-----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, PhPqSgAB5apfSGanIZdIPpC0DfIx0AbRFME1oUGBDc/DDVPLxwfD/Fr84CIAeb84 waIXJczb9ntr2DCQzP+yWA== 0000891092-07-000328.txt : 20070131 0000891092-07-000328.hdr.sgml : 20070131 20070131171854 ACCESSION NUMBER: 0000891092-07-000328 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20070131 DATE AS OF CHANGE: 20070131 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-06620 FILM NUMBER: 07569057 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/A 1 e26172_10qa.txt AMENDMENT NO. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Amendment No. 1) (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, 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 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 __ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" 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 May 5, 2006 was 17,189,657. Explanatory Note The purpose of this amended Quarterly Report on Form10-Q/A of Anaren, Inc. (the "Company") is to restate the Company's consolidated condensed financial statements for the three and nine months ended March 31, 2006 ("the financial statements") and to modify the related disclosures. See Note 1 to the financial statements included in this amended Quarterly Report. The restatement arose from the Company's determination that an error had occurred in its accounting treatment for the foreign translation gain recognized upon final liquidation of its European subsidiary in the quarter ended March 31, 2006. This gain of $735,464, which was previously recorded in the third quarter ended March 31, 2006, should have been recorded in the second quarter of fiscal 2004 ended December 31, 2003 when substantially all the physical assets of the European subsidiary had been liquidated. As a result of this error, the Company has determined that its net income for the three months and nine months ended March 31, 2006 were both overstated. The restatement also arose from the Company's determination that an error had occurred in the computer program used by the Company to value work-in-process inventory resulting in a misstatement of inventory. As a result of this error, the Company has determined that its inventory at March 31, 2006 was overstated. The Company has also determined that for the three months and nine months ended March 31, 2006 its pretax income was understated by $6,426 and overstated by $284,457, respectively. Additionally, the Company has corrected certain errors in accounting for income taxes related to the expiration of the federal research and experimentation tax credit at the end of calendar 2005. This amended Quarterly Report does not update or discuss any other Company developments after the date of the original filing. All information contained in this amended Quarterly Report and the original Quarterly Report is subject to updating and supplementing as provided in the periodic reports that the Company has filed and will file after the original filing date with the Securities and Exchange Commission. 2 ANAREN, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 4 March 31, 2006 (restated) and June 30, 2005 (revised) Consolidated Condensed Statement of Earnings 5 for the Three Months Ended March 31, 2006 (restated) and 2005 (unaudited) Consolidated Condensed Statements of Earnings 6 for the Nine Months Ended March 31, 2006 (restated) and 2005 (unaudited) Consolidated Condensed Statements of Cash Flows 7 for the Nine Months Ended March 31, 2006 (restated) and 2005 (unaudited) Notes to Consolidated Condensed Financial 8 Statements (unaudited) Item 2. Management's Discussion and Analysis 21 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Item 4. Controls & Procedures 34 PART II - OTHER INFORMATION - --------------------------- Item 1A. Risk Factors 35 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35 Item 4. Submission of Matters to a Vote of Security Holders 35 Item 6. Exhibits 35 Officer Certifications 37 - 40 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheets March 31, 2006 and June 30, 2005
Assets March 31, 2006 June 30, 2005 ------ -------------- ------------- (Restated - See note 1) (Revised) (Unaudited) Current assets: Cash and cash equivalents $ 7,762,295 $ 5,900,841 Securities available for sale (note 4) 35,094,112 16,200,000 Securities held to maturity (note 4) 32,608,063 36,307,880 Receivables, less allowance of $113,189 at March 31, 2006 and $213,099 at June 30, 2005 15,611,714 14,780,146 Inventories (note 5) 21,843,120 19,403,348 Other receivables 958,174 1,144,680 Deferred income taxes 664,792 686,411 Prepaid expenses 554,329 662,247 Other current assets 675,292 423,000 ------------- ------------- Total current assets 115,771,891 95,508,553 Securities available for sale (note 4) -- 3,500,000 Securities held to maturity (note 4) 5,502,468 20,100,547 Property, plant and equipment, net (note 5) 25,689,775 24,983,653 Goodwill 30,715,861 30,715,861 Other intangible assets, net of accumulated amortization of $2,601,378 at March 31, 2006 and $2,351,725 at June 30, 2005 (note 2) 423,588 673,241 ------------- ------------- Total assets $ 178,103,583 $ 175,481,855 ============= ============= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 5,167,651 $ 6,077,313 Accrued expenses (note 7) 2,475,492 2,331,885 Income taxes payable 1,465,796 1,501,088 Customer deposits 483,722 -- Other current liabilities (note 9) 447,847 1,044,759 ------------- ------------- Total current liabilities 10,040,508 10,955,045 Deferred income taxes 1,853,090 1,627,304 Pension and postretirement benefit obligation 3,954,179 3,253,188 Other liabilities (note 9) 692,973 567,755 ------------- ------------- Total liabilities 16,540,750 16,403,292 ------------- ------------- Stockholders' equity: Common stock of $.01 par value. Authorized 200,000,000 shares; issued 26,275,968 shares at March 31, 2006 and 26,070,764 at June 30, 2005 262,760 260,708 Additional paid-in capital 173,529,734 171,333,975 Unearned compensation (197,679) (248,578) Retained earnings 66,883,687 59,395,271 Accumulated other comprehensive income (loss) 1,067,622 (1,483,003) ------------- ------------- 241,546,124 229,258,373 Less cost of 9,249,643 and 8,553,058 treasury shares at March 31, 2006 and June 30, 2005, respectively 79,983,291 70,179,810 ------------- ------------- Total stockholders' equity 161,562,833 159,078,563 ------------- ------------- Total liabilities and stockholders' equity $ 178,103,583 $ 175,481,855 ============= =============
See accompanying notes to consolidated condensed financial statements. 4 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Three Months Ended March 31, 2006 and 2005 (Unaudited)
March 31, 2006 March 31, 2005 -------------- -------------- (Restated - See note 1) Net sales $ 26,701,083 $ 21,783,418 Cost of sales 16,451,676 14,630,770 ------------ ------------ Gross profit 10,249,407 7,152,648 ------------ ------------ Operating expenses: Marketing 1,806,587 1,513,274 Research and development 2,187,966 1,635,048 General and administrative 2,756,279 2,256,819 ------------ ------------ Total operating expenses 6,750,832 5,405,141 ------------ ------------ Operating income 3,498,575 1,747,507 Other income, primarily interest 620,172 558,166 Interest expense (6,143) (6,143) ------------ ------------ Total other income $ 614,029 $ 552,023 ------------ ------------ Income before income taxes 4,112,604 2,299,530 Income tax expense 942,000 439,000 ------------ ------------ Net income from continuing operations $ 3,170,604 $ 1,860,530 ------------ ------------ Discontinued operations: Income from discontinued operations of Anaren Europe (note 13) 81,713 -- ------------ ------------ Net income $ 3,252,317 $ 1,860,530 ============ ============ Basic earnings per share: Income from continuing operations $ 0.19 $ 0.10 Income from discontinued operations -- -- ------------ ------------ Net income $ 0.19 $ 0.10 ============ ============ Diluted earnings per share: Income from continuing operations $ 0.19 $ 0.09 Income from discontinued operations -- -- ------------ ------------ Net income $ 0.19 $ 0.09 ============ ============ Shares used in computing net earnings per share: Basic 16,946,993 19,336,007 ============ ============ Diluted 17,547,333 19,801,542 ============ ============
See accompanying notes to consolidated condensed financial statements. 5 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Earnings Nine Months Ended March 31, 2006 and 2005 (Unaudited)
March 31, 2006 March 31, 2005 -------------- -------------- (Restated - See note 1) Net sales $76,334,454 $70,340,797 Cost of sales 48,684,975 48,536,159 ----------- ----------- Gross profit 27,649,479 21,804,638 ----------- ----------- Operating expenses: Marketing 5,290,326 5,150,892 Research and development 6,491,045 4,667,230 General and administrative 7,771,713 6,500,755 Restructuring (note 7) -- 458,335 ----------- ----------- Total operating expenses 19,553,084 16,777,212 ----------- ----------- Operating income 8,096,395 5,027,426 Other income, primarily interest 1,744,738 1,090,937 Interest expense (18,429) (21,785) ----------- ----------- Total other income 1,726,309 1,069,152 ----------- ----------- Income before income taxes 9,822,704 6,096,578 Income tax expense 2,416,000 1,274,000 ----------- ----------- Net income from continuing operations $ 7,406,704 $ 4,822,578 =========== =========== Discontinued operations: Income from discontinued operations of Anaren Europe (note 13) 81,713 -- ----------- ----------- Net income $ 7,488,417 $ 4,822,578 =========== =========== Basic earnings per share: Income from continuing operations $ 0.43 $ 0.24 Income from discontinued operations 0.01 -- ----------- ----------- Net income $ 0.44 $ 0.24 =========== =========== Diluted earnings per share: Income from continuing operations $ 0.42 $ 0.24 Income from discontinued operations -- -- ----------- ----------- Net income $ 0.42 $ 0.24 =========== =========== Shares used in computing net earnings per share: Basic 17,124,494 19,689,024 =========== =========== Diluted 17,623,362 20,217,742 =========== ===========
