-----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, G/OUJctgPU68QHggzvzFKg+LZNFjHAEBfqe9+Z0kEJOG0sSQ2JdPRjrAqPU6FutH 5DPHGIytQSOPjmdqiGX8qg== 0000891092-04-000580.txt : 20040206 0000891092-04-000580.hdr.sgml : 20040206 20040206152429 ACCESSION NUMBER: 0000891092-04-000580 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040206 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: 04574006 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 e16745_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, 2003 ----------------- |_| 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 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by Check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ The number of shares of Registrant's Common Stock outstanding on February 5, 2004 was 20,547,782. 1 ANAREN, INC. INDEX PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 3 December 31, 2003 and June 30, 2003 (unaudited) Consolidated Condensed Statements of Earnings 4 for the Three Months Ended December 31, 2003 and 2002 (unaudited) Consolidated Condensed Statements of Earnings 5 for the Six Months Ended December 31, 2003 and 2002 (unaudited) Consolidated Condensed Statements of Cash Flows 6 for the Six Months Ended December 31, 2003 and 2002 (unaudited) Notes to Consolidated Condensed Financial 7 Statements (unaudited) Item 2. Management's Discussion and Analysis 13 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls & Procedures 25 PART II - OTHER INFORMATION - --------------------------- Item 5. Submission of Matters to a Vote of Security Holders 25 Item 6. Exhibits and Reports on Form 8-K 25 Officer Certifications 27 - 30 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheets December 31, 2003 and June 30, 2003 (Unaudited) Assets December 31, 2003 June 30, 2003 ------ ----------------- ------------- Current assets: Cash and cash equivalents $ 12,841,702 $ 11,062,662 Securities available for sale (note 3) 5,767,763 5,682,260 Securities held to maturity (note 3) 59,162,017 87,584,016 Receivables, less allowance of $237,981 and $245,000, respectively 10,577,482 9,317,941 Inventories (note 4) 14,919,130 15,671,659 Interest and other receivables 751,554 823,189 Refundable income taxes 1,800,000 876,220 Deferred income taxes 1,392,977 1,132,016 Prepaid expenses and other current assets 1,209,528 1,235,325 ------------- ------------- Total current assets 108,422,153 133,385,288 ------------- ------------- Securities held to maturity (note 3) 36,308,077 23,394,382 Property, plant and equipment, net (note 5) 20,844,766 23,639,821 Goodwill 30,715,861 30,715,861 Other intangible assets, net of accumulated amortization of $1,321,311 at December 31, 2003 and $1,071,542 at June 30, 2003 (note 1) 1,703,655 1,953,424 ------------- ------------- $ 197,994,512 $ 213,088,776 ============= ============= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 3,278,047 $ 4,380,459 Accrued expenses (note 6) 2,345,731 2,477,670 Income taxes payable 1,194,277 66,594 Customer advance payments 880,368 -- Other current liabilities (note 8) 260,109 225,534 ------------- ------------- Total current liabilities 7,958,532 7,150,257 Deferred income taxes 1,772,611 1,601,346 Postretirement benefit obligation 3,501,760 3,302,532 Other liabilities (note 8) 409,156 437,236 ------------- ------------- Total liabilities 13,642,059 12,491,371 ------------- ------------- Stockholders' equity: Common stock of $.01 par value Authorized 200,000,000 shares; issued 25,730,154 shares at December 31, 2003 and 25,681,854 at June 30, 2003 257,302 256,818 Additional paid-in capital 169,218,347 168,805,153 Unearned compensation (238,488) (381,588) Accumulated other comprehensive loss (1,094,218) (1,216,961) Retained earnings 46,329,995 43,290,143 ------------- ------------- 214,472,938 210,753,565 Less cost of 5,257,922 and 3,820,822 treasury shares at December 31, 2003 and June 30, 2003 30,120,485 10,156,160 ------------- ------------- Total stockholders' equity 184,352,453 200,597,405 ------------- ------------- $ 197,994,512 $ 213,088,776 ============= ============= See accompanying notes to consolidated condensed financial statements. 3 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Three Months Ended December 31, 2003 and 2002 (Unaudited) 2003 2002 ---- ---- Net sales $19,593,930 $19,736,523 Cost of sales 12,952,703 13,542,715 ----------- ----------- Gross profit 6,641,227 6,193,808 ----------- ----------- Operating expenses: Marketing 1,681,384 1,535,903 Research and development 1,133,246 1,527,747 General and administrative 1,863,784 2,228,267 ----------- ----------- Total operating expenses 4,678,414 5,291,917 ----------- ----------- Operating income 1,962,813 901,891 Other income, primarily interest 375,735 620,659 Interest expense (1,550) (10,111) ----------- ----------- Income before income taxes 2,336,998 1,512,439 Income tax expense 746,000 248,000 ----------- ----------- Income from continuing operations 1,590,998 1,264,439 ----------- ----------- Discontinued operations: Loss from discontinued operations of Anaren Europe (note 9) (335,053) (789,271) ----------- ----------- Net income $ 1,255,945 $ 475,168 =========== =========== Basic earnings (loss) per share: Income from continuing operations $ 0.08 $ 0.06 Income (loss) from discontinued operations (0.02) (0.04) ------ ------ Net income $ 0.06 $ 0.02 ====== ====== Diluted earnings (loss) per share: Income from continuing operations $ 0.07 $ 0.05 Income (loss) from discontinued operations (0.01) (0.03) ------ ------ Net income $ 0.06 $ 0.02 ====== ====== Shares used in computing net earnings (loss) per share: Basic 21,123,035 22,301,824 =========== =========== Diluted 21,887,468 22,821,430 =========== =========== See accompanying notes to consolidated condensed financial statements. 