-----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, V2R05aPnmlii90yFQn6OJojL72W/hx/Bjx48muC5Py1xLxm+bgfqQkDWgO8iYgBT 5IDs30mSXSPMdLjPC66xMQ== 0000891092-04-002170.txt : 20040503 0000891092-04-002170.hdr.sgml : 20040503 20040503150856 ACCESSION NUMBER: 0000891092-04-002170 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040503 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: 04773278 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 e17645_10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 |_| 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 East Syracuse, New York 13057 - ----------------------- ---------- (Address of principal (Zip Code) 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 April 27, 2004 was 20,684,682. 1 ANAREN, INC. INDEX PART I - FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 3 March 31, 2004 and June 30, 2003 (unaudited) Consolidated Condensed Statements of Earnings 4 for the Three Months Ended March 31, 2004 and 2003 (unaudited) Consolidated Condensed Statements of Earnings 5 for the Nine Months Ended March 31, 2004 and 2003 (unaudited) Consolidated Condensed Statements of Cash Flows 6 for the Nine Months Ended March 31, 2004 and 2003 (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 24 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. Consolidated Condensed Balance Sheets March 31, 2004 and June 30, 2003 (Unaudited)
Assets March 31, 2004 June 30, 2003 ------ -------------- ------------- Current assets: Cash and cash equivalents $ 21,662,525 $ 11,062,662 Securities available for sale (note 3) 2,487,557 5,682,260 Securities held to maturity (note 3) 60,924,875 87,584,016 Receivables, less allowance of $289,538 and $244,810, respectively 13,065,650 9,317,941 Inventories (note 4) 14,853,253 15,671,659 Interest and other receivables 818,244 823,189 Refundable income taxes 843,000 876,220 Deferred income taxes 2,349,977 1,132,016 Prepaid expenses and other current assets 1,304,535 1,235,325 ------------ ------------ Total current assets 118,309,616 133,385,288 ------------ ------------ Securities held to maturity (note 3) 33,781,899 23,394,382 Property, plant and equipment, net (note 5) 20,945,288 23,639,821 Goodwill 30,715,861 30,715,861 Other intangible assets, net of accumulated amortization of $1,446,195 at March 31, 2004 and $1,071,542 at June 30, 2003 (note 1) 1,578,771 1,953,424 ------------ ------------ $205,331,435 $213,088,776 ============ ============ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 6,053,199 $ 4,380,459 Accrued expenses (note 6) 2,803,566 2,477,670 Income taxes payable 1,197,578 66,594 Customer advance payments 631,339 -- Other current liabilities (note 8) 277,947 225,534 ------------ ------------ Total current liabilities 10,963,629 7,150,257 Deferred income taxes 1,860,511 1,601,346 Postretirement benefit obligation 3,310,570 3,302,532 Other liabilities (note 8) 394,456 437,236 ------------ ------------ Total liabilities 16,529,166 12,491,371 ------------ ------------ Stockholders' equity: Common stock of $.01 par value. Authorized 200,000,000 shares; issued 25,942,604 shares at March 31, 2004 and 25,681,854 at June 30, 2003 259,426 256,818 Additional paid-in capital 171,097,609 168,805,153 Unearned compensation (166,938) (381,588) Accumulated other comprehensive loss (858,244) (1,216,961) Retained earnings 48,590,901 43,290,143 ------------ ------------ 218,922,754 210,753,565 Less cost of 5,257,922 and 3,820,822 treasury shares at March 31, 2004 and June 30, 2003 30,120,485 10,156,160 ------------ ------------ Total stockholders' equity 188,802,269 200,597,405 ------------ ------------ $205,331,435 $213,088,776 ============ ============
See accompanying notes to consolidated condensed financial statements. 3 ANAREN, INC. Consolidated Condensed Statements of Earnings Three Months Ended March 31, 2004 and 2003 (Unaudited)
2004 2003 ---- ---- Net sales $22,387,222 $18,101,491 Cost of sales 14,473,285 12,420,998 ----------- ----------- Gross profit 7,913,937 5,680,493 ----------- ----------- Operating expenses: Marketing 1,714,075 1,513,614 Research and development 1,394,269 1,789,137 General and administrative 2,068,795 1,918,469 Restructuring (note 7) -- 295,706 ----------- ----------- Total operating expenses 5,177,139 5,516,926 ----------- ----------- Operating income 2,736,798 163,567 Other income, primarily interest 367,526 499,530 Interest expense (2,997) (10,135) ----------- ----------- Income before income taxes 3,101,327 652,962 Income tax expense 879,000 41,812 ----------- ----------- Income from continuing operations 2,222,327 611,150 ----------- ----------- Discontinued operations: Income (loss) from discontinued operations of Anaren Europe (note 9) 38,579 (1,625,071) Income tax benefit -- (55,812) ----------- ----------- Net income (loss) from discontinued operations 38,579 (1,569,259) ----------- ----------- Net income (loss) $ 2,260,906 $ (958,109) =========== =========== Basic earnings (loss) per share: Income from continuing operations $ 0.11 $ 0.03 Income (loss) from discontinued operations 0.00 (0.07) ----------- ----------- Net income $ 0.11 $ (0.04) =========== =========== Diluted earnings (loss) per share: Income from continuing operations $ 0.10 $ 0.03 Income (loss) from discontinued operations 0.00 (0.07) ----------- ----------- Net income $ 0.10 $ (0.04) =========== =========== Shares used in computing net earnings (loss) per share: Basic 20,565,218 22,224,562 =========== =========== Diluted 21,556,951 22,224,562 =========== ===========
See accompanying notes to consolidated condensed financial statements. 4 ANAREN, INC. Consolidated Condensed Statements of Earnings Nine Months Ended March 31, 2004 and 2003 (Unaudited)
Mar. 31, 2004 Mar. 31, 2003 ------------- ------------- Net sales $60,251,825 $57,035,831 Cost of sales 39,737,766 38,971,984 ----------- ----------- Gross profit 20,514,059 18,063,847 ----------- ----------- Operating expenses: Marketing 4,980,925 4,647,000 Research and development 3,949,297 4,717,945 General and administrative 5,770,978 6,287,299 Restructuring (note 7) -- 295,706 ----------- ----------- Total operating expenses 14,701,200 15,947,950 ----------- ----------- Operating income 5,812,859 2,115,897 Other income, primarily interest 1,211,237 1,767,200 Interest expense (7,519) (39,768) ----------- ----------- Income before income taxes 7,016,577 3,843,329 Income tax expense 2,006,000 667,812 ----------- ----------- Income from continuing operations 5,010,577 3,175,517 Discontinued operations: Loss from discontinued operations of Anaren Europe (note 9) (1,509,819) (3,988,064) Income tax benefit (1,800,000) (475,812) ----------- ----------- Net income (loss) from discontinued operations 290,181 (3,512,252) ----------- ----------- Net income (loss) $ 5,300,758 $ (336,735) =========== =========== Basic earnings (loss) per share: Income from continuing operations $ 0.24 $ 0.14 Income (loss) from discontinued operations 0.01 (0.16) ----------- ----------- Net income (loss) $ 0.25 $ (0.02) =========== =========== Diluted earnings per share: Income from continuing operations $ 0.23 $ 0.14 Income (loss) from discontinued operations 0.01 (.16) ----------- ----------- Net income (loss) $ 0.24 $ (0.02) =========== =========== Shares used in computing net earnings (loss) per share: Basic 21,150,784 22,286,339 =========== =========== Diluted 21,934,570 22,286,339 =========== ===========
See accompanying notes to consolidated condensed financial statements. 5 ANAREN, INC. Consolidated Condensed Statements of Cash Flows Nine Months Ended March 31, 2004 and 2003 (Unaudited)