See accompanying notes to consolidated condensed financial statements. 6 ANAREN, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows Nine Months Ended March 31, 2006 and 2005 (Unaudited)
March 31, 2006 March 31, 2005 -------------- -------------- (Restated - See note 1) Cash flows from operating activities: Net income $ 7,488,417 $ 4,822,578 Net income from discontinued operations 81,713 -- ------------ ------------ Net income from continuing operations 7,406,704 4,822,578 Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: Depreciation 3,593,626 3,676,678 Impairment loss -- 272,118 Amortization of intangibles 249,653 487,427 Loss on sale of equipment 15,875 67,397 Loss on sale of securities available for sale -- 342,711 Deferred income taxes 247,405 218,337 Equity based compensation 2,590,491 39,077 Provision for doubtful accounts (12,613) 84,124 Tax benefit from exercise of stock options -- 13,536 Changes in operating assets and liabilities: Receivables (818,955) 783,753 Inventories (2,439,772) (3,111,932) Other receivables 186,506 106,278 Other current assets (186,108) 198,372 Accounts payable (876,135) (2,308,380) Accrued expenses 143,607 (877,045) Income taxes payable (35,292) 318,353 Customer advance payments 483,722 (407,536) Other liabilities 700,990 163,169 Postretirement benefit obligation (284,533) (264,603) ------------ ------------ Net cash provided by operating activities from continuing operations 10,965,171 4,624,412 Net cash used in operating activities from discontinued operations (97,241) -- ------------ Net cash provided by operating activities 10,867,930 4,624,412 Cash flows from investing activities: Capital expenditures (4,316,623) (8,258,546) Proceeds from sale of equity securities 1,000 2,746,130 Proceeds from sale of equipment -- 160,000 Maturities of marketable debt and auction rate securities 77,172,784 89,422,942 Purchase of marketable debt and auction rate securities (74,269,000) (80,225,097) ------------ ------------ Net cash provided by (used in) investing activities (1,411,839) 3,845,429 ------------ ------------ Cash flows from financing activities: Stock options exercised 1,783,491 180,771 Tax benefit from exercise of stock options 378,318 -- Purchase of treasury stock (9,803,481) (20,900,147) ------------ ------------ Net cash used in financing activities (7,641,672) (20,719,376) ------------ ------------ Effect of exchange rates 47,035 (2,151) ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,861,454 (12,251,686) Cash and cash equivalents at beginning of period 5,900,841 23,303,263 ------------ ------------ Cash and cash equivalents at end of period $ 7,762,295 $ 11,051,577 ============ ============ Supplemental Disclosures of Cash Flow Information: Cash Paid During the Period For: Interest $ 12,286 $ 21,785 ============ ============ Income taxes, net of refunds $ 1,802,569 $ 742,036 ============ ============
See accompanying notes to consolidated condensed financial statements. 7 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The consolidated condensed financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments and those described in note 1 herein) 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, 2005. The results of operations for the nine months ended March 31, 2006 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2006, or any future interim period. The income tax rates utilized for interim financial statement purposes for the nine months ended March 31, 2006 and 2005 are based on estimates of income and utilization of tax credits for the entire year. NOTE 1: Restatement of Financial Statements The Company has determined that an error occurred related to the timing of the recording of the foreign currency translation adjustment gain recognized upon final liquidation of its European subsidiary in the quarter ended March 31, 2006. This gain, which amounted to $735,464, was previously recorded in the third quarter of fiscal 2006, and upon further review should properly have been recorded in the second quarter of fiscal 2004 (three months ended December 31, 2003) when substantially all the physical assets of the European corporation had been liquidated. As a result of this error, the Company has determined that its net income for the three and nine months ended March 31, 2006 was overstated. The Company also determined that an error had occurred in the computer program used by the Company to value work-in-process inventory, resulting in a misstatement of inventory. As a result of this error, the Company has determined that its inventory at March 31, 2006 and its net income for the three months and nine months ended March 31, 2006 were both overstated. Additionally, the Company has corrected certain errors in accounting for income taxes related to the expiration of the Research and Experimentation federal tax credits at the end of calendar 2005, which had previously been considered immaterial. The Company's previously issued consolidated condensed financial statements for the three and nine months ended March 31, 2006 have been restated to correct the accounting for the following items: o Recording in the third quarter and the first nine months of fiscal 2006 a $735,464 reduction in income from discontinued operations of Anaren Europe to correct the timing of the recognition of the remaining foreign currency translation adjustment gain upon final liquidation of that corporation. o Recording in the third quarter of fiscal 2006 a $284,457 reduction in inventory to correct an overstatement of work-in-process inventory at March 31, 2006 caused by an error in the Company's inventory valuation software. Additionally, $6,426 was recorded as a reduction in cost of sales affecting the third quarter, and $284,457 was recorded as additional cost of sales for the first nine months of fiscal 2006. 8 o Recording in the third quarter and first nine months of fiscal 2006 increases in income tax expense of $50,000 and $7,000, respectively, due to the reduction in taxable income caused by the inventory error correction and the addition to tax expense to properly reflect the expiration of the research and experimentation credit at the end of calendar 2005. o Recording an increase in taxes payable of $7,000 as a result of the increase in income tax expense for the nine months ended March 31, 2006. The following tables summarize the effect of the restatement adjustments on the consolidated condensed financial statements as of and for the three and nine months ended March 31, 2006:
Three Months Ended March 31, ---------------------------- 2006 2006 ---- ---- (Previously Reported) (Restated) Cost of sales $16,458,102 $16,451,676 Gross profit 10,242,981 10,249,407 Operating income 3,492,149 3,498,575 Income before income taxes 4,106,178 4,112,604 Income tax expense 892,000 942,000 Net income from continuing operations 3,214,178 3,170,604 Income from discontinued operations of Anaren Europe 817,177 81,713 Net income $ 4,031,355 $ 3,252,317 Basic earnings per share: Income from continuing operations $ 0.19 $ 0.19 Income from discontinued operations $ 0.05 $ 0.00 Net Income $ 0.24 $ 0.19 Diluted earnings per share Income from continuing operations $ 0.18 $ 0.19 Income from discontinued operations $ 0.05 $ 0.00 Net income $ 0.23 $ 0.19
9
Nine Months Ended March 31, --------------------------- 2006 2006 ---- ---- (Previously Reported) (Restated) Cost of sales $48,400,518 $48,684,975 Gross profit 27,933,936 27,649,479 Operating income 8,380,852 8,096,395 Income before income taxes 10,107,161 9,822,704 Income tax expense 2,409,000 2,416,000 Net income from continuing operations 7,698,161 7,406,704 Income from discontinued operations of Anaren Europe 817,177 81,713 Net income $ 8,515,338 $ 7,488,417 Basic earnings per share: Income from continuing operations $ 0.45 $ 0.43 Income from discontinued operations $ 0.05 $ 0.01 Net Income $ 0.50 $ 0.44 Diluted earnings per share Income from continuing operations $ 0.43 $ 0.42 Income from discontinued operations $ 0.05 $ 0.00 Net income $ 0.48 $ 0.42
As of March 31, --------------- 2006 2006 ---- ---- (Previously Reported) (Restated) Inventories $ 22,127,577 $ 21,843,120 Total current assets 116,056,348 115,771,891 Total assets 178,388,040 178,103,583 Income taxes payable 1,458,796 1,465,796 Total current liabilities 10,033,508 10,040,508 Total liabilities 16,533,750 16,540,750 Retained earnings 67,175,144 66,883,687 Total stockholders' equity 161,854,144 161,562,833 Total liabilities and stockholders' equity $178,388,040 $178,103,583
The adjustments to the balance sheet and income statement at and for the three and nine months ended March 31, 2006 had no impact on total cash flows from operating, investing and financing activities. The restatement of the consolidated financial statements also affected footnotes 5, 10, 13 and 14. The balance sheet at June 30, 2005 has been revised to reflect the effect of recording the foreign currency translation gain in the second quarter of fiscal 2004 instead of the third quarter fiscal 2006 as follows: As of June 30, -------------- 2005 2005 ---- ---- (Previously Reported) (Restated) Retained earnings $ 58,659,807 $ 59,395,271 Accumulated other comprehensive loss (747,539) (1,483,003) 10 NOTE 2: Intangible Assets INTANGIBLE ASSETS: Intangible assets as of March 31, 2006 and June 30, 2005 are as follows:
March 31 June 30 --------------------------- ---------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization -------------- ----------- -------------- ------------ Patent $ 574,966 $ 485,128 $ 574,966 $ 431,225 Customer Base 1,350,000 1,031,250 1,350,000 862,500 Trade Name 320,000 320,000 320,000 320,000 Non-Competition Agreements 180,000 165,000 180,000 138,000 Favorable Lease 600,000 600,000 600,000 600,000 ---------- ---------- ---------- ---------- Total $3,024,966 $2,601,378 $3,024,966 $2,351,725 ========== ========== ========== ==========