4 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Six Months Ended December 31, 2003 and 2002 (Unaudited) Dec. 31, 2003 Dec. 31, 2002 ------------- ------------- Net sales $37,864,603 $38,934,340 Cost of sales 25,264,481 26,550,986 ----------- ----------- Gross profit 12,600,122 12,383,354 ----------- ----------- Operating expenses: Marketing 3,266,850 3,133,386 Research and development 2,555,028 2,928,808 General and administrative 3,702,183 4,368,830 ----------- ----------- Total operating expenses 9,524,061 10,431,024 ----------- ----------- Operating income 3,076,061 1,952,330 Other income, primarily interest 843,711 1,267,670 Interest expense (4,522) (29,633) ----------- ----------- Income before income taxes 3,915,250 3,190,367 Income tax expense 1,127,000 626,000 ----------- ----------- Income from continuing operations 2,788,250 2,564,367 Discontinued operations: Loss from discontinued operations of Anaren Europe (note 9) (1,548,398) (2,362,993) Income tax benefit (1,800,000) (420,000) ----------- ----------- Net income (loss) from discontinued operations 251,602 (1,942,993) ----------- ----------- Net income $ 3,039,852 $ 621,374 =========== =========== Basic earnings per share: Income from continuing operations $0.13 $ 0.12 Income (loss) from discontinued operations 0.01 (0.09) ----- ------ Net income $0.14 $ 0.03 ===== ====== Diluted earnings per share: Income from continuing operations $0.13 $ 0.11 Income (loss) from discontinued operations 0.01 (.08) ----- ------ Net income $0.14 $ 0.03 ===== ====== Shares used in computing net earnings per share: Basic 21,440,385 22,316,557 =========== =========== Diluted 22,120,197 22,816,521 =========== =========== See accompanying notes to consolidated condensed financial statements. 5 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows Six Months Ended December 31, 2003 and 2002 (Unaudited) Dec. 31, 2003 Dec. 31, 2002 Cash flows from operating activities: ------------- ------------- Net income $ 3,039,852 $ 621,374 Net income (loss) from discontinued operations 251,602 (1,942,993) ------------ ----------- Net income from continuing operations $ 2,788,250 $ 2,564,367 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,999,534 1,924,826 Amortization of intangibles 249,769 249,769 Deferred income taxes (89,696) 62,599 Unearned compensation 143,100 318,354 Provision for doubtful accounts 75,949 28,580 Tax benefit from exercise of stock options 137,280 -- Changes in operating assets and liabilities, net of acquisition: Receivables (1,928,666) 1,575,168 Inventories 262,124 2,132,897 Interest and other receivables 192,932 102,469 Other current assets (199,409) (239,335) Refundable income taxes 876,220 -- Accounts payable (776,448) (1,437,636) Accrued expenses 120,719 238,593 Income taxes payable 1,127,683 (114,928) Customer advance payments 880,368 (244,831) Other liabilities 6,495 20,664 Postretirement benefit obligation 199,228 -- ------------ ----------- Net cash provided by operating activities from continuing operations 6,065,432 7,181,556 Net cash used in operating activities from discontinued operations (157,244) (1,531,919) ------------ ----------- Net cash provided by operating activities 5,908,188 5,649,637 ------------ ----------- Cash flows from investing activities: Capital expenditures (1,480,144) (3,597,185) Maturities of marketable debt securities 142,295,305 69,935,000 Purchases of marketable debt and equity securities (126,787,000) (67,958,281) ------------ ----------- Net cash provided by (used in) investing activities from continuing operations 14,028,161 (1,620,466) Net cash provided by investing activities from discontinued operations 1,493,378 -- ------------ ----------- Net cash provided by (used in) investing activities 15,521,539 (1,620,466) ------------ ----------- Cash flows from financing activities: Stock options exercised 276,398 199,931 Purchase of treasury stock (19,964,325) (593,700) ------------ ----------- Net cash used in financing activities (19,687,927) (393,769) ------------ ----------- Effect of exchange rates 37,240 89,659 Net increase in cash and cash equivalents 1,779,040 3,725,061 Cash and cash equivalents at beginning of period 11,062,662 12,565,424 ------------ ----------- Cash and cash equivalents at end of period $ 12,841,702 $16,290,485 ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Period For: Interest $ 4,522 $ 29,684 ============ =========== Income taxes $ 2,000 $ 750,000 ============ =========== See accompanying notes to consolidated condensed financial statements. 6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The consolidated condensed financial statements are unaudited 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, 2003. The results of operations for the six months ended December 31, 2003 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2004, or any future interim period. The income tax rates utilized for interim financial statement purposes for the six months ended December 31, 2003 and 2002 are based on estimates of income and utilization of tax credits for the entire year. NOTE 1: Intangible Assets INTANGIBLE ASSETS: Intangible assets as of December 31, 2003 are as follows: Gross Carrying Accumulated Amount Amortization -------------- ------------ Patent $ 574,966 $ 323,419 Customer Base 1,350,000 525,000 Trade Name 320,000 248,892 Non-Competition Agreements 180,000 84,000 Favorable Lease 600,000 140,000 ---------- ---------- Total $3,024,966 $1,321,311 ========== ========== Intangible asset amortization expense for the six month periods ended December 31, 2003 and December 31, 2002 was $249,769. Amortization expense related to intangible assets for the next five years is as follows: Year Ending June 30, 2004 $ 499,539 2005 $ 410,645 2006 $ 392,871 2007 $ 362,879 2008 $ 97,500 7 NOTE 2: Stock-Based Compensation The Company measures compensation expense for its stock option-based employee compensation plans using the intrinsic value method. The following table sets forth the pro forma effect of these plans as if the fair value-based method had been used to measure compensation expense.
