= ======= ======= Three Months Ended December 31, 2002 Compared to Three Months Ended December 31, 2001 Net Sales. Net sales increased $3.6 million, or 21%, to $20.9 million for the three months ended December 31, 2002 compared to $17.2 million for the second quarter of the previous fiscal year. This increase resulted from a $2.7 million (25.5%) rise in shipments of wireless infrastructure products and a $937,000 (14.1%) increase in sales of Space and Defense products. 18 The increase in sales of Wireless products, which consist of standard surface mount components and custom subassemblies for use in building wireless base station equipment, was the result of a slight general rise in customer demand for wireless infrastructure products. Wireless product and customer lead times remain very short, resulting in little or no visibility going forward. Given this ongoing situation, the Company expects Wireless sales to remain at or below current levels in the second half of fiscal 2003. Space and Defense products consist of custom components and assemblies for communication satellites and defense radar and countermeasure subsystems for the military. Sales in the Space and Defense group rose $937,000, or 14.1%, in the second quarter of fiscal 2003, compared to the same quarter in the prior fiscal year. This increase in shipments resulted from production sales under a number of defense contracts for Digital Frequency Discriminators (DFD's) and Digital RF Memories (DRFMs) for foreign applications, radar antenna feed networks and precision ranging subsystems (PRSS) for U.S. Government applications. These products were part of the rise in defense orders in the Company's backlog over the last fiscal year. Space and Defense shipments are expected to range between $7.0 and $7.5 million per quarter for the remainder of fiscal 2003. Gross Profit. Cost of sales consists primarily of engineering design costs, material, material fabrication costs, assembly costs, direct and indirect overhead, and test costs. Gross profit for the second quarter of fiscal 2003 was $5.6 million (26.7% of net sales), up $1.1 million from $4.5 million (25.9% of net sales) for the same quarter of the prior year. The rise in gross margin as a percent of net sales in quarter two is a result of the 21% increase in sales over quarter two in fiscal 2002 and the Company's continuing cost cutting programs. The Company has reduced its personnel levels by 68 people, or 10.3%, over the first six months of this fiscal year. These cost cutting efforts should help to improve future gross margins, but any significant improvement in gross margins will only occur with a rise in sales volume. Marketing. Marketing expenses consist mainly of employee related expenses, commissions paid to sales representatives, trade show expenses, advertising expenses and related travel expenses. Marketing expenses decreased 10.7% to $1.7 million (7.9% of net sales) for the second quarter of fiscal 2003 from $1.9 million (10.7% of net sales) for the second quarter of fiscal 2002. Marketing expense declined in the second quarter of fiscal 2003 due to a budgeted decline in advertising expenditures in the current fiscal year compared to 2002 and the reassignment of some marketing personnel to other company functions. 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 decreased 4.0% to $1.5 million (7.3% of net sales) in the second quarter of fiscal 2003 from $1.6 million (9.2% of net sales) for the second quarter of fiscal 2002. Research and development expenditures are supporting further development of wireless infrastructure products and new wireless networking product opportunities. Despite the continuing 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, and intangible amortization, travel related expenses and other corporate costs. General and administrative expenses increased 14.6% to $2.4 million (11.5% of net sales) for the second quarter of fiscal 2003 from $2.1 million (12.1% of net sales) for the 19 second quarter of fiscal 2002. Of the $300,000 increase in the second quarter, approximately $125,000 was related to professional services associated with the Celeritek bid, $100,000 was related to the Company's new operation in China and the remainder represents personnel reclassifications due to the new holding company structure. Operating Income: Operating income increased $1.8 million in the second quarter of fiscal 2003 to a profit of $2,000 (0.0% of sales), from a loss of $1.8 million, (10.3% of net sales), for the second quarter of fiscal 2002. On a reporting segment basis, the Wireless operating loss was $1.5 million for the second quarter of 2003, an improvement of $1.9 million from the Wireless operating loss of $3.4 million in the second quarter of 2002. The principal reason for the improvement in the Wireless operating loss was the decrease in the operating loss at Anaren Europe in the current second quarter ($900,000) compared to the operating loss at Anaren Europe in the second quarter of 2002 ($2.4 million). The operating loss at Anaren Europe for the second quarter last year included approximately $1.2 million in fire related costs and costs to outsource production due to the July 2001 fire. Wireless operating profits in the second quarter of fiscal 2003 improved approximately $600,000 over the first quarter, but are expected to remain depressed at current sales levels. Space and Defense operating income fell $108,000 in the second quarter of fiscal 2003 to $1.5 million compared