Intangible asset amortization expense for nine month period ended March 31, 2006 and 2005 aggregated $249,653 and $487,427, respectively, while amortization expense for the three month period ended March 31, 2006 and 2005 aggregated $83,218 and $83,217, respectively. Amortization expense related to intangible assets for the next five years is as follows: Year Ending June 30, 2006 $ 332,869 2007 $ 302,874 2008 $ 37,498 2009 $ -- 2010 $ -- NOTE 3: 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. Total equity based compensation expense included in operating expenses for the three months and nine months ended March 31, 2006 is $864,647 and $2,590,491, respectively. These amounts include $29,634 and $86,901, respectively, related to the Company's restricted stock program and $835,013 and $2,503,590, respectively related to the Company's stock option program, for the three and nine month periods. As a result of the adoption of SFAS 123R, both operating income and income before taxes for the three months and nine months ended March 31, 2006 were reduced by $835,013 and $2,503,590, respectively, while net income was reduced by $777,986, or $0.05 per basic and $0.04 per diluted share, for the same three month period and $2,332,510, or $0.14 per basic and $0.13 per diluted share, respectively, for the same nine month period. 11 Equity based compensation expense included in operating expenses are classified as follows on March 31, 2006: Three Months Nine Months Ended Ended ----- ----- Cost of goods sold $216,115 $ 737,631 Marketing 67,891 205,357 Research and development 109,679 237,381 General and administrative 441,328 1,323,221 -------- ---------- $835,013 $2,503,590 ======== ========== As of March 31, 2006, there were 2,902,371 stock options outstanding. At March 31, 2006, the aggregate value of unvested options, as determined using a Black- Scholes option valuation model was $6,891,744 (net of estimated forfeitures). During the nine months ended March 31, 2006, the Company granted 376,000 non-statutory stock options, with a fair value of $3,220,546 (net of estimated forfeitures), and 53,810 options were forfeited and/or expired. 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. Prior to adopting SFAS 123R on July 1, 2005, the Company's equity based employee compensation expense was accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. For the three months and nine months ended March 31, 2005, no equity option based employee compensation cost is reflected in net income, as all options granted under the Company's stock option plans had an exercise price equal to the underlying common stock price on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123R, Accounting for Equity-Based Compensation, to equity based employee compensation for the three months and nine months ended March 31, 2005.
Three months ended Nine Months Ended March 31, 2005 March 31, 2005 -------------- -------------- Net income, as reported $ 1,860,530 $4,822,578 Deduct total equity based employee compensation expense determined under fair value based method for all awards, net of related tax effects 1,862,920 5,588,760 ------------ ---------- Pro forma net loss $ (2,390) $ (766,182) ============ ========== Earnings (loss) per share: Basic - as reported $0.10 $0.24 Basic - pro forma $0.00 $(0.04) Diluted - as reported $0.09 $0.24 Diluted - pro forma $0.00 $(0.04)
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 12 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, non-statutory stock options, stock appreciation rights, restricted stock, performance shares, and performance units. On March 31, 2006, the Company had 1,325,088 shares available for grant under the restated plan. Information with respect to these plans are as follows:
Weighted Total average Shares Option Price exercise price ------ ------------ -------------- Outstanding at June 30, 2004 2,796,662 $1.38 to 62.44 $15.53 Issued 389,600 $12.05 to 13.43 $12.06 Exercised (98,460) $1.38 to 9.51 $ 1.26 Expired (220,692) $8.57 to 62.44 $26.90 Canceled (84,330) $9.51 to 62.44 $11.28 --------- Outstanding at June 30, 2005 2,782,780 $2.27 to $57.59 $14.73 Issued 376,000 $11.97 to 15.63 $13.97 Exercised (202,599) $2.27 to 16.35 $ 8.03 Expired (30,830) $9.51 to 53.00 $47.35 Canceled (22,980) $14.73 to 53.00 $14.39 --------- Outstanding at March 31, 2006 2,902,371 $2.27 to $57.59 $13.14 ========= Shares exercisable at March 31, 2006 1,863,527 $2.27 to $57.59 $15.25 =========
The following table summarizes significant ranges of outstanding and exercisable options at March 31, 2006:
Options outstanding Options exercisable - --------------------------------------------------------------------------------------------------------------- Range of exercise Shares Weighted average Weighted average Shares Weighted average prices remaining life in exercise price exercise price years - --------------------------------------------------------------------------------------------------------------- $1.00 - $5.00 138,800 0.64 $2.28 138,800 2.28 - --------------------------------------------------------------------------------------------------------------- $5.01 - $15.00 2,371,851 5.69 $11.62 1,367,931 11.13 - --------------------------------------------------------------------------------------------------------------- $15.01 - $40.00 217,120 4.56 $20.07 182,196 20.30 - --------------------------------------------------------------------------------------------------------------- $40.01 - $65.00 174,600 4.57 $54.64 174,600 53.12 - --------------------------------------------------------------------------------------------------------------- 2,902,371 1,863,527 - ---------------------------------------------------------------------------------------------------------------
During the nine months ended March 31, 2006, the per share weighted average fair value of the non-statutory stock options granted was $8.77. 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 March 31: 2006 2005 ---- ---- Expected option life - key employee plan 6.5 5 Expected option life - company-wide plan 6.5 3 Weighted average risk-free interest rate 3.92% - 4.47% 3.22% Weighted average expected volatility 54.12% - 69.00% 59.75% - 87.57% For the nine month period ended March 31, 2006, the Company used the Simplified Method to estimate the expected term of the expected life of stock option grants as defined by SEC Staff Accounting Bulletin No. 107, Share-Based Payment, for each award granted. Expected volatility for the nine month period ended March 31, 2006, is based on historical volatility levels of the Company's common stock. The risk-free interest rate for the nine month period ended March 13 31, 2006 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 Grants On November 17, 2004, the Company issued a new grant of 23,500 shares of restricted stock. The per-share price of the grant was $13.60. The shares of restricted stock vest after a 36-month period. On September 1, 2005, the Company issued a new grant of 2,605 shares of restricted stock. The per-share price of the grant was $13.82. The shares of stock vest after a 36 month period. As of March 31, 2006 and 2005, the Company has issued restricted shares aggregating 26,105 and 21,600, respectively, under its 2004 Comprehensive Long-Term Incentive Plan. During fiscal year 2005, there were 1,900 shares forfeited and 19,700 shares that matured. The shares of restricted stock vest after a period of 36 and 48 months. Included in the $2,590,491 and $39,077, of total equity based compensation expense, for the nine months ended March 31, 2006 and 2005, the Company recognized compensation expense associated with the lapse of restrictions aggregating $86,901 and $39,077, respectively. NOTE 4: Securities The amortized cost and fair value of securities are as follows:
March 31, 2006 -------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- Securities available for sale: Auction rate securities $35,094,112 $ -- $ -- $35,094,112 ----------- -------- --------- ----------- Total securities available-for-sale $35,094,112 $ -- $ -- $35,094,112 =========== ======== ========= =========== Securities held to maturity: Municipal bonds $27,995,320 $ -- $(171,320) $27,824,000 Commercial paper 2,728,628 -- -- 2,728,628 Corporate bonds 3,637,131 -- (5,565) 3,631,566 Zero coupon bonds -- -- -- -- Federal agency bonds 3,749,452 154 (43,295) 3,706,311 ----------- -------- --------- ----------- Total securities held to maturity $38,110,531 $ 154 $(220,180) $37,890,505 =========== ======== ========= ===========
June 30, 2005 ------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- Securities available for sale: Auction rate securities $19,700,000 $ -- $ -- $19,700,000 ----------- -------- --------- ----------- Total securities Available-for-sale $19,700,000 $ -- $ -- $19,700,000 =========== ======== ========= =========== Securities held to maturity: Municipal bonds $37,746,195 $ 1,702 $(198,447) $37,549,450 Commercial paper 2,141,851 -- -- 2,141,851 Corporate bonds 10,792,879 185 (50,276) 10,742,788 Zero coupon bonds 1,977,785 -- (11,205) 1,966,580 Federal agency bonds 3,749,717 -- (21,627) 3,728,090 ----------- -------- --------- ----------- Total securities held to maturity $56,408,427 $ 1,887 $(281,555) $56,128,759 =========== ======== ========= ===========
14 The unrealized losses on the Company's held to maturity marketable debt securities were caused by interest rate increases. Because the Company has the ability and intent to hold these investments until recovery of their amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2006. Contractual maturities of marketable debt securities held to maturity are summarized as follows:
March 31, 2006 June 30, 2005 -------------- ------------- Fair Fair Market Market Cost Value Cost Value ---- ----- ---- ----- Within one year $32,608,063 $32,440,292 $36,307,880 $36,176,998 One year to five years 5,502,468 5,450,213 20,100,547 19,951,761 ----------- ----------- ----------- ----------- Total $38,110,531 $37,890,505 $56,408,427 $56,128,759 =========== =========== =========== ===========
Contractual maturities of auction rate securities available for sale are summarized as follows:
March 31, 2006 June 30, 2005 -------------- ------------- Fair Fair Market Market Cost Value Cost Value ---- ----- ---- ----- Within one year $35,094,112 $35,094,112 $16,200,000 $16,200,000 One year to five years -- -- 3,500,000 3,500,000 ----------- ----------- ----------- ----------- Total $35,094,112 $35,094,112 $19,700,000 $19,700,000 =========== =========== =========== ===========
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. In prior years, the Company classified a portion of its auction rate securities as cash equivalents; however, such amounts have been reclassified as available-for-sale securities for all periods presented in this report. During the three months and nine months ended March 31, 2006, the Company sold securities available for sale and recognized losses of $0 and $342,711, respectively, that are included in other income in the Company's Statements of Earnings for those periods. NOTE 5: Inventories (Restated) Inventories are summarized as follows: March 31, 2006 June 30, 2005 -------------- ------------- (Restated) ---------- Component parts $ 10,086,883 $ 10,369,049 Work in process 9,129,992 7,709,465 Finished goods 3,957,605 2,766,157 ------------ ------------ $ 23,174,480 $ 20,844,671 Reserve for obsolescence (1,331,360) (1,441,323) ------------ ------------ Net inventory $ 21,843,120 $ 19,403,348 ============ ============ 15 NOTE 6: Property, Plant and Equipment Property, plant and equipment are summarized as follows: March 31, 2006 June 30, 2005 -------------- ------------- Land and land improvements $ 2,207,823 $ 2,207,823 Buildings, furniture and fixtures 17,061,510 16,654,351 Machinery and equipment 55,554,347 51,680,883 ----------- ----------- $74,823,680 $70,543,057 Less accumulated depreciation and amortization (49,133,905) (45,559,404) ----------- ----------- $25,689,775 $24,983,653 =========== =========== NOTE 7: Accrued Expenses Accrued expenses consist of the following: March 31, 2006 June 30, 2005 -------------- ------------- Compensation $1,235,265 $1,222,891 Commissions 663,315 620,990 Health insurance 506,162 271,561 Restructuring (note 7) -- 19,863 Other 70,750 196,580 ---------- ---------- $2,475,492 $2,331,885 ========== ========== The Company maintains an accrual for incurred, but not reported, claims arising from self-insured health benefits provided to the Company's employees in the United States, which is included in accrued expenses in the consolidated balance sheets. The Company determines the adequacy of this accrual by evaluating its historical experience and trends related to both health insurance claims and payments, information provided by its third party administrator, as well as industry experience and trends. NOTE 8: Restructuring RF Power Components, Inc. On October 26, 2004 the Company announced its decision to merge its RF Power Components, Inc. operations into Anaren Ceramics. In doing so, the Company closed RF Power's Long Island facility and relocated the operation to the Anaren Ceramics New Hampshire location. All of RF Power's employees were either terminated or transferred to the New Hampshire facility. Remaining costs associated with terminating 79 employees included in the restructuring liability were paid-in-full in the six months ended December 31, 2005: Balance Nine months ended March 31, 2006 Balance June 30, Costs Cash March 31, 2005 Incurred Expenditures 2006 ---- -------- ------------ ---- Severance payments $19,863 $ -- $19,863 $ -- ------- ------- ------- ------- $19,863 $ -- $19,863 $ -- ======= ======= ======= ======= 16 NOTE 9: Other Liabilities Other liabilities consist of the following: March 31, 2006 June 30, 2005 -------------- ------------- Deferred compensation $ 757,973 $ 650,064 Pension liability - 675,000 Other 382,847 287,450 ---------- ---------- 1,140,820 1,612,514 Less current portion 447,847 1,044,759 ---------- ---------- $ 692,973 $ 567,755 ========== ========== NOTE 10: Net Income (Loss) Per Share (Restated) 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 2004 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 382,020 and 2,579,938 at March 31, 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 Nine Months Ended ------------------ ----------------- March 31 March 31 2006 2005 2006 2005 ---- ---- ---- ---- (Restated) (Restated) Numerator: Net income from continuing operations $3,170,604 $1,860,530 $7,406,704 $4,822,578 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 16,946,993 19,336,007 17,124,494 19,689,024 =========== =========== =========== =========== Denominator for diluted earnings per share: Weighted average shares outstanding 16,946,993 19,336,007 17,124,494 19,689,024 Common stock options and restricted stock 600,340 465,535 498,869 528,718 ----------- ----------- ----------- ----------- Weighted average shares and conversions 17,547,333 19,801,542 17,623,362 20,217,742 =========== =========== =========== ===========
NOTE 11: Components of Net Periodic Pension Benefit Costs Three Months Ended Nine Months Ended ------------------ ----------------- March 31 March 31 2006 2005 2006 2005 ---- ---- ---- ---- Service cost $ 85,587 $61,825 $256,761 $185,475 Interest cost 151,795 141,090 455,385 423,270 Expected return on plan assets (173,365) (156,687) (520,095) (470,060) Amortization of prior service cost (808) 2,623 (2,424) 7,868 Amortization of the net (gain) loss 47,436 12,414 142,308 37,242 -------- -------- -------- -------- Net periodic benefit cost $110,645 $ 61,265 $331,935 $183,795 ======== ======== ======== ======== 17 Expected Pension Contributions Contributions for fiscal 2006 were $486,012. Estimated Future Pension Benefit Payments The following estimated benefit payments, which reflect future service, as appropriate, are expected to be paid: July 1, 2005 - June 30, 2006 ..................................... $ 402,899 July 1, 2006 - June 30, 2007 ..................................... 405,260 July 1, 2007 - June 30, 2008 ..................................... 472,452 July 1, 2008 - June 30, 2009 ..................................... 483,474 July 1, 2009 - June 30, 2010 ..................................... 521,588 Years 2010 - 2014 ................................................ 2,981,761 NOTE 12: Components of Net Periodic Postretirement Health Benefit Costs Three Months Ended Nine Months Ended ------------------ ----------------- March 31 March 31 2006 2005 2006 2005 ---- ---- ---- ---- Service cost $14,285 $15,286 $42,855 $45,858 Interest cost 46,327 27,802 138,981 83,406 Amortization of the net (gain) loss 18,788 4,617 56,364 13,851 ------- ------- -------- -------- Postretirement health benefit costs $79,400 $47,705 $238,200 $143,115 ======= ======= ======== ======== Expected Postretirement Health Contributions Expected contributions for fiscal 2006 are $175,839, net of $17,501 expected subsidy receipts. NOTE 13: Discontinued Operations (Restated) During the quarter ended March 31, 2006, final liquidation of the Company's Anaren Europe operation took place. The results of operations for Anaren Europe for the prior fiscal years have been classified as discontinued operations in the Statement of Earnings. Components of the income from discontinued operations of Anaren Europe for the three months and nine months ended March 31 are as follows: Three Months Ended Nine Months Ended ------------------ ----------------- March 31 March 31 2006 2005 2006 2005 ---- ---- ---- ---- Income from liquidation of net assets (restated) $ 81,713 $ -- $ 81,713 $ -- Any tax related effects of such discontinued operations have been recognized in prior fiscal years. 18 NOTE 14: Segment Information (Restated) 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 infrastructure original equipment manufacturers in the wireless communications market. The space and defense segment of the business designs, manufactures and markets specialized products for original equipment manufacturers in the defense electronics and satellite communications markets. The revenue disclosures for the Company's reportable segments depict products that are similar in nature. 19 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, 2006 16,014,209 10,686,874 -- 26,701,083 March 31, 2005 14,155,895 7,627,523 -- 21,783,418 Nine months ended: March 31, 2006 47,919,045 28,415,409 -- 76,334,454 March 31, 2005 47,930,254 22,410,543 -- 70,340,797 Operating income: Three months ended: March 31, 2006 (restated) 1,522,071 1,976,504 -- 3,498,575 March 31, 2005 482,772 1,264,735 -- 1,747,507 Nine months ended: March 31, 2006 (restated) 4,801,295 3,295,100 -- 8,096,395 March 31, 2005 394,803 4,632,623 -- 5,027,426 Goodwill and intangible assets: March 31, 2006 31,139,449 -- -- 31,139,449 June 30, 2005 31,389,102 -- -- 31,389,102 Identifiable assets:* March 31, 2006 (restated) 19,752,896 17,340,106 109,871,132 146,964,134 June 30, 2005 21,497,591 12,685,903 109,909,259 144,092,753 Depreciation:** Three months ended: March 31, 2006 (restated) 644,346 558,203 -- 1,202,549 March 31, 2005 673,888 500,618 -- 1,174,506 Nine months ended: March 31, 2006 (restated) 1,890,305 1,703,321 -- 3,593,626 March 31, 2005 2,223,986 1,452,692 -- 3,676,678 Intangibles amortization: *** Three months ended: March 31, 2006 83,218 -- -- 83,218 March 31, 2005 83,217 -- -- 83,217 Nine months ended: March 31, 2006 249,653 -- -- 249,653 March 31, 2005 487,427 -- -- 487,427