Cash flows from operating activities: Mar. 31, 2004 Mar. 31, 2003 ------------- ------------- Net income (loss) $ 5,300,758 $ (336,735) Net income (loss) from discontinued operations 290,181 (3,512,252) ------------ ------------- Net income from continuing operations $ 5,010,577 $ 3,175,517 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,070,731 2,930,206 Amortization of intangibles 374,653 374,654 Deferred income taxes (1,796) 1,072,228 Unearned compensation 214,650 400,681 Provision for doubtful accounts 127,506 (10,881) Tax benefit from exercise of stock options 797,537 -- Changes in operating assets and liabilities, net of acquisition: Receivables (4,468,390) 1,405,171 Inventories 328,001 3,167,009 Interest and other receivables (160,418) 177,268 Other current assets (9,276) (696,316) Refundable income taxes 876,220 -- Accounts payable 2,234,678 (779,843) Accrued expenses 630,455 101,292 Income taxes payable 1,130,984 -- Customer advance payments 631,339 (244,831) Other liabilities 9,632 34,821 Postretirement benefit obligation 8,039 -- ------------ ------------- Net cash provided by operating activities from continuing operations 10,805,122 11,106,976 Net cash used in operating activities from discontinued operations (405,018) (2,517,882) ------------ ------------- Net cash provided by operating activities 10,400,104 8,589,094 ------------ ------------- Cash flows from investing activities: Capital expenditures (2,651,864) (4,185,103) Dividend return of capital in equities held for resale 3,497,850 -- Maturities of marketable debt securities 167,816,623 118,751,324 Purchase of marketable debt and equity securities 151,545,000) (122,778,281) ------------ ------------- Net cash provided by (used in) investing activities from continuing operations 17,117,609 (8,212,060) Net cash provided by investing activities from discontinued operations 1,493,378 -- ------------ ------------- Net cash provided by (used in) investing activities 18,610,987 (8,212,060) ------------ ------------- Cash flows from financing activities: Stock options exercised 1,497,527 248,035 Purchase of treasury stock (19,964,325) (2,209,118) ------------ ------------- Net cash used in financing activities (18,466,798) (1,961,083) ------------ ------------- Effect of exchange rates 55,570 57,165 Net increase (decrease) in cash and cash equivalents 10,599,863 (1,526,884) Cash and cash equivalents at beginning of period 11,062,662 12,565,424 ------------ ------------- Cash and cash equivalents at end of period $ 21,662,525 $ 11,038,540 ============ ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Period For: Interest $ 7,519 $ 40,177 ============ ============= Income taxes $ 127,859 $ 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 nine months ended March 31, 2004 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 nine months ended March 31, 2004 and 2003 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 March 31, 2004 are as follows: Gross Carrying Accumulated Amount Amortization ------ ------------ Patent $ 574,966 $ 341,386 Customer Base 1,350,000 581,250 Trade Name 320,000 275,559 Non-Competition Agreements 180,000 93,000 Favorable Lease 600,000 155,000 ---------- ---------- Total $3,024,966 $1,446,195 ========== ========== Intangible asset amortization expense for the nine month periods ended March 31, 2004 and March 31, 2003 was $374,653. Amortization expense related to intangible assets for the next five fiscal years is as follows: Fiscal 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 Nine Months Ended ------------------ ----------------- March 31 March 31 March 31 March 31 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss), as reported $2,260,906 $ (958,109) $ 5,300,758 $ (336,735) Fair value-based stock based compensation cost, net of tax 2,317,672 2,190,454 6,711,336 6,571,361 ---------- ----------- ----------- ----------- Pro forma net loss $ (56,766) $(3,148,563) $(1,410,578) $(6,908,096) ========== =========== =========== =========== Net income (loss) per share: Basic $ 0.11 $ (0.04) $ 0.25 $ (0.02) Diluted $ 0.10 $ (0.04) $ 0.24 $ (0.02) Pro forma net loss per share: Pro forma basic $ 0.00 $ (0.14) $ (0.07) $ (0.31) Pro forma diluted $ 0.00 $ (0.14) $ (0.06) $ (0.31)
NOTE 3: Marketable Securities Marketable securities are summarized as follows: March 31, 2004 June 30, 2003 -------------- ------------- Marketable debt securities - held-to-maturity $94,706,774 $110,978,398 Marketable equity securities - available for sale 2,487,557 5,682,260 ----------- ------------ Total 97,194,331 116,660,658 Current portion 63,412,432 93,266,276 ----------- ------------ Long term $33,781,899 $ 23,394,382 =========== ============
March 31, 2004 -------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- Securities available for sale $ 3,088,648 $ -- $(601,091) $ 2,487,557 Securities held to maturity $94,706,774 $170,288 $ -- $94,877,062
June 30, 2003 ------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- Securities available for sale $ 6,586,529 $ -- $(904,269) $ 5,682,260 Securities held to maturity $110,978,398 $113,366 $ (14,684) $111,077,080
8 Contractual maturities of marketable equitable securities held to maturity at March 31, 2004, are summarized as follows: Cost FMV ---- --- Within one year $60,924,875 $58,576,145 One year to five years 33,781,899 36,300,917 ----------- ----------- Total $94,706,774 $94,877,062 =========== =========== NOTE 4: Inventories Inventories are summarized as follows: March 31, 2004 June 30, 2003 -------------- ------------- Component parts $ 8,541,121 $ 8,810,207 Work in process 6,319,149 5,627,150 Finished goods 2,175,436 2,656,029 ----------- ----------- $17,035,706 $17,093,386 Reserve for obsolescence (2,182,453) (1,421,727) ----------- ----------- Net inventory $14,853,253 $15,671,659 =========== =========== NOTE 5: Property, Plant and Equipment Property, plant and equipment are summarized as follows: March 31, 2004 June 30, 2003 -------------- ------------- Land and land improvements $ 1,599,323 $ 1,595,821 Buildings, furniture and fixtures 13,072,155 12,944,778 Machinery and equipment 46,994,643 47,590,955 ------------ ------------ $ 61,666,121 $ 62,131,554 Less accumulated depreciation and amortization (40,720,833) (38,491,733) ------------ ------------ $ 20,945,288 $ 23,639,821 ============ ============ NOTE 6: Accrued Expenses Accrued expenses consist of the following: March 31, 2004 June 30, 2003 -------------- ------------- Compensation $1,674,012 $ 924,290 Commissions 473,028 355,098 Health insurance 193,360 290,424 Restructuring (note 7) 46,160 710,885 Other 417,006 196,973 ---------- ---------- $2,803,566 $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. 9 Balance Balance June 30, Cash Non-Cash March 31, 2003 Expenditures Write-offs 2004 ---- ------------ ---------- ---- Severance $677,251 $(631,091) $-- $46,160 Outplacement services and others 33,634 (33,634) -- -- -------- --------- --- ------- Total $710,885 $(664,725) $-- $46,160 ======== ========= === ======= At March 31, 2004, outstanding liabilities related to the restructuring totaled $46,160 and are included in accrued expenses in the accompanying Balance Sheets and are expected to be paid in full over the next twelve months. NOTE 8: Other Liabilities Other liabilities consist of the following: March 31, 2004 June 30, 2003 -------------- ------------- Deferred compensation $ 459,456 $ 502,236 Other 212,947 160,534 --------- --------- 672,403 662,770 Less current portion (277,947) (225,534) --------- --------- $ 394,456 $ 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 nine months ended March 31, 2004, 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 nine months ended March 31, 2004 are the following:
Three Months Ended Nine Months Ended ------------------ ----------------- March 31 March 31 2004 2003 2004 2003 ---- ---- ---- ---- Net sales $ -- $ 1,115,497 $ 675,340 $ 3,490,168 Income (expense) 38,579 (2,684,756) (1,402,870) (7,478,232) Loss on sale of equipment -- -- (782,289) -- ------- ----------- ----------- ----------- Net income (loss) from discontinued operations $38,579 $(1,569,259) $(1,509,819) $(3,988,064) ======= =========== =========== ===========
The Company also recorded an income tax benefit of $1,800,000 resulting from the investment losses attributable to Anaren Europe. 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 10 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 2,004,987 and 2,417,300 at March 31, 2004 and 2003, 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 Nine Months Ended ------------------ ----------------- March 31 March 31 Numerator: 2004 2003 2004 2003 ---- ---- ---- ---- Earnings available to common stockholders $ 2,260,906 $ (958,109) $ 5,300,758 $ (336,735) =========== =========== =========== =========== Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 20,565,218 22,224,562 21,150,784 22,286,339 =========== =========== =========== =========== Denominator for diluted earnings per share: Weighted average shares outstanding 20,565,218 22,224,562 21,150,784 22,286,339 Common stock options and restricted stock 991,733 -- 783,786 -- ----------- ----------- ----------- ----------- Weighted average shares and conversions 21,556,951 22,224,562 21,934,570 22,286,339 =========== =========== =========== ===========