to $1.6 million in the second quarter of fiscal 2002. This decrease resulted from a change in product mix during the current second quarter compared to the second quarter last year. This year's second quarter sales included more military programs while the sales in the second quarter last year were driven by more profitable Space programs. Other Income. Other income is primarily interest income received on invested cash balances. Other income decreased 36.6% to $641,000 (3.1% of net sales) for the quarter ended December 31, 2002 from $1.0 million (5.9% 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. Interest income will fluctuate based on the level of interest rates and the level of investable cash balances. Interest Expense: Interest expense represents commitment fees and interest paid on a deferred obligation. Interest expense for the second quarter of fiscal 2003 was $10,000 (0.1% of net sales) compared to $69,000 (0.4% of net sales) for the second quarter of fiscal 2002. Income Taxes: Income tax expense for the second quarter of fiscal 2003 was $158,000 (0.7% of net sales), representing an effective tax rate of 25%. This compares to a tax benefit of 2.8% of net sales for the second quarter of fiscal 2002, representing an effective tax benefit rate of 57.4%. The Company's effective tax rate is a direct result of the proportion of federally exempt state municipal bond income and federal tax credit and benefits in relation to the levels of taxable income. Six Months Ended December 31, 2002 Compared to Six Months Ended December 31, 2001 Net Sales. Net sales increased $9.1 million; or 28.1%, to $41.3 million for the first six months of fiscal 2003, compared to $32.2 million for the first six months of the prior fiscal year. This increase consisted of a $7.3 million (37.9%) rise in Wireless sales and a $1.8 million (13.7%) increase in shipments of Space and Defense products. The $7.3 million increase in fiscal 2003 Wireless sales resulted from a combination of new acquisitions during fiscal 2002 and increased customer demand. Wireless sales for the first half 20 of fiscal 2003 include a full six months of sales for Amitron and Anaren Europe, while the first six months of fiscal 2002 included only three months and four months sales for Anaren Europe and Amitron, respectively. These acquisitions resulted in additional sales in fiscal 2003 of $3.4 million compared to fiscal 2002. Additionally, customer wireless infrastructure demand rose slightly in the second quarter, coming mainly from Asian customers. Sales in the Space and Defense group rose $1.8 million or 13.7%, in the first six months of fiscal 2003, compared to the same period in the prior fiscal year. This increase in shipments resulted from production sales under a number of defense contracts for Digital Frequency Discriminators (DFDs) and Digital RF Memories (DRFMs) for foreign applications, radar antenna feed networks, and precision ranging subsystems (PRSS) for U.S. Government applications. These products were part of the rise in defense orders in the Company's backlog during the last fiscal year. Space and Defense shipments are expected to range between $7.0 and $7.5 million per quarter for the remainder of fiscal 2003. Gross Profit. Gross profit for the first half of fiscal 2003 was $11.0 million (26.5% of net sales, up $1.4 million from $9.6 million (29.8% of net sales) for the first six months of fiscal 2002. Gross profit as a percent of sales fell in the current six months compared to the same period last year due to the inclusion of Anaren Europe for a full two quarters in the current year compared to one quarter last year. Anaren Europe has been running negative gross profit while it rebuilds its sales base due to the fire in its facility in July 2001. The Company continues to implement cost cutting programs and has reduced its personnel levels over 10% during the first six months of this year. These efforts should help to improve future margins, but any significant improvement will require an increase in sales volume. Marketing. Marketing expenses increased one-half of one percent in the first six months of fiscal 2003 compared to the first half of fiscal 2002. Budgeted declines in advertising expenditures in the first half of the current year offset increases in other marketing expenses due to the higher sales volume in the current six months. Marketing expense is expected to continue at the lower current levels through the remainder of fiscal 2003. Research and Development. Research and development expenses increased 6.7% to $2.9 million (7.1% of net sales) in the first six months of fiscal 2003 from $2.7 million (8.5% of net sales) for the first six months of fiscal 2002. Research and development expenditures are supporting further development of wireless infrastructure products and new wireless networking 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 increased 22.3% to $4.7 million (11.3% of net sales) for the first six months of fiscal 2003 from $3.8 million (11.9% of net sales) for the first half of fiscal 2002. This increase was due to professional services costs associated with the Celeritek offer, costs incurred at the new China facility, a full six months of expenditures for Amitron and Anaren Europe compared to four and three months last year and reassignment of personnel from other functions due to the new holding Company structure. Restructuring. In September 2002, the Company recorded $403,403 of restructuring charges. The restructuring charges are associated with the Company's restructuring plan as it relates to its wholly owned subsidiary Anaren Europe, B.V. The Company's restructuring plan was primarily aimed at reducing the cost of excess personnel, including termination of 24 employees. 