* 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. 20 ** 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. 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/A. 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/A. Overview The consolidated financial statements present the financial condition of the Company as of March 31, 2006 and June 30, 2005, and the consolidated results of operations and cash flows of the Company for the three and nine months ended March 31, 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, 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 21 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. On August 3, 2004, the Company acquired a 65,000 square foot building situated on approximately 12 acres in Salem, New Hampshire for a purchase price of $4.8 million. The Company commenced the move of its Amitron, Inc. subsidiary to the new facility in September 2004 and is operating the business under the name of Anaren Ceramics, Inc., a wholly owned subsidiary of the Company. The New Hampshire facility will provide adequate space for anticipated future growth of that business. In conjunction with the decision to move to this new facility, the Company negotiated a buy out of the remaining lease of the Amitron facility for a one-time charge in fiscal 2004 of $350,000 and the Company also accelerated amortization of the Amitron, Inc. leasehold improvement and lease related intangibles amounting to $250,000 recognized in the fourth quarter of fiscal 2004, and $250,000 recognized in the first quarter of fiscal 2005. In October, 2004 the Company announced that in order to accelerate ceramic product growth initiatives and improve operating efficiency, it had decided to consolidate its RF Power, Inc. subsidiary with the Company's Amitron subsidiary and close RF Power's facility in Bohemia, New York. The consolidated company, Anaren Ceramics, Inc., operates at the Company's Salem, New Hampshire facility, which will fully accommodate the current capacity needs of the combined entity as well as significant future growth. The relocation of RF Power's operation to the Salem, New Hampshire facility was completed during the second quarter of fiscal 2005. As a result of this consolidation, the Company recognized costs of $458,335 for severance and outplacement expenses, $91,000 for lease cancellation and $300,000 for additional inventory write-downs during the second quarter of fiscal 2005. Additionally, the Company incurred further consolidation costs totaling approximately $397,000, including equipment write-downs of $272,000, in the third quarter of fiscal 2005, related to integrating RF Power's operation into Anaren Ceramics. Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123R (SFAS 123R). 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. These costs are to be recognized as compensation expense over the vesting period of the awards. SFAS 123R provides for a prospective application for adoption which the Company chose. Under this method, the Company began recognizing compensation costs for stock option equity based compensation for all new or modified grants after June 30, 2005 and for the unvested portion of the grant date fair value of awards issued prior to adoption, based on the fair value previously calculated for footnote disclosure purposes. Equity based compensation cost for employee stock options recognized in the third quarter and nine months ended March 31, 2006 was $835,000 and $2,504,000, respectively. The final liquidation and dissolution of the Company's European corporate structure was concluded during the quarter ended March 31, 2006. As part of this liquidation and dissolution, the Company recognized income from discontinued operations of $81,713 (restated) resulting from final asset and liability liquidation. 22 Fourth Quarter of Fiscal 2006 Outlook Given the current volatile wireless market demand and our Space and Defense order backlog, we expect net sales to be in the range of $26.0 - $28.0 million for the fourth quarter of fiscal 2006. With an anticipated tax rate of approximately 24% and an expected equity based compensation expense of approximately $0.04 per diluted share, we expect net earnings per diluted share to be in the range of $0.14 - $0.17 for the fourth quarter. Results of Operations Net sales for the three months ended March 31, 2006 were $26.7 million, up $4.9 million from $21.8 million for the third quarter of fiscal 2005. Net income for the third quarter of fiscal 2006 was $3.3 million (restated), or 12.2% (restated) of net sales, up $1.4 million (restated), or 75% (restated) from net income of $1.9 million in the third quarter of fiscal 2005. 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, 2006 Mar. 31, 2005 Mar. 31, 2006 Mar. 31, 2005 ------------- ------------- ------------- ------------- (Restated) (Restated) Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 61.6% 67.2% 63.8% 69.0% ----- ----- ----- ----- Gross profit 38.4% 32.8% 36.2% 31.0% ----- ----- ----- ----- Operating expenses: Marketing 6.8% 6.9% 6.9% 7.3% Research and development 8.2% 7.5% 8.5% 6.6% General and administrative 10.3% 10.4% 10.2% 9.3% Restructuring 0.0% 0.0% 0.0% 0.7% ----- ----- ----- ----- Total operating expenses 25.3% 24.8% 25.6% 23.9% ----- ----- ----- ----- Operating income 13.1% 8.0% 10.6% 7.1% ----- ----- ----- ----- Other income (expense): Other, primarily interest income 2.3% 2.5% 2.3% 1.6% Interest expense 0.0% 0.0% 0.0% 0.0% ----- ----- ----- ----- Total other income (expense), net 2.3% 2.5% 2.3% 1.6% ----- ----- ----- ----- Income from continuing operations before income tax 15.4% 10.5% 12.9% 8.7% Income taxes 3.5% 2.0% 3.2% 1.8% ----- ----- ----- ----- Income from continuing operations 11.9% 8.5% 9.7% 6.9% ===== ===== ===== ===== Discontinued operations: Income (loss) from discontinued operations of Anaren Europe 0.3% 0.0% 0.1% 0.0% Income tax benefit 0.0% 0.0% 0.0% 0.0% ----- ----- ----- ----- Net income (loss) from discontinued operations 0.3% 0.0% 0.1% 0.0% ----- ----- ----- ----- Net income 12.2% 8.5% 9.8% 6.9% ===== ===== ===== =====
23 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 -------- -------- 2006 2005 2006 2005 ---- ---- ---- ---- Wireless $16,014 $14,156 $47,919 $47,930 Space and Defense 10,687 7,628 28,415 22,411 ------- ------- ------- ------- Total $26,701 $21,784 $76,334 $70,341 ======= ======= ======= ======= Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005 Net sales. Net sales rose $4.9 million, or 22.6% to $26.7 million for the third quarter ended March 31, 2006, compared to $21.8 million for the third quarter of fiscal 2005. This increase resulted from a $3.1 rise in shipments of Space and Defense products and a $1.8 million increase in sales of Wireless products in the current third quarter of fiscal 2006. The increase in sales of Wireless products, which consist of standard components, ferrite components and custom assemblies for use in building Wireless basestation and consumer equipment was a result of increased customer demand for both custom subassemblies and standard components for basestation construction during the third quarter of fiscal 2006 compared to same quarter last year. Wireless product sales rose $1.8 million or 13.1% in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005. This increase was due to a $1.1 million increase in shipments of Wireless custom subassemblies in the current third quarter driven by a rise in Nokia demand. Wireless sales in the third quarter of fiscal 2006 were further augmented by a $700,000 improvement in sales of Wireless standard products as a result of the current high level of demand for basestation components. Space and Defense products consist of custom components and assemblies for communication satellites and defense radar and countermeasure subsystems for the military. Sales of Space and Defense products rose $3.1 million, or 40%, to $10.7 million in the third quarter of fiscal 2006 compared to the third quarter of the previous fiscal year. Defense product sales are increasing due to the higher level of new business booked by the Company in fiscal 2004 and 2005, which is now in production. Space and Defense product bookings were $37.7 million in fiscal 2004, $40.9 million in fiscal 2005 and have exceeded $27.0 million in the first nine months of fiscal 2006. Sales of Space and Defense products in the fourth quarter of fiscal 2006 are expected to range between $10.0 and $11.0 million, as a result of the rise in new order levels over the last two fiscal years. 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 2006 was $10.2 million (restated), (38.4% (restated) of net sales), up $3.0 million (restated) from $7.2 million (32.8% of net sales) for the same quarter of the prior year. Gross profit on sales increased in the third quarter of fiscal 2006 over the third quarter of last year due to the higher sales volume and favorable manufacturing efficiencies. These efficiencies resulted from higher production volumes at our lower cost China facility and from yield improvements and manufacturing overhead cost savings realized by combining the RF Power and Amitron production facilities in one building as Anaren Ceramics. Cost of sales included the 24 recognition of $215,000 of stock option equity based compensation expense, while cost of sales in the third quarter of last year did not include costs associated with equity based compensation expense. 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 (6.8% of net sales) for the third quarter of fiscal 2006, up $293,000 from $1.5 million (6.9% of net sales) for the third quarter of fiscal 2005. Included in marketing expense for the third quarter of fiscal 2006 is $69,000 of stock option equity based compensation expense, while marketing expense for the third quarter of fiscal 2005 does not include such expense. Absent the inclusion of stock option equity based compensation expense, marketing costs in the third quarter of fiscal 2006 rose approximately 15% year over year due to increased commission expenses related to the higher sales volume and additional personnel costs associated with the current higher levels of marketing activities. 