NOTE 11: Components of Net Period Benefit Costs Three Months Ended March 31 --------------------------- Pension Benefits ---------------- 2004 2003 ---- ---- Service cost $ 65,712 $ 53,216 Interest cost 135,206 126,190 Expected return on plan assets (134,113) (128,259) Amortization of prior service cost 4,560 3,774 Amortization of the net (gain) loss 27,066 4,560 --------- --------- Net periodic benefit cost $ 98,431 $ 59,481 ========= ========= NOTE 12: 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 11 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. The following table reflects the operating results of the segments consistent with the Company's internal financial reporting process. The following results are used in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments:
Space & Corporate and Wireless Defense Unallocated Consolidated -------- ------- ----------- ------------ Net sales: Three months ended: March 31, 2004 $15,505,871 6,881,351 -- $ 22,387,222 March 31, 2003 $10,800,782 7,300,709 -- $ 18,101,491 Nine months ended March 31, 2004 $40,026,192 20,225,633 -- $ 60,251,825 March 31, 2003 $34,850,768 22,185,063 -- $ 57,035,831 Operating income (loss): Three months ended: March 31, 2004 1,908,628 828,170 -- 2,736,798 March 31, 2003 (1,414,902) 1,578,469 -- 163,567 Nine months ended: March 31, 2004 2,757,935 3,054,924 -- 5,812,859 March 31, 2003 (2,646,719) 4,762,616 -- 2,115,897 Goodwill and intangible assets: March 31, 2004 32,294,632 -- -- 32,294,632 June 30, 2003 32,669,285 -- -- 32,669,285 Identifiable assets:* March 31, 2004 17,826,136 10,382,305 144,828,362 173,036,803 June 30, 2003 14,145,826 9,760,194 156,513,471 180,419,491 Depreciation:** Three months ended: March 31, 2004 532,393 538,805 -- 1,071,198 March 31, 2003 613,312 392,068 -- 1,005,380 Nine months ended: March 31, 2004 1,591,128 1,479,603 -- 3,070,731 March 31, 2003 1,794,748 1,135,458 -- 2,930,206 Goodwill and intangibles amortization: *** Three months ended: March 31, 2004 124,885 -- -- 124,885 March 31, 2003 124,835 -- -- 124,885 Nine months ended: March 31, 2004 374,653 -- -- 374,653 March 31, 2003 374,654 -- -- 374,654
* 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 12 cash and cash equivalents, marketable securities, other receivables, prepaid expenses, deferred 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 13: 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 nine months ended March 31, 2004 and its financial condition at March 31, 2004. This review should be read in conjunction with the accompanying consolidated condensed financial statements. Statements contained in management's discussion and analysis, other than historical facts, are forward-looking statements that are qualified by the cautionary statements at the end of this discussion. Overview The consolidated condensed financial statements present the financial condition of the Company as of March 31, 2004 and June 30, 2003, and the consolidated results of operations and cash flows of the Company for the three months and nine months ended March 31, 2004 and 2003. 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 13 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 Andrew, 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 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 due to the pending ramp up of a new custom assembly. 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 nine months ended March 31, 2004 and 2003. Included in the results of discontinued operations for the first nine months of fiscal 2004 are a loss from European operations of $1.5 million and a U.S. tax benefit of $1.8 million resulting from investment losses attributable to Anaren Europe. Net sales from continuing operations for the third quarter ended March 31, 2004 were $22,387,000, up 23.7% from the third quarter of last fiscal year and up 14.3% from the second quarter of fiscal 2004. Operating income for the third quarter was $2.7 million, or 12.2% of net sales, up $2.6 million from the third quarter of last year, and up 39.4% sequentially from the second quarter of fiscal 2004. Income from continuing operations for the third quarter of fiscal 2004 was $2,222,000, or $0.10 per diluted share, while the income from discontinued operations was $39,000 or $0.00 per diluted share, resulting in current third quarter net income of $2,261,000, or $0.10 per diluted share. This compares to income from continuing operations of $611,000, or $0.03 per diluted share and a loss from discontinued operations of ($1,569,000), or ($0.07) per diluted share, resulting in a net loss of ($958,000), or $(0.04) per diluted share, for the third quarter of last year, and net income of $1,256,000 or $0.07 per diluted share (including a net loss from discounted operations of $(335,000) for the second 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 Nine Months Ended Mar. 31, 2004 Mar. 31, 2003 Mar. 31, 2004 Mar. 31, 2003 ------------- ------------- ------------- ------------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 64.7% 68.6% 66.0% 68.3% ----- ----- ----- ----- Gross profit 35.3% 31.4% 34.0% 31.7% ----- ----- ----- ----- Operating expenses: Marketing 7.7% 8.4% 8.3% 8.2% Research and development 6.2% 9.9% 6.5% 8.3% General and administrative 9.2% 10.6% 9.6% 11.0% Restructuring 0.0% 1.6% 0.0% 0.5% ----- ----- ----- ----- Total operating expenses 23.1% 30.5% 24.4% 28.0% ----- ----- ----- ----- Operating income 12.2% 0.9% 9.6% 3.7% ----- ----- ----- ----- Other income (expense): Other, primarily interest income 1.6% 2.8% 2.0% 3.1% Interest expense (0.0%) (0.1%) (0.0%) (0.1%) ----- ----- ----- ----- Total other income (expense), net 1.6% 2.7% 2.0% 3.0% ----- ----- ----- ----- Income from continuing operations before income taxes 13.8% 3.6% 11.6% 6.7% Income taxes 3.9% 0.2% 3.3% 1.1% ----- ----- ----- ----- Income from continuing operations 9.9% 3.4% 8.3% 5.6% ----- ----- ----- ----- Discontinued operations: Income (loss) from discontinued operations of Anaren Europe 0.2% (9.0%) (2.5%) (7.0%) Income tax benefit 0.0% (0.3%) (3.0%) (0.8%) ----- ----- ----- ----- Net income (loss) from discontinued operations 0.2% (8.7%) 0.5% (6.2%) ----- ----- ----- ----- Net income (loss) 10.1% (5.3%) 8.8% (0.6%) ===== ===== ===== =====
The following table summarizes the Company's net sales by operating segments for the periods indicated. Amounts are in thousands. Three Months Ended Nine Months Ended March 31 March 31 -------- -------- 2004 2003 2004 2003 ---- ---- ---- ---- Wireless $15,506 $10,800 $40,026 $34,851 Space and Defense 6,881 7,301 20,226 22,185 ------- ------- ------- ------- $22,387 $18,101 $60,252 $57,036 ======= ======= ======= ======= 15 Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Net sales. Net sales increased $4.3 million, or 23.7%, to $22.4 million for the three months ended March 31, 2004, compared to $18.1 million for the third quarter of fiscal 2003. This increase resulted from a $4.7 million rise in sales of Wireless infrastructure equipment which more than offset a $420,000 decline in sales of Space and Defense 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 nine months. This demand generated increased orders from a majority of the Company's base station infrastructure original equipment manufacturing customers in fiscal 2004. Sales of standard surface mount components were $4.7 million in the third quarter of fiscal 2004, up 74% from the third quarter last year, while sales of custom components rose $2.0 million, or 80% in the current quarter compared to the same quarter last year. This increase was partially offset by a $1.2 million, or 54% decrease in sales of ferrite component products in the current third quarter compared to the third quarter of 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 $420,000, or 5.8% in the third quarter of fiscal 2004 to $6.9 million, compared to the same quarter 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 $850,000 in the third quarter of that fiscal year. The decline in commercial space revenue in fiscal 2004 was partially off-set by a $430,000 increase in defense product sales. Sales in the Space and Defense segment are expected to average approximately $6.7 to $7.2 million per quarter through the first half of fiscal 2005. 