-----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, Tt+2pwvWuUn76Ax1ZKlXIVrSjuy6Q+1XqW79Oz7roclNHAWv0XwVp6CZC1q3hmgC /wsWAsa4+vSMD+z58J7Pjg== 0000891092-06-003451.txt : 20061108 0000891092-06-003451.hdr.sgml : 20061108 20061108090352 ACCESSION NUMBER: 0000891092-06-003451 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061108 DATE AS OF CHANGE: 20061108 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: 061195660 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 e25504_10q.txt 10-Q UNITED STATES 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 September 30, 2006 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ________________________ Commission file number 0-6620 ANAREN, INC. (Exact name of registrant as specified in its Charter) New York 16-0928561 -------- ---------- (State of incorporation) (I.R.S Employer Identification No.) 6635 Kirkville Road 13057 East Syracuse, New York ---------- - ----------------------- (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 315-432-8909 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by Check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Check One: Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X| The number of shares of Registrant's Common Stock outstanding on November 1, 2006 was 17,816,793. ANAREN, INC. INDEX PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 3 September 30, 2006 and June 30, 2006 (unaudited) Consolidated Condensed Statements of Earnings 4 for the Three Months Ended September 30, 2006 and 2005 (unaudited) Consolidated Condensed Statements of Cash Flows 5 for the Three Months Ended September 30, 2006 and 2005 (unaudited) Notes to Consolidated Condensed Financial 6 Statements (unaudited) Item 2. Management's Discussion and Analysis 16 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls & Procedures 25 PART II - OTHER INFORMATION - --------------------------- Item 1A. Risk Factors 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 6. Exhibits 26 Officer Certifications 28 - 31 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheets September 30, 2006 and June 30, 2006 (Unaudited) Assets September 30, 2006 June 30, 2006 ------ ------------------ ------------- Current assets: Cash and cash equivalents $ 13,033,249 $ 15,733,214 Securities available for sale (note 3) 32,184,947 35,635,000 Securities held to maturity (note 3) 26,156,786 31,124,733 Receivables, less allowance of $86,133 at September 30, 2006 and $84,854 at June 30, 2006 20,030,729 16,362,011 Inventories (note 4) 25,458,126 22,132,680 Other receivables 996,000 1,176,009 Prepaid expenses 1,393,391 744,321 Deferred income taxes 716,287 716,287 Other current assets 1,098,273 851,863 ------------ ------------ Total current assets 121,067,788 124,476,118 Securities held to maturity (note 3) 15,410,769 6,131,425 Property, plant and equipment, net (note 5) 28,525,335 27,635,161 Deferred income taxes 32,902 32,902 Goodwill 30,715,861 30,715,861 Other intangible assets, net of accumulated amortization of $2,764,813 at September 30, 2006 and $2,684,595 at June 30, 2006 (note 1) 260,153 340,371 Other assets 341,448 -- ------------ ------------ Total assets $196,354,256 $189,331,838 ============ ============ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 7,476,965 $ 6,798,793 Accrued expenses (note 6) 1,841,653 3,254,816 Income taxes payable 1,636,443 676,488 Customer advance payments 483,722 483,722 Other current liabilities (note 7) 814,632 769,523 ------------ ------------ Total current liabilities 12,253,415 11,983,342 Deferred income taxes 1,956,955 1,811,955 Pension and postretirement benefit obligation 2,503,862 2,356,789 Other liabilities (note 7) 764,912 728,943 ------------ ------------ Total liabilities 17,479,144 16,881,029 ------------ ------------ Stockholders' equity: Common stock of $.01 par value. Authorized 200,000,000 shares; issued 27,017,454 shares at September 30, 2006 and 26,857,554 at June 30, 2006 270,174 268,575 Additional paid-in capital 184,254,746 181,780,660 Retained earnings 74,787,031 70,826,262 Accumulated other comprehensive loss (453,548) (441,397 ------------ ------------ 258,858,403 252,434,100 Less cost of 9,249,643 treasury shares at September 30, 2006 and June 30, 2006 79,983,291 79,983,291 ------------ ------------ Total stockholders' equity 178,875,112 172,450,809 ------------ ------------ Total liabilities and stockholders' equity $196,354,256 $189,331,838 ============ ============ See accompanying notes to consolidated condensed financial statements. 3 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Three Months Ended September 30, 2006 and 2005 (Unaudited) September 30, 2006 September 30, 2005 ------------------ ------------------ Net sales $ 30,203,110 $ 24,614,358 Cost of sales 18,886,687 15,959,912 ------------- ------------- Gross profit 11,316,423 8,654,446 ------------- ------------- Operating expenses: Marketing 1,812,706 1,768,079 Research and development 2,138,185 2,034,641 General and administrative 2,768,226 2,492,310 ------------- ------------- Total operating expenses 6,719,117 6,295,030 ------------- ------------- Operating income 4,597,306 2,359,416 Other income, primarily interest 896,606 587,744 Interest expense (6,143) (6,143) ------------- ------------- Total other income 890,463 $ 581,601 ------------- ------------- Income before income taxes 5,487,769 2,941,017 Income tax expense 1,527,000 687,000 ------------- ------------- Net income $ 3,960,769 $ 2,254,017 ============= ============= Basic net income per share $0.23 $0.13 ===== ===== Diluted net income per share: $0.22 $0.13 ===== ===== Shares used in computing net earnings per share: Basic 17,492,157 17,402,270 ========== ========== Diluted 17,975,795 17,936,051 ========== ========== See accompanying notes to consolidated condensed financial statements. 4 ANAREN, INC. Consolidated Condensed Statements of Cash Flows Three Months Ended September 30, 2006 and 2005 (Unaudited) September 30, September 30, Cash flows from operating activities: 2006 2005 ------------- ------------- Net income $ 3,960,769 $ 2,254,017 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 1,323,094 1,201,919 Amortization of intangibles 80,218 83,218 Gain on sale of land (77,508) -- Deferred income taxes 145,000 72,000 Equity based compensation 827,808 861,921 Provision for doubtful accounts 1,279 -- Changes in operating assets and liabilities: Receivables (3,669,997) 14,040 Inventories (3,325,446) (1,385,255) Other receivables 180,009 (106,462) Other current assets (895,480) (255,357) Accounts payable 678,172 470,944 Accrued expenses (1,413,163) (565,555) Income taxes payable 959,955 272,125 Pension and postretirement benefit obligation 170,578 -- Other liabilities 57,573 225,298 ------------- ------------- Net cash provided by (used in) operating activities (997,139) 3,142,853 ------------- ------------- Cash flows from investing activities: Capital expenditures (2,270,268) (847,902) Increase in other assets (341,448) -- Proceeds from sale of land 134,508 Maturities of marketable debt and auction rate securities 39,529,106 18,732,408 Purchase of marketable debt and auction rate securities (40,390,450) (15,200,000) ------------- ------------- Net cash provided by (used in) investing activities (3,338,552) 2,684,506 ------------- ------------- Cash flows from financing activities: Stock options exercised 1,225,797 147,836 Tax benefit from exercise of stock options 422,080 -- Purchase of treasury stock -- (4,894,151) ------------- ------------- Net cash provided by (used in) financing activities 1,647,877 (4,746,315) ------------- ------------- Effect of exchange rates (12,151) 63,689 ------------- ------------- Net increase (decrease) in cash and cash equivalents (2,699,965) 1,144,733 Cash and cash equivalents at beginning of period 15,733,214 5,900,841 ------------- ------------- Cash and cash equivalents at end of period $ 13,033,249 $ 7,045,574 ============= ============= Supplemental Disclosures of Cash Flow Information: Cash Paid During the Period For: Interest $ 6,143 $ 6,143 ============= ============= Income taxes, net of refunds $ -- $ 342,875 ============= ============= See accompanying notes to consolidated condensed financial statements. 