Three Months Ended Six Months Ended ------------------------------- ------------------------------- December 31 December 31 December 31 December 31 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net income, as reported $ 1,255,945 $ 475,168 $ 3,039,852 $ 621,374 Fair value-based stock based Compensation cost, net of tax 2,317,672 2,187,164 4,393,664 4,374,328 ----------- ----------- ----------- ----------- Pro forma net loss $(1,061,727) $(1,711,996) $(1,353,812) $(3,752,954) =========== =========== =========== =========== Net income (loss) per share: Basic $ 0.06 $ 0.02 $ 0.14 $ 0.03 Diluted $ 0.06 $ 0.02 $ 0.14 $ 0.03 Pro forma net loss per share: Pro forma basic $ (0.05) $ (0.08) $ (0.06) $ (0.17) Pro forma diluted $ (0.05) $ (0.08) $ (0.06) $ (0.17)
NOTE 3: Marketable Securities Marketable securities are summarized as follows: December 31, 2003 June 30, 2003 ----------------- ------------- Marketable debt securities - held-to-maturity $ 95,470,094 $110,978,398 Marketable equity securities - available for sale 5,767,763 5,682,260 ------------ ------------ Total 101,237,857 116,660,658 Current portion 64,929,780 93,266,276 ------------ ------------ Long term $ 36,308,077 $ 23,394,382 ============ ============ NOTE 4: Inventories Inventories are summarized as follows: December 31, 2003 June 30, 2003 ----------------- ------------- Component parts $ 8,912,662 $ 8,810,207 Work in process 5,413,095 5,627,150 Finished goods 2,569,737 2,656,029 ----------- ----------- $16,895,494 $17,093,386 Reserve for obsolescence (1,976,364) (1,421,727) ----------- ----------- Net inventory $14,919,130 $15,671,659 =========== =========== 8 NOTE 5: Property, Plant and Equipment Property, plant and equipment are summarized as follows: December 31, 2003 June 30, 2003 ----------------- ------------- Land and land improvements $ 1,595,821 $ 1,595,821 Buildings, furniture and fixtures 13,593,369 12,944,778 Machinery and equipment 46,146,842 47,590,955 ------------ ----------- $ 61,336,032 $62,131,554 Less accumulated depreciation and amortization (40,491,266) 38,491,733 ------------ ----------- $ 20,844,766 $23,639,821 ============ =========== NOTE 6: Accrued Expenses Accrued expenses consist of the following: December 31, 2003 June 30, 2003 ----------------- ------------- Compensation $ 1,174,927 $ 924,290 Commissions 387,713 355,098 Health insurance 175,413 290,424 Restructuring (note 7) 138,975 710,885 Other 468,703 196,973 ----------- ---------- $ 2,345,731 $2,477,670 =========== ========== NOTE 7: Restructuring The following is a rollforward of the balance of restructuring charges since the filing of the Company's Form 10-K Annual Report for the fiscal year ended June 30, 2003.
Balance Balance June 30, Cash Non-Cash December 31, 2003 Expenditures Write-offs 2003 -------- ------------ ---------- ------------ Severance $677,251 $(538,276) $ -- $138,975 Outplacement services and others 33,634 (33,634) -- -- -------- --------- ----- -------- Total $710,885 $(571,910) $ -- $138,975 ======== ========= ===== ========
At December 31, 2003, outstanding liabilities related to the restructuring totaled $138,975 and are included in accrued expenses in the accompanying Balance Sheets and are expected to be paid in full over the next twelve months. 9 NOTE 8: Other Liabilities Other liabilities consist of the following: December 31, 2003 June 30, 2003 ----------------- ------------- Deferred compensation $ 474,156 $ 502,236 Other 195,109 160,534 --------- --------- 669,265 662,770 Less current portion (260,109) 225,534 --------- --------- $ 409,156 $ 437,236 ========= ========= NOTE 9: Discontinued Operations On July 10, 2003, the Company announced its decision to dispose of its Anaren Europe operation. After completing production of the remaining customer orders under contract during the first quarter of fiscal 2004, production at Anaren Europe ceased and the remaining net assets of that operation were liquidated through the sale of equipment via auction. Effective with the reporting of the Company's operating results for the three months ended September 30, 2003, the results of operations for Anaren Europe for both the current and prior year have been reclassified as discontinued operations in the statement of earnings. Components of the loss from discontinued operations of Anaren Europe for the three months and six months ended December 31, 2003 are the following:
Three Months Ended Six Months Ended ----------------------------- ------------------------------- December 31 December 31 2003 2002 2003 2002 --------- ----------- ----------- ----------- Net sales $ 17,861 $ 1,148,615 658,329 $ 2,374,671 Expenses (352,914) (1,937,886) (1,424,438) (4,737,664) Loss on sale of equipment -- -- (782,289) -- --------- ----------- ----------- ----------- Net loss from discontinued operations $(335,053) $ (789,271) $(1,548,398) $(2,362,993) ========= =========== =========== ===========
The Company also recorded an income tax benefit of $1,800,000 related to the disposal of its Anaren Europe operations in the quarter ended September 30, 2003. 10 NOTE 10: Net Income (Loss) Per Share Basic income (loss) per share is based on the weighted average number of common shares outstanding. Diluted income (loss) 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 (loss) per share does not include antidilutive shares aggregating 2,326,210 and 2,425,700 at December 31, 2003 and 2002, 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. 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: 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Earnings available to common stockholders $ 1,255,945 $ 475,168 $ 3,039,852 $ 621,374 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 21,123,035 22,301,824 21,440,385 22,316,557 =========== =========== =========== =========== Denominator for diluted earnings per share: Weighted average shares outstanding 21,123,035 22,301,824 21,440,385 22,316,557 Common stock options and restricted stock 764,432 519,606 679,813 499,964 ----------- ----------- ----------- ----------- Weighted average shares and conversions 21,887,468 22,821,430 22,120,197 22,816,521 =========== =========== =========== ===========