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 third quarter of fiscal 2004 was $7.9 million (35.3% of net sales), up $2.2 million from $5.7 million (31.4% of net sales) for the same quarter of the prior year. The rise in gross margin as a percent of sales was a result of the $1.2 million decrease in sales of unprofitable and low margin ferrite products, coupled with an increase in sales of higher margin wireless products in the current third quarter compared to the third quarter last year. The Company expects gross margins to continue at current levels over the next few quarters as the Company anticipates its projected sales increases will result primarily from initial production of a new custom assembly product. 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 (7.7% of net sales) for the third quarter of fiscal 2004, up $200,000 from $1.5 million (8.4% of net sales) for the third 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 nine 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 16 expenses were $1.4 million (6.2% of net sales) in the third quarter of fiscal 2004, down 22.1% from $1.8 million (9.9% of net sales) for the third quarter of fiscal 2003. Research and development expenditures are supporting further development of wireless infrastructure products and new wireless networking product opportunities. Research and development expenditures fell in the third quarter of fiscal 2004 compared to the same quarter last year due to a much higher level of customer funded development activity in the Space and Defense group, resulting in a higher level of engineering costs being included in cost of goods sold. 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, intangible amortization, travel related expenses and other corporate administrative costs. General and administrative expenses increased 7.9% to $2.1 million (9.2% of net sales) for the third quarter of fiscal 2004 from $1.9 million (10.6% of net sales) for the third quarter of last fiscal year. This increase resulted primarily from rising administrative costs due to Sarbanes-Oxley regulations and a rise in corporate donations to support development of new microwave engineering talent. Restructuring. There were no restructuring charges in the third quarter of fiscal 2004. In March 2003, the Company recorded a restructuring charge of $296,000 related to the Company's restructuring plan at its RF Power subsidiary. This plan was primarily aimed at reducing the cost of excess personnel in this operation and included the termination of 16 employees. Operating Income. Operating income increased in the third quarter of fiscal 2004 to $2.7 million (12.2% of sales) from $164,000 (0.9% of net sales) for the third quarter of fiscal 2003. On a reporting segment basis, Wireless operating income was $1.9 million for the third quarter of fiscal 2004, an improvement of $3.3 million from a Wireless operating loss of ($1.4 million) for the third quarter of fiscal 2003. The main reasons for the increase in Wireless income in the current third 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 $2.0 million increase in Wireless sales in the current quarter compared to the same period during the prior year. Wireless operating margins are expected to continue at current levels during the remainder of fiscal 2004. Space and Defense operating income fell $750,000 in the third quarter of fiscal 2004 to $828,000, compared to $1.6 million in the third quarter of fiscal 2003. This decrease resulted from the lower sales volume and a change in product mix during the current third quarter compared to the third quarter of last year. This year's third quarter sales included more sales volume attributable to military programs, while sales in the third quarter last year consisted of more profitable shipments for commercial space programs. Going forward, we expect Space and Defense sales to be driven primarily by defense related programs over the next four to five quarters. Other Income. Other income is primarily interest income received on invested cash balances. Other income decreased 26.4% to $368,000 (1.6% of net sales) for the quarter ended March 31, 2004, from $500,000 (2.8% 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 for Treasury shares in the first 17 half of fiscal 2004. Interest income will fluctuate based on the level of interest rates and the level of investable cash balances. Income Taxes. Income taxes for the third quarter of fiscal 2004 were $879,000 (3.9% of net sales), representing an effective tax rate of 28.3%. This compares to income tax expense of $42,000 (0.2% of net sales) for the third quarter of fiscal 2003, representing an effective tax rate of 6.4%. 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 of fiscal 2004, the Company ceased production at Anaren Europe and the remaining net assets of that operation were liquidated. Effective with the Company's Form 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 third quarter ended March 31, 2004 included income of $39,000 reflecting the results of that operation in the third quarter. Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003 Net Sales. Net sales increased $3.3 million, or 5.6% to $60.3 million for the first nine months of fiscal 2004, compared to $57.0 million for the first nine months of fiscal 2003. This increase resulted from a $5.1 million, or 14.8% increase in shipments of Wireless products, which more than offset a $2.0 million decline in Space and Defense product shipments. The increase in sales of Wireless products was a result of a significant increase in worldwide demand for Wireless basestation components over the past nine months. This rising demand generated increased orders from a majority of the Company's base station infrastructure original equipment manufacturing customers in fiscal 2004. Sales of standard components, including resistive products, rose to $21.1 million for the first nine months of fiscal 2004, up 50.7% from $14.0 million for the first nine months of last year, while sales of custom components increased $1.2 million, or 13.5% in the current nine months compared to the same period last year. These increases more than offset a $3.0 million decline in ferrite product sales, which resulted from the Company's continuing effort to discontinue production of unprofitable and low margin ferrite products in fiscal 2004. Sales in the Space and Defense group fell $2.0 million, or 8.8%, in the first nine months of fiscal 2004, compared to the same period in the prior fiscal year. This decrease in sales resulted from the completion of shipments for the Boeing Spaceway program in the fourth quarter of fiscal 2003. This program accounted for over $4.0 million in shipments in fiscal 2003, of which $2.9 million generated in the first nine months of that year. Sales in the Space and Defense segment are expected to average approximately $6.8 to $7.2 million per quarter through the first half of fiscal 2005. Gross Profit. Gross profit in the first nine months of fiscal 2004 was $20.5 million (34.0% of net sales), up $2.4 million from $18.1 million (31.7% of net sales) for the first nine months of the prior year. The increase in gross margin as a percent of sales was a result of the $3.0 million decrease in shipments of unprofitable and low margin ferrite products and the $8.3 million increase in shipments of higher margin standard and custom Wireless components in the current first nine months compared to the same period last year. 18 Marketing. Marketing expenses increased 7.2% to $5.0 million (8.3% of net sales) for the first nine months of fiscal 2004 from $4.6 million (8.2% of net sales) for the first nine months of last year. This increase is a result of the