5 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, 2006. The results of operations for the three months ended September 30, 2006 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2007, or any future interim period. The income tax rates utilized for interim financial statement purposes for the three months ended September 30, 2006 and 2005 are based on estimates of income and utilization of tax credits for the entire year. NOTE 1: Intangible Assets Intangible assets as of September 30, 2006 and June 30, 2006 are as follows:
September 30 June 30 ------------------------------- ----------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization -------------- ------------ -------------- ------------ Patent $ 574,966 $ 521,063 $ 574,966 $ 503,095 Customer Base 1,350,000 1,143,750 1,350,000 1,087,500 Trade Name 320,000 320,000 320,000 320,000 Non-Competition Agreements 180,000 180,000 180,000 174,000 Favorable Lease 600,000 600,000 600,000 600,000 ---------- ---------- ---------- ---------- Total $3,024,966 $2,764,813 $3,024,966 $2,684,595 ========== ========== ========== ==========
Intangible asset amortization expense for the three month period ended September 30, 2006 and 2005 aggregated $80,218 and $83,218, respectively. Amortization expense related to intangible assets for the next five years is as follows: Year Ending June 30, 2007 $302,875 2008 $ 37,496 2009 $ 0 2010 $ 0 2011 $ 0 NOTE 2: Equity-Based Compensation Effective July 1, 2005, the Company adopted the fair-value recognition provisions of Statement of Financial Accounting Standards No. 123R (SFAS 123R) on a prospective basis. This standard requires the Company to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost is recognized as compensation expense over the vesting period of the awards. 6 Total stock-based compensation expense recognized for the three month periods ended September 30, 2006 and 2005 was $829,666 and $861,921, respectively. These amounts include $82,283 and $27,633 related to the Company's restricted stock program (see restricted stock programs below) and $747,383 and $834,288 related to the Company's stock option program for the three month periods ended September 30, 2006 and 2005, respectively. As a result of the adoption of SFAS 123R, both operating income and income before taxes for the three month periods ended September 30, 2006 and 2005 were reduced by $747,383 and $834,288, respectively. Net income was reduced by $634,383 and $777,288, or $0.04 per basic, and $0.04 per diluted share for the three month periods ended September 30, 2006 and 2005, respectively. Stock-based compensation expense included in operating expenses is as follows for the three month periods ended September 30: 2006 ------------------------------------ Stock Restricted Total option stock stock-based program program compensation ------- ---------- ------------ Cost of goods sold ..................... $224,808 $50,377 $275,185 Marketing .............................. 55,906 -- 55,906 Research and development ............... 68,671 -- 68,671 General and administrative ............. 396,140 31,906 428,046 -------- ------- -------- Total cost of stock-based compensation ......... 745,525 82,283 827,808 Change in amounts capitalized in inventory ............. 1,858 -- 1,858 Net stock-based compensation expense ................. $747,383 $82,283 $829,666 ======== ======= ======== Amount of related income tax benefit recognized in income ................. $113,000 $36,000 $149,000 ======== ======= ======== 2005 ------------------------------------ Stock Restricted Total option stock stock-based program program compensation ------- ---------- ------------ Cost of goods sold ..................... $325,295 $26,633 $351,928 Marketing .............................. 68,452 -- 68,452 Research and development ............... -- -- -- General and administrative ............. 440,541 1,000 441,541 -------- ------- -------- Total cost of stock-based compensation ......... 834,288 27,633 861,921 Change in amounts capitalized in inventory ............. -- -- -- -------- ------- -------- Net stock-based compensation expense ................. $834,288 $27,633 $861,921 ======== ======= ======== Amount of related income tax benefit recognized in income ................. $ 57,000 $10,000 $ 67,000 ======== ======= ======== As of September 30, 2006, there were 2,492,929 stock options outstanding. At September 30, 2006, the aggregate unrecognized compensation cost of unvested options, as determined using a capital Black-Scholes option valuation model, was $7,971,182 (net of estimated forfeitures) which is expected to be recognized as compensation expense in fiscal years 2007 through 2012. The aggregate intrinsic value of these options was $16,562,033 (net of forfeitures). As of September 30, 2006, 1,483,504 stock options were exercisable, which represents an aggregate intrinsic value of $10,504,760. 7 During the three month periods ended September 30, 2006 and 2005, the Company granted 185,350 and 373,500 nonstatutory stock options with a fair value of $2,511,781 and $3,192,150 (net of estimated forfeitures), respectively. During the three month periods ended September 30, 2006 and 2005, 26,900 and 46,770 options were forfeited and/or expired, respectively. During the three month periods ended September 30, 2006 and 2005, there were 111,428 and 23,660 stock options exercised, which represents an aggregate intrinsic value of $1,205,943 and $177,688, respectively. New option grants made after July 1, 2005, as well as option grants issued prior to that date, have been valued using a Black-Scholes option valuation model. Stock Option Plans In November 2004, the shareholders approved the amendment and restatement of the Company's three existing stock option plans, which combined these plans under one single consolidated equity compensation plan, the Anaren, Inc. Comprehensive Long-Term Incentive Plan. The effect of the amendment and restatement was to combine the separate share pools available for grant under the three existing plans into a single grant pool, expand the type of equity-based awards the Company may grant, and extend the term of the combined plan to October 31, 2014. Under the restated plan, the Company may issue incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, performance shares, and performance units that can vest immediately or up to five years. Under this plan, the Company reserved 1,326,488 common shares available for grant. On September 30, 2006, the Company had 899,543 shares available for grant under the restated plan. Information with respect to this plan is as follows:
Weighted Total Option average shares price exercise price ------ ----- -------------- Outstanding at June 30, 2005................... 2,782,780 $ 2.27 to 57.59 $14.73 Issued...................................... 387,500 11.97 to 21.15 14.22 Exercised................................... (664,103) 2.27 to 20.17 8.04 Expired..................................... (36,090) 14.73 to 57.59 39.05 Canceled.................................... (24,180) 9.51 to 53.00 14.43 --------- Outstanding at June 30, 2006................... 2,445,907 $ 2.27 to 54.00 $15.91 Issued...................................... 185,350 19.56 19.56 Exercised................................... (111,428) 2.27 to 19.21 10.97 Expired..................................... (21,100) 15.00 to 19.21 19.17 Canceled.................................... (5,800) 9.51 to 14.73 14.13 --------- Outstanding at September 30, 2006.............. 2,492,929 $ 2.27 to 54.00 $16.55 ========= Shares exercisable at September 30, 2006....... 1,483,504 $ 2.27 to 54.00 $16.70 =========
8 The following table summarizes significant ranges of outstanding and exercisable options at September 30, 2006:
Options outstanding Options exercisable - ----------------------------------------------------------------- ------------------------- Weighted Weighted Weighted Range of average average average exercise remaining exercise exercise prices Shares life in years price Shares price -------- ------ ------------- -------- ------ -------- $1.00 - 5.00 17,292 .39 $ 2.28 17,292 $ 2.28 5.01 - 15.00 1,945,463 6.65 6.85 1,136,488 10.94 15.01 - 40.00 359,574 7.38 9.05 159,124 20.44 40.01 - 65.00 170,600 4.32 53.04 170,600 53.04 --------- --------- 2,492,929 1,483,504 ========= =========
During the years ended September 30, 2006 and 2005, the per-share weighted average fair value of the nonstatutory stock options granted was $13.90 and $8.88. The fair value of options at the date of the grant was estimated using the Black-Scholes model with the following assumptions for the respective period ending September 30: 2006 2005 ---- ---- Expected option life (using the Simplified Term Method) 6.0 - 6.5 years 6.0 - 6.5 years Weighted average risk-free interest rate............................ 4.84% - 4.87% 3.92 - 4.30% Weighted average expected volatility............................... 75.00% 61.00% - 69.00% For the three month periods ended September 30, 2006 and 2005, the Company used the Simplified Term Method for each award granted. Expected volatility for the three month periods ended September 30, 2006 and 2005, is based on historical volatility levels of the Company's common stock. The risk-free interest rate for the three month period ended September 30, 2006 and 2005 is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life. Restricted Stock Program On November 17, 2004, the Company issued restricted stock grants of 23,500 shares. The per-share price of each grant was $13.60. The shares of restricted stock are subject to a 36 month forfeiture period. On September 1, 2005, the Company issued restricted stock grants totaling 2,605 shares. The per-share price of each grant was $13.82. The shares of restricted stock are subject to a 36 month foreiture period. On May 17, 2006, the Company issued restricted stock grants totaling 120,082 shares. The per-share price of each grant was $21.15. These shares are subject to a forfeiture period which expires as of the later of May 17, 2009 and the last day of the Company's single fiscal year during which the Company has both net sales from operations of at least $250 million and operating income of at least 12 percent of net sales. These grant agreements expire if both financial performance conditions above are not met by June 30, 2011. Presently, the Company has recognized no compensation expense for this grant and the shares have not been included in the current diluted earnings per share calculation as the Company believes that it is more likely than not that these goals will not be met within the time period specified. In the future, if it becomes more likely than not that the sales and earnings goal will be achieved then at that time the compensation cost associated with the grant will be recognized over the remaining vesting period. 9 On August 9, 2006, the Company issued restricted stock grants totaling 48,450 shares. The per share price of each grant was $19.56. The shares of restricted stock are subject to a 36 month forfeiture period. As of September 30, 2006 and 2005, the Company has issued restricted shares aggregating 194,637 and 26,105, respectively, under its 2004 Comprehensive Long-Term Incentive Plan. No shares were forfeited during the three month periods ended September 30, 2006 and 2005. No shares vested during the three month periods ended September 30, 2006 and 2005. For the three month period ended September 30, 2006 and 2005, the Company recognized compensation expense associated with the lapse of restrictions aggregating $82,283 and $27,633, respectively. NOTE 3: Securities The amortized cost and fair value of securities are as follows:
September 30, 2006 ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------- ---------- ---------- ---------- Securities available for sale: Auction securities $32,184,947 $ -- $ -- $32,184,947 ----------- ----- --------- ----------- Total securities available-for-sale $32,184,947 $ -- $ -- $32,184,947 =========== ===== ========= =========== Securities held to maturity: Municipal bonds $33,425,678 $ -- $ (52,799) $33,372,879 Commercial paper 2,231,632 -- -- 2,231,632 Corporate bonds 2,363,688 146 -- 2,363,834 Federal Agency Bond 3,546,557 -- (22,756) 3,523,801 ----------- ----- --------- ----------- Total securities held to maturity $41,567,555 $ 146 $ (75,555) $41,492,146 =========== ===== ========= =========== June 30, 2006 ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------- ---------- ---------- ---------- Securities available for sale: Auction rate securities $35,635,000 $ -- $ -- $35,635,000 ----------- -------- ----------- ----------- Total securities Available-for-sale $35,635,000 $ -- $ -- $35,635,000 =========== ======== =========== =========== Securities held to maturity: Municipal bonds $29,056,496 $ -- $ (143,144) $28,913,352 Commercial paper 2,976,555 -- -- 2,976,555 Corporate bonds 1,824,132 1,989 (2,666) 1,823,455 Federal agency bonds 3,398,975 -- (41,890) 3,357,085 ----------- -------- ----------- ----------- Total securities held to maturity $37,256,158 $ 1,989 $ (187,700) $37,070,447 =========== ======== =========== ===========
Contractual maturities of marketable debt securities held to maturity at September 30, 2006 and June 30, 2006 are summarized as follows:
September 30, 2006 June 30, 2006 ------------------------------ ------------------------------- Fair Fair Market Market Cost Value Cost Value ----------- ----------- ----------- ----------- Within one year $26,156,786 $26,092,510 $31,124,733 $30,994,480 One year to five years 15,410,769 15,399,636 6,131,425 6,075,967 ----------- ----------- ----------- ----------- Total $41,567,555 $41,492,146 $37,256,158 $37,070,447 =========== =========== =========== ===========
10 Contractual maturities of auction rate securities available for sale at September 30, 2006 and June 30, 2006 are summarized as follows:
September 30, 2006 June 30, 2006 ------------------------------ ------------------------------- Fair Fair Market Market Cost Value Cost Value ----------- ----------- ----------- ----------- Within one year $32,184,947 $32,184,947 $35,635,000 $35,635,000 One year to five years -- -- -- -- ----------- ----------- ----------- ----------- Total $32,184,947 $32,184,947 $35,635,000 $35,635,000 =========== =========== =========== ===========