NOTE 11: 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 defense electronics and satellite communications markets. The revenue disclosures for the Company's reportable segments depict products that are similar in nature. 11 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, 2003 $12,993,731 6,600,199 -- $ 19,593,930 December 31, 2002 $12,167,696 7,568,827 -- $ 19,736,523 Six months ended December 31, 2003 $24,520,321 13,344,282 -- $ 37,864,603 December 31, 2002 $24,049,986 14,884,354 -- $ 38,934,340 Operating income (loss): Three months ended: December 31, 2003 792,486 1,170,327 -- 1,962,813 December 31, 2002 (622,106) 1,523,997 -- 901,891 Six months ended: December 31, 2003 682,678 2,393,383 -- 3,076,061 December 31, 2002 (1,231,817) 3,184,147 -- 1,952,330 Goodwill and intangible assets: December 31, 2003 32,554,401 -- -- 32,554,401 June 30, 2003 32,669,285 -- -- 32,669,285 Identifiable assets:* December 31, 2003 14,774,849 10,959,745 138,646,125 164,380,719 June 30, 2003 14,145,826 9,760,194 156,513,471 180,419,491 Depreciation:** Three months ended: December 31, 2003 495,099 506,470 -- 1,001,569 December 31, 2002 963,102 373,348 -- 1,336,450 Six months ended: December 31, 2003 1,058,737 940,797 -- 1,999,534 December 31, 2002 1,181,436 743,390 -- 1,924,826 Goodwill and intangibles amortization:*** Three months ended: December 31, 2003 124,885 -- -- 124,885 December 31, 2002 124,884 -- -- 124,884 Six months ended: December 31, 2003 249,769 -- -- 249,769 December 30, 2002 249,769 -- -- 249,769
* Segment assets primarily include receivables and inventories. 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 12 income taxes, property, plant and equipment not specific to business acquisitions and assets associated with discontinued operations of Anaren Europe. ** 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 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. NOTE 12: Other Postretirement Benefits In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position FAS 106-1,"Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," the Company has elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. Currently, the Company does not believe it will need to amend its plan to benefit from the Act. The measurement date used to determine pension and other postretirement benefit measures for the pension plan and the postretirement benefit plan is June 30. 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 months and six months ended December 31, 2003 and its financial condition at December 31, 2003. 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, 2003 and June 30, 2003, and the consolidated results of operations and cash flows of the Company for the three months and six months ended December 31, 2003 and 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 shipment. Payments received from customers in advance of products delivered are recorded as customer advance payments until earned. Annually, 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 13 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. The Company expects to increase the utilization of its Suzhou China facility as the result of the increase in customer demand for its wireless products and in anticipation of initiating production of a new custom assembly. In addition, the Company has been selected to receive an order in excess of $11.0 million (to be shipped over 36 months) to supply digital RF memory jamming subsystems, which will further strengthen the Company's Space and Defense backlog. On July 10, 2003, after several restructurings, the Company announced its decision to dispose of its Anaren Europe subsidiary due to continuing low sales levels and large operating losses. This facility ceased production during the first quarter of fiscal 2004, an auction was held and all remaining equipment was sold in September 2003. This subsidiary is now being accounted for as a discontinued operation in the statements of earnings for the three and six months ended December 31, 2003 and 2002. Included in the results of discontinued operations for the first half of fiscal 2004 are a loss from European operations of $1.5 million and a U.S. tax benefit of $1,800,000 resulting from losses attributable to Anaren Europe. Net sales from continuing operations for the second quarter ended December 31, 2003 were $19,594,000, relatively unchanged from the second quarter of last fiscal year and up 7.0% from the first quarter of fiscal 2004. Operating income for the second quarter was $2.0 million, or 10% of net sales, up 15.7% from the second quarter of last year, and up 76% sequentially from the first quarter of fiscal 2004. Income from continuing operations for the second quarter of fiscal 2004 was $1,591,000, or $0.07 per diluted share, while the loss from discontinued operations was $335,000 or $0.01 per diluted share, resulting in net income of $1,256,000, or $0.06 per diluted share. This compares to income from continuing operations of $1,264,000, or $0.05 per diluted share and a loss from discontinued operations of ($789,000), or ($0.03) per diluted share, resulting in net income of $475,000, or $0.02 per diluted share, for the second quarter of last year, and $0.08 per diluted share (including net income from discounted operations of $587,000) for the first quarter of fiscal 2004. 14 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, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002 ------------- ------------- ------------- ------------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 66.1% 68.6% 66.7% 68.2% ---- ---- ---- ---- Gross profit 33.9% 31.4% 33.3% 31.8% ---- ---- ---- ---- Operating expenses: Marketing 8.6% 7.8% 8.6% 8.1% Research and development 5.8% 7.7% 6.8% 7.5% General and administrative 9.5% 11.3% 9.8% 11.2% ---- ---- ---- ---- Total operating expenses 23.9% 26.8% 25.2% 26.8% ---- ---- ---- ---- Operating income 10.0% 4.6% 8.1% 5.0% ---- ---- ---- ---- Other income (expense): Other, primarily interest income 1.9% 3.2% 2.2% 3.3% Interest expense (0.0%) (0.1%) (0.0%) (0.1%) ---- ---- ---- ---- Total other income (expense), net 1.9% 3.1% 2.2% 3.2% ---- ---- ---- ---- Income (loss) before income taxes and extraordinary item 11.9% 7.7% 10.3% 8.2% Income taxes 3.8% 1.3% 3.0% 1.6% ---- ---- ---- ---- Income from continuing operations 8.1% 6.4% 7.3% 6.6% ---- ---- ---- ---- Discontinued operations: Income (loss) from discontinued Operations of Anaren Europe (1.7%) (4.5%) (4.1%) (6.1%) ---- ---- ---- ---- Income tax benefit 0.0% (0.5%) (4.8%) (1.1%) ---- ---- ---- ---- Net income (loss) from Discontinued operations (1.7%) (4.0%) 0.7% (5.0%) ---- ---- ---- ---- Net income 6.4% 2.4% 8.0% 1.6% ==== ==== ==== ====