21 Operating Income. The operating loss decreased $650,000 in the first six months of fiscal 2003 to a loss of ($453,000) (1.1% of net sales) from an operating loss of $1.1 million (3.3% of net sales) for the first six months of fiscal 2002. On a reporting segment basis, the Wireless operating loss was $3.6 million for the first half of fiscal 2003, an improvement of $600,000 from an operating loss of $4.2 million in the first half of fiscal 2002. The main reason for the improved Wireless results in the first six months of fiscal 2003, was a combined $700,000 improvement in the combined operating income at the Amitron and RF Power subsidiaries due to higher revenue levels at each facility. Space and Defense operating income rose $74,000 or 2.4% for the first half of fiscal 2003 compared to the first half of fiscal 2002. This increase resulted from a $1.8 million rise in Space and Defense revenues year over year, which caused better absorption of fixed overhead in the first half of fiscal 2003 compared to the previous year. Additionally, cost reduction and efficiency efforts in this segment were successful in containing the overall cost of operations in fiscal 2003. Other Income. Other income decreased 42.8% to $1.3 million (3.2% of net sales) for the six months ended December 31, 2002 from $2.3 million (7.1% of net sales) for the same six months 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 half of fiscal 2003 was $30,000 (0.1% of net sales) compared to $85,000 (0.3% of net sales) for the first half of fiscal 2002. Income Taxes: Income tax expense for the first half of fiscal 2003 was $206,000 (0.5% of net sales), representing an effective tax rate of 25%. This compared to $117,000 (0.3% of net sales) for the first half of fiscal 2002, representing an effective tax rate of 10.3%. The Company's effective tax rates are a direct result of the proportion of federally exempt state municipal bond income and federal tax credits and benefits in relation to the levels of taxable income. Extraordinary Gain. The extraordinary gain of $3.4 million (19.7% of net sales), recorded in the second quarter of fiscal 2002, resulted from the purchase of Anaren Europe. As a result of the fire and the subsequent insurance claim, the value of the Anaren Europe 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 of fiscal 2002. Critical Accounting Policies The methods, estimates and judgments management uses in applying the Company's most critical accounting policies have a significant impact on the results reported in the Company's financial statements. The U.S. Securities and Exchange Commission has defined the most critical accounting policies as those that are most important to the portrayal of Anaren's financial condition and results, and requires management to make the 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, the Company's most critical policies include: valuation of inventory, which impacts cost of sales and gross margin; valuation of allowance for doubtful accounts, which impacts bad debt expense; the assessment of recoverability of goodwill and other 22 intangible assets, which impacts write-offs of goodwill and intangibles; and accounting for income taxes, which impacts valuation allowance and the effective tax rate. Management reviews 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. The Company believes these estimates are reasonable, but actual results could differ from these estimates. The Company states inventories 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, pricing, competition and changes in technology. The Company's accounts receivable represent those amounts which have been billed to customers but not yet collected. The Company analyzes various factors including historical experience, credit worthiness of customers and current market and economic 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 judgments 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. The Company evaluates the need for valuation allowances on a regular basis and adjusts as appropriate. These adjustments, when made, would have an impact on the Company's financial statements in the period that they were recorded. 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 unit 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 projection of future cash flows for the goodwill impairment analysis requires significant judgments and estimates with respect to future revenues related to the assets 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 changes 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 six months ended December 31, 2002 and the six months ended December 31, 2001 were $5.6 million and $9.3 million, respectively. The positive cash flow from operations in the first six months of fiscal 2003 was due primarily to the $1.6 million 23 and $2.1 million reductions in accounts receivable and inventory, respectively, during the period. The positive cash flow from operations in the first half of fiscal 2002 was due mainly to the high income level and the large amount of cash ($5.3 million) received from the Anaren Europe insurance settlement. Net cash used in investing activities consists of funds used to purchase capital equipment and, in fiscal 