The Company invests in auction rate securities. Auction rate securities have long-term underlying maturities; however, the market is highly liquid and the interest rates reset every 7, 28 or 35 days. NOTE 4: Inventories Inventories are summarized as follows: September 30, 2006 June 30, 2006 ------------------ ------------- Component parts $ 11,579,367 $ 10,521,929 Work in process 10,749,121 9,034,733 Finished goods 4,429,565 3,767,308 ------------- ------------- $ 26,758,053 $ 23,323,970 Reserve for obsolescence (1,299,927) (1,191,290) ------------- ------------- Net inventory $ 25,458,126 $ 22,132,680 ============= ============= NOTE 5: Property, Plant and Equipment Property, plant and equipment are summarized as follows: September 30, 2006 June 30, 2006 ------------------ ------------- Land and land improvements $ 2,150,823 $ 2,207,823 Construction in process 3,138,817 1,918,653 Buildings, furniture and fixtures 16,632,785 16,608,430 Machinery and equipment 58,201,821 57,176,071 ------------- ------------- $ 80,124,246 $ 77,910,977 Less accumulated depreciation and amortization (51,598,911) (50,275,816) ------------- ------------- $ 28,525,335 $ 27,635,161 ============= ============= 11 NOTE 6: Accrued Expenses Accrued expenses consist of the following: September 30, 2006 June 30, 2006 ------------------ ------------- Compensation $ 738,714 $2,082,104 Commissions 828,994 732,749 Health insurance 252,668 294,500 Other 21,277 145,463 ---------- ---------- $1,841,653 $3,254,816 ========== ========== NOTE 7: Other Liabilities Other liabilities consist of the following: September 30, 2006 June 30, 2006 ------------------ ------------- Deferred compensation $ 829,912 $ 793,943 Pension liability 336,165 312,660 Other 413,467 391,863 ---------- ---------- 1,579,544 1,498,466 Less current portion 814,632 769,523 ---------- ---------- $ 764,912 $ 728,943 ========== ========== NOTE 8: Net Income Per Share Basic income per share is based on the weighted average number of common shares outstanding. Diluted income per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company's case, comprise shares issuable under the Company's Comprehensive Long-Term Incentive Plan. The weighted average number of common shares utilized in the calculation of the diluted income per share does not include antidilutive shares aggregating 202,600 and 1,481,103 at September 30, 2006 and 2005, 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 ------------------ September 30 2006 2005 ---- ---- Numerator: Net income $ 3,960,769 $ 2,254,017 ============= ============= Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 17,492,157 17,402,270 ============= ============= Denominator for diluted earnings per share: Weighted average shares outstanding 17,492,157 17,402,270 Common stock options and restricted stock 483,638 533,781 ------------- ------------- Weighted average shares and conversions 17,975,795 17,936,051 ============= ============= 12 NOTE 9: Components of Net Periodic Pension Benefit Costs Three Months Ended ------------------ September 30 2006 2005 ---- ---- Service cost $ 85,587 $ 61,825 Interest cost 151,795 141,090 Expected return on plan assets (173,365) (156,687) Amortization of prior service cost (808) 2,623 Amortization of the net (gain) loss 47,436 12,414 --------- --------- Net periodic benefit cost $ 110,645 $ 61,265 ========= ========= Expected Pension Contributions Expected contributions for fiscal 2007 are $336,165. Estimated Future Pension Benefit Payments The following estimated benefit payments, which reflect future service, as appropriate, are expected to be paid: July 1, 2006 - June 30, 2007 ................................. $ 419,601 July 1, 2007 - June 30, 2008 ................................. 480,626 July 1, 2008 - June 30, 2009 ................................. 487,453 July 1, 2009 - June 30, 2010 ................................. 525,600 July 1, 2010 - June 30, 2011 ................................. 543,938 Years 2012 - 2016 ............................................ 3,122,875 13 NOTE 10: Components of Net Periodic Postretirement Health Benefit Costs Three Months Ended ------------------ September 30 2006 2005 ---- ---- Service cost $ 18,677 $ 14,285 Interest cost 36,665 46,327 Amortization of the net (gain) loss 13,208 18,788 -------- -------- Postretirement Health $ 68,550 $ 79,400 ======== ======== Expected Postretirement Health Contributions Expected contributions for fiscal 2007 are $165,149, net of $39,381 expected subsidy receipts. Estimated Future Benefit Payments Shown below are expected gross benefit payments (including prescription drug benefits) and the expected gross amount of subsidy receipts. Employer Contributions Subsidy Receipts ---------------------- ---------------- July 1, 2006 - June 30, 2007 204,530 (39,381) July 1, 2007 - June 30, 2008 199,286 (48,950) July 1, 2008 - June 30, 2009 214,390 (53,689) July 1, 2009 - June 30, 2010 216,892 (59,938) July 1, 2010 - June 30, 2011 220,394 (64,144) Years 2012 - 2016 1,140,941 (364,243) NOTE 11: Segment Information The Company operates predominately in the wireless communications, satellite communications and defense electronics markets. The Company's two reportable segments are the wireless group and the space and defense group. These segments have been determined based upon the nature of the products and services offered, customer base, technology, availability of discrete internal financial information, homogeneity of products and delivery channel, and are consistent with the way the Company organizes and evaluates financial information internally for purposes of making operating decisions and assessing performance. The wireless segment designs, manufactures and markets commercial products used mainly by the wireless communications market. The space and defense segment of the business designs, manufactures and markets specialized products for the defense electronics and satellite communications markets. The revenue disclosures for the Company's reportable segments depict products that are similar in nature. 14 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: September 30, 2006 19,827,407 10,375,703 -- 30,203,110 September 30, 2005 16,410,735 8,203,623 -- 24,614,358 Operating income: Three months ended: September 30, 2006 3,268,711 1,328,595 -- 4,597,306 September 30, 2005 2,045,191 314,225 -- 2,359,416 Goodwill and intangible assets: September 30, 2006 30,976,014 -- -- 30,976,014 June 30, 2006 31,056,232 -- -- 31,056,232 Identifiable assets:* September 30, 2006 26,231,538 19,145,742 120,000,962 165,378,242 June 30, 2006 20,572,238 18,053,595 119,649,773 158,275,606 Depreciation:** Three months ended: September 30, 2006 771,359 551,735 -- 1,323,094 September 30, 2005 638,912 563,007 -- 1,201,919 Intangibles amortization: *** Three months ended: September 30, 2006 80,218 -- -- 80,218 September 30, 2005 83,218 -- -- 83,218