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 2003 2002 2003 2002 ------- ------- ------- ------- Wireless $12,994 $12,168 $24,521 $24,050 Space and Defense 6,600 7,569 13,344 14,884 ------- ------- ------- ------- $19,594 $19,737 $37,865 $38,934 ======= ======= ======= ======= 15 Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002 Net sales. Net sales decreased $143,000, or 0.7%, to $19.6 million for the three months ended December 31, 2003, compared to $19.7 million for the second quarter of the previous fiscal year. This decrease resulted from a $969,000 decline in sales of Space and Defense products which was largely offset by a $826,000 increase in sales of Wireless infrastructure products. 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 significant increase in worldwide demand for wireless base station components over the last six months which generated increased orders from the Company's base station infrastructure original equipment manufacturer customers in the second quarter. Sales of standard surface mount components were $4.1 million in the second quarter, up 72% from the second quarter last year. This increase was partially offset by a $618,000, or 31%, decrease in sales of ferrite component products in the current second quarter compared to last year as a result of the Company's continuing efforts to eliminate unprofitable and low margin ferrite products in fiscal 2004. 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 fell $969,000, or 12.8%, in the second quarter of fiscal 2004, compared to the same quarter in the prior fiscal year. This decrease in shipments resulted from the completion of shipments under the Boeing Spaceway program in the fourth quarter of fiscal 2003. This program accounted for over $4.0 million in shipments in fiscal 2003 and $1.0 million in the second quarter of that year. Sales in the Space and Defense segment are expected to average approximately $6.7 to $7.2 million per quarter throughout the remainder of fiscal 2004. Gross Profit. Cost of sales consists primarily of engineering design costs, materials, material fabrication costs, assembly costs, direct and indirect overhead, and test costs. Gross profit for the second quarter of fiscal 2004 was $6.6 million (33.9% of net sales), up $447,000 from $6.2 million (31.4% of net sales) for the same quarter of the prior year. The rise in gross margin as a percent of sales, despite the drop in revenue year over year, was a result of the $618,000 decrease in sales of unprofitable and low margin ferrite products, coupled with an increase in sales of higher margin surface mount wireless components, in the current second quarter compared to the second quarter last year. The Company expects gross margins to continue to improve with further increases in sales levels. 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 were $1.7 million (8.6% of net sales) for the second quarter of fiscal 2004, up $146,000 from $1.5 million (7.8% of net sales) for the second quarter of fiscal 2003. This increase is a result of the addition of three new geographic product line marketing positions and a general increase in sales and marketing support costs to meet the increased demand in both the Wireless and Space and Defense markets that the Company has experienced over the last six months. 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 were $1.1 million (5.8% of net sales) in the second quarter of fiscal 2004, down 25.8% from $1.5 million (7.7% of net sales) for the second quarter of fiscal 2003. Research and 16 development expenditures are supporting further development of wireless infrastructure products and new wireless networking product opportunities. Research and development expenditures fell in the second quarter of fiscal 2004 compared to the same quarter last year due to a much higher level of customer funded development activity in the current year. Despite the current temporary decline in spending, the Company does not expect to significantly reduce its current research and development efforts in the long 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 decreased 16.3% to $1.9 million (9.5% of net sales) for the second quarter of fiscal 2004 from $2.2 million (11.3% of net sales) for the second quarter of last fiscal year. This decrease was due to a decline in personnel as a result of the Company's restructuring in the second half of fiscal 2003. The decline was further augmented by current year reductions in spending for professional services and outside consulting. Operating Income. Operating income increased in the second quarter of fiscal 2004 to $1,963,000 (10.0% of sales) from $902,000 (4.6% of net sales) for the second quarter of fiscal 2003. On a reporting segment basis, Wireless operating income was $792,000 for the second quarter of fiscal 2004, an improvement of $1.4 million from a Wireless operating loss of ($622,000) for the second quarter of fiscal 2003. The main reasons for the increase in Wireless income in the current second quarter were the Company's restructuring and cost reduction activities in the second half of fiscal 2003 (which lowered Wireless operating costs), the discontinuation of some unprofitable and low margin wireless ferrite products, and the $800,000 increase in Wireless sales in current quarter compared to the same period during the prior year. Wireless operating margins are expected to continue to improve during the remainder of fiscal 2004 with higher expected sales levels and further cost reduction initiatives. Space and Defense operating income fell $354,000 in the second quarter of fiscal 2004 to $1.2 million, compared to $1.5 million in the second quarter of fiscal 2003. This decrease resulted from the lower sales volume and 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 shipment volume attributable to military programs, while sales in the second quarter last year consisted of more profitable sales for commercial space programs. Going forward, we expect Space and Defense sales to be driven primarily by defense related programs. Interest Expense. The Company does not have any long term debt, and interest expense represents interest paid on a deferred obligation. Interest expense for the second quarter of fiscal 2004 was $2,000 (0.0% of net sales) compared to $10,000 (0.1% of net sales) for the second quarter of fiscal 2003. Other Income. Other income is primarily interest income received on invested cash balances. Other income decreased 39.5% to $376,000 (1.9% of net sales) for the quarter ended December 31, 2003, from $621,000 (3.2% of net sales) for the same quarter last year. This decrease was caused by the decline in market interest rates over the last 12 months brought about by reductions in the Federal Funds rate and the decrease in investable cash balances due to the $20.0 million expenditure to repurchase shares of the Company's common stock on Treasury shares. Interest income will fluctuate based on the level of interest rates and the level of investable cash balances. 