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 $2.2 million (8.2% of net sales) in the third quarter of fiscal 2006, up 33.8% from $1.6 million (7.5% of net sales) for the third quarter of fiscal 2005. Research and development expenditures are supporting further development of Wireless infrastructure and consumer component opportunities. Research and Development expenditures have increased in the third quarter of fiscal 2006 over third quarter of fiscal 2005 levels due to the higher level of Wireless opportunities in the marketplace and due to the inclusion of $110,000 for stock option equity based compensation expense. These opportunities resulted in the hiring of additional product development personnel in fiscal 2005 and 2006, and additional outside spending by the Company in the current first nine months to expedite the new product development process. 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 products. 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 22.1% to $2.8 million (10.3% of net sales) for the third quarter of fiscal 2006 from $2.3 million (10.4% of net sales) for the third quarter of fiscal 2005. The increase resulted primarily from the inclusion in general and administrative expense of $441,000 of stock option equity based compensation expense in the third quarter of fiscal 2006. General and Administrative expense for the third quarter of fiscal 2005 does not include expense for equity based compensation. Absent the inclusion of stock option equity based compensation expense, general and administrative costs for the third quarter of fiscal 2006 rose $58,000, or 2.5% over the third quarter of fiscal 2005 due to the increase in business volume. Operating Income. Operating income increased $1.8 million (restated), or 100% (restated) in the third quarter of fiscal 2006 to $3.5 million (restated) (13.1% (restated) of net sales) compared to $1.7 million (8.0% of net sales) for the third quarter of last fiscal year. In the third quarter of fiscal 2006, operating income was reduced by $835,000 for stock option equity based compensation expense. Operating income for the third quarter of fiscal 2005 (the prior year) does not include any expense for stock option equity based compensation. On a reporting segment basis, Wireless operating income was $1.5 million (restated) for the third quarter of fiscal 2006 (including $404,000 of stock option equity based compensation expense) 25 up $1.0 million from Wireless operating income of $483,000 (restated) for the third quarter of last year. Wireless operating income improved significantly in the current third quarter due to continuing cost savings achieved through the consolidation of the RF Power and Amitron operations in fiscal 2005, the absence of consolidation and charges ($397,000 in the third quarter of fiscal 2005), cost efficiencies resulting from higher manufacturing volumes in the Company's China operation and a more favorable wireless product mix in the current third quarter, compared to the third quarter of last fiscal year. Space and Defense operating income rose $700,000 (restated) in the third quarter of fiscal 2006 to $2.0 million (restated) (including $431,000 of stock option equity based compensation expense) compared to $1.3 million (with no stock option equity based compensation expense) in the third quarter of fiscal 2005. This increase resulted from the large number of new Space and Defense programs entering production over the second half of last fiscal year and the first half of fiscal 2006, which drove revenues to record levels in the current third quarter. The higher shipment levels coupled with the passage of these newer programs from initial to full production has resulted in better manufacturing efficiencies in the current third quarter. Operating margin in this group are expected to fluctuate based on sales volume and mature production volumes. Other Income. Other income is primarily interest income received on invested cash balances and losses on the sale of stock and capital equipment. Other income increased 11% to $620,000 (2.3% of net sales) for the third quarter of fiscal 2006, from $558,000 (2.5% of net sales) for the same quarter last year. This increase was caused mainly by the rise in market interest rates over the past twelve months. Other income will fluctuate based on short-term market interest rates and the level of investable cash balances. Interest Expense. Interest expense represents interest paid on a deferred obligation. Interest expense for the third quarter of fiscal 2006 was $6,000 compared to $6,000 for third quarter of fiscal 2005. Income Taxes. Income taxes for the third quarter of fiscal 2006 were $942,000 (3.5% of net sales) (restated), representing an effective tax rate of 22.9% (restated). This compares to income tax expense of $439,000 (2.0% of net sales) for the third quarter of fiscal 2005, representing an effective tax rate of 19.1%. The Company's effective tax rate is a direct result of the proportion of federally exempt state municipal bond income, foreign tax benefits and federal tax credits and benefits in relation to the levels of taxable income or loss. The projected effective tax rate for fiscal 2006 is approximately 24.3% compared to an actual effective tax rate of 19.0% for fiscal 2005. The increase in the projected effective tax rate is a result of (a) the higher level of income; (b) the expiration of the federal Research and Experimentation credit at the end of calendar 2005; and (c) the amount of nondeductible incentive stock option equity based compensation expense expected in fiscal 2006 compared to the level of deductible non-statutory stock option equity based compensation expenses resulting from the adoption of SFAS 123R. Stock options issued prior to the adoption of SFAS 123R, were mainly incentive stock options and are presently generating the majority of the company's equity based employee stock option compensation expense. Compensation expense for these options, under SFAS 123R, does not generate a tax deduction and related deferred tax benefit. New options granted after the adoption of SFAS 123R are expected to be mainly non-statutory stock options, which will generate a tax deduction and related deferred tax benefit. Discontinued Operations. (Restated) Discontinued operations represents the result of liquidation and dissolution of the Company's Anaren Europe corporate structure which ceased operation December 2003. During the third quarter ended March 31, 2006 and in conjunction with the 26 finalization of Anaren Europe's bankruptcy proceeding, the Company performed the final liquidation of its Anaren Europe corporate structure. As a result of this liquidation, the Company recognized a gain of $82,000 from the liquidation of the remaining assets. Nine Months Ended March 31, 2006 Compared to Nine Months Ended March 31, 2005 Net Sales. Net sales increased $6.0 million, or 8.5%, to $76.3 million for the first nine months of fiscal 2006 compared to $70.3 million for the first nine months of fiscal 2005. This rise in sales resulted from a $6.0 million increase in sales of Space and Defense products in the first nine months of fiscal 2006, while shipments of Wireless products were flat year over year for same period. Sales of Wireless products for the first nine months of fiscal 2006 were flat compared to the same period in fiscal 2005. During the first three quarters of fiscal 2006 sales of new consumer products rose $1.7 million, or 127%, and shipments of custom components, which are produced mainly in our China facility, increased $600,000 or 3.5% compared to the same period in fiscal 2005. These increases were offset by a $2.3 million decline in combined circulator and resistive products sales in the current first nine months compared to the same period last year as a result of a decline in demand for these older products. Space and Defense products shipments rose $6.0 million, or 27%, to $28.4 million in the first nine months of fiscal 2006 compared to the first nine months of the previous fiscal year. Defense product sales are increasing due to the higher level of new business booked by the Company in fiscal 2004 and 2005, which is now in production. Space and Defense product bookings were $37.7 million in fiscal 2004, $40.9 million in fiscal 2005, and have exceeded $26.8 million in the first nine months of fiscal 2006. Sales of Space and Defense products in fiscal 2006 are expected to range between $38.0 million and $40.0 million, as a result of the rise in new order levels over the last two fiscal years. Gross Profit. Gross profit for the first nine months of fiscal 2006 was $27.6 million (restated) (36.2% of net sales) (restated) up $5.8 million (restated) from $21.8 million (31.0% of net sales) for the same period of the prior year. Gross profit on sales increased in the first nine months of fiscal 2006 over the first nine months of last year due to favorable manufacturing efficiencies and a more favorable product mix in the current year. These efficiencies resulted from higher production volumes at our lower cost China facility and in our Defense group, as well as manufacturing overhead cost savings realized by combining the RF Power and Amitron production facilities into one building at Anaren Ceramics. Current year growth in gross profit was lowered by the recognition of $738,000 of stock option equity based compensation expense in the first nine months of fiscal 2006. Marketing. Marketing expenses were $5.3 million, (6.9% of net sales) for the first nine months of fiscal 2006, up $139,000 from $5.2 million (7.3% of net sales) for the first nine months of fiscal 2005. Included in marketing expense for the first nine months of fiscal 2006 is $205,000 of stock option equity based compensation expense. Marketing expense for the first nine months of fiscal 2005 does not include expense for stock option equity based compensation. Absent the inclusion of stock option equity based compensation expense, marketing costs in the first nine months of fiscal 2006 declined approximately 1.3% year over year due to cost savings realized through the consolidation of the RF Power and Amitron production facilities during fiscal 2005. Research and Development. Research and development expenses were $6.5 million (8.5% of net 27 sales) in the first nine months of fiscal 2006, up 39.1% from $4.7 million (6.6% of net sales) for the first nine months of fiscal 2005. Research and development expenditures are supporting further development of Wireless infrastructure and consumer component opportunities. Research and development expenditures have increased in the first nine months of fiscal 2006 over the first nine months of fiscal 2005 levels due to the higher level of Wireless opportunities in the marketplace and due to the inclusion of $237,000 for stock option equity based compensation expense. General and Administrative. General and administrative expenses increased 19.6% to $7.8 million (10.2% of net sales) for the first nine months of fiscal 2006, from $6.5 million (9.3% of net sales) for the first nine months of fiscal 2005. The increase resulted primarily from the inclusion in general and administrative expense of $1.3 million of stock option equity based compensation expense in the first nine months of fiscal 2006. General and administrative expense for the first nine months of fiscal 2005 does not include expense for stock option equity based compensation. Absent the inclusion of stock option equity based compensation expense, general and administrative costs for the first nine months of fiscal 2006 were flat compared with the same period in fiscal 2005. Restructuring. Restructuring cost which consisted of wages, health insurance, payroll taxes and outplacement costs were $458,000 in the first nine months of fiscal 2005. These costs were related to the termination of 79 people in conjunction with the closure of RF Power's facility and the move of that operation to Salem, New Hampshire in the second quarter of fiscal 2005. There were no restructuring charges in the first nine months of fiscal 2006. Operating Income. Operating income increased $3.1 million (restated), or 61.0% (restated) in the first nine months of fiscal 2006 to $8.1 million (restated) (10.6% of net sales) (restated) compared to $5.0 million (7.1% of net sales) for the first nine months of last fiscal year. In the first nine months of fiscal 2006, operating income was reduced by $2.5 million for stock option equity based compensation expense. Operating income for the first nine months of fiscal 2005 (the prior year) does not include any expense for stock option equity based compensation. Operating income has improved significantly in fiscal 2006 due to manufacturing efficiencies achieved through operation consolidations and sales volume increases, the relative flat levels of marketing and general and administrative expense in fiscal 2006 compared to fiscal 2005 and the absence of one time consolidation and restructuring charges in the current year compared to fiscal 2005 which included $1.5 million of one-time charges in the first nine months. On a reporting segment basis, Wireless operating income was $4.8 million (restated) for the first nine months of fiscal 2006 (including $1.2 million of stock option equity based compensation expense) up $4.4 million (restated) from Wireless operating income of $395,000 for the first nine months of last year. Wireless operating income improved significantly in the current first nine months due to cost savings achieved through the consolidation of the RF Power and Amitron operations in fiscal 2005, the absence of consolidation charges ($1.5 million in the first nine months of fiscal 2005), cost efficiencies resulting from higher manufacturing volumes in the Company's China operation and a more favorable wireless product mix in the current first nine months, compared to the first nine months of last fiscal year. Space and Defense operating income fell $1.3 million (restated) in the first nine months of fiscal 2006 to $3.3 million (restated) (including $1.3 million of stock option equity based compensation expense) compared to $4.6 million in the first nine months of fiscal 2005. This decrease, despite a rise in sales volume, resulted from the large number of new Space and Defense programs entering production over the second half of last fiscal year and the current first nine months of 28 fiscal 2006, as well as the $1.3 million of stock option equity based compensation. These programs in their early production phase require a higher level of engineering support, have higher scrap costs and lower manufacturing efficiencies than more mature programs. Operating margins in this group improved in the third quarter and are expected to improve further as the new programs mature. Other Income. Other income increased 60% to $1.7 million (2.2% of net sales) for the nine months ended March 31, 2006, from $1.1 million (1.6% of net sales) for the same period last year. This increase was caused mainly by the rise in market interest rates over the past eighteen months and the absence of losses on equipment and investment sales in the current first nine months compared to $410,000 of losses recorded in the first nine months of last year. Other income will fluctuate based on short-term market interest rates and the level of investable cash balances. Interest Expense. Interest expense represents interest paid on a deferred obligation. Interest expense for the first half of fiscal 2006 was $18,000 compared to $22,000 for the first half of fiscal 2005. Income Taxes. Income taxes for the first nine months of fiscal 2006 were $2.4 million (restated) (3.2% (restated) of net sales) representing an effective tax rate of 24.6% (restated). This compares to income tax expense of $1.3 million (1.8% of net sales) for the first nine months of fiscal 2005, representing an effective tax rate of 20.1%. 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 2006 is between 24.3% compared to an actual effective tax rate of 19% for fiscal 2005. The increase in the projected effective tax rate is a result of both the higher level of income, the expiration of the federal research and experimentation credit at the end of calendar 2005 and the amount of nondeductible incentive stock option equity based compensation expense expected in fiscal 2006 compared to the level of deductible non-statutory stock option equity based compensation expense resulting from the adoption of SFAS 123R. Stock options issued prior to the adoption of SFAS 123R, were mainly incentive stock options and are presently generating the majority of the company's equity based employee stock option compensation expense. Compensation expense for these options, under SFAS 123R, does not generate a tax deduction and related deferred tax benefit. New options granted after the adoption of SFAS 123R are expected to be mainly non-statutory stock options, which will generate a tax deduction and related deferred tax benefit. Discontinued Operations. (Restated) Discontinued operations represents the result of liquidation and dissolution of the Company's Anaren Europe corporate structure which ceased operation December 2003. During the third quarter ended March 31, 2006 and in conjunction with the finalization of Anaren Europe's bankruptcy proceeding, the Company performed the final liquidation of its Anaren Europe corporate structure. As a result of this liquidation, the Company recognized a gain of $81,713 (restated) from the liquidation of the remaining assets. 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 Anaren's financial condition and results, and that require management to make the most difficult and subjective 29 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 in conjunction with evaluating customer credit worthiness. 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. 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 30 is indicated as being impaired (the fair value of the reporting unit is less than the carrying amount), the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value of the reporting unit goodwill is then compared with the carrying amount of the reporting unit goodwill and, if it is less, the Company would then recognize an impairment loss. The projection of future cash flows for the goodwill impairment analysis requires significant judgments and estimates with respect to future revenues related to the assets and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in changes in this assessment and result in an impairment charge. The use of different assumptions could increase or decrease the related impairment charge. Liquidity and Capital Resources Net cash provided by operations for the nine months ended March 31, 2006 was $10.9 million, while net cash provided by operations for the first nine months of the prior year was $4.6 million. The positive cash flow from operations in the current nine months was due to the high level of net income before depreciation and non cash equity compensation, which more than off-set the $3.3 million (restated) used to fund the current inventory and accounts receivable increase. The positive cash flow from operations in the first nine months of fiscal 2005 was due primarily to income before depreciation and amortization for the period coupled with a $1.1 million decline in trade and other receivables which off-set a $3.1 million increase in inventory and a $3.1 million pay down of current liabilities. Net cash used in, or provided by, investing activities consists of funds used to purchase capital equipment, proceeds from the sale of investments and funds used or provided by the net purchase or maturity of marketable debt securities. Net cash used in investing activities in the first nine months of fiscal 2006 was $1.4 million and consisted of $2.9 million provided by the maturity of marketable debt securities, net of $4.3 million used to acquire capital equipment. Net cash provided by investing activities in the first nine months of fiscal 2005 was $3.8 million and consisted of funds provided by the sale and maturity of marketable securities totaling $11.9 million, which were partially off-set by capital additions of $8.3 million, including approximately $5.0 million for the purchase and renovation of the new Anaren Ceramics facility. Net cash used in financing activities was $7.6 million in the first nine months of fiscal 2006 and $20.7 million in the first nine months of last fiscal year. Cash used in the first nine months of fiscal 2006 consisted of $9.8 million used for the purchase of 344,311 treasury shares, net of $2.2 million in cash and tax benefits received from the exercise of stock options. Cash used in the first nine months of fiscal 2005 was $20.9 million for the purchase of 1,701,532 treasury shares, net of $181,000 received from the exercise of stock options. During the remainder of fiscal 2006, the Company anticipates that its main cash requirements will be for additions to capital equipment and the purchase of additional treasury shares when market prices allow. Capital expenditures are expected to total between $5.0 and $5.5 million for fiscal 2006 and will be funded by existing cash balances. 31 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, 2006 there were 1,077,879 shares remaining under the current Board repurchase authorization. At March 31, 2006, the Company had approximately $81.0 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 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, lease agreements, and under contingent commitments, such as debt guarantees. The Company's obligations and commitments at March 31, 2006 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 $3,739,684 $501,635 $967,610 $908,176 $1,362,263 Deferred compensation 354,120 65,000 130,000 130,000 29,120
Recent Accounting Pronouncements In November, 2004 the FASB published Statement of Financial Accounting Standards No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151 amends the guidance in Chapter 4, "Inventory Pricing" of ARB No. 43 and clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Statement 151 requires that those items be recognized as current-period charges. Statement 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Statement 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Statement 151 was effective for the Company's 2006 fiscal year and upon adoption did not have a material impact on the Company's financial statements. In May 2005, the FASB published Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections. Statement 154 replaces APB No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Changes in Interim Financial Statements. The Statement changes the accounting for, and reporting of, a change in accounting principle. Statement 154 requires retrospective application to prior periods' financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Statement 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 (the Company's fiscal 2007). Early application is permitted for accounting changes and corrections of errors during fiscal years beginning after June 1, 2005 (the Company's fiscal 2006). 32 Forward-Looking Cautionary Statement The statements contained in this Form 10-Q/A 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 need for any follow-on actions in connection with the Company's accounting practices, and the impact of the Company's restatements and the reaction to them from the Company's stockholders and the financial markets in general; unanticipated delays and/or difficulties associated with ramping up the Company's Suzhou China facility to meet existing and anticipated demand for certain Wireless products; 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 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 2005 Annual Report, Anaren's Form 10-K for the fiscal year ended June 30, 2005 and Anaren's Form 10-Q (as amended) for the three months ended March 31, 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 amended). As of March 31, 2006, the Company had cash, cash equivalents and marketable securities of $81.0 million, all of which consisted of 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 March 31, 2006 rates, or 0.30%, would have reduced net income and cash flow by approximately $61,000, or $0.003 per share for the quarter. Due to the relatively short maturities of the securities and its ability to hold those investments to maturity, the Company does not believe that an immediate decrease in interest rates would have a significant effect on its financial condition or results of operations. Over time, however, declines in interest rates will reduce the Company's interest income. 33 Item 4. Controls and Procedures A. Evaluation of Disclosure Controls and Procedures The Company's Chief Executive Officer and its Chief Financial Officer evaluated the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this quarterly report. Management has concluded that the Company's disclosure controls and procedures were not effective due to a material weakness related to the Company's internal control surrounding the accounting for foreign currency translation adjustments for discontinued operations, which resulted in an adjustment to the unaudited interim financial statements for the third quarter of fiscal 2006. Management believes that the accompanying financial statements for the third quarter of fiscal 2006 are presented fairly and that the material weakness has been remediated as of January 26, 2007. B. Changes in Internal Control Over Financial Reporting Except as noted above, there has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. 34 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, except as set forth below: The filing of this Amended Quarterly Report Could Adversely Affect the Company's Stock Price This amended Quarterly Report on Form 10-Q/A restates the Company's consolidated condensed financial statements for the three months ended March 31, 2006, modifies related disclosures, and discloses a material weakness in the Company's disclosure controls and procedures. The Company cannot predict the reaction to the filing of this amended Quarterly Report from its shareholders and the financial markets in general. An adverse reaction by its shareholders or the financial markets in general could cause the market price of the Company's Common Stock to decline, potentially rapidly and sharply. 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 privately negotiated transactions through its previously announced stock repurchase program and as of December 31, 2005, 1,078,579 remained authorized for purchase. 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 March 31, 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 - --------------------------------------------------------------------------------------------------------------------- January 2006 -- -- -- 1,078,579 - --------------------------------------------------------------------------------------------------------------------- February 2006 700 $15.72 700 1,077,879 - -------------------------------------------------------------------------------------------------------------------- March 2006 -- -- -- 1,077,879 - --------------------------------------------------------------------------------------------------------------------- Total 700 700 - ---------------------------------------------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders None. Item 6. Exhibits 31 RULE 13a-14(a) CERTIFICATIONS 32 SECTION 1350 CERTIFICATIONS 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Anaren, Inc. ------------ (Registrant) Date: January 31, 2007 /s/Lawrence A. Sala ---------------------------------------- Lawrence A. Sala President & Chief Executive Officer Date: January 31, 2007 /s/Joseph E. Porcello ---------------------------------------- Joseph E. Porcello Sr. Vice President of Finance, Treasurer 36 EX-31 2 e26172ex_31.txt CERTIFICATIONS Exhibit 31 CERTIFICATIONS I, Lawrence A. Sala, certify that: 1. I have reviewed this amended quarterly report on Form 10-Q/A 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: January 31, 2007 /s/ Lawrence A. Sala ------------------------------------- Lawrence A. Sala President and Chief Executive Officer Exhibit 31 I, Joseph E. Porcello, certify that: 1. I have reviewed this amended quarterly report on Form 10-Q/A 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: January 31, 2007 /s/ Joseph E. Porcello ---------------------------------------- Joseph E. Porcello Sr. Vice President of Finance, Treasurer EX-32 3 e26172ex_32.txt SECTION 906 CERTIFICATIONS Exhibit 32 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 amended Quarterly Report of Anaren, Inc. (the "Company") on Form 10-Q/A for the quarter ended March 31, 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: January 31, 2007 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. Exhibit 32 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 amended Quarterly Report of Anaren, Inc. (the "Company") on Form 10-Q/A for the quarter ended March 31, 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 Sr. Vice President of Finance, Treasurer __________________________ Date: January 31, 2007 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-----