2002, $12.1 million of cash used to purchase the capital stock of Amitron and Anaren Europe. Capital equipment placed in service amounted to $3.6 million in the six months ended December 31, 2002 compared to $6.3 million in the first six months of the previous fiscal year including $4.7 million at Anaren Europe. Net cash used in financing activities in the first half of fiscal 2003 was $394,000. Of this amount, $200,000 was generated by the exercise of stock options and $594,000 was used to repurchase Company stock under an existing repurchase plan previously authorized by the Board of Directors. Net cash used in 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 Anaren Europe and $375,000 generated by the exercise of stock options. During the remainder of fiscal 2003, the Company's main cash requirements will be for additions to capital equipment. Capital expenditures, including purchases of $3.6 million made in the first six months, are expected to total approximately $5.0 million for fiscal 2003 (6% of sales) and will be funded by existing cash balances. At December 31, 2002, the Company had approximately $126.7 million in cash, cash equivalents, and marketable securities and no debt. For the past six years the Company has maintained a guaranteed revolving line of credit facility under which it has never borrowed any funds. Effective October 1, 2002, the Company converted this line to a demand line to eliminate the current annual fee of approximately $38,000. The Company believes that its cash requirements for the foreseeable future will be satisfied by currently invested cash balances and expected cash flows from operations. 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:
Payment Due by Period --------------------- Less Total than 1 Yr. 2-3 Yrs 4-5 Yrs Over 5 Yrs ----- ---------- ------- ------- ---------- Contractual obligations Operating leases - facilities $5,753,257 $946,649 $1,264,367 $960,765 $2,581,476 Deferred compensation 514,522 65,000 130,000 130,000 189,522 Lines of credit -- -- -- -- --
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, 24 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 include, but are not limited to: 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 costs associated with potential product recalls; o unpredictable difficulties or delays in the development of new products; o the timely availability of component parts and services from a limited number of suppliers; o the risks associated with any technological market 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 outbreak of war and the potential adverse effects on the Company's military defense business; o difficulties in successfully integrating newly acquired businesses (including Celeritek Inc. if a transaction were consummated); o unanticipated difficulties rebuilding Anaren Europe's customer base; o increased pricing pressure and increased competition; o the failure of wireless customers' annual procurement forecasts to result in future sales; o potential impairments of assets including investment values and goodwill; o foreign currency fluctuations; o litigation relating to Anaren's ownership interest in Celeritek, Inc. or a potential transaction with Celeritek, or involving antitrust, intellectual property, product warranty, product liability and other issues; Anaren disclaims any obligation, unless required by law, to update or revise any forward-looking statement. Readers are advised to carefully review the risk factors set forth in this quarterly report on form 10-Q and the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission to learn more about the various risks and uncertainties facing Anaren's business and their potential impact on Anaren's revenues and earnings. 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, 2002, the Company had cash, cash equivalents and marketable securities of $126.7 million, of which approximately $105.3 million consisted of highly liquid investments in marketable debt securities and $5.2 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 September 30, 2002 25 rates, or 0.25%, would have reduced net income and cash flow by approximately $65,000, or $0.003 per share for the quarter. 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 $5.2 million. Fluctuations in market value of these securities are presently considered to be temporary and are charged to stockholders' equity monthly. A theoretical 10.0% decline in market value of these securities would result in a $520,000 reduction in stockholders' equity. In the future, if the decline in value of these securities is considered other than temporary, then the full decline in value experienced to the date of impairment will be reflected in the then current period income statement. 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, Anaren Europe, are denominated in Euros to European customers and United States dollars to U.S. customers. Sales to U.S. customers by Anaren Europe denominated in United States dollars would be subject to currency exchange losses. At present, due to the fire at Anaren Europe, 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 Anaren Europe's sales increase significantly. 26 Item 4. Controls and Procedures Within the 90 days prior to the filing date of this Quarterly Report, the Company carried out an evaluation, under the supervision and with the participation of the company's management, including Lawrence A. Sala and Joseph E. Porcello, of the effectiveness of the design and operation of the company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, Messrs. Sala and Porcello concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses (as no such deficiencies or weaknesses were discovered in the course of the evaluation). 