17 Income Taxes. Income taxes for the second quarter of fiscal 2004 were $746,000 (3.8% of net sales), representing an effective tax rate of 31.9%. This compares to income tax expense of $248,000 (1.3% of net sales) for the second quarter of fiscal 2003, representing an effective tax rate of 16.4%. The Company's effective tax rate is a direct result of the proportion of federally exempt state municipal bond income and federal tax credits and benefits in relation to the anticipated levels of taxable income for the entire fiscal year. Discontinued Operations. On July 10, 2003, the Company announced its decision to dispose of its Anaren Europe operation. During the first quarter, the Company ceased production at Anaren Europe and the remaining net assets of that operation were liquidated. Effective with the Company's 10-Q Quarterly Report for the first quarter ended September 30, 2003, the results of operations for Anaren Europe for all periods reported on have been reclassified as discontinued operations in the statements of earnings. The results from discontinued operations for the second quarter ended December 31, 2003 include a loss of $335,000 reflecting the cost of that operation in the second quarter. Six Months Ended December 31, 2003 Compared to Six Months Ended December 31, 2002 Net Sales. Net sales decreased $1.0 million, or 2.7%, to $37.9 million for the first six months of fiscal 2004, compared to $38.9 million for the first half of the prior fiscal year. This decrease resulted from a $1.5 million decline in Space and Defense product sales, which was partially offset by a $470,000, or 2.0%, rise in shipments of Wireless products. The increase in sales of Wireless products resulted from a worldwide surge in demand for Wireless base station infrastructure equipment beginning in the Company's first quarter of fiscal 2004. This increase in sales of surface mount components and custom products amounted to $2.3 million and more than offset the $1.8 million decline in sales of ferrite products, which resulted from the Company's continuing efforts to discontinue production of unprofitable and low margin ferrite products in fiscal 2004. Sales in the Space and Defense group fell $1.5 million, or 10.4%, in the first half of fiscal 2004, compared to the same period in the prior fiscal year. This decrease in sales resulted from the completion of shipments under the Boeing Spaceway program in the fourth quarter of fiscal 2003. This program accounted for over $4.0 million in shipments in fiscal 2003 and $2.0 million in the first half of that year. Sales in the Space and Defense segment are expected to average approximately $6.7 to $7.2 million per quarter for the remainder of fiscal 2004. Gross Profit. Gross profit in the first half of fiscal 2004 was $12.6 million (33.3% of net sales), up $217,000 from $12.4 million (31.8% of net sales) for the first six months of the prior year. The increase in gross margin as a percent of sales despite the decline in sales levels was a result of the $1.8 million decrease in shipments of unprofitable and low margin ferrite products and the $1.3 million increase in shipments of higher margin surface mount and custom Wireless components in the current first six months compared to the same period last year. The Company expects that gross margins will continue to rise as shipment levels improve. Marketing. Marketing expenses increased 4.3% to $3.3 million (8.6% of net sales) for the first six months of fiscal 2004 from $3.1 million (8.0% of net sales) for the first half of last year. This increase is a result of the addition of three new geographic product line marketing positions and a general increase in sales and marketing support costs, such as travel and administrative personnel, to support the rising customer demand levels the Company has experienced over the last six months. 18 Research and Development. Research and development expenses were $2.6 million (6.8% of net sales) in the first half of fiscal 2004, down 12.8% from $2.9 million (7.5% of net sales) for the first half of fiscal 2003. Research and development expenditures are supporting further development of Space and Defense subsystems, Wireless infrastructure products and new Wireless networking product opportunities. Research and development expenditures declined in the first half of fiscal 2004 due to a higher level of customer funded development activity in the current fiscal year. Despite the current decline, the Company does not expect to significantly reduce its 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 declined 15.3% to $3.7 million (9.8% of net sales) for the first six months of fiscal 2004, from $4.4 million (11.2% of net sales) for the first half of last fiscal year. The decrease in general and administrative expense in the current year compared to fiscal 2003 was due to a decline in personnel as a result of the Company's restructurings in the second half of fiscal 2003 as well as reduced spending for professional services and outside consulting. Operating Income. Operating income increased 57.6% in the first half of fiscal 2004 to $3.1 million (8.1% of sales) from $2.0 million (57.6% of net sales) for the first half of fiscal 2003. On a reporting segment basis, the Wireless operating income was $683,000 for the first six months of fiscal 2004, an improvement of $1.8 million from a Wireless operating loss of $1.1 million for the first six months of fiscal 2003. The main reasons for the improvement in Wireless results operating profitability in the current first six months were the restructuring and cost reduction activities in the second half of fiscal 2003 (which lowered Wireless operating costs), and the discontinuation of some unprofitable and low margin Wireless ferrite products, and better factory utilization. Space and Defense operating income fell $791,000 in the first half of fiscal 2004 to $2.4 million, compared to $3.2 million in the first half of fiscal 2003. This decrease resulted from the lower sales volume and a change in