addition of three new geographic product line marketing positions, increased commissions 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 nine months. Research and Development. Research and development expenses were $3.9 million (6.5% of net sales) in the first nine months of fiscal 2004, down 16.3% from $4.7 million (8.3% of net sales) for the first nine months of fiscal 2003. Research and development expenditures are supporting further development of Space and Defense subsystems, Wireless infrastructure and subscriber products. Research and development expenditures declined in the first nine months of fiscal 2004 due to a higher level of customer funded development activity in the Space and Defense group 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 8.2% to $5.8 million (9.6% of net sales) for the first nine months of fiscal 2004, from $6.3 million (11.0% of net sales) for the first nine months of last fiscal year. This decrease 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 and consulting services in the current year. Restructuring. There were no restructuring charges in the first nine months of fiscal 2004. In March 2003, the Company recorded a restructuring charge of $296,000 related to the Company's restructuring plan at its RF Power subsidiary. This plan was primarily aimed at reducing the cost of excess personnel in this operation and included the termination of 16 employees. Operating Income. Operating income increased 175% in the first nine months of fiscal 2004 to $5.8 million (9.6% of sales) from $2.1 million (3.7% of net sales) for the first nine months of fiscal 2003. On a reporting segment basis, the Wireless operating income was $2.8 million for the first nine months of fiscal 2004, an improvement of $5.4 million from a Wireless operating loss of $2.6 million for the first nine months of fiscal 2003. The main reasons for the improvement in Wireless operating profitability in the current first nine months were the 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, the large increase in sales of higher margin Wireless products in the current fiscal year. Space and Defense operating income fell $1.7 million in the first nine months of fiscal 2004 to $3.1 million, compared to $4.8 million in the first nine months of fiscal 2003. This decrease resulted from the lower sales volume and a change in product mix during the current nine months compared to the first nine months of last year. Sales for the first nine months of fiscal 2004 included more volume attributable to military programs, while sales in the first nine months of last year consisted of more profitable commercial space programs. Other Income. Other income is primarily interest income received on invested cash balances. Other income decreased 31.5% to $1.2 million (1.6% of net sales) for the nine months ended March 31, 2004, from $1.8 million (3.1% of net sales) for the first nine months of last year. This decrease was caused by the decline in market interest rates over the last 12 months and the 19 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 nine months of fiscal 2004 were $2.0 million (3.3% of net sales), representing an effective tax rate of 28.6%. This compares to income tax expense of $668,000 (1.1% of net sales) for the first nine months of fiscal 2003, representing an effective tax rate of 17.4%. 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 levels of taxable income or loss. The effective tax rate has risen year over year for the first nine 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 28-29%. Discontinued Operations. On July 10, 2003, the Company announced its decision to dispose of its Anaren Europe operation due to further deterioration in its business. During the first quarter, production at Anaren Europe ceased and the remaining net assets of that operation were liquidated. Effective with the Company's Form 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 have been reclassified as discontinued operations in the statements of earnings. The results from discontinued operations for the first nine months ended March 31, 2004 include a loss of ($1.5) million reflecting the cost of that operation in the first nine months, and a federal tax benefit of $1.8 million resulting from the investment losses attributable to Anaren Europe. Fourth 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 fourth quarter of fiscal 2004 to range between $23.0 and $25.0 million and net earnings per diluted share are expected to be approximately $0.11. 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 20 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 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. 21 Liquidity and Capital Resources Net cash provided by operations for the nine months ended March 31, 2004 and the nine months ended March 31, 2003 was $10.4 million and $8.6 million, respectively. The positive cash flow from operations was due primarily to profit before depreciation in both years. In the current year cash flow was decreased by a rise in receivables, while the prior fiscal year was improved due to a decline in receivables and inventory. Net cash provided by investing activities for the first nine months of fiscal 2004 was $17.1 million and consisted of net maturities of marketable debt securities of $16.3 million, plus a return of capital dividend on equity securities (Celeritek, Inc.) held for resale of $3.5 million, less $2.7 million used to fund capital equipment acquisitions. Net cash used in investing activities in the first nine months of fiscal 2003 was $8.2 million and consisted of $4.2 million used to acquire capital equipment and net purchases of marketable debt securities amounting to $4.0 million. Additionally, in fiscal 2004, $1.5 million was generated in discontinued operations in Europe through the auction sale of capital equipment. Net cash used for financing activities was $18.5 million in the first nine months of fiscal 2004 and $2.0 million in the first nine months of last year. $20.0 million in cash was used in the first nine months of fiscal 2004 for the purchase of 1,437,100 shares of the Company's common stock, net of $1.5 million received from the exercise of stock options. Funds used in the first nine months of fiscal 2003 were $2.2 million to purchase 271,900 shares of the Company's common stock, while funds provided by financing activities were $248,035 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 possible purchase of additional shares of the Company's common stock. Capital expenditures, including purchases of $2.7 million made in the first nine 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 March 31, 2004, there were 1,070,000 shares remaining under the current Board repurchase authorization. The Company repurchased no shares during the third quarter ended March 31, 2004. At March 31, 2004, the Company had approximately $118.8 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. 22 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 $6,541,000 $1,045,000 $1,790,000 $1,363,000 $2,343,000 Deferred compensation 731,250 65,000 130,000 130,000 406,250