* Segment assets primarily include receivables and inventories. The Company does not segregate other assets on a products and services basis for internal management reporting and, therefore, such information is not presented. Assets included in corporate and unallocated principally are cash and cash equivalents, marketable securities, other receivables, prepaid expenses, deferred income taxes, and property, plant and equipment not specific to business acquisitions. ** Depreciation expense related to acquisition - specific property, plant and equipment is included in the segment classification of the acquired business. Depreciation expense related to non- business combination assets is allocated departmentally based on an estimate of capital equipment employed by each department. Depreciation expense is then further allocated within the department as it relates to the specific business segment impacted by the consumption of the capital resources utilized. Due to the similarity of the property, plant and equipment utilized, the Company does not specifically identify these assets by individual business segment for internal reporting purposes. 15 *** 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-Q. The following discussion, other than historical facts, contains forward-looking statements that involve a number of risks and uncertainties. The Company's 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. Overview The consolidated financial statements present the financial condition of the Company as of September 30, 2006 and June 30, 2006, and the consolidated results of operations and cash flows of the Company for the three months ended September 30, 2006 and 2005. The Company designs, develops and markets microwave components and assemblies for the wireless communications, satellite communications and defense electronics markets. The Company's distinctive manufacturing and packaging techniques enable it to cost-effectively produce compact, lightweight microwave products for use in base stations for wireless communications systems, in satellites and in defense electronics systems. Beginning in 2004, the Company has introduced new components addressing consumer wireless applications such as wireless local area networks, Bluetooth, WiFi, cellular handsets and satellite telecommunications. The Company sells its products to leading wireless communications equipment manufacturers such as Ericsson, Motorola, Nokia, Nortel Networks, and Andrew, and to satellite communications and defense electronics companies such as Boeing Satellite, ITT, 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 has 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 fixed-price contracts for the sale of engineering design and development efforts for space and defense electronics products. Sales and estimated profits under long-term contracts are recognized according to customer contractual milestones 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. In April 2006, the Company entered into a lease for a new 76,000 square foot facility in Suzhou, China, at an annual rent of $165,227 to replace its current 25,000 square foot leased facility. The initial lease period on the new building runs through April 2013 and is renewable through April 2023. No additional cost will be incurred for termination of the lease on the current building in the second quarter of fiscal 2007. The Company is in the process of moving its China operation 16 to this new facility and expects to be fully operational in this facility prior to the end of calendar year 2006. In July 2006, the Company began construction on a 54,000 square foot addition to its facility in East Syracuse, New York. This addition is needed primarily to accommodate the growth of the Company's Space and Defense business. The project is expected to be completed during the second quarter of calendar 2007 at an estimated cost of $5.8 million for the building addition. Second Quarter of Fiscal 2007 Outlook For the second quarter, the Company expects a decline in demand for wireless infrastructure products, a seasonally driven decrease in demand for the consumer component product line and increased demand for the Space & Defense segment as a result of recent new contract wins. As a result, the Company expects net sales to be in the range of $29.0 - $32.0 million for the second quarter of fiscal 2007. With an anticipated tax rate of approximately 25% and an expected stock based compensation expense of approximately $0.04 per diluted share, we expect net earnings per diluted share to be in the range of $0.20 - $0.23 for the second quarter. Results of Operations Net sales from continuing operations for the three months ended September 30, 2006 were $30.2 million, up $5.6 million from $24.6 million for the first quarter of fiscal 2006. Net income for the first three months of fiscal 2007 was $4.0 million, or 13.1% of net sales, up $1.7 million, or 76% from net income of $2.3 million in the first three months of fiscal 2006. 17 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 Sept. 30, 2006 Sept. 30, 2005 -------------- -------------- Net Sales 100.0% 100.0% Cost of sales 62.5% 64.8% ----- ----- Gross profit 37.5% 35.2% ----- ----- Operating expenses: Marketing 6.0% 7.2% Research and development 7.1% 8.3% General and administrative 9.2% 10.1% ----- ----- Total operating expenses 22.3% 25.6% ----- ----- Operating income 15.2% 9.6% Other income (expense): Other, primarily interest income 3.0% 2.4% Interest expense 0.0% 0.0% ----- ----- Total other income (expense), net 3.0% 2.4% ----- ----- Income before income taxes 18.2% 12.0% Income taxes 5.1% 2.8% ----- ----- Net income 13.1% 9.2% ===== ===== The following table summarizes the Company's net sales by operating segments for the periods indicated. Amounts are in thousands. Three Months Ended September 30 ------------------- 2006 2005 ---- ---- Wireless $19,827 $16,410 Space and Defense 10,376 8,204 ------- ------- Total $30,203 $24,614 ======= ======= Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 Net sales. Net sales increased $5.6 million, or 22.7% to $30.2 million for the first quarter ended September 30, 2006 compared to $24.6 million for the first quarter of fiscal 2006. This increase resulted from a $3.4 million rise in shipments of wireless infrastructure and consumer products and a $2.2 million rise in sales of Space and Defense products. The increase in sales of Wireless products, which consist of standard components, ferrite components and custom subassemblies for use in building wireless basestation and consumer equipment, was a result of a significant rise in customer demand for standard Wireless components during the current first quarter compared to the first quarter of last year. Wireless product sales rose $3.4 million, or 20.8% in the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006, due to a $1.2 million increase in shipments of custom products 18 resulting from higher Nokia demand, a $697,000; or 54% increase in new consumer products and a $1.5 million rise in sales of standard component products due to rising worldwide demand for infrastructure products. Wireless sales are expected to remain at or decline from current levels through the second quarter of fiscal 2007. Space and Defense products consist of custom components and assemblies for communication satellites and defense radar, receiver, and countermeasure subsystems for the military. Sales of Space and Defense products rose $2.2 million, or 27% in the first quarter of fiscal 2007 compared to the first quarter of the previous fiscal year. This increase consisted of a $316,000 rise in sales of Space products and a $1.8 million increase in Defense product shipments during the current first quarter compared to the same quarter in fiscal 2006. Space and Defense product sales are increasing due to the higher level of new business booked by the Company over the last three years which is now in production. Sales of Space and Defense products in the remainder of fiscal 2007 are expected to range between $11.0 million and $13.0 million, quarterly. 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 first quarter of fiscal 2007 was $11.3 million, (37.5% of net sales), up $2.6 million from $8.7 million (35.2% of net sales) for the same quarter of the prior year. Gross profit on sales increased in the first quarter of fiscal 2007 over the first quarter of last year due to the substantial rise in overall sales of $5.6 million and a more favorable product mix resulting from the increase in sales of higher margin standard components in the current quarter. 