product mix during the current six months compared to the first half of last year. Sales for the first six months of fiscal 2004 included more volume attributable to military programs, while sales in the first six months of last year consisted of more profitable commercial space programs. Interest Expense. The Company does not have any long term debt and interest expense represents interest paid on a deferred obligation. Interest expense for the first half of fiscal 2004 was $5,000 (0.0% of net sales) compared to $30,000 (0.1% of net sales) for the first half of fiscal 2003. Other Income. Other income is primarily interest income received on invested cash balances. Other income decreased 33.4% to $844,000 (2.2% of net sales) for the six months ended December 31, 2003, from $1.3 million (3.3% of net sales) for the first six months of last year. This decrease was caused by the decline in market interest rates over the last 12 months brought about by reductions in the Federal Funds rate and the decline in investable cash balances due to the use of $20.0 million to repurchase shares of the Company's common stock. Interest income will fluctuate based on the level of interest rates and the level of investable cash balances. Income Taxes. Income taxes for the first six months of fiscal 2004 were $1.1 million (3.0% of net sales), representing an effective tax rate of 28.8%. This compares to income tax expense of $626,000 (1.6% of net sales) for the first six months of fiscal 2003, representing an effective tax 19 rate of 19.6%. The Company's effective tax rate is 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 or loss. The effective tax rate has risen year over year for the first six months due to a higher level of taxable income coupled with a 33% decline in nontaxable municipal income. The effective tax rate for the remainder of fiscal 2004 is expected to range between 27-29%. Discontinued Operations. On July 10, 2003, the Company announced its decision to dispose of its Anaren Europe operation. During the first quarter, production at Anaren Europe ceased and the remaining net assets of that operation were liquidated. Effective with the Company's 10-Q Quarterly Report for the first quarter ended September 30, 2003, the results of operations for Anaren Europe for both the current and prior year first quarters have been reclassified as discontinued operations in the statements of earnings. The results from discontinued operations for the first six months ended December 31, 2003 include a loss of $1.5 million reflecting the cost of that operation in the first six months, and a federal tax benefit of $1.8 million resulting from losses attributable to Anaren Europe. Third Quarter of Fiscal 2004 outlook Based on current Wireless market demand and the Company's present Space and Defense order backlog, the Company expects sales for the third quarter of fiscal 2004 to range between $20.0 and $21.5 million and net income per diluted share to range between $0.07 and $0.09. 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 United States Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of Anaren's financial condition and results, and that require 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 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 and long-lived assets, which impacts write-offs of goodwill, intangibles and long-lived assets; and accounting for income taxes, which impacts the 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 materially from these estimates. The Company's accounts receivable represent those amounts which have been billed to its 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 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 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 20 for valuation allowances on a regular basis and adjusts the allowance as needed. 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. Long-lived assets with estimated useful lives are depreciated to their residual values over those useful lives in proportion to the economic value consumed. Long-lived assets are tested for impairment at the group level, which is usually an economic unit such as a manufacturing facility or department, which has a measurable economic output or product. Long-lived assets are tested for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable and exceeds its fair market value. This circumstance exists if the carrying amount of the asset in question exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value as determined by the discounted cash flow, or in the case of negative cash flow an independent market appraisal, of the asset. Goodwill is tested annually, or sooner if indicators of impairment exist, 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, 2003 and the six months ended December 31, 2002 was $5.9 million and $5.6 million, respectively. The positive cash flow from operations was due primarily to the profit before depreciation in both years, and in the current year was decreased by the rise in receivables, while the prior fiscal year was augmented by the decline in receivables. Net cash used in investing activities consists of funds used to purchase capital equipment in both years as well as net maturities of marketable debt securities. Capital equipment purchases in the first half of fiscal 2004 were $1.5 million, down 61% from $3.6 million in capital equipment expenditures in the first half of fiscal 2003. Additionally, in fiscal 2004 $1.5 million was generated in discontinued operations in Europe through the auction sale of capital equipment, 21 and maturities of marketable securities produced $15.5 million of investing activities cash, which was used to purchase shares of the Company's common stock. Net cash used for financing activities was $19.7 million in the first half of fiscal 2004 and $394,000 in the first half of last year. $20.0 million in cash was used in the first half of fiscal 2004 for the purchase of 1,437,100 shares of the Company's common stock, net of $276,000 received for the exercise of stock options. Funds used in the first half of last fiscal year were $594,000 to purchase 71,800 shares of the Company's common stock, while funds provided by investing activities were $200,000 generated by stock option exercises. During the remainder of fiscal 2004, the Company anticipates that its main cash requirements will be for additions to capital equipment and the purchase of additional shares of the Company's common stock. Capital expenditures, including purchases of $1.5 million made in the first six months, are expected to total between $3.0 and $4.0 million for fiscal 2004 (4.0-5.0% of sales) and will be funded by existing cash balances. The Company expects to continue to purchase shares of its common stock in the open market and/or through private negotiated transactions under the current Board authorization, depending on market conditions. At December 31, 2003 there were 1,070,000 shares remaining under the current Board repurchase authorization. At December 31, 2003, the Company had approximately $114.1 million in cash, cash equivalents, and marketable securities and no debt, and has had positive operating cash flow for over eight years. 