27 PART II - OTHER INFORMATION Item 5. Submission of Matters to a Vote of Security Holders The Company's Annual Shareholders' meeting was held on November 7, 2002, at which time the election of Directors was conducted. The following named individuals were nominated and re-elected as Directors. Votes Votes For Against ----- ------- Lawrence A. Sala 21,499,331 36,503 David Wilemon 21,499,221 36,613 Messrs. Sala and Wilemon were elected to terms expiring in 2005. The terms of Directors Matthew Robison, Carl W. Gerst, Jr., Herbert I. Corkin and Dale F. Eck continued after the meeting. The Company held a Special Meeting of Shareholders on December 16, 2002, at which time the following proposals were voted on and passed: Authorization to create a holding company structure in which the Company's operating assets would be transferred to a newly formed, wholly owned, subsidiary. Votes For: Votes Against: Votes Abstained: 14,988,348 573,823 8,354 Authorization of an amendment to the Company's Certificate of Incorporation to change the name of the Company from "Anaren Microwave, Inc." to "Anaren", Inc. in connection with the proposed reorganization. Votes For: Votes Against: Votes Abstained: 15,533,066 32,097 5,362 Item 6. Exhibits and Reports on Form 8-K Item 6(a) Exhibits -------- 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 3 Certificate of Amendment of the Certificate of Incorporation Item 6(b) Reports on Form 8-K On November 18, 2002, the Company filed a Periodic Report on Form 8-K to announce its adoption of a Code of Business Conduct. 28 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, Inc. (Registrant) Date: January 28, 2003 S/Lawrence A. Sala ----------------------------------- Lawrence A.Sala President & Chief Executive Officer Date: January 28, 2003 S/Joseph E. Porcello ----------------------------------- Joseph E. Porcello Vice President of Finance and Treasurer 29 CERTIFICATIONS I, Lawrence A. Sala , certify that: 1. I have reviewed this quarterly report on Form 10-Q of Anaren, Inc.; 2. based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. the registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. the registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. the registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 28, 2003 S/Lawrence A. Sala ---------------------------------- Lawrence A. Sala President, Chief Executive Officer (Principal Executive Officer) 30 I, Joseph E. Porcello, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Anaren, Inc.; 2. based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. the registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. the registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. the registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 28, 2003 S/Joseph E. Porcello --------------------------------------- Joseph E. Porcello Vice President of Finance and Treasurer (Principal Financial Officer) 31 EX-3 3 e14184ex3.txt AMENDMENT OF CERTIFICATE OF INCORPORATION Exhibit 3 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF ANAREN MICROWAVE, INC. Pursuant to Section 805 of the New York Business Corporation Law Lawrence A. Sala and David M. Ferrara, the undersigned, President and Secretary of Anaren Microwave, Inc. (the "Corporation"), hereby certify: 1. The name of the Corporation is Anaren Microwave, Inc. It was formed under the name Micronetics, Inc. 2. The Corporation's Certificate of Incorporation was filed by the New York Department of State on August 11, 1967. 3. Paragraph FIRST, setting forth the name of the Corporation, is hereby amended to read as follows: FIRST, The name of the Corporation is Anaren, Inc. 4. This amendment to the Certificate of Incorporation of Anaren Microwave, Inc. was authorized, pursuant to section 803(a) of the Business Corporation Law, by vote of the Board of Directors, followed by the vote of the holders of over a majority of all outstanding shares entitled to vote thereon at a meeting of the shareholders of the Corporation, duly called and held in accordance with the New York Business Corporation Law. IN WITNESS WHEREOF, we have signed this Certificate of Amendment on December 20, 2002 and we affirm that the statements in this Certificate of Amendment are true under the penalties of perjury. /s/ Lawrence A. Sala ----------------------------------- Lawrence A. Sala President /s/ David M. Ferrara ----------------------------------- David M. Ferrara Secretary EX-99.1 4 e14184ex99_1.txt CERTIFICATION PURSUANT TO 18 U.S.C. Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Anaren, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence A. Sala, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Lawrence A. Sala - -------------------- Lawrence A. Sala President and Chief Executive Officer January 28, 2003 EX-99.2 5 e14184ex99_2.txt CERTIFICATION PURSUANT TO 18 U.S.C. Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Anaren, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph E. Porcello, Vice President, Finance and Treasurer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joseph E. Porcello - ---------------------- Joseph E. Porcello Vice President, Finance and Treasurer January 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----