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 $1.8 million (6.0% of net sales) for the first quarter of fiscal 2007, unchanged from $1.8 million (7.2% of net sales) for the first quarter of fiscal 2006. Marketing expenses in the current first quarter were relatively unchanged, rising $45,000 over the first quarter of last fiscal year due to increased commission expense resulting from the higher sales levels. Research and Development. Research and development expenses consist of material and salaries and related overhead costs of employees engaged in ongoing research, design and development activities associated with new products and technology development. Research and development expenses were $2.1 million (7.1% of net sales) in the first quarter of fiscal 2007, up 5% from $2.0 million (8.3% of net sales) for the first quarter of fiscal 2006. Research and development expenditures are supporting further development of Wireless infrastructure and consumer component opportunities, as well as new technology development in the Space and Defense Group. Research and Development expenditures have increased in the first quarter of fiscal 2007 versus the first quarter of last year due to the higher level of opportunities in the marketplace which have resulted in the hiring of additional personnel over the last 12 months to do development work. The Company does not expect to reduce its current research and development efforts and is presently working on a number of new standard and custom Wireless and Space and Defense opportunities. General and Administrative. General and administrative expenses consist of employee related expenses, professional services, intangible amortization, travel related expenses and other corporate costs. General and administrative expenses increased 10.1% to 2.8 million (9.2% of net sales) for the first quarter of fiscal 2007 from $2.5 million (10.1% of net sales) for the first quarter of fiscal 2006. The increase resulted primarily from additional personnel costs due to the 19 expanded level of Company business and a one-time, first quarter write down of the China facility leasehold improvement costs of $80,000 resulting from the move to a new larger facility. Operating Income. Operating income rose 95% in the first quarter of fiscal 2007 to $4.6 million (15.2% of sales) compared to $2.4 million (9.6% of net sales) for the first quarter of fiscal 2006. On a reporting segment basis, Wireless operating income was $3.3 million for the first quarter of fiscal 2007, up $1.3 million, or 60%, from Wireless operating income of $2.0 million in the first quarter of fiscal 2006. Wireless operating income improved significantly in the current first quarter as compared to the first quarter of last fiscal year. This increase was due to efficiency gains derived from the large overall increase in sales and a more favorable Wireless product mix. Space and Defense operating income was $1.3 million (12.8% of Space and Defense net sales), for the first quarter of fiscal 2007, up $1.0 million from $314,000 for the first quarter of fiscal 2006. Operating margins in this group have improved as a result of efficiencies realized from both the overall $5.6 million increase in sales volume and the $2.2 million rise in shipments of Space and Defense Group products in the current first quarter compared to the same quarter of the prior year. Additionally, many new Space and Defense Group products which were just entering production at the beginning of fiscal 2006 are now in full production resulting in better manufacturing efficiencies. Interest Expense. Interest expense represents interest paid on a deferred obligation. Interest expense for the first quarter of fiscal 2007 was $6,000; no change from the first quarter of fiscal 2006. Other Income. Other income is primarily interest income received on invested cash balances and gains on the sale of land. Other income increased 53% to $897,000 in the first quarter of fiscal 2007 compared to $588,000 for the first quarter of last year. This increase was caused mainly by the rise in market interest rates over the last twelve months and a one-time gain of $80,000 on the sale of a small parcel of land during the current first quarter. Other income will fluctuate based on short term market interest rates and the level of investable cash balances. Income Taxes. Income taxes for the first quarter of fiscal 2007 were $1.5 million (5.1% of net sales), representing an effective tax rate of 27.8%. This compares to income tax expense of $687,000 (2.8% of net sales) for the first quarter of fiscal 2006, representing an effective tax rate of 23.4%. 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 projected effective tax rate for fiscal 2007 is approximately 25% compared to an actual effective tax rate of 22.1% for fiscal 2006. The increase in the projected effective tax rate is due mainly to the expiration of the federal research credit and the higher level of taxable income the Company is currently generating. 20 Critical Accounting Policies The methods, estimates and judgments management uses in applying the Company's most critical accounting policies have a significant impact on the results reported in the Company's financial statements. The U.S. Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company'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 and have differed at times from these estimates. The Company's accounts receivable represent those amounts which have been billed to its customers but not yet collected. The Company analyzes various factors including historical experience, credit worthiness of customers and current market and economic conditions. The allowance for doubtful accounts balance is established based on the portion of those accounts receivable which are deemed to be potentially uncollectible. Changes in judgments on these factors could impact the timing of costs recognized. The Company states inventories at the lower of cost or market, using a standard cost methodology to determine the cost basis for the inventory. This method approximates actual cost on a first-in-first-out basis. The recoverability of inventories is based on the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology. The Company records valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. The Company evaluates the need 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 assets 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. 21 Goodwill is tested annually during the fourth fiscal quarter, or sooner if indicators of impairment exist, for impairment by the Company at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Valuation methods for determining the fair value of the reporting unit include reviewing quoted market prices and discounted cash flows. If the goodwill is indicated as being impaired (the fair value of the reporting unit is less than the carrying amount), the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value of the reporting unit goodwill is then compared with the carrying amount of the reporting unit goodwill and, if it is less, the Company would then recognize an impairment loss. The projection of future cash flows for the goodwill impairment analysis requires significant judgments and estimates with respect to future revenues related to the assets and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in changes in this assessment and result in an impairment charge. The use of different assumptions could increase or decrease the related impairment charge. Liquidity and Capital Resources Net cash used in operations for the first quarter ended September 30, 2006 was $1.0 million, while net cash provided by operations for the first quarter of the prior year was $3.1 million. The negative cash flow from operations in the current first quarter was due to the $3.7 million and $3.3 million rise in accounts receivable and inventory, respectively, resulting from the increased levels of Company business. The positive cash flow from operations in the first quarter of the prior year was a result of the high level of income before depreciation and non-cash stock based compensation and the absence of any significant growth in receivables and inventory. Net cash used in investing activities in the first quarter of fiscal 2007 was $3.3 million and consisted of capital additions of $2.3 million, and net purchases of marketable securities totaling $861,000. Net cash provided by investing activities in the first quarter of fiscal 2006 was $2.7 million and consisted of $3.5 million provided by the maturity of marketable debt securities, net of $848,000 used to acquire capital equipment. Net cash provided by financing activities was $1.6 million in the first quarter of fiscal 2007 and consisted of cash and tax benefits provided by the exercise of stock options. Cash used in financing activities was $4.7 million in the first quarter of fiscal 2006 and consisted of $4.9 million used for the purchase of 352,000 treasury shares, net of $148,000 received from the exercise of stock options. During the remainder of fiscal 2007, the Company anticipates that its main cash requirement will be for capital expenditures. Capital expenditures, including approximately $5.8 million to fund a 56,000 square foot addition to the Company's East Syracuse facility, for the remainder of fiscal 2007 are expected to total between $11.0 and $12.0 million and will be funded from existing cash and investments. Although no shares were repurchased during the current first quarter, 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 September 30, 2006 there were 1,077,879 shares remaining under the current Board repurchase authorization. 22 At September 30, 2006, the Company had approximately $86.8 million in cash, cash equivalents, and marketable securities. The Company has no debt, and on a fiscal year basis has had positive operating cash flow for over ten 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, lease agreements, and under contingent commitments, such as debt guarantees. The Company's obligations and commitments are as follows:
Payment Due by Period ----------------------------------------------------------------------- Less Total than 1 Yr. 2-3 Yrs 4-5 Yrs Over 5 Yrs ----- ---------- ------- ------- ---------- Contractual obligations Operating leases - facilities $5,819,448 $792,494 $1,640,215 $1,640,215 $1,746,524 Deferred compensation 353,788 65,000 130,000 130,000 28,788
Recent Accounting Pronouncements FASB Interpretation 48 was issued in July 2006 to clarify the criteria for recognizing tax benefits under FASB Statement No. 109, Accounting for Income Taxes. The Interpretation defines the threshold for recognizing the benefits of tax-return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority and will affect many companies' reported results and their disclosures of uncertain tax positions. The Interpretation does not prescribe the type of evidence required to support meeting the more-likely-than-not threshold, stating that it depends on the individual facts and circumstances. The benefit recognized for a tax position meeting the more-likely-than-not criterion is measured based on the largest benefit that is more than 50 percent likely to be realized. The measurement of the related benefit is determined by considering the probabilities of the amounts that could be realized upon ultimate settlement, assuming the taxing authority has full knowledge of all relevant facts and including expected negotiated settlements with the taxing authority. Interpretation 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006 (the Company's 2008 fiscal year). The company is currently analyzing the financial statement impact of adopting this pronouncement. Accounting for Pension and Other Postretirement Benefits -- In September 2006, the FASB published Statement of Financial Accounting No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires companies to report on their balance sheets the funded status of pension and other post retirement benefit plans. The proposal would also require companies to measure plan assets and obligations as of the employer's balance-sheet date. As a result, companies would recognize on their balance sheets actuarial gains and losses and prior service cost that have not yet been included in income. This could significantly increase reported liabilities for many companies with a corresponding reduction in equity reported as accumulated other comprehensive income. The provisions for the statement are effective for fiscal years ending after December 15, 2006, (the Company's 2007 fiscal year) with earlier application encouraged. The Company is currently analyzing the financial statement impact of adopting this pronouncement. 23 In September 2006, SEC Staff Accounting Bulletin No. 108 was issued to provide guidance on Quantifying Financial Statement Misstatements. Staff Accounting Bulletin No. 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. The SAB requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The SAB does not change the staff's previous guidance in SAB 99 on evaluating the materiality of misstatements. When the effect of initial adoption is determined to be material, the SAB allows registrants to record that effect as a cumulative-effect adjustment to beginning-of-year retained earnings. The requirements are effective for annual financial statements covering the first fiscal year ending after November 15, 2006 (the Company's fiscal 2007). Fair Value Measurements. In September 2006, the FASB published Statement of Financial Accounting No. 157, Fair Value Measurements. This Statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The Statement applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. It will also affect current practices by nullifying the Emerging Issues Task Force (EITF) guidance that prohibited recognition of gains or losses at the inception of derivative transactions whose fair value is estimated by applying a model and by eliminating the use of "blockage" factors by brokers, dealers, and investment companies that have been applying AICPA Guides. The Statement is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 (the Company's fiscal 2009) and interim periods within those fiscal years. Early application is permissible only if no annual or interim financial statements have been issued for the earlier periods. The requirements of the Statement are applied prospectively, except for changes in fair value related to estimating the fair value of a large block position and instruments measured at fair value at initial recognition based on transaction price in accordance with EITF 02-3 or Statement 155. Forward-Looking Cautionary Statement The statements contained in this Form 10-Q which are not historical information are "forward-looking statements". These, and other forward-looking statements, are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. The risks and uncertainties described below are not the only risks and uncertainties facing our Company. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial may also impair our business operations. If any of the following risks actually occur, our business could be adversely affected, and the trading price of our common stock could decline, and you may lose all or part of your investment. Such known factors include, but are not limited to: the Company's ability to timely ramp up to meet some of our customers' increased demands; unanticipated delays and/or difficulties associated with relocating the Company's Suzhou China facility and successfully completing all requalification procedures; potential unanticipated liabilities and delays associated with the physical expansion of the Company's Syracuse, New York facility; unanticipated delays in successfully completing customer orders within contractually required timeframes; increased pricing pressure from our customers; decreased capital expenditures by wireless service providers; the possibility that the Company may be unable to successfully execute its business strategies or achieve its operating 24 objectives, generate revenue growth or achieve profitability expectations; successfully securing new design wins from our OEM customers, reliance on a limited number of key component suppliers, unpredictable difficulties or delays in the development of new products; order cancellations or extended postponements; the risks associated with any technological shifts away from the Company's technologies and core competencies; unanticipated impairments of assets including investment values and goodwill; diversion of defense spending away from the Company's products and or technologies due to on-going military operations; and litigation involving antitrust, intellectual property, environmental, product warranty, product liability, and other issues. You are encouraged to review Anaren's 2006 Annual Report, Anaren's Form 10-K for the fiscal year ended June 30, 2006 and Anaren's Form 10-Q for the three months ended September 30, 2006 and exhibits to those Reports 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 revenue, earnings and stock price. Unless required by law, Anaren disclaims any obligation to update or revise any forward-looking statement. 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 September 30, 2006, the Company had cash, cash equivalents and marketable securities of $86.8 million, all of which consisted of cash and highly liquid investments in marketable debt securities. The marketable debt securities at date of purchase normally have maturities between one and 18 months, are exposed to interest rate risk and will decrease in value if market interest rates increase. A hypothetical decrease in market interest rates of 10.0% from September 30, 2006 rates, or 0.375%, would have reduced net income and cash flow by approximately $81,000, or $0.004 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. 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 Rules 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. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. 25 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. PART II OTHER INFORMATION Item 1A. Risk Factors The Company is exposed to certain risk factors that may effect operations and/or financial results. The significant factors known to the company are described in the Company's most recently filed annual report on Form 10-K and below. There have been no material changes from the risk factors as previously disclosed in the Company's Annual Report on Form 10-K. PART II OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities On May 10, 2005, the Board of Directors increased by 2,000,000 the number of shares that the Company was authorized to repurchase in open market or by privately negotiated transactions through its previously announced stock repurchase program. The program, which may be suspended at any time without notice, has no expiration date. The following table sets forth information regarding shares repurchased and purchasable under the program during and as of the end of the periods indicated. On September 30, 2006, 1,077,879 shares remained authorized for purchase.
- ---------------------------------------------------------------------------------------------------------------------- Period Total Number of Average Price Paid Total Number of Maximum Number (or Shares (or Units) per Share (or Unit) Shares (or Units) Approximate Dollar Purchased Purchased as Part of Value) of Shares (or Publicly Announced Units) that May Yet Plans or Programs Be Purchased Under the Plans or Programs - ---------------------------------------------------------------------------------------------------------------------- July 2006 0 -- 0 1,077,879 - ---------------------------------------------------------------------------------------------------------------------- August 2006 0 -- 0 1,077,879 - ---------------------------------------------------------------------------------------------------------------------- September 2006 0 -- 0 1,077,879 - ---------------------------------------------------------------------------------------------------------------------- Total 0 -- 0 -- - ----------------------------------------------------------------------------------------------------------------------
Item 6. Exhibits 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Anaren, Inc. ------------ (Registrant) Date: November 8, 2006 /s/ Lawrence A. Sala ---------------------------------------- Lawrence A. Sala President & Chief Executive Officer Date: November 8, 2006 /s/ Joseph E. Porcello ---------------------------------------- Joseph E. Porcello Vice President of Finance and Treasurer 27 EX-31.1 2 e25504ex31_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)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) 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. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this c 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 a 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: November 8, 2006 /s/ Lawrence A. Sala ------------------------------------- Lawrence A. Sala President and Chief Executive Officer 28 EX-31.2 3 e25504ex31_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)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) 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. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this c 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 a 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: November 8, 2006 /s/ Joseph E. Porcello --------------------------------------- Joseph E. Porcello Vice President of Finance and Treasurer 29 EX-32.1 4 e25504ex32_1.txt SECTION 1350 CERTIFICATIONS 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 September 30, 2006 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 - ------------------------------------- Date: November 8, 2006 A signed original of this written statement required by Section 906 has been provided to Anaren, Inc. and will be retained by Anaren, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 30 EX-32.2 5 e25504ex32_2.txt SECTION 1350 CERTIFICATIONS 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 September 30, 2006 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 - ------------------------------------- Date: November 8, 2006 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. 31 -----END PRIVACY-ENHANCED MESSAGE-----