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 obligations and commitments to make future payments under contracts, such as debt and 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 $6,711,494 $1,039,647 $1,862,432 $1,411,108 $2,398,307 Deferred compensation 747,500 65,000 130,000 130,000 422,500
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 including future sales and net income. 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. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to management that are currently immaterial may also impair our business operations. If any of the following risks actually occur, the Company's business could be adversely effected, 22 and the trading price of its common stock could decline, and shareholders could lose all or part of their investment. Such factors include, but are not limited to: o current unpredictable wireless market conditions; o the possibility that the Company may be unable to successfully execute its business strategies or achieve its operating objectives, generate revenue growth or achieve profitability; o decreased capital expenditures by wireless service providers; o failure to successfully secure new design wins from the Company's original equipment manufacturer OEM customers; 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 lack of 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 diversion of defense spending away from the Company's products and/or technologies due to on-going military operations; 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 litigation relating to potential transactions, or litigation or adverse regulatory action involving antitrust, intellectual property, environmental, product warranty, product liability, tax 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, 2003, the Company had cash, cash equivalents and marketable securities of $114.1 million, of which approximately $108.3 million consisted of cash and highly liquid investments in marketable debt securities and $5.8 million consisted of marketable equity securities. The marketable debt securities at date of purchase normally have maturities between one and eighteen months, are exposed to interest rate risk and will decrease in value if market interest rates increase. A hypothetical decrease in market interest rate of 10.0% from December 31, 2003 rates, or 0.15%, would have reduced net income and cash flow by approximately 23 $40,000, or $0.002 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 $5.8 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 $580,000 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. 24 Item 4. Controls and Procedures 1. Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. 2. Changes in internal controls. During the period covered by this Quarterly Report on Form 10-Q, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 5. Submission of Matters to a Vote of Security Holders The Company's Annual Shareholders' meeting was held on November 6, 2003, at which time the election of Directors was conducted. The following named individuals were nominated and re-elected as Directors. Votes Votes For Against ---------- ------- Dale F. Eck 19,915,985 14,919 Carl W. Gerst, Jr. 19,915,835 15,069 James G. Gould 19,915,985 14,919 Messrs. Eck, Gerst and Gould were elected to terms expiring in 2006. The terms of Directors Lawrence A. Sala, Matthew Robison, Herbert I. Corkin and Dr. David Wilemon continued after the meeting. Additionally, the selection of KPMG LLP was approved as the Company's independent auditors for fiscal 2004 was ratified by a vote of 19,646,249 for and 277,379 against. Item 6. Exhibits and Reports on Form 8-K Item 6(a) Exhibits 31 RULE 13a-14(a) CERTIFICATION, 32 SECTION 1350 CERTIFICATION, Item 6(b) Reports on Form 8-K The Company filed a current report on Form 8-K on October 23, 2003 with respect to its Results of Operations for the first quarter ended September 30, 2003. 25 The Company filed a current report on Form 8-K on November 10, 2003 with respect to the Board's common stock repurchase authorization. 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: February 5, 2004 /s/ Lawrence A. Sala --------------------------------------- Lawrence A.Sala President & Chief Executive Officer Date: February 5, 2004 /s/ Joseph E. Porcello --------------------------------------- Joseph E. Porcello Vice President of Finance and Treasurer 26 EX-31 3 e16745ex_31.txt CERTIFICATION EXHIBIT 31 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [text omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: February 5, 2004 /s/ Lawrence A. Sala ------------------------------------- Lawrence A. Sala President and Chief Executive Officer 27 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [text omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: February 5, 2004 /s/ Joseph E. Porcello --------------------------------------- Joseph E. Porcello Vice President of Finance and Treasurer 28 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, 2003 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 February 5, 2004 A signed original of this written statement required by Section 906 has been provided to Anaren, Inc. and will be retained by Anaren, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 29 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, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph E. Porcello, Vice President of 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 of Finance and Treasurer February 5, 2004 A signed original of this written statement required by Section 906 has been provided to Anaren, Inc. and will be retained by Anaren, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 30 -----END PRIVACY-ENHANCED MESSAGE-----