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, 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, including the new Wireless custom assembly placed into production during the third quarter, 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. 23 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 March 31, 2004, the Company had cash, cash equivalents and marketable securities of $118.8 million, of which approximately $116.3 million consisted of cash and highly liquid investments in marketable debt securities and $2.5 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 $44,000, 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 $2.5 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 $250,000 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 None. Item 6. Exhibits and Reports on Form 8-K Item 6(a) Exhibits -------- 10.1 Employment Agreement, effective as of February 14, 2004, between Anaren, Inc. and Carl W. Gerst, Jr. 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications Item 6(b) Reports on Form 8-K The Company filed a current report on Form 8-K on January 27, 2004 with respect to its Results of Operations for the quarter ended December 31, 2003. The Company filed a current report on Form 8-K on January 26, 2004 with respect to the receipt by the Company of an $11.0 million contract from Raytheon Company for Digital Radio Frequency Memory subsystems used in the Raytheon AN/ALQ-187 internal jammer. 25 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: April 30, 2004 S/Lawrence A. Sala ----------------------------------- Lawrence A.Sala President & Chief Executive Officer Date: April 30, 2004 S/Joseph E. Porcello ----------------------------------- Joseph E. Porcello Vice President of Finance and Treasurer 26 EX-10.1 2 e17645ex10_1.txt EMPLOYMENT AGREEMENT Exhibit 10.1 Employment Agreement, effective as of February 14, 2004, between Anaren, Inc. and Carl W. Gerst, Jr. EMPLOYMENT AGREEMENT This sets forth the terms of the Employment Agreement ("Agreement") made effective as of February 14, 2004 between Anaren, Inc. ("Employer"), a New York corporation with common stock publicly traded on the NASDAQ, and Carl W. Gerst, Jr. ("Employee" or "Mr. Gerst"), an individual currently residing at 115 E. Genesee Street, Skaneateles, New York 13152. RECITALS A. Mr. Gerst is a co-founder of Anaren and is currently employed by Anaren as its Chief Technical Officer. B. Mr. Gerst has served on Anaren's Board of Directors since the Company was first incorporated in 1967, and currently is Vice Chairman of the Board. C. Anaren desires to retain the services of Mr. Gerst and to induce him to remain with Anaren. D. The Compensation Committee of Anaren's Board recommended, and the Board unanimously approved at its February 14, 2004 regular meeting, that the Company enter into an Employment Agreement with Mr. Gerst whereby in the event of a Change of Control of the Company, defined below, and Mr. Gerst's employment is involuntarily terminated, or if Mr. Gerst becomes disabled or ceases to be employed with Employer after the Term of this Employment Agreement, Mr. Gerst would be entitled to certain severance pay and benefits as provided for in this Agreement. IN CONSIDERATION of the mutual covenants and representations contained herein, and other good and valuable consideration, receipt of which is acknowledged, the parties agree as follows: 1. Employment. (a) Term. Employer shall continue to employ Employee, and Employee shall continue to serve, as its Chief Technical Officer for a forty (40) month term commencing on February 14, 2004 and ending on June 30, 2007 ("Period of Employment"), subject to termination as provided in this Agreement. (b) Salary. During the Period of Employment, Employee's Base Salary shall be set by Employer's Board of Directors but shall not be below $250,000 ("Base Salary"), provided Employee continues to work his current normal work schedule. Employee's Base Salary is payable in accordance with Employer's regular payroll procedures for executive employees. (c) Successor Agreement. In the event Employee elects not to retire at the end of the Period of Employment, Employee and Employer shall commence good faith negotiations for a successor agreement, to be completed by May 31, 2007. If Employee elects to retire or Employer and Employee cannot agree on the terms of Employee's continued employment by June 30, 2007, Employee shall be entitled to be paid, as "Severance Compensation", an amount equal to three years of the Base Salary in effect on the date Employee's employment ends. Payments required pursuant to the preceding sentence shall be paid, unless otherwise agreed upon by the parties, in thirty-six (36) substantially equal installments, with the first installment paid within 3 business days following the date Employee's employment ends, and each succeeding installment paid on a monthly basis thereafter. If Mr. -2- Gerst deceases prior to payment of the total Severance Compensation provided for in this section (1(c)), Employer shall pay Mr. Gerst's spouse, Anne Marie Gerst, any remaining severance compensation payments that were otherwise owed to Mr. Gerst. It is the parties intent to pay the severance payments required by this provision in such a manner to minimize any income tax obligations that would otherwise be applicable. For the period during which the Severance Compensation is paid, Employee shall not be eligible to participate in any Employer fringe benefit plan except to the extent Employee is eligible for any post retirement medical plan provided by Employer. 2. Duties During The Period Of Employment. Employee shall continue to perform his Chief Technical Officer duties, subject to the direction of Employer's President & CEO and the discharge of such other duties and responsibilities to Employer as may from time to time be reasonably assigned to Employee by Employer's President & CEO. Employee shall devote his best efforts to the affairs of Employer, serve faithfully and to the best of Employee's ability, and devote all of Employee's working time and attention, knowledge, experience, energy and skill to the business of Employer, except that Employee may affiliate with professional associations, and civic organizations. 3. Termination. Employee's employment by Employer shall be subject to termination as follows: (a) Expiration of the Term. This Agreement shall terminate automatically at the expiration of the Period of Employment, unless the parties enter into a written agreement extending Employee's employment, except for the continuing obligation of the parties as specified hereunder. -3- (b) Termination Upon Death or Disability. This Agreement shall terminate upon Employee's death or disability as follows: (i) This Agreement shall terminate automatically upon Employee's death. In the event this Agreement is terminated as a result of Employee's death, Employer shall continue payments of Employee's Base Salary for a period of ninety (90) days following Employee's death to the beneficiary designated by Employee on the "Beneficiary Designation Form" attached to this Agreement as Appendix A. (ii) Employer may terminate this Agreement upon Employee's disability. For the purpose of this Agreement, Employee's inability to perform Employee's regular duties by reason of physical or mental illness or injury for a period of twenty-six (26) successive weeks ("Disability Period") shall constitute "Disability." The determination of Disability shall be made by a physician selected by Employer and a physician selected by Employee; provided, however, that if the two physicians so selected shall disagree, the determination of Disability shall be submitted to Arbitration in accordance with the rules of the American Arbitration Association, and the decision of the Arbitrator shall be binding on both parties. During the Disability Period, Employee shall be entitled to continue to receive his regular Base Salary pursuant to Employer's short term disability policy (and supplemented, if necessary, by -4- Employee's accrued but unused sick leave), reduced by any other benefits to which Employee may be entitled for the disability period on account of such disability, including, but not limited to, benefits provided under New York's Workers' Compensation law. (iii) Upon termination of this Agreement due to Employee's death or disability, Employer shall treat as immediately exercisable each unexpired stock option held by Employee that is not exercisable or that has not been fully exercised, so as to permit Employee (or his beneficiary) to purchase any portion or all of the Employer common stock not yet purchased pursuant to each such option until the one year anniversary of Employee's death or disability. (iv) In the case of termination due to death, Mr. Gerst's beneficiary will be entitled to life insurance proceeds equal to three times Mr. Gerst's base salary at the time of death. In the event these life insurance proceeds are not paid to Mr. Gerst's beneficiary, Anaren will pay Mr. Gerst's beneficiary the Severance Compensation provided for in paragraph 1(c). Severance Compensation shall also be payable to Mr. Gerst at the end of the Disability Period if termination of this Agreement is due to Employee's disability as defined in Section 3(b)(ii) above. (c) Termination by Employer for Cause. Employer may terminate Employee's employment immediately for "cause" by written notice to Employee. For purpose of -5- this Agreement, termination shall be for "cause" if the termination results from any of the following events: (i) material breach of this Agreement; (ii) documented misconduct as an executive or director of Employer, including, but not limited to, misappropriating any funds or property of Employer, or attempting to obtain any personal benefit from any transaction to which Employer is a party or from any transaction which any third party in which Employee has an interest which is adverse to the interest of Employer, unless, in either case, Employee shall have first obtained the written consent of Employer's President & CEO; (iii) unreasonable neglect or refusal to perform the duties assigned to Employee; (iv) conviction of a crime other than a vehicle and traffic misdemeanor; (v) documented failure to follow the reasonable, written instructions of the Employer's President & CEO or the Board of Directors of Employer; or (vi) any knowing and material violation of the Security and Exchange Commissions or NASDAQ's rules or regulations. Notwithstanding any other term or provision of this Agreement to the contrary, if Employee's employment is terminated for cause, Employee shall forfeit all rights to payments and benefits otherwise provided pursuant to this Agreement; provided, however, that Base Salary will be paid to Employee through the date of termination. -6- (d) Termination by Employee for Good Reason. Employee's employment with Employer may be terminated by Employee for "good reason". For purposes of this Agreement "good reason" shall mean: (i) the assignment to Employee of any duties inconsistent with Employee's position (including any change in his status, offices, and titles) authority, duties, responsibilities, or work location as contemplated by paragraphs 1 and 2 of this Agreement; or (ii) any failure by Employer to comply with any of the provisions of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by Employer promptly after receipt of notice thereof given by Employee. (e) Termination by Employer for Reasons Other Than Cause or by Employee for Good Reason. In the event Employer terminates Employee for reasons other than cause, or in the event Employee terminates employment for good reason, Employer shall pay/provide to Employee : (i) the greater of (A) the Severance Compensation described in and payable in accordance with subparagraph 1(d) of this Agreement or (B) Employee's regular Base Salary for the balance of the Period of Employment, paid in a single sum within 60 days following termination; and (ii) the right to exercise each unexpired stock option held by Employee that is not exercisable or that has not been fully exercised, so as to -7- permit the Employee to purchase any portion or all of the Employer stock not yet purchased pursuant to each such option until the first anniversary of the Employee's termination. 4. Fringe Benefits. (a) Benefit Plans. During the Period of Employment, Employee shall be eligible to participate in Employer's Deferred Compensation Plan for Certain Executive Employees, any employee pension benefit plans (as determined and defined under Section 3(2) of the Employee Retirement Income Security Act of 1974 as amended), Employer paid group life insurance plans, medical plans, dental plans, short term and long term disability plans, business travel insurance programs and other fringe benefit programs maintained by Employer for the benefit of its executive employees, including but not limited to four (4) weeks of paid vacation. Except as modified by this Agreement, participation in any of Employer's benefit plans and programs shall be based on, and subject to satisfaction of, the eligibility requirements and other conditions of such plans and programs. (b) Expenses. Upon submission to Employer of vouchers or other required documentation, Employee shall be reimbursed for Employee's actual out-of-pocket travel and other expenses reasonably incurred and paid by Employee in connection with Employee's duties. (c) Other Benefits. During the Period of Employment, Employee shall be entitled to receive the following additional benefits: (i) Reimbursement, plus an appropriate tax adjustment ("gross-up"), of an amount equal to the annual premium on a $1.0 million whole life insurance policy, which is owned by Employee. -8- 5. Stock Options. (a) Prior Stock Option Grants. Pursuant to Employer's 1996 and 2000 incentive stock option plans, Employee has been granted options to purchase shares of common stock of Employer. The parties hereby agree that the Plans and any implementing option grant agreement shall be amended, if necessary, to incorporate specific terms of this Agreement regarding the exercise of options following Employee's termination of employment. 6. Change of Control. (a) If Employee's employment with Employer is terminated by Employee or Employer for any reason other than cause within two years following a "Change of Control" that occurs during the Period of Employment, Employer shall: (i) pay Employee a severance benefit equal to the amount (and at the time(s)) determined under subparagraph 3(e)(i) of this Agreement; (ii) treat as immediately exercisable each unexpired stock option that is not otherwise exercisable or that has not been fully exercised, so as to permit Employee to purchase any portion or all of the Employer stock not yet purchased pursuant to each such option until the tenth anniversary of the date the option was granted to Employee; and (iii) waive all restrictions on any Employer stock granted to Employee so as to permit Employee to dispose of any restricted stock previously granted to Employee. (b) If any portion of the amounts paid to, or value received by Employee following a "Change of Control" (whether paid or received pursuant to his paragraph 6 or -9- otherwise) constitutes an "excess parachute payment" within the meaning of Internal Revenue Code Section 280G, then the parties shall negotiate a restructuring of payment dates and/or methods (but no payment amounts) to minimize or eliminate the application of Section 280G. If an agreement to restructure payments cannot be reached within sixty days of the date the first payment is due under this paragraph 6, then payment shall be made without restructuring. In that case, Employee shall be responsible for all taxes and penalties payable by Employee as a result of Employee's receipt of an "excess parachute payment". (c) For purpose of this paragraph 6, a "Change of Control" shall be deemed to have occurred if: (i) any "person" including a "group" as determined in accordance with Section 13D(3) of the Securities Exchange Act of 1934, is or becomes a beneficial owner, directly or indirectly, of securities of Employer representing 30% or more of the combined voting power of Employer's then outstanding securities; (ii) as a result of, or in connection with, any tender offer or exchange offer, merger or other business combination the persons who are directors of Employer before the transaction shall cease to constitute a majority of the Board of Directors of Employer or any successor to Employer; (iii) any tender offer or exchange offer, merger or other business combination not approved by two-thirds of the members of the Board of Directors in office immediately prior to such event; -10- (iv) Employer is merged or consolidated with another entity and as a result of the merger or consolidation less than 70% of the outstanding voting securities of the surviving or resulting corporation shall then be owned in the aggregate by the former stockholders of Employer, other than (A) affiliates within the meaning of the Exchange Act or (B) any party to the merger or consolidation; (v) A tender offer or exchange offer is made and consummated for the ownership of securities of Employer representing 30% or more of the combined voting power of Employer's then outstanding voting securities; or (vi) Employer transfers substantially all of its assets to another corporation which is not controlled by Employer. 7. Withholding. Employer shall deduct and withhold from compensation and benefits provided under this Agreement all legally required taxes and any benefit contributions required. 8. Covenants. (a) Confidentiality. Employee shall not, without the prior written consent of Employer, disclose or use in any way, either during his employment by Employer or thereafter, except as required in the course of his employment by Employer, any confidential business or technical information or trade secrets acquired in the course of Employee's employment by Employer. Employee acknowledges and agrees that it would be difficult to fully compensate Employer for damages resulting from the breach or threatened breach of the foregoing provision -11- and, accordingly, that Employer shall be entitled to temporary preliminary injunctions and permanent injunctions to enforce this provision. Employer's right to obtain injunctive relief shall not, however, diminish Employer's right to claim and recover damages. Employee commits to use his best efforts to prevent the publication or disclosure of any trade secret or any confidential information concerning the business or finances of Employer or Employer's affiliates, or any of its or their dealings, transactions or affairs which may come to Employee's knowledge in the pursuance of its duties on behalf of Employer. (b) No Competition. Employee's employment is subject to the condition that during the term of his employment and for a period of thirty-six (36) months from the date of the termination of his employment (the "Date of Termination") Employee shall not, directly or indirectly, own, manage, operate, control or participate in the ownership, management, operation or control of or be connected as an officer, employee, partner, director, individual proprietor, lender, consultant or otherwise, or have any financial interest in, or aid or assist anyone else in the conduct of any entity or business ("a Competitive Operation") which principal business directly competes with Employer on the Date of Termination. Ownership by Employee of not more than 5% of the voting stock of any publicly held corporation shall not constitute a violation of this paragraph. (c) Certain Affiliates of Employer. It is understood that Employee may have access to technical knowledge, trade secrets and customer lists of affiliates of Employer or companies which Employer may acquire in the future and may serve as a member of the board of directors or as an officer or employee of an affiliate of Employer. Employee commits that he shall not, during the term of his employment by Employer or for a period of thirty-six (36) months thereafter, in any way, directly or indirectly, own, manage, operate, control or participate -12- in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director, individual proprietor, lender, consultant or otherwise aid or assist anyone else in any business or operation which competes with or engages in the business of such an affiliate. (d) Termination of Payments. Upon the breach by Employee of any covenant under this paragraph 8, Employer may offset and/or recover from Employee immediately any and all of the Severance Compensation paid to Employee under subparagraph 1(d) hereof in addition to any and all other remedies available to Employer under law or in equity. 9. Notices. Any notice which may be given hereunder shall be sufficient if in writing and mailed by certified mail, return receipt requested, to Employee at his residence and to Employer at P.O. Box 178, 6635 Kirkville Road, E. Syracuse, New York 13057 or at such other addresses as either Employee or Employer may, by similar notice, designate. 10. Rules, Regulations and Policies. Employee shall abide by and comply with all of the rules, regulations, and policies of Employer, including without limitation Employer's policy of strict adherence to, and compliance with, any and all requirements of the Security and Exchange Commission and the NASDAQ. 11. No Prior Restrictions. Employee affirms and represents that Employee is under no obligation to any former employer or other third party which is in any way inconsistent with, or which imposes any restriction upon, the employment of Employee by Employer, or Employee's undertakings under this Agreement. 12. Return of Employer's Property. After Employee has received notice of termination or at the end of the term of this Agreement whichever first occurs, Employee shall immediately return to Employer all documents and other property in his possession belonging to Employer. -13- 13. Construction and Severability. The invalidity of any one or more provisions of this Agreement or any part thereof, all of which are inserted conditionally upon their being valid in law, shall not affect the validity of any other provisions to this Agreement; and in the event that one or more provisions contained herein shall be invalid, as determined by a court of competent jurisdiction, this instrument shall be construed as if such invalid provisions had not been inserted. 14. Governing Law. This Agreement was executed and delivered in New York and shall be construed and governed in accordance with the laws of the State of New York. 15. Assignability and Successors. This Agreement may not be assigned by Employee or Employer, except that this Agreement shall be binding upon, and shall inure to the benefit of the successor of Employer through merger, acquisition or corporate reorganization. 16. Miscellaneous. (a) This Agreement constitutes the entire understanding and agreement between the parties with respect to Employee's employment with Employer and shall supersede all prior understandings and agreements. (b) This Agreement cannot be amended, modified or supplemented in any respect, except by a subsequent written agreement entered into by the parties. (c) The services to be performed by Employee are special and unique; it is agreed that any breach of this Agreement by Employee shall entitle Employer (or any successor or assigns of Employer), in addition to any other legal remedies available to it, to apply to any court of competent jurisdiction to enjoin such breach. 17. Counterparts. This Agreement may be executed in counterparts, which together shall constitute one in the same instrument. -14- 18. Jurisdiction and Venue. The jurisdiction of any proceeding between the parties arising out of, or with respect to this Agreement, shall be with New York State Supreme Court, and venue shall be in Onondaga County. Each party shall be subject to the personal jurisdiction of Onondaga County Supreme Court. ANAREN, INC. By: /s/Lawrence A. Sala ------------------- Lawrence A. Sala, President & CEO Date: April 21, 2004 /s/ Carl W. Gerst, Jr. ---------------------- Carl W. Gerst, Jr. Chief Technical Officer Date: April 20, 2004 -15- APPENDIX A BENEFICIARY DESIGNATION FORM Pursuant to the Employment Agreement between ANAREN, INC. and CARL W. GERST, JR. dated as of February 14, 2004 ("Agreement"), I, Carl W. Gerst, Jr. hereby designate Ann Marie Gerst, my spouse, as the beneficiary of amounts payable upon my death in accordance with subparagraph 3(b)(ii) of the Agreement. My beneficiary's current address is the same as mine. Dated: April 20, 2004 /s/ Carl W. Gerst, Jr. ---------------------- Carl W. Gerst, Jr. /s/David M. Ferrara - ------------------- Witness -16- EX-31.1 3 e17645ex_31-1.txt CERTIFICATION EXHIBIT 31.1 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: April 30, 2004 /s/ Lawrence A. Sala Lawrence A. Sala President and Chief Executive Officer EX-31.2 4 e17645ex_31-2.txt CERTIFICATION EXHIBIT 31.2 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: April 30, 2004 /s/ Joseph E. Porcello --------------------------------------- Joseph E. Porcello Vice President of Finance and Treasurer EX-32.1 5 e17645ex_32-1.txt CERTIFICATION EXHIBIT 32.1 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 March 31, 2004 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 April 30, 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. EX-32.2 6 e17645ex_32-2.txt CERTIFICATION EXHIBIT 32.2 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 March 31, 2004 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 April 30, 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. -----END PRIVACY